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Finra comes in from out of the cold

Feb 16, 2014 @ 12:01 am

finra, brokercheck, expungement, arbitration, investor
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(Roger Schillerstrom)

The snowstorm that walloped most of the East Coast did not deter Finra's board from meeting in New York last Thursday and putting one potential rule change out for public comment while adopting two others.

All three — one has to do with disclosure, and the other two come into play when an investor has a complaint that ends up in arbitration — will help investors.

Let's take them one at a time.

The first change requires brokers to include on their website a link to the Financial Industry Regulatory Authority Inc.'s BrokerCheck, a database of background information on brokerage firms and securities brokers that includes disciplinary history. The database can be a valuable tool for investors when they are researching firms and brokers they are considering hiring as their financial adviser.

The problem is that many investors don't know it exists. Anything Finra can do to raise BrokerCheck's profile among the public is a positive step toward more disclosure and transparency. While investors may not now know what BrokerCheck is, or where to find it, many know enough to do a rudimentary background check online of a firm or a broker they intend to entrust with their hard-earned money. That likely would include looking at the firm's website, where they would now find a link to BrokerCheck. This is especially helpful at a time when Finra is concerned with minimizing the impact of rogue brokers on the investing public.

While this measure is good for investors, Finra could have gone one important step further. Its original proposal, which was withdrawn after industry backlash, would have linked investors directly to a broker's profile, including disciplinary charges. That would have been more helpful, but even this latest, watered-down proposal, which the Finra board agreed last week to open up to public comment, is beneficial.

The next two rule changes have to do with arbitration. Right now, investors who file a complaint against a broker are forced to arbitrate the case, usually through a Finra arbitration panel. These panels are made up of three arbitrators who are either considered public arbitrators or non-pub- arbitrators with ties to the securities industry.

The panels had been made up of a mix of both public and industry arbitrators, but in the past few years, Finra has allowed investors to choose all-public arbitration panels.

The problem with Finra's old rule is that it allows industry arbitrators to call themselves public arbitrators as long as they haven't been associated with a brokerage firm for a five-year period or worked in the industry for 20 years or more. Similarly, attorneys, accountants and others who may have represented brokerage firms in the past could list themselves as public arbitrators as long as they hadn't received $50,000 in revenue from the industry over the past two years.

TRUTH IN LABELING

Under the rule adopted last week, these individuals would no longer be able to claim they were public arbitrators. If they wanted to participate in an arbitration hearing, they would have to identify themselves as non-public, industry arbitrators.

The third action taken by Finra has to do with expungement. After plaintiffs' attorneys and some members of Congress complained that too many brokers were getting disciplinary actions wiped from their records by arbitrators, Finra has proposed a rule that likely would reduce those numbers.

In the past, a broker would strike a settlement with a wronged investor contingent on that investor's agreeing not to oppose the broker's application for expungement. Since the monetary award was often more important to an investor than the broker's disciplinary record, in-vestors usually signed off, paving the way for the brokers to have their disciplinary slates wiped clean. The new rule would prohibit brokers from making settlements contingent on agreements not to oppose expungement.

The two proposed rule changes now move on to the Securities and Exchange Commission for final approval.

While none of these initiatives alone is a game changer, taken together, they are a sign that Finra understands that a fair and level playing field for investors also benefits the industry it serves and regulates.

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