The Financial Industry Regulatory Authority Inc.'s Central Registration Depository makes publicly available brokers' “disclosure events” — including descriptions of most investment-related customer complaints — through its free, Web-based BrokerCheck service.
The intention is admirable. By disseminating such information, BrokerCheck can provide useful information to the investing public. The problem, however, lies in what is considered a “disclosure event.”
Under the current version of Form U4, brokers and their firms are required to disclose any written customer complaint, no matter how frivolous, as long as it somehow relates to a sales practice issue, even if the broker is not named in the complaint. The broker that is the subject of the complaint has it reported on his or her CRD and can remove the disclosure only by going through an expensive and time consuming expungement action, in which the broker bears the burden of proving the complaint is false.
In other words, the broker is deemed guilty until he or she proves his or her innocence. No other profession has a reporting system where the mere filing of a complaint, even if it is later withdrawn, remains part of the public record for years afterward.
Now there is a renewed push by the claimant's bar to greatly expand the scope of “disclosure events” to include securities exam results and non-investment-related civil lawsuits. Increasing the quantity of information available to the public does not affect the quality of the information, nor does it further the process of picking an investment professional.
The focus should be on customer complaints and regulatory actions in which there has been an adjudication of wrongdoing after an evidentiary hearing. A broker should be allowed the same due-process rights to contest an allegation that would sully his or her professional reputation before it is made part of the public record.
Moreover, I know of no other profession in which test scores and prior results on a licensure exam are made available for public inspection — attorneys certainly are not subject to such disclosures. Investors are best served when regulators provide the public with final decisions involving brokers, whether in the context of civil, criminal or regulatory actions.
Simply publishing untested allegations, with only limited ability to expunge such matters off of BrokerCheck, does not materially assist the investor but rather only besmirches the professional reputations of many reputable brokers and registered persons, and ultimately will drive qualified persons out of the industry.
S. Lawrence Polk is a partner at Sutherland Asbill & Brennan.