Class Action

Ponzi Schemes

Latest News


It Matters How Often Brokers Take Their Securities Exams

It Matters How Often Brokers Take Their Securities Exams

Investors should know if a broker took his or her Series 7 and Series 63 exams more than once, because such brokers statistically accrue more disciplinary issues. This is the essence of a petition an organization of lawyers, the Public Investors Arbitration Bar Association (PIABA) presented to the Financial Industry Regulatory Authority (FINRA).

An investigation of thousands of broker records by the Wall Street Journal reveals that the more times brokers failed their security exams, the higher the average total of negative strikes on their records.

For example, those who failed the test more than twice were 77 percent more likely to have a felony or financial-related misdemeanor than brokers who passed the exam on the first try. They were also 55 percent more likely to have been terminated.

The number of brokers in question is staggering: More than 51,000 stockbrokers failed their security exam at least once.

In examining the records for some 368,000 brokers who took the Series 63 state exam, the Journal found that 3,024 brokers failed the test at least three times. These brokers were about two thirds more likely to have three or more red flags than brokers who passed the first time.

A red flag is an industry measure that shows a broker may be troubled. Customer complaints constituted the only major red flag that didn’t increase with repeated exam failures. Misdemeanors ran the gamut: unauthorized trading, churning (excessive trading to generate fatter commissions), sales of unsuitable products, high pressure sales tactics, impersonating another broker, misrepresentations and fraud.

Broker tests are the equivalent of board exams for physicians or bar exams for attorneys. Potential brokers may take the Series 7 and Series 63 exams an unlimited number of times, but a six-month wait is required to take the test after three consecutive failures.

FINRA says that like lawyers, the 633,155 brokers it regulates should be able to keep their exam scores private. The organization’s BrokerCheck web site shows only when brokers passed their exams.

In 2012, FINRA asked for public comment on disclosing more information, including exam scores, in BrokerCheck. But industry organizations strongly objected to added disclosure, saying it risked unfairly singling out brokers who took the tests repeatedly.

Rebuffing the call from the PIABA lawyers regarding more disclosure, FINRA said the lawyers provided no evidence to support a correlation between test scores and broker competence.

Brokerage houses exercise different policies regarding hiring brokers who had multiple exam failures. Some of the largest brokerage firms hire such brokers and those with several red flags.

Morgan Stanley is one of the large brokerage firms to limit how often trainee brokers can fail. Trainees at Morgan Stanley must pass the Series 7 exam on their first attempt, and the Series 63 or its equivalent within two attempts.

Scott Starr, securities lawyer at Starr Austen & Miller LLP, is a member of PIABA. Starr believes revealing the number of times brokers took their Series 7 and Series 63 exams is a crucial extra step in protecting investors.

The team of investment fraud lawyers at Starr Austen & Miller LLP handles cases involving securities arbitration misrepresentation, overconcentration, broker fraud, stock churning, negligence and breach of trust.

Source: The Wall Street Journal