The Securities and Exchange Commission today charged a San Diego-based broker-dealer with failing to reasonably supervise one of its registered representatives who engaged in unauthorized fraudulent trading in the accounts of two Florida municipalities.
This is an all-too common problem with brokerage firms. While the large majority of brokerage firms mean well and supervise properly there remain a large number of brokerage firms who either cannot properly supervise their operation for various reasons or worse yet, there are firms who don’t really care about proper supervision. This particular instance involved a common scenario where the brokerage firm is in California, the broker is in Houston, and the client is another state. It is difficult for firms to properly supervise their geographically dispersed registered representatives/brokers. What happens is the classic ‘when the cat’s away the mice shall play’ scenario resulting in fraud such as the SEC charged in this case against the broker himself.
What to do? Proper supervision can be done if the brokerage firms are held accountable but they resist because supervisory personnel are a cost instead of a profit center for the brokerage firms. Thus many brokerage firms will opt for less supervisory personnel and factor into their cost of doing business the settlements and fines they have to pay for not having proper supervision. One possible solution would be ensure that the SEC is actually focusing on this issue; it may be more expensive for the SEC but will protect many, many investors.
Here’s a link to the SEC’s press release: http://www.sec.gov/news/press/2010/2010-35.htm