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Who Wants To Know How To Weed Out Rogue Stockbrokers

Posted in Compliance and Supervision, Dodd-Frank, FINRA Compliance, Registered Representatives, SEC Compliance

robber.jpgMy partner, Ernest Badway, recently blogged about the dangers of a lawyer referring a client to a rogue stockbroker.  The question for the broker-dealer/investment advisors is how do you uncover rogue brokers or prevent them from infecting your firm.

In all of the years that I have defended broker-dealers and investment advisors in cases involving rogue brokers, I have found that the answer to this question is much like the search for Bigfoot; everyone thinks it exists but cannot see to find it.  So what is a firm to do?

The most fundamental thing a firm can do to prevent/uncover rogue brokers is to foster a culture of compliance.  Firms with such a culture will go a long way to establishing itself as an entity to which rogue brokers need not apply. 

Rogue brokers tend to thrive in those environments where compliance and supervision are not up to snuff.  A firm that promotes a culture of compliance will also encourage other brokers to report up the supervisory chain when they see conduct that one can characterize as “rogue”. 

Another useful tool for firms to employ is a regular review of your brokers, coupled with occasional surprise reviews.  Regular reviews are good because they emphasize that the firm is watching its brokers.

Surprise reviews are, in some ways, even better because the truly rogue broker may be able to cover their tracks before a regularly scheduled review.  The surprise inspection takes away this potential luxury.  Also, the firm should let its brokers know that they are subject to no notice surprise inspections.

Unfortunately, some rogue brokers are so good that they may fly under the radar even at firms that promote the culture of compliance; I have seen it happen.  But put the odds in your favor.  Keep tabs on your brokers through regular and surprise inspections, and maybe you will find Bigfoot.