Securities Markets:

Actions Needed to Better Protect Investors Against Unscrupulous Brokers

GGD-94-208: Published: Sep 14, 1994. Publicly Released: Sep 14, 1994.

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Pursuant to a congressional request, GAO reviewed the Securities and Exchange Commission's (SEC) and several self-regulatory organizations' (SRO) oversight of unscrupulous brokers, focusing on: (1) the extent of unscrupulous broker activity in the securities industry; (2) regulatory and industry efforts to discipline unscrupulous brokers; and (3) the industry's capability to identify unscrupulous brokers through its Central Registration Depository (CRD) database.

GAO found that: (1) the extent of unscrupulous broker activity is difficult to measure because of the difficulty of detecting sales abuse practices, the lack of CRD data on informal disciplinary actions, CRD inability to provide summary data by violation type, and the unknown extent to which firms report of disciplinary actions to CRD; (2) as of November 30, 1993, CRD showed that 9,799 of about 470,000 active brokers had at least one formal disciplinary action against them, and 816 brokers had 3 or more disciplinary actions against them; (3) firms' disciplinary policies and practices need improvement and SEC and SRO sanctions need to be strengthened; (4) a SEC staff study recommended that problem brokers be identified early, closely scrutinized when hired, and subject to aggressive enforcement action when warranted, but SEC has yet to adopt the recommendations; (5) certain disciplinary practices, such as retroactive and revoked bars, have led to the perception that SEC and SRO are lenient in disciplinary actions; (6) some disciplined and barred brokers have entered other sectors of the financial services industry; (7) CRD lacks certain needed data and has limited functional capability to effectively track brokers' employment and disciplinary histories; and (8) the National Association of Securities Dealers (NASD) is in the process of redesigning CRD to overcome its limitations, but additional enhancements would improve its capability as a regulatory surveillance tool.

Recommendations for Executive Action

  1. Status: Closed - Not Implemented

    Comments: Banking and securities regulators have worked out an agreement and proposed rule under which bank securities personnel would take NASD qualification exams and be registered in CRD. In effect, this will enable users to review disciplinary records of securities salespersons regardless of whether employed by banks or brokers. Banking regulators, however, are not acting to approve the proposed rule pending congressional action on H.R. 10.

    Recommendation: The Secretary of the Treasury should work with SEC and other financial regulators to increase disclosure of CRD information available to regulators and employers among the financial services industry and related industries so that regulators may be aware of and give consideration to a broker's disciplinary history in allocating examination resources and so that employers can use the information in making a hiring decision.

    Agency Affected: Department of the Treasury

  2. Status: Closed - Not Implemented

    Comments: Banking and securities regulators have worked out an agreement and proposed rule under which bank securities personnel would take NASD qualification exams and be registered in CRD. In effect, this will enable users to review disciplinary records of securities salespersons regardless of whether employed by banks or brokers. Banking regulators, however, are not acting to approve the proposed rule pending congressional action on H.R. 10.

    Recommendation: To help maintain investor confidence in the securities markets, SEC should work with NASD, the North American Securities Administrators Association, and the Department of the Treasury to increase disclosure of CRD data pertinent to the detection of unscrupulous brokers that migrate from the securities industry to other segments of the financial services industry.

    Agency Affected: United States Securities and Exchange Commission

  3. Status: Closed - Implemented

    Comments: SEC approved a rule expanding information available to investors through the NASD hotline. This implements part 2 of the recommendation. Part 1 was implemented when the CRD redesign is completed, which would require direct reporting to CRD by regulators and SROs.

    Recommendation: To help maintain investor confidence in the securities markets, SEC should direct SRO to enhance and increase the reporting of information to CRD. Specifically, SEC should direct that: (1) SRO disciplinary actions be reported directly to CRD; and (2) information on customer complaints and their dispositions be collected, monitored, and reported to CRD. SEC should also work with NASD to develop procedures to balance regulatory surveillance and public disclosure interests pertaining to disclosure of customer complaint and complaint disposition information to regulators and investors.

    Agency Affected: United States Securities and Exchange Commission

  4. Status: Closed - Implemented

    Comments: SEC worked closely with the NASD redesign team and fully supports the new CRD as a critical element in the effort to identify problem brokers.

    Recommendation: To help maintain investor confidence in the securities markets, SEC should monitor the CRD redesign to ensure that it provides the capability to allow regulators to more easily identify and monitor brokers with disciplinary histories.

    Agency Affected: United States Securities and Exchange Commission

  5. Status: Closed - Implemented

    Comments: In May 1994, SEC issued the Large Firm Project, which presented the findings of a SEC staff study of the hiring, retention, and supervisory practice abuses of nine of the largest domestic broker-dealers. SEC, in conjunction with SROs and securities industry participants, has begun implementing a number of recommendations resulting from the Large Firm Project. As a result of the project, SEC released a letter to all SRO dated August 4, 1994, that reiterates SEC's position regarding the imposition of a permanent bar for individuals that commit the most egregious violations.

    Recommendation: To help maintain investor confidence in the securities markets, SEC should implement the recommendations of the SEC staff study to strengthen existing disciplinary standards, including the imposition of a permanent bar with no opportunity for reentry, when warranted.

    Agency Affected: United States Securities and Exchange Commission

  6. Status: Closed - Not Implemented

    Comments: Banking and securities regulators have worked out an agreement and proposed rule under which bank securities personnel would take NASD qualification exams and be registered in CRD. In effect, this will enable users to review disciplinary records of securities salespersons regardless of whether employed by banks or brokers. Banking regulators, however, are not acting to approve the proposed rule pending congressional action on H.R. 10.

    Recommendation: The Secretary of the Treasury should work with SEC and other financial regulators to determine whether legislation or additional reciprocal agreements between SEC and other financial regulators are necessary to prevent the migration of unscrupulous brokers to other financial services industries.

    Agency Affected: Department of the Treasury

 

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