For years a battle has been waged between investors (and their advocates - ie, attorneys) and the broker-dealer industry over whether brokers have a fiduciary duty to their clients. A fiduciary duty is a legal obligation to act solely and faithfully in another’s best interest, typically a client’s best interest. Brokerage firms however will often insist, during a dispute over misconduct or malfeasance, that they do not have such a duty; that they are rather simply order-takers executing the wishes of their clients.
Some brokers start cheating early. A recent Reuters piece reminded us of how important it is for retail investors to remain ever-vigilant when dealing with representative of a financial industry so rife with rule-benders and rule-breakers. As you may know, the industry watchdog, FINRA (Financial Industry Regulatory Authority) requires would-be brokers to pass a series of licensing exams before they can handle other people's money. The most common exam is known as the "Series 7," or general stockbroker exam, and it's a 250 multiple-choice question test that ensures candidates have a strong grasp of industry rules and regulations as well as how to invest appropriately according to client risk tolerances and investment objectives. In 2012, according to FINRA, around 32% of Series 7 test-takers failed the exam. Another handful cheated and got caught. Who knows how many cheated and didn't get caught.
Normally, a candidate who gets caught cheating on any of the FINRA exams will be banned from the financial industry. In rare cases, he or she will receive a lengthy suspension. Some of the more colorful examples of broker cheating include hiring a better prepared test-taker to ace the exam; stashing review materials in the ceiling tiles of a test center bathroom; and using the old cheat-sheet during the test. Although new technologies such as palm scanning, test randomization (which means each individual gets a unique test generated from scores of possible questions, so peeking at your neighbor's answers is pointless), and in some cases video surveillance have significantly cut back on the amount of broker subterfuge going on each year, the impulse to game the system remains alive and well in some shady quarters. And apparently it's not just aspiring brokers who are guilty of cheating, it's test-prep professionals, too, who try to steal test questions to better prepare their students.
Although it's amusing to hear anecdotes like these, which harken back to high school midterms or the SATs, we must remember that these cheaters could have been our future brokers, the ones handling our life-savings or 401Ks. And again, not every cheater gets caught. And some cheaters, as we've seen in so many of our cases, are late bloomers. They wait till they pass their exams before they really start cheating.
If you or anyone you know has been the victim of broker fraud or misconduct, please contact us immediately for a free consultation.