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Be wary of stockbrokers who fail securities exam repeatedly

Raymond James stockbroker Karen L. Gallahar got some unwanted attention this week in a nationwide analysis that shows brokers who repeatedly failed a basic securities exam tend to have worse disciplinary records.

According to the Wall Street Journal, Gallahar amassed 23 customer disputes related to her selling Morgan Keegan mutual funds. Many of those funds experienced significant losses in the financial crisis, resulting in total settlement payouts of more than $775,000 to client investors by her employer.

The analysis says Gallahar failed her Series 63 exam four times. She works as a first vice president in Montgomery, Ala., for Raymond James, which 14 months ago acquired her previous employer, Morgan Keegan.

Gallahar declined comment. But she is just one of more than 51,500 stockbrokers across the country who failed at least once to pass the exam required to sell securities. The analysis found that the more times a qualifying exam was taken, the higher the average number of black marks against a broker ranging from customer complaints and regulatory actions to criminal charges. The Journal found that less than 15 percent of stockbrokers who passed the securities exam the first time had red flags on their records. But more than 21 percent had red flags if they took the exam five or more times before passing.

That is information that Wall Street regulators do not disclose to investors.

What should already market-wary investors take away from these findings? Are people who repeatedly fail exams to become stockbrokers less smart or disciplined than their test-passing peers, or just too young at the time or less committed to the job?

It seems to be some combination of adverse factors that increases the likelihood of taking shortcuts on the job that generate disciplinary actions.

Bottom line? More than ever, you better know if your stockbroker has a clean bill of professional health.

While anyone who invests should carefully check their financial adviser's background, few folks do. Several years ago, a survey by the Wall Street watchdog Financial Industry Regulatory Authority found only 15 percent of investors had checked on an adviser with a state or federal regulator.

The Journal reports that FINRA, partially in response to the paper's analysis of brokers, plans to propose new rules that would require brokerage firms for the first time to do formal background checks on new employees, including brokers hired from other firms. FINRA also intends to vet the information publicly reported for each of the approximately 630,000 stockbrokers it oversees against public court records.

The moves follow a Journal report in March that revealed more than 1,600 brokers had bankruptcy filings or criminal charges that were not publicly reported. That is a violation of FINRA regulations.

Think you've properly vetted your broker? Try again. Better disclosure is ahead.

Contact Robert Trigaux at rtrigaux@tampabay.com.

Three ways to vet a stockbroker

1. The Financial Industry Regulatory Authority (finra.org) operates a database called BrokerCheck that stores key information on more than 1.3 million current and former stockbrokers and 17,000 current and former brokerage firms. Data include a stockbroker's work history and lists any investment related investigations, disciplinary actions, arbitrations, criminal records and bankruptcies.

2. The Securities and Exchange Commission offers guidance (sec.gov/investor/brokers.htm) on how to get background data on brokers and advisers.

3. State regulators also track brokers and advisers. In Florida, that agency is accessible at flofr.com.

Be wary of stockbrokers who fail securities exam repeatedly 04/16/14 [Last modified: Wednesday, April 16, 2014 10:38pm]
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