SEC Chairman Jay Clayton is moving full steam ahead with his goal to root out retail fraud. In mid-November, Clayton bowled over the industry with news that the securities regulator is creating a website that will allow investors to search a database of individuals who have been barred or suspended for breaking federal securities laws.
The searchable database, Clayton said, “will be particularly valuable when bad actors have shifted from the registered space for investment advisors and broker-dealers to the unregistered space.”
Prior actions of “repeat offenders and fraudsters” will be more visible to investors, Clayton said during remarks at the Practising Law Institute’s 49th Annual Institute on Securities Regulation conference in New York.
Industry officials, including the former head of enforcement for the Financial Industry Regulatory Authority, said the database is a good idea — but will undoubtedly face scrutiny like FINRA’s BrokerCheck.
“For the foreseeable future, BrokerCheck will remain the gold standard for due diligence on registered brokers,” Brad Bennett, a former FINRA enforcement director and now a partner at Baker Botts in Washington, told me at press time in mid-November.
Bennett said that while the SEC’s planned database should be applauded as an effort “for getting more information into the hands of investors about disciplinary history [and promoting] investor protection,” it most assuredly will have its detractors. “To the extent the SEC database includes customer complaints and unadjudicated allegations, it will be subject to the same industry pushback as BrokerCheck,” Bennett opined.
A FINRA spokesperson told me in an email message on Nov. 13 that FINRA “looks forward” to helping the SEC with the new database, “so that investors who are researching information about the full range of disqualified individuals in BrokerCheck and Investment Adviser Public Disclosure would also have access to the new SEC database.”
The IAPD website compiles investment advisor firms currently registered with the SEC and state securities regulators. An SEC spokesperson declined to comment at press time on a potential timeline for the database’s release.
Industry officials see the database as being especially beneficial at shining a light on shady brokers moving to the insurance and registered investment advisor spaces. Andrew Stoltmann, the new president of the Public Investors Arbitration Bar Association, said the SEC database is “long overdue,” and sees it working “hand in hand” with BrokerCheck.
However, it will ultimately serve as a Band-Aid on a “really serious problem,” Stoltmann added. “Unfortunately, it doesn’t do anything to get these bad actors completely out of the channels where they operate. Bad brokers becoming insurance agents or RIAs is a massive problem and this database, while a good first step, doesn’t address the primary issue of keeping these folks out of all channels where they can defraud customers.”
Jon Henschen, head of the broker-dealer recruiting firm Henschen & Associates, agreed the database could be a “valuable tool” for the public: “Often times, these rogue brokers that are barred from doing securities business continue their rogue behavior in the insurance and/or the RIA space, so ensuring the public is protected in these venues as well would create an umbrella policy of protection for the unsuspecting public.”
During his comments at the Practising Law Institute event, Clayton said that the SEC reminds investors “repeatedly that they should conduct a background check before investing with a financial professional, and we are showing them how to do just that” with the upcoming website and with FINRA’s BrokerCheck.