Regulatory Leakage Among Financial Advisors: Evidence From FINRA Regulation of 'Bad' Brokers

57 Pages Posted: 18 Apr 2023 Last revised: 26 Oct 2023

See all articles by Colleen Honigsberg

Colleen Honigsberg

Stanford Law School

Edwin Hu

New York University School of Law

Robert J. Jackson, Jr.

New York University School of Law

Date Written: October 10, 2023

Abstract

We create a single database containing four categories of financial advisors: (1) brokers regulated primarily by FINRA, (2) investment advisers regulated by the SEC, (3) investment advisers regulated primarily by state regulators, and (4) insurance producers. There is significant overlap across the categories; more than 40% of the advisors are registered with more than one regulator. We examine how this regulatory fragmentation intersects with regulatory discipline by studying two FINRA rules designed to nudge “bad” brokers out of FINRA’s regulatory regime. Although the rules caused thousands of high-risk brokers to exit the FINRA broker regime, 98% of those who exited are currently registered with state regulators as insurance producers.

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

JEL Classification: D18, K20, K22, K23, G24, G28

Suggested Citation

Honigsberg, Colleen and Hu, Edwin and Jackson, Jr., Robert J., Regulatory Leakage Among Financial Advisors: Evidence From FINRA Regulation of 'Bad' Brokers (October 10, 2023). Available at SSRN: https://ssrn.com/abstract=4410143 or http://dx.doi.org/10.2139/ssrn.4410143

Colleen Honigsberg

Stanford Law School ( email )

559 Nathan Abbott Way
Stanford, CA 94305
United States

Edwin Hu

New York University School of Law ( email )

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

Robert J. Jackson, Jr. (Contact Author)

New York University School of Law ( email )

Bobst Library, E-resource Acquisitions
20 Cooper Square 3rd Floor
New York, NY 10003-711
United States

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