Broker-Dealer Agent Licensing and Its Impact on Investor Protection

Full Text Study | Executive Summary

The Department of Banking has always supported legislative efforts at both the state and federal levels to reduce the regulatory burden on financial services firms. However, we have been very troubled by proposals put forth by the Securities Industry Association ("SIA") which we believe would be harmful to Connecticut investors. Congress is now considering SIA recommendations in drafting legislation, the Securities Markets Enhancement Act of 1999 ("SMEA"), purportedly to improve our securities markets.

One SIA proposal, currently removed from active consideration by the Senate Banking Committee, would have dismantled the current system of multiple state registration for broker-dealer agents and created a "home state" licensing system. Agents who are registered with the National Association of Securities Dealers and with the state from which they conduct business, according to the SIA proposal, would not be subject to other states' review. Since, on average, more that 90% of the agents registered in a particular jurisdiction are from out-of-state, this would severely restrict the ability of states to protect their citizens.

As Connecticut investors trust broker-dealer agents to help them meet such important financial goals as investing for college, retirement and medical needs, we believe agents should be held to high professional and ethical standards. Yet under the SIA proposal, agents with histories of criminal conduct including attempted murder, assault, drug possession, theft and further offenses that would quickly disqualify other professionals from pursuing their vocation would become automatically licensed in Connecticut.

In response to the licensing proposal, the Securities Division conducted a study to show how easily applicants with extensive histories of disciplinary actions and criminal convictions can become registered to sell securities. The report, titled "Study of the Effect of Industry Hiring Practices and SRO Agent Licensing on Connecticut Investor Protection," documents industry firms willing to overlook egregious conduct for the sake of commission dollars agents will generate. The report has been provided to Congress and other parties and is available on the agency's web site.

While it advocates lax licensing standards and would deny states the basic right to determine who can do business within their borders, the SIA also seeks to limit the ability of states to act against violators by restricting rescission remedies and enforcement actions, proposals that would further jeopardize Connecticut investors. We believe these proposals will shield a small, unsavory segment of the industry from scrutiny and penalize the entire industry by eroding the confidence American investors feel towards our markets.