Securities Markets

Actions Needed to Better Protect Investors Against Unscrupulous Brokers Gao ID: GGD-94-208 September 14, 1994

Unscrupulous brokers--persons licensed to sell securities who have seriously breached sales practice rules or have a history of repeated sales practice violations--can significantly harm investors financially and can erode public confidence in the securities market. Although unable to determine the exact extent to which unscrupulous brokers are operating in the securities industry, GAO obtained data showing that of almost 470,000 active brokers, about 10,000 had at least one formal disciplinary action taken against them for a variety of violations, including sales practice abuse; 816 had three or more disciplinary actions. Precise information on unscrupulous brokers is unavailable because abusive sales practices are often difficult to detect and the Central Registration Depository--a data base maintained by state regulators and the National Association of Securities Dealers--does not describe informal disciplinary actions taken against brokers and does not provide summary data by type of violation for the disciplinary histories it maintains. Available evidence points to shortcomings in the detection and discipline of unscrupulous brokers. Furthermore, GAO found that some practices contribute to a perception that Securities and Exchange Commission and industry disciplinary actions are lenient. For example, brokers who were permanently barred have been able to reenter the industry. Also, brokers barred from the securities industry are free to work in other financial sectors, such as the banking and insurance industries. GAO summarized this report in testimony before Congress; see: Securities Markets: Actions Needed to Better Protect Investors Against Unscrupulous Brokers, by James L. Bothwell, Director of Financial Institutions and Markets Issues, before the Subcommittee on Telecommunications and Finance, House Committee on Energy and Commerce. GAO/T-GGD-94-190, Sept. 14, 1994 (eight pages).

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.


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