The Costs of Federalism in Financial Advice

65 Pages Posted: 18 Feb 2021 Last revised: 22 Jul 2021

See all articles by Colleen Honigsberg

Colleen Honigsberg

Stanford Law School

Edwin Hu

New York University School of Law

Robert J. Jackson, Jr.

Professor of Law

Date Written: January 20, 2021

Abstract

Financial advisor misconduct often has devastating consequences, leading lawmakers to seek tightened investor protections at the federal level. But many advisors can choose whether to be federally regulated or instead overseen by state insurance regulators, giving advisors with a history of misconduct incentives to select the more lax, state-level regulatory environment. Despite significant debate over the regulation of financial advice, no prior work has examined those incentives.

Using a novel dataset, this Article identifies thousands of financial advisors who have committed serious misconduct and exited the primary federal regulatory regime—yet continue to advise investors, often using state insurance licenses. Advisors who exit are disproportionately likely to harm investors in the future. And advisors who do this are overwhelmingly male: women with a history of serious misconduct are more likely to exit financial services entirely.

Our analysis identifies a limit of federal lawmaking in this area: federal regulators rely on state regulators, who may be captured by the insurance industry. We show that more than one in ten state legislators who oversee insurance regulation are now, or were previously, in the business of selling insurance. We argue that existing tools for federal regulation of advisor misconduct risk the unintended consequence of pushing the worst advisors into poorly regulated state regimes.
with tools to address this phenomenon.

Keywords: broker, advisor, adviser, insurance, wandering, regulation, misconduct, FINRA, SEC, CFTC, NAIC, consumer finance

JEL Classification: G24, G28, D14, D18, K22, K23

Suggested Citation

Honigsberg, Colleen and Hu, Edwin and Jackson, Jr., Robert J., The Costs of Federalism in Financial Advice (January 20, 2021). NYU Law and Economics Research Paper No. 21-02, Available at SSRN: https://ssrn.com/abstract=3769653 or http://dx.doi.org/10.2139/ssrn.3769653

Colleen Honigsberg

Stanford Law School ( email )

559 Nathan Abbott Way
Stanford, CA 94305
United States

Edwin Hu (Contact Author)

New York University School of Law ( email )

40 Washington Square South
New York, NY 10012-1099
United States

Robert J. Jackson, Jr.

Professor of Law ( email )

40 Washington Square South
New York, NY 10012-1099
United States

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
242
Abstract Views
1,086
rank
155,585
PlumX Metrics