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Regulators To Increase Scrutiny Of Barred Brokers With Insurance Licenses

By Dennis A. Stubblefield, Esq.and Paris Novinni of Shustak Reynolds & Partners, P.C. posted on Friday, June 26, 2015.

Dennis A. Stubblefield

Dennis A. Stubblefield


State regulators are setting their sights on barred securities brokers who continue to sell insurance and other financial products, it was reported recently. According to the Wall Street Journal, the National Association of Insurance Commissioners (NAIC) wants to improve coordination among regulators to ensure that such agents are monitored more closely in an attempt to protect consumers from potential harm.  According to its website, the NAIC is the U.S. standard-setting and regulatory support organization created and governed by the chief insurance regulators from the 50 states, the District of Columbia and five U.S. territories.

Though it is not illegal per se for representatives to sell insurance following a securities-industry bar by the Financial Industry Regulatory Authority (FINRA), concerns have been repeatedly expressed that brokers who have been barred over prohibited conduct such as identity theft, misappropriating customer funds, or failing to provide FINRA with required information, should be observed more diligently by state insurance regulators.

 Following the adoption of new policies, NAIC staff will review monthly FINRA disciplinary reports that catalog recently barred stockbrokers.  The staff will then run flagged names from FINRA’s list against NAIC’s database of insurance agents to determine if any individuals are a match and notify state insurance regulators for necessary and appropriate verification and follow-up. Changes are projected to go into effect as early as next month.

Although these new procedures do not force states to invalidate the licenses of barred brokers, state regulators generally have the discretion to do so if they deem it necessary. Under California Insurance Code sections 1738 and 1669, insurance representatives who have previously had their broker licenses revoked by FINRA may find their insurance licenses being suspended or revoked by state regulators; this can occur without a hearing. Fredrick M. Ray, Esq., an Orange County practitioner who specializes in representing licensed professionals, warns that the new regulations may be extremely problematic for any agents that are affected: “Summary revocations can be appealed; however, the effect is immediate and devastating. This development will certainly up the stakes for insurance producers in California who settle for a FINRA bar under the belief that their insurance licenses will remain valid and safe from discipline.”  

Our view is that this NAIC development is reflective of the new reality in federal, SRO and state enforcement: that of regulators/enforcers taking their game to the next level and putting into place seemingly more robust cooperation.

Considering the impact that this new NAIC initiative could have on registered representatives, and the broker-dealers who employ them, firms may wish to reach out proactively and notify all their representatives who hold insurance licenses of these upcoming changes and the potential consequences that may later ensue.

Dennis A. Stubblefield, Esq., is a partner with the firm whose practice focuses on securities enforcement defense. Dennis can be reached personally at our Irvine office on 760.533.0233. Alternatively, contact us via our website today for a confidential analysis of your situation.

Paris Novinni is a legal extern at Shustak Reynolds & Partners, P.C.


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