According to FINRA, one out of every eight brokers has one to four disclosures, which may include customer complaints, bankruptcy, certain criminal charges, regulatory action and termination. All of these can be leading indicators of potential risk. To protect investors, FINRA continues to place significant focus on risky sales practices. In 2014, FINRA has expanded its High Risk Broker program, created a dedicated Enforcement team, and is employing technology-enabled risk analysis to identify individuals and firms to prioritize surveillance and conduct focused examinations and enforcements.
Among the greatest challenges faced by broker-dealers is the ability to readily identify potential risk, on an ongoing basis, among the firm’s registered representative population before it causes reputational harm. For mid-sized to large firms, rep populations can number in the hundreds to thousands, exacerbating the oversight task. The inability to bring together the aggregate of compliance and other data, in precise views, to identify red flags that warrant immediate attention is core to the challenge.
A firm’s best defense is a sound, proactive compliance program, rigorous oversight of sales practices and rep behavior, and the employment of technology to identify potential risk at the earliest possible juncture.