More On Legal & Compliancefrom The Advisor's Professional Library
- Trading Practices and Errors When SEC-registered investment advisors conduct annual audits of firm policies and procedures, they should pay close attention to trading practices. Though usually not required to, state-registered advisors should look at their trading practices and revise policies that do not fully protect clients.
- RIAs and Customer Identification Just as RIAs owe a duty to diligently protect their clients privacy and guard against theft, firms also play a vital role in customer identification. Although RIAs are not subject to an anti-money laundering rule, securities regulators expect advisors to address these issues in their policies and procedures.
The Financial Industry Regulatory Authority’s BrokerCheck is full of holes and deletes crucial information about brokers’ backgrounds — including criminal records — despite the fact that such information is available from many state securities agencies operating under robust public records laws, according to a report released Thursday by the Public Investors Arbitration Bar Association (PIABA).
PIABA, a group of attorneys who represent investors in claims against brokers, states in its report that the extent of omitted “red flag” background information in BrokerCheck is “so serious that unwitting investors relying on the online database may very well select brokers with whom they would not do business if they had access to the more complete picture available to FINRA but now being hidden.”
PIABA argues that FINRA maintains the Central Registration Depository (CRD) database — a comprehensive database of broker information — on its behalf and on behalf of state securities agencies, which means that BrokerCheck and the states draw on the same pool of information. “FINRA promotes BrokerCheck as a major resource for investors. States also make available information from CRD records, but have not generally invested the same kind of time and effort in publicizing the availability of the often more complete information,” the report states.
PIABA calls on FINRA to ensure that BrokerCheck disclosures “be made consistent with the more complete reporting provided by state securities agencies.”
Jason Doss, PIABA’s president, said in releasing the report that “all investors should be able to obtain complete and consistent information about brokers. Period.”
“The quality of the disclosure you get about brokers should not depend on which state you live in. There is no rational basis for FINRA to hide key ‘red flag’ information that investors in some states can get from state-level agencies.”
Doss added that given that FINRA “has failed repeatedly to take action to increase the disclosures in BrokerCheck, Congress and the SEC need to compel them to do so if necessary.”
But FINRA responded in a statement that “while the [BrokerCheck] 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.”
In fact, said FINRA, “more than 75% of state securities regulators refer investors to BrokerCheck from their websites. FINRA has committed considerable resources and made significant enhancements to BrokerCheck, particularly over the last five years, to create a more user-friendly interface that allows investors to quickly access and intuitively understand the professional background of investment professionals.”
FINRA went on to say in its statement that “just as BrokerCheck provides information not available from state securities regulators, state securities regulators provide some information that is not available through BrokerCheck.”
As part of its analysis, PIABA compared FINRA BrokerCheck and state-level disclosures for a number of brokers. PIABA found the following:
When a broker-dealer fired a registered broker, BrokerCheck reports excluded the reason for the termination and other commentary regarding the termination, although this information is available from states.
Information about whether a broker was ever under internal review “for fraud or wrongful taking of property, or violating investment-related statutes, regulations, rules or industry standards of conduct” is not reported by BrokerCheck, but is disclosed by states.
A personal bankruptcy filed by a broker is not reported by BrokerCheck, but is revealed in state reports.
A federal tax lien filed against a broker in excess of $100,000 is not disclosed by BrokerCheck, but is disclosed in state reports.
Information about failed tests for industry qualification exams is not disclosed through BrokerCheck, which does not reveal the scores achieved and the number of times a broker failed such tests. It only shows which exams were passed but not the score or how many times a broker may have failed before finally passing. State reports do include this more detailed information.
But FINRA argues that PIABA's study information is incorrect, first by stating that FINRA makes "only a small portion" of the information contained in CRD available through BrokerCheck. In support of this "flawed premise," FINRA says the PIABA also includes flawed data about four categories of information included in a CRD snapshot that are "allegedly not provided" on BrokerCheck.
When a broker resigns, or is fired or permitted to resign, after allegations of violation of investment-related laws or rules, fraud or wrongful taking of property, or failure to supervise, both the termination of employment and the allegations of misconduct are reported on BrokerCheck. "Other reasons for termination, which do not implicate investor protection issues, are not reported. Nonetheless, PIABA mistakenly contends that BrokerCheck always excludes reasons for termination."
FINRA also argues that BrokerCheck currently excludes bankruptcies more than 10 years old, and judgments or liens that have been satisfied, consistent with the SEC and state approved uniform registration forms.
As to exam scores, BrokerCheck provides information regarding the name and date of all qualifying examinations that the broker has passed, FINRA states. "BrokerCheck does not provide test scores or information regarding failed exams.Though PIABA offers no evidence to support a correlation between test scores and broker competence, the authors argue that if an investor decides the information is important, they should be permitted to see it."
When a broker is the subject of an internal review by a former employer, disclosure information regarding that matter is not provided on BrokerCheck, FINRA says. However, "the events related to the internal investigation may be reported under sections of the uniform registration forms for disclosure of employment termination, regulatory action, customer complaints, arbitration or civil litigation."
Check out ‘Alarming’ Number of Brokers’ Arb Records Wiped Clean: Study on ThinkAdvisor.