This week the Financial Industry Regulatory Authority announced it is seeking the SEC’s approval to expand the amount of information made public on current and former brokers’ permanent records in its free online CRD database, BrokerCheck. While the disclosures are aimed at making bad brokers’ records more transparent to the public, it could also make some good brokers look bad, and make it harder for them to attract new clients.
According to FINRA’s release, the proposed expansion would increase the number of customer complaints reported publicly. It would also extend the public disclosure period of a former broker’s full record from two years to 10, and make information such as criminal convictions and certain civil and arbitration judgments about a former broker permanently available.
"These proposed changes will provide additional information to investors who are considering whether to conduct, or continue to conduct, business with a particular securities firm or broker," said FINRA Chairman and CEO Rick Ketchum in the release. "Just as important, they will provide valuable information about persons who have left the securities industry, often not of their own accord, but who can still cause great harm to the investing public. 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."
Bill Singer, securities attorney and Registered Rep. columnist, says FINRA is responding to public pressure, as it has lately come to light that a number of suspended and barred NASD/FINRA brokers migrated to other related professions—notably insurance, real estate, and mortgage refinancing—where they continued to rip people off. This might not have happened if complaints and disciplinary actions had been permanently disclosed in FINRA’s database. Under current rules, the database is purged of the records of individuals who are no longer active in the industry every 2 years. “Essentially what they’re doing is creating a tattoo, so if you’re a former broker, and to some degree a “bad boy”, FINRA is essentially going to tattoo you,” Singer says.
Under current rules, so-called historic complaints (those that are more than 2 years old, and have not been settled for under $15,000) are only reported on BrokerCheck when a broker has three or more disclosable regulatory actions. However, the new proposal would make all historic complaints dating back to 1999 public for registered brokers and brokers whose registrations were terminated in the preceding two years.
The current disclosure policy was created so that brokers with a pattern of bad behavior would get dinged, says Victoria Bach-Fink, CEO and CFO of independent b/d Wall Street Financial Group based in Rochester, NY. Bach-Fink takes issue with parts of FINRA’s new rule proposal because she says it will hurt brokers who are guilty of nothing more than having litigious clients who maybe lost some money in a bad market.
“A lot of people are going to have complaints on their U4 and that is quite frankly because the market went down 45 percent, and customers weren’t happy. It doesn’t mean things were unsuitable because they have a complaint that alleges unsuitability when the entire market went down,” says Bach-Fink. Furthermore, Bach-Fink says it is doubtful how much of the regular investing public is going to know a financial professional was a broker or know to go to FINRA’s website to look up that fact nine or ten years later.
FINRA has already made changes to disclosure rules that would will make it easier for arbitration claims to find their way onto a rep’s U4 and into the CRD system. (Read Registered Rep.’s September cover story “J’Accuse!” for how the FINRA amendments which took effect last May might force firms to nail some good FAs.)
