Wednesday, August 24, 2016

Rovner v Oppenheimer - $115,000 Churning Award

In August 2016, a FINRA arbitration panel in Philadelphia, PA ordered Oppenheimer & Co. to pay $115,000 in compensatory damages after a hearing wherein the Claimant alleged Respondents churned the Claimant's accounts. The award can be downloaded here. Dr. McCann testified to the churning and damages on behalf of the Claimant.

Is the Securities Industry Cleaning Up Its Hiring Practices? Nope

By Craig McCann, PhD, CFA, Chuan Qin, PhD and Mike Yan, PhD, CFA, FRM

Our BrokerCheck study, How Widespread and Predictable is Stock Broker Misconduct? and Egan Matovs and Seru’s The Market for Financial Adviser Misconduct have shined a spotlight on the persistence of bad brokers and the bad firms which give them a platform.

We have posted extensively based on our BrokerCheck research. In Have 1.3% or 7.3% of Stock Brokers Engaged in Misconduct? we explain that competing estimates of broker misconduct differ because of differences in definition of misconduct and the sample of brokers studied. Using the most restrictive measure of misconduct and the largest sample size, we conclude that at least 5% of brokers have been associated with meritorious customer claims.

In Smaller Brokerage Firms Are Even Worse! we show that while some large firms are noteworthy in the number of bad brokers they employ, small firms are much worse.

In A Bad Broker Found His Firm; You Should Avoid Them Both we gave an example of a broker who had been twice previously fired yet was immediately snapped up by one of the truly awful small firms to continue to prey upon unsophisticated investors.

FINRA claims to take hiring practices seriously and to have been working for some time to impose more discipline on its member firms’ hiring practices. In Figure 1, we report the number of brokers hired each 12-month period from July 1, 2006 to June 30, 2016.

Figure 1 Percent of Brokers Hired Who Had Previously Been Fired Has Increased

The number of brokers hired has declined from around 160,000 per year to around 105,000 per year but the number who had previously been fired and found a new home each year has stayed between 1,300 and 1,400. The percent of hires who had previously been fired actually increased by 50% - from roughly 0.85% to 1.25%. Even more troubling the percent of hires who were fired immediately prior to the most recent hiring has doubled from roughly 0.25% to over 0.50% - from 368 brokers in 2006-2007 to 559 brokers in 2015-2016.

The Takeaway

That 1,313 brokers were hired in the past 12 months (1,231 of which are currently still in the industry) despite having been fired by a previous employer after some allegations is indicative of the problem EM&S highlighted. Bad brokers who have been terminated after allegations seem to have no problem getting rehired.

That only FINRA and SLCG (and maybe some Russian hackers) can know this number is the problem MQ&Y highlight. FINRA protects itself and its members at the expense of investors they are supposed to serve by withholding this data which is supposed to be publicly available. FINRA should release the data, even if it causes some short term embarrassment. If FINRA made BrokerCheck data truly publicly available Morningstar, USN&WR and academics would be able to crunch the data and help investors. This would also help the good brokers and brokerage firms.

Obviously, if FINRA is cracking down, we don’t see it in the data.


Monday, August 22, 2016

Zabara v FMS Bonds $218,600 Puerto Rican Bond Award

In August 2016, a FINRA panel in Boca Raton, FL ordered FMS Bonds to pay the Claimant $218,600 in compensatory damages for breach of fiduciary duty, breach of contract and negligent supervision. The award is available here. The subject investments were individual Puerto Rico municipal bonds sold to a U.S. client. Dr. O'Neal testified on portfolio concentration, default risk and suitability of the Puerto Rico muni bonds.

Friday, July 29, 2016

Financial Times, July 29, 2016, “Fears grow over Wall St’s appetite for securities-based lending”

The Financial Times continues to cover the substantial increase in securities-based lending to customers of broker-dealers. Lending has become the primary focus of sales and marketing efforts at retail wirehouses like Merrill Lynch, Morgan Stanley and UBS. Paul Meyer, who has written extensively on the investor protection risks posed by these loans, is quoted today by the Financial Times cautioning about the risks associated SBLs. The article is available here.