How Regulators - And YOU - Can Identify a "High-Risk" Broker

Not every broker is created equal. A certain percentage of brokers engage in behavior that causes regulators to identify them as "high-risk." If regulators, like the securities industry watchdog, FINRA (Financial Industry Regulatory Authority), deem a certain financial advisor "high-risk," that FA's sponsoring broker-dealer will be asked to take on additional measures to ensure compliance by the FA.

Unfortunately, broker-dealers don't always comply with compliance; and some brokers who are engaging in high-risk trading or other behaviors simply have not yet been caught by regulators. 

How FINRA Determines High Risk in Brokers

According to FINRA, while there is no airtight definition of a high-risk (yet), the regulatory body deploys a set of criteria to help identify these individuals and ratchet up the oversight on them. Using data from FINRA's recently developed advanced analytics team, FINRA looks the the following criteria:

  • Settlements
  • Complaints
  • Disclosures
  • Employment history/termination history
  • Exam attempts
  • Geography — where the rep is located
  • Individuals who associate with high-risk brokers

FINRA's calls these criteria the "qualitative assessment." What follows is  a quantitative assessment in which FINRA looks at the sheer number of complaints, settlements, disclosures, etc.

At this point, FINRA may reach out to the FA's registered broker-dealer and indicate that it is monitoring the FA in question; it may also impose additional requirements for supervision on the high-risk broker. Currently, FINRA has made public for comment a proposed rule that would impose extra restrictions on member firms that employ brokers with a history of "significant" past misconduct - ie, the highest of the high risk brokers.

What Does This All Mean for You?

While much of this information may only become relevant if you bring a lawsuit against your broker or broker-dealer for misconduct - then the professional history will be become hugely relevant - the thing you should keep in mind is that there is nothing stopping you from conducting your own qualitative or quantitative assessment of your FA or a potential FA's risk profile. The easiest way to do so is to visit FINRA's BrokerCheck website, which is a comprehensive database that collects work history for registered brokers in the industry. In other words, don't wait for FINRA to decide if your broker is too high-risk for you. Make the call yourself.

PA & NJ Securities Litigation Law Firm

Name *

If you or someone you know has been the victim of broker misconduct or securities fraud, please contact our team of securities attorneys immediately to discuss your legal rights by calling toll-free 215 462 3330 or by using our online contact form.