Editorial

Can Finra serve investors and the industry?

Mar 16, 2014 @ 12:01 am

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(Roger Schillerstrom)

Is it possible to serve two masters? The Financial Industry Regulatory Authority Inc. would do well to keep that question in mind as it tries to sort out its responsibilities to investors and the securities industry.

The context for this self-assessment is a new study by the Public Investors Arbitration Bar Association and an exposé in The Wall Street Journal, each of which concluded that Finra isn't doing enough to disclose important background information about brokers.

The target of both these groups is BrokerCheck, the database of records that Finra maintains and makes available to investors for broker background checks.

TWO SLAPS

PIABA, a group of lawyers who represent investors in arbitration cases, took Finra to task for omitting certain information from BrokerCheck, in-cluding brokers' tax liens for less than $100,000, personal bankruptcies more than 10 years old, terminations from previous employers that don't involve investor protection issues, and failing grades on industry exams. Finra has access to this information but withholds it based on privacy concerns for brokers.

The Wall Street Journal took a slightly different tack. It looked at the records Finra is supposed to make available on BrokerCheck and found 1,600 instances where required information about brokers was missing.

This information included personal bankruptcies less than 10 years old, as well as criminal charges relating to burglary, forgery, larceny, bad checks, identity theft, assault with a deadly weapon, stalking, sexual battery, false imprisonment, bail jumping and drug offenses.

Although Finra relies on firms and brokers to self-report negative information, it would be foolhardy not to have some system of checks and balances in place for both investigative purposes and to serve as a deterrent. Certainly, it is fair to ask Finra, if The Wall Street Journal was able to cross-reference the names of brokers against criminal and bankruptcy court filings, why hasn't it done so?

For an agency that usually gets its back up rather easily whenever it is criticized, Finra was somewhat chastened by the newspaper's findings. It acknowledged its failure, calling the situation “unacceptable” and promised to update its database.

Let's hope it follows through and makes good on that promise.

Its reaction to the PIABA report, on the other hand, was somewhat different. Finra took a defensive posture and argued that it needs to be fair to brokers in determining what information it releases, while still protecting the investing public.

FINRA'S DILEMMA

The dilemma Finra faces goes to the heart of being a self-regulatory organization.

It also raises serious questions: Can Finra protect both investors and the privacy of brokers at the same time? When there is a conflict, with whom does Finra side?

On its website, Finra describes its mission this way: “Finra is dedicated to investor protection and market integrity through effective and efficient regulation of the securities industry.” It further states: “We're an independent not-for-profit organization authorized by Congress to protect America's investors by making sure the securities industry operates fairly and honestly.”

It doesn't mention the privacy of brokers — anywhere.

PIABA's call for more disclosure is serious and shouldn't be dismissed out of hand. Based on the PIABA study, two U.S. senators also have called on Finra to upgrade BrokerCheck.

Reasonable people can argue whether certain information is material to investors. But unfortunately, Finra seems to have made up its mind already.

Maybe it isn't possible to serve two masters after all.

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