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Star Brokers’ Wings Clipped by Increased Regulatory Scrutiny

Star Brokers’ Wings Clipped by Increased Regulatory Scrutiny

A widely accepted reality of the financial industry is that management typically turns a blind eye to potential indiscretions of star brokers — the top 1 percent. This is to avoid antagonizing the agents who bring in humungous amounts of money in fees and commissions.

But big producers are now facing tough questions from regulators about alleged violations. Three recent terminations of star producers have brought the issue to the fore.

Merrill Lynch recently fired Stephen S. Brown and James P. Goetz, allegedly for not disclosing outside business activities and participating in private transactions involving clients. The transactions allegedly involved non-Merrill Lynch products. In addition, Goetz allegedly was less than forthcoming during an internal review. Both men managed $2.5 billion at Merrill Lynch.

Similarly, LPL Financial let go James “Jeb” Bashaw for allegedly participating in private securities transactions without providing written disclosure or obtaining written approval from the firm. Bashaw also allegedly borrowed money from a client — a big infraction in the securities industry.

With total assets of $3.8 billion, Bashaw had about two dozen advisers reporting to him. In 2011, Barron’s magazine ranked Bashaw as the top financial adviser in Texas.

Making securities transactions without broker-dealer approval is commonly known in the industry as “selling away.” It’s one of the most common allegations made against advisers.

Clients often remain loyal to these star advisers because of their superior performance, and because the clients are often unaware of allegations facing the advisers.

Industry recruiter Jon Henschen said that as recently as five years ago, much more regulatory grace was given to large producers. However, he notes that today, regulators, including the Financial Industry Regulatory Authority Inc. (FINRA), are paying more attention to selling away.

Danny Sarch, another industry recruiter, notes that the Securities and Exchange Commission (SEC) is paying more attention to selling away. He adds that the prevailing notion in the industry is that nobody is bigger than the firm’s reputation. So you fire before the firm’s reputation is stained.

Through threats and fines, FINRA and the SEC have made securities industry CEOs and presidents increasingly fearful. So they prefer to forgo huge revenues from top producers in favor of keeping their firms’ reputation intact.

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

Source: Investment News