FINRA: Exposing the "Bad" Brokers

The Financial Industry Regulatory Authority (FINRA), which is the arbitration forum that handles virtually every customer/broker dispute, has proposed an expansion of its free BrokerCheck disclosure system. See FINRA's news release here.

BrokerCheck is a free on-line service that FINRA provides to investors to research their brokerage firms and investment advisors for past regulatory infractions.  It is an invaluable resource in helping investors judge whether or not to conduct business with a particular brokerage firm or investment advisor.  

At this time, the FINRA BrokerCheck system temporarily discloses information about investment advisors who have left the industry (often involuntarily), but it only discloses that information for up to two years after the advisor's departure. FINRA's proposed changes would allow BrokerCheck to disclose information for up to 10 years, and in some cases permanently.

In the news release, FINRA Chairman and CEO Rick Ketchum states that "recent regulatory and criminal proceedings in the financial services sector reveal that former brokers have been engaging in fraud and other misconduct long after establishing themselves in other segments of the financial services industry."  Since these "bad" brokers can still cause great harm to the investing public, FINRA wishes to help investors identify them by keeping their infraction and termination records public for as long as possible, and to make certain information available permanently, such as criminal convictions and certain civil and arbitration judgments.

These expansions to the information disclosed by BrokerCheck are helpful, and they are a move in the right direction.  However, I would also recommend another type of expansion regarding the information disclosed.  In many cases, a broker may have additional complaints on his record with state regulators and the SEC, but these are not typically disclosed in the FINRA BrokerCheck reports.  Therefore, it would be advantageous to request that state regulators and the SEC report any complaints and infractions to the FINRA BrokerCheck system, so that this information will also be available to investors when they are evaluating the disclosure record of their investment advisors via the BrokerCheck system.  

Another area of concern is the current practice in securities litigation where a plaintiff attorney avoids naming the investment advisor in a customer dispute in order to facilitate the future settlement of the arbitration case.  The trend has developed because it typically provides no legal benefit to name the investment advisor.  The approach is often seen as less adversarial and friendlier by the respondent brokerage firm, which ultimately benefits the claimant in terms of easing future settlements negotiations.  However, while it does make the settlement process smoother and easier for both sides, the unfortunate result is that a "bad" investment advisor can commit infractions that result in lawsuits without gaining any bad marks on his or her record.  Since the "bad" advisor was not a named party in the action, nothing will be disclosed on the advisor's BrokerCheck report, and the advisor will appear to have a perfectly clean background.  In order to avoid this kind of situation, FINRA should disclose whether or not an investment advisor committed an infraction that resulted in a lawsuit regardless of whether the advisor was merely acting in the course and scope of his or her employment, and regardless of whether the advisor was named as a respondent in the action.