Heed the red flags. This is the thrust of a new NASD proposal that would require brokerage houses to devote extra supervision to reps with extensive numbers of complaints or regulatory actions against them. The proposal would require that firms pay more attention to brokers who drew more than three customer complaints or regulatory actions in the last five years and/or two or more terminations or "internal firm reviews" involving wrongdoing. The NASD has previously issued only guidelines on this matter, not requirements. "I think it’s a good idea," says Chicago-based securities attorney James Eccleston of the proposal. He notes that the current guidelines are not very specific and leave special supervision largely to the discretion of individual firms. "Having this bright-line test will make it easier for firms to apply," he says, making it easier to achieve the goal of protecting investors from unscrupulous brokers.
In the last five years, 2,751 brokers have logged more than three customer complaints, 216 have had more than three investigations or regulatory actions and 1,198 have been fired or subjected to an internal review, according to the NASD.
"Investors face higher risk dealing with a broker who has a long regulatory record," says Robert Glauber, chairman and CEO of NASD, in a statement. "Securities firms must respond to that risk with enhanced controls."
The Securities Industry Association hasn’t formally commented on the proposal yet. However, an SIA spokeswoman said the association is looking at it, and that while the idea of tough regulation is one the SIA supports, "we’re concerned that the ‘three complaints and you’re marked’ approach may be arbitrary—for instance, what about three unfounded complaints?"
There are currently approximately 663,000 registered representatives with the NASD. Representatives from major wirehouses, including Merrill Lynch, UBS Securities and Wachovia Securities, declined comment.
