SIFMA Fires Back at "Inflated Claims" Made in "Flawed" Academic Report on Financial Advisor Misconduct

Steven Lofchie Commentary by Steven Lofchie

In a recent post on its "Pennsylvania + Wall" blog, SIFMA criticized an academic report titled "The Market for Financial Misconduct" (the "Report") that makes "overly broad and inflated claims" concerning the level of misconduct among financial advisors. The Report, which was written by business school professors at the University of Chicago and the University of Minnesota, has received significant media coverage.

Specifically, SIFMA argues:

  • The Report misleads with the claim that 7% of all advisors have misconduct records based on customer complaint figures from the FINRA BrokerCheck database. SIFMA stated that "about 60%" of the customer complaints compiled in the database are resolved by settlement for reasons that may have nothing to do with advisor misconduct.

  • Many customer claims concern "product" failures that do not necessarily indicate advisor misconduct, but are "more closely tied to the downside risks of the product."

  • The Report considers all FINRA BrokerCheck disclosures about civil and criminal records, regulatory actions and employment separations after allegations of "misconduct." Using all disclosures creates a questionable interpretation, SIFMA argues, since many of those disclosures do not relate to retail sales practices.

  • The Report classifies every single individual who is registered with FINRA – over 640,000 registrants, at last count – as "advisors," even though less than half of those individuals are Series 7-licensed, client-facing financial advisors.

  • The Report fails to "properly credit [the securities regulators'] fairly well-functioning regulatory regime, and the diligence, care and hard work that . . . members and their financial advisors put in each day to protect their clients and help them achieve their financial goals."

SIFMA also claimed that the authors of the Report have "no reasonable basis" for their "sensational charge" that "certain firms business models specialize in misconduct," and noted that the inference of such a charge is "simply not the kind of conclusion that flows logically from dispassionate and rational examination of data. Rather, it seems to suggest an anti-industry bias."

SIFMA stated that it welcomed further studies of the securities industry, but stressed that the "stud[ies have] to get it right, too, and this one missed the mark on some key points."

Commentary

More of this kind of back-and-forth exchange between the industry and industry observers (expressing views that are both positive and negative) is needed. The authors of the Report should take the SIFMA response as an opportunity to defend their work or add to it. The broad conclusions of the Report should encourage others to comment as well. An important goal is to avoid a situation in which open discussion disappears in the wake of political intimidation.

Notwithstanding the results of the professors' study, a good argument could be made that the sanctions imposed on persons who are charged with misdeeds are quite severe, even in cases in which those persons are able to get other jobs in the same industry.

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