Financial industry groups oppose adding exam scores to BrokerCheck

Both SIFMA and FSI cautious about Finra proposal to strengthen its database

Apr 23, 2014 @ 1:05 pm

By Mark Schoeff Jr.

As Finra considers ways to improve BrokerCheck, two industry groups said they will oppose efforts to expand the database by adding brokers' scores on securities licensing exams.

The Financial Industry Regulatory Authority Inc. board will take the first step toward strengthening its broker database when it meets on Thursday to consider a rule requiring brokerages to adopt written procedures to verify the accuracy and completeness of the information it submits on the Form U4 for brokers joining the firm.

The U4 is the foundation of broker profiles on Finra's BrokerCheck system, which is designed to help investors find red flags that would indicate problems with brokers with whom they might do business. BrokerCheck has been criticized recently by investor-advocacy groups and federal lawmakers for containing inaccurate and incomplete information.

David Bellaire, executive vice president and general counsel at the Financial Services Institute Inc., said that background checks would not be new for the independent broker-dealers and financial advisers that belong to the organization.

“Many of our firms already perform routine credit and other background checks when they're recruiting and supervising financial advisers,” Mr. Bellaire said.

The FSI backs Finra's efforts to improve the accuracy of information in the Central Registration Depository and on BrokerCheck, Mr. Bellaire said. Information included on BrokerCheck is drawn from the CRD.

But the group will evaluate the frequency, detail and potential cost of Finra's new background-check requirements to determine whether it supports the proposal. The rule has not yet been posted on the Finra website.

“If the Finra proposal memorializes what our member firms are already doing, it would be helpful to set that standard for the whole industry,” Mr. Bellaire said.

In an interview earlier this month, Finra chairman and chief executive Richard G. Ketchum said that the industry-funded broker regulator is reviewing BrokerCheck to look for instances of underreporting and is considering adding more disclosure categories.

The database is supposed to include information about brokers' 10-year employment history, charges and convictions for felonies and investment-related misdemeanors, disciplinary actions, investment-related civil and judicial actions and proceedings, and customer-initiated complaints and arbitration.

The Public Investors Arbitration Bar Association has been pushing Finra to include more information on BrokerCheck, such as older bankruptcies, tax liens, firings and internal investigations of brokers at their firms and broker scores on securities examinations. That data can be found on the CRD but not on BrokerCheck.

A major Wall Street industry group said that the PIABA idea goes too far.

“We're concerned about this notion that everything in the CRD should be published on BrokerCheck,” said Kevin Carroll, managing director and associate general counsel at the Securities Industry and Financial Markets Association. “We don't think all that information is relevant and helpful to investors and could be prejudicial to brokers and their firms.”

For instance, Mr. Carroll opposes posting brokers' scores on securities licensing exams. He used the illustration of a broker who failed an exam the first time he took it but then passed later and has been conducting a successful business for many years.

“So, he failed the exam 15 years ago,” Mr. Carroll said. “What's the point? Are you saying he's not competent now? He's been performing [successfully for] over 15 years. There's more potential for that information to be misused and abused than to help investors make informed decisions.”

The FSI also opposes putting exam scores on BrokerCheck. Many brokers took the tests under the assumption that the goal was to pass rather than worrying about their score, Mr. Bellaire said.

“Now to disclose scores, and tell investors that they're a relevant and important component in their consideration, is misleading and unfair,” Mr. Bellaire said.

Both FSI and SIFMA said that they intend to talk to Finra about BrokerCheck changes.

“We want to work with them to make sure investors have access to information that's accurate and meaningful in their choice of a financial adviser,” Mr. Bellaire said.


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