Former FINRA Brokers with Misconduct Histories Flock to Insurance Industry, According to Recent Study
From the desk of Jim Eccleston at Eccleston Law
A recent academic study reveals that thousands of brokers expelled from the securities industry for misconduct nonetheless continue to operate under state insurance licenses, often selling annuities and other financial products to unsuspecting clients.
According to InvestmentNews, researchers Colleen Honigsberg, Edward Hu, and Robert J. Jackson Jr. published a paper titled “Regulatory Leakage Among Financial Advisors: Evidence from FINRA Regulation of ‘Bad’ Brokers” in the Journal of Financial Economics. The study examined data from 2012 to 2022 across FINRA, the Securities and Exchange Commission (SEC), and state insurance regulators. It found that the insurance industry has become a refuge for brokers with problematic histories.
The authors concluded that “insurance seems to attract FINRA brokers with a history of misconduct” and that “bad brokers flow to insurance.” Unlike securities, insurance is regulated at the state level, where oversight is inconsistent and often less stringent, as reported by InvestmentNews. Indeed, the report found that 98 percent of FINRA brokers who left the securities industry remained active in the insurance business, often retaining authority to sell investment-type products. The researchers described the ongoing movement between sectors as a “game of whack-a-mole” between regulators and bad actors.
Out of 127,865 financial advisors who exited FINRA’s BrokerCheck database during the study period, 65,384 continued working as insurance producers. Roughly 10.3 percent of those individuals had a record of “serious misconduct”—including criminal infractions, regulatory violations, civil judgments, or employment terminations for improper conduct. According to InvestmentNews, that rate is nearly five times higher than among former FINRA brokers who became SEC-registered investment advisers.
The authors urged state insurance regulators to use FINRA’s high-risk broker profiles—developed since 2018—to identify and monitor problematic individuals more effectively. InvestmentNews notes that the message in the report is clear: without stronger oversight, bad brokers will continue finding safe harbor in the insurance industry.
Eccleston Law LLC represents investors and financial advisors nationwide in securities, employment, transition, regulatory, and disciplinary matters.
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