Brokers Penalized Lightly
How big an offense do you have to commit to get fired?
What if you steal from customers? Lie? Charge illegal markups? Make purchases on their behalf without their authorization?
If you’d like to do these things but your boss won’t let you, maybe you should become a stockbroker.
Of course, statistics show that most stockbrokers don’t do these things, and the reputable firms quickly dump the ones who do.
Still, customer complaints to regulators have soared in the last few years. The issue of fraud and improper practices is big enough that Securities and Exchange Commission Chairman Arthur Levitt has made it his top priority.
Why would a brokerage hire and retain brokers with bad records? Because it’s a money-obsessed culture, and crooked brokers can be big producers. Even at big-name firms, sleazy brokers have been kept on long after customers complained to the bosses.
For a clear look at the industry’s values, you need only look at the “Sanction Guidelines” issued by the National Association of Securities Dealers. This is the brokers’ organization that the SEC has authorized to handle customer complaints.
Below are some of the NASD’s recommended penalties, and they speak for themselves. For perspective on the fines, note that in 1994, the latest year for which statistics are available, the average broker earned about $117,000. The bull market since then has surely pushed that up.
A bar, incidently, is an NASD order that the broker be permanently banned from the business, making it illegal for any firm to employ him. A suspension is temporary.
Churning - excessive trading in a customer’s account to build up commissions. Fine the broker $5,000 to $50,000 plus the amount of commissions earned. Suspend the broker for “up to 60 days.” For multiple offenses, consider a longer suspension or bar.
Unauthorized trading - buying or selling on the customer’s behalf without written authority. Fine equal to the commissions earned plus $2,500 to $10,000. No bar or suspension if it was only a failure to put an oral authorization into writing. In case of numerous violations, “substantial customer losses” or intentional and reckless misconduct, “consider a 10- to 30-day suspension.”
Stealing - officially called conversion or improper use of a customer’s funds or securities. The penalty is restitution plus a fine of five times the amount involved, a bar from the industry and, in cases involving $10,000 or more, referral to lawenforcement authorities.
Forgery and/or falsification of records - such as acts to hide wrongdoing or make it seem that improper activities were authorized. Fine of $5,000 to $50,000 and, in “egregious cases,” a bar. A suspension “if there is no harm to customer and/or firm.”
Guaranteeing a customer against loss - an element in many frauds. Fine of $2,500 to $10,000 plus the amount earned in commissions. “In cases involving one guarantee to one customer and little or no loss to the customer, a suspension of the respondent is not warranted.” In more serious cases, such as when a customer has lost money, a 10- to 30-day suspension.
Markup violations - a common element in stock frauds that generally means selling a customer a security at a price more than 10 percent above its price on the open market. A fine equal to the excessive markup, plus $5,000 to $50,000. No suspension in “limited” cases. A suspension of up to three years or permanent bar for repeated offenses.