More On Legal & Compliancefrom The Advisor's Professional Library
- Preventing and Dealing with Client Complaints Although the SEC has not provided specific guidance on how client complaints should be handled, a firms policies and procedures should provide clear direction how to do so, as neglecting complaints can exacerbate a bad situation.
- Conducting Due Diligence of Sub-Advisors and Third-Party Advisors Engaging in due-diligence of sub-advisors isnt just a recommended best practice it is part of the fiduciary obligation to a client. An RIA should be extremely reluctant to enter a relationship with a sub-advisor who claims the firms strategy is proprietary.
Brokers and advisors take note: the Financial Industry Regulatory Authority (FINRA) plans to revamp BrokerCheck to not only make it easier for investors to track down information about their broker—including “unifying” the search capabilities for BrokerCheck and the SEC’s Investment Adviser Public Disclosure database—but to also expand the types of information investors can get about their broker.
Until recently, FINRA noted that BrokerCheck was the only regulator that provided a comprehensive, online tool that enabled investors to check the backgrounds of financial service industry professionals. In 2010, the SEC expanded the IAPD database—which had previously only included information on investment advisor firms—to include information on investment advisor representatives. Although BrokerCheck and IAPD have many similarities, there are differences in the information available, FINRA explains, which includes the presentation format and the manner in which individuals may obtain information from the systems.
In January 2011, SEC staff released a study and recommendations on improving investor access to investment advisor and broker-dealer registration information, as required by Section 919B of Dodd-Frank.
The SEC staff recommended the following three near-term recommendations to improve investor access to registration information through BrokerCheck:
- unify search returns for BrokerCheck and the IAPD databases;
- add the ability to search BrokerCheck by ZIP Code or other indicator of location; and
- add educational content to BrokerCheck, including links and definitions of terms that may be unfamiliar to investors.
Dodd-Frank mandates that these recommendations be implemented within 18 months after completion of the study, and FINRA will put them into effect before the July 2012 deadline.
FINRA is also asking the public to weigh in with comments on how to facilitate more use of BrokerCheck by April 6.
Nancy Lininger (left), a compliance consultant with The Consortium in Camarillo, Calif., says that adding search capabilities by location, for instance, “will make the BrokerCheck database a go-to source for locating and determining background of the investor’s financial advisor.”
A big problem now, she says, is that to find information on a financial advisor, the investor may not know if the professional is in the IAPD database or FINRA BrokerCheck for BD firms and registered reps. “Studies have proven that investors don’t even know the difference between an RIA and BD. So merging of the two databases (one search engine) is important.”
What’s more, Lininger says, “if a FINRA rep leaves the commission world and goes to the fee-only advisory side, and the investor is checking the BrokerCheck system, there will be a disconnect.”
In addition to the near-term recommendations mentioned above, the study includes an intermediate-term recommendation to be addressed after the 18-month implementation period.
Specifically, SEC staff recommends that FINRA continue to analyze the feasibility and advisability of expanding BrokerCheck to include additional information available in the Central Registration Depository (CRD) system (e.g., the reason for and comments related to a broker’s termination, scores on industry qualification exams, formerly reportable information), as well as the method and format of publishing BrokerCheck content.
Jonathan Henschen (left), president of the consulting firm Henschen & Associates, says that while having greater transparency is a positive step in “an industry that does things wrong on both a rep and broker-dealer level, and pays fines but rarely admits to wrong doing,” greater disclosure can become “over the top” when considering disclosing advisors test scores, for example, on such securities tests as Series 7, 63, 66 and 24.
Greater access to information, he says, can spark “greater misuse.” Says Henschen: “With firms like BrightScope having advisor-rating systems you have to question objectivity and balance in their approach and be cautious of data being used to black ball advisors inappropriately.”
Expanding the amount of data available about brokers/advisors could induce private vendors to “rate” them. “Are private vendors going to be like Weiss Research and use the data to rate reps on an A-F scale based off of the data?” Henschen says. “Will reps use a rep rating service as a marketing tool as they boast of their ‘A’ rating?” he wonders.
Overall, however, Henschen says that greater public disclosure “will help motivate reps to keep out of trouble for the sake of their client base and livelihood.”
Living in the world of Google, “clients now do their own research on reps and broker-dealers looking for disparaging articles online as part of their own due diligence, so if FINRA doesn’t bring things to the surface, others will.”