Securities MarketsActions Needed to Better Protect Investors Against Unscrupulous Brokers Gao ID: T-GGD-94-190 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.