Securities regulators are finally taking notice of a loop hole in the securities laws that allow securities brokers who have lost their licenses to keep selling investments. A recent article in the Wall Street Journal (WSJ) highlighted the fact that some brokers who have lost their securities license by violating securities laws and industry practices continue to sell securities by using their insurance broker licenses. The WSJ quoted Mr. Woodwell, a vice chairman of the enforcement section at the North American Securities Administrators Association, as estimating that there are at least 1,000 instances nationwide of former securities brokers with insurance licenses.
Unfortunately, in my experience clients rarely check a broker’s background, licenses, or qualifications before allowing the advisor to manage their accounts. Because of the trust that clients place in brokers, clients can be sold financial products that are unregistered securities and are being sold outside of the proper distribution channels. It is ironic that an insurance salesman may, in some instances, be using their insurance license to continue the same inappropriate business activities that got the broker ousted from the securities industry in the first place.
In practice the insurance license allows the broker to potentially continue wrongful investment activity because the insurance license acts as an umbrella under which salesmen can pitch a variety of financial related products. Many investors are taken in by these securities schemes because their licensed insurance broker has an air of credibility and trustworthiness. An insurance license can create that impression of credibility for an investor even if that same insurance broker was previously barred from the financial industry.
Some regulators are now zeroing in on the loophole and seeking to close it. Keith Woodwell, director of the Utah Division of Securities stated that “if you do something bad enough to lose the securities license, you probably shouldn’t have an insurance license either.” Several states including Alabama, Utah, Florida, and Maine are starting to act in some fashion to limit the public’s exposure to financial brokers masquerading as insurance salesman.
According to the WSJ, Alabama plans to institute a policy that would revoke someone’s insurance broker license once their securities license is revoked. The new proposed rule would also apply in reverse by stripping the broker of their securities license once they lose they insurance license. Utah, Florida, and Maine have also sought a decrease in financial fraud by improving information sharing between the securities and insurance departments. These state regulators hope to prevent banned brokers from using their insurance licenses to wrongfully sell investment products to clients.
The WSJ cited a court case against Richard Gearhart as an example of an insurance salesman that pitched a financial product, in this case promissory notes, with a guaranteed 8% annual return. According to the complaint retirees bought the notes in 2010 and say that they didn’t know that Mr. Gearhart hadn’t had a license to sell securities since 1997. According to the WSJ, Gearhart had been permitted to resign at the end of 1996 from an Indiana broker-dealer after a customer complaint. Court documents state that the notes were backed by a company run by Mr. Gearhart that eventually stopped paying interest and lost their value. Mr. Gearhart now faces at least nine lawsuits from clients concerning the sales of the promissory notes.
To learn more about Adam Weinstein, visit his site at www.ganalawfirm.com.