Why FINRA’s BrokerCheck Is Under Fire
March 10, 2014 by Andrew Welsch
FINRA’s BrokerCheck service for investors is facing criticism on multiple fronts.
Several recent reports indicate that information may be missing in the reports provided to inquiring investors: While brokers themselves may fail to report their own financial issues or misconduct, FINRA may also fail to fully disclose a broker’s background.
The Public Investors Arbitration Bar Association, an advocacy group for investors, claims that BrokerCheck reports are missing key ‘red flag’ information, leaving investors in the dark about numerous blemishes on brokers’ records.
According to PIABA’s new study, BrokerCheck provides an incomplete record of a broker’s background even though state securities regulators, who rely on the same database, supply the missing information.
“Full and meaningful disclosure is a cornerstone of the markets. We see this cornerstone as being eroded,” saysJason Doss, anAtlanta-based attorney and president of PIABA.
MISSING INFORMATION
Key information left out of the BrokerCheck reports but included in reports from state securities agencies, according to PIABA, includes:
Problems with personal finances and failing examinations are relevant details for investors because they speak to the competency of a broker and that broker’s ability to manage finances, saysChristine Lazaro, acting director of theSecurities Arbitration Clinic at St. John’sUniversity School of Law, and one of the authors of the report.
‘SYSTEM MAY NOT BE PERFECT’
In a statement, FINRA acknowledged that there were some differences in reporting between FINRA and state securities agencies as well as between different states.
“While the system may not be perfect, we do have to make determinations on what information about registered representatives is appropriate to release, while at the same time balancing fairness rather than ignoring it,” FINRA said.
The self-regulatory organization also said that it has committed considerable resources to make BrokerCheck, which is a free service, a more user-friendly interface that quickly provides investors with information on the background of brokers.
FINRA spokespersons were not available for further comment at the time of publication.
EXPUNGEMENTS, WALL STREET JOURNAL
This is not the only criticism facing FINRA’s BrokerCheck. A PIABA study at the end of 2013 suggesting that expungements were on the rise led to Senators Chuck Grassley (R-Iowa) and Jack reed (D-R.I.) questioning FINRA on its response to the PIABA recommendations and whether investors were getting all of the necessary information to make key financial decisions. Last month, FINRA’s Board of Governors approved a rule proposal to limit the practice.
Separately, theWall Street Journal reported on Thursday that about 1,600 brokers failed to disclose red flags such bankruptcy filings and criminal charges in violation of regulations and without regulators noticing the discrepancies.
NOT A ‘FULL PICTURE’
Doss says that the information left out of BrokerCheck reports is essential because unwitting investors may choose to entrust their money and assets to brokers that they would not have otherwise.
“The problem in a nutshell is this: FINRA does not give investors a full picture of disclosure,” argues Doss.
As an example, Lazaro pointed to information on why a broker was fired from a previous firm. PIABA’s study finds that reasons for termination were not available through BrokerCheck, but were available through reports from state security agencies.
“If an investor relied solely on a BrokerCheck report, they may be misled into believing that the broker left on amicable grounds,” Lazaro says.
STATE AGENCIES
Relying on state agencies can be burdensome on investors, Lazaro argues, because they will need to find the state agency where the broker is registered. Advocates also deem it unnecessary because FINRA maintains the database, theCentral Registration Depository, from which BrokerCheck and state regulatory agencies derive information for their reports.
The database contains records for more than 6,800 registered broker-dealers as well as employment and disclosure histories for more than 660,000 active registered individuals, according FINRA’s website.
Advocates argue that the information needed by investors is largely available within the CRD, and that creating a separate agency by a state government is not a viable option.
“We’re talking hundreds of thousands of brokers who have been licensed over the years. That’s the universe of information we are talking about. It would be prohibitively expensive for a state or for all the states to build an alternative system,” saysDenise Voigt Crawford, former Texas Securities Commissioner and former president of theNorth American Securities Administrators Association.
Christine Hines, consumer and civil justice counsel for Public Citizen’s Congress Watch, says that if the authority does not implement reforms, then theSEC and federal government should compel it do so.
“It is indefensible for FINRA to withhold info from its BrokerCheck system. The veil of secrecy should be lifted,” Hines says.
