It seems that whenever an economy goes
through a strong contraction, the
fraudsters float to the surface. Just
think back to our last recession in the
early 2000s and the shenanigans
uncovered at Worldcom and Enron. Then
fast-forward seven years. Today’s global
markets are in a recession unlike any
previous one we have seen in more than
seven decades. Top executives of the
world’s largest investment firms have
been confronted with the reality that
their once stable organizations now are
on the brink of collapse. Our largest
companies—AIG, General Motors, and
others—are selling stock to the United
States Federal Reserve Board or taking
bail out “loans” to avoid bankruptcy.
And who is popping up? The fraudsters.
In December there was Bernie Madoff, the
famous New York trader charged with
perpetrating what may be the largest
investor fraud ever committed by a
single person. Then there was the
dramatic “disappearance” of Marcus
Schrenker, who now faces two counts for
working as an investment adviser without
being registered and is alleged by his
clients to have deposited their
investments directly into his own
account. One has to wonder how many
other Madoffs and Schrenkers are out
there, and why financial institutions
don’t do a better job of protecting
consumers from investment fraud. The
reasons are part systemic and part
laziness. The licensing and appointing
process for insurance agents and
securities representatives is a complex
system in which each state has its own
specific rules and regulations for
producers who sell insurance and
securities products within their state.
Because of the disparities between state
regulatory requirements, many of these
rules and regulations are subject to
different interpretation by the
insurance and securities companies. The
disparities also create the opportunity
for producers to act unethically, or
even illegally, and “slip through the
cracks” without being noticed by the
regulators. While the system is
imperfect, there are steps that
insurance and securities companies can
take to help protect investors. First,
they shouldn’t wait for mandatory
compliance regulation. Getting by with
the minimum oversight required by law is
not in the best interest of consumers.
Proper due diligence is critical to
ensure that financial institutions are
onboarding properly qualified, ethical
and law abiding producers and
representatives to sell their products.
The first and most critical step in this
process is a thorough background
investigation of producers and
representatives. Background
investigations currently are conducted
for each individual who chooses to sell
insurance and securities products as
part of the onboarding process. However,
not all states explicitly require
background checks and many financial
institutions choose not to perform these
background checks in states in which
they are not required. In addition, few
if any organizations perform follow-up
background investigations after this
initial check. Financial institutions
need to be much more diligent and should
conduct follow-up background
investigations on their
agents/representatives on a regular
basis to ensure that their records have
not changed over time. Another
opportunity for insurance carriers to
perform due diligence on their producers
is to utilize a service such as Vector
One. Vector One, for example, enables
insurance carriers and agencies to
perform checks to ensure that producers
do not carry a debit balance with
organizations. A debit balance can occur
when the producer receives commission
advances on policies that are never
permanently placed. Many organizations
state cost as the primary reasons for
performing only the minimum required due
diligence while onboarding producers.
One must wonder if all the bad press and
subsequent mistrust from customers is
worth the cost savings of not performing
thorough background and Vector One
checks. Insurance and financial
institutions also can utilize compliance
software applications to help track
complaints consumers make against a
producer/representative. Brokers/Dealers
are required to follow specific
procedures when a consumer files a
complaint. Kaplan Compliance Solutions
developed software that is available
today that helps broker/dealers track
complaints, then file timely and
accurately reports to the Financial
Industry Regulatory Authority’s (FINRA)
centralized complaints database.
Consumers and financial institutions can
access FINRA’s complaints database to
check specific broker/dealers and
investment firms to see if they have
conducted any unethical activity. The
talk in Washington is all about
transparency. The tools to provide a
level of transparency to help avoid
investment fraud already are available.
Financial institutions must be committed
to using them. Given the recent events
that have taken place in the financial
sector, it’s likely that more
regulations and procedures will be
imposed to protect consumers in the
coming months. How extensive the
regulation will be is yet to be
determined.
