Finra gets OK to share more info about reps' disciplinary records

SEC approves SRO's plan to issue monthly notices, online action system to publish more data

Jun 25, 2013 @ 11:23 am

By Mark Schoeff Jr.

The brokerage industry regulator has won Securities and Exchange Commission backing to provide more public information about brokers who are the subject of disciplinary complaints and actions.

The SEC approved a proposal by the Financial Industry Regulatory Authority Inc. that allows Finra to release publicly a copy of any disciplinary complaint or decision it issues, including the names of the parties involved in the matter.

Most pending Finra complaints against registered representatives and firms are disclosed in summary form in Finra's BrokerCheck system. The information is gleaned from U4 form filings.

Under the new rule, Finra would be permitted to release more details through monthly notices and in its online disciplinary action reporting system. Except in certain cases left to Finra's discretion, the information would not be redacted.

Currently, some disciplinary information that Finra is not permitted to disclose is available on BrokerCheck, including unredacted summaries of Finra moves.

“The Commission believes that the proposed rule change promotes transparency, consistency across Finra's program, and clarity regarding the information Finra releases to the public and will provide greater access to information regarding Finra's disciplinary actions,” the SEC stated in a June 21 rule notice.

Kenneth Klabunde, vice president of City Securities Corp., said that the SEC and Finra have good intentions of providing more broker background to investors.

But the proof will be in the first monthly Finra disciplinary report released after the rule goes into effect, he said. The June version was a 56-page document that included background about Finra cases that involved suspension of a broker or firm and a monetary sanction of more than $10,000, among other factors.

“If [the rule] is an enhancement of transparency and access of information for investors, then that's a positive thing,” Mr. Klabunde said. “A comparison of old [disciplinary] reports to the new version of those reports will give us a good test to determine whether transparency has really been improved.”

Pete Bush, owner of Horizon Wealth Management LLC, is sanguine about the change. He likens the increased transparency to random drug testing at the College World Series, where he played for Louisiana State. Flagging people who violate Finra rules will strengthen the industry.

“That may give [investors] some good information to make a decision on whether to work with [a broker] or not,” Mr. Bush said.

Some observers are wary of the latitude that Finra now has to include in its monthly reports and database complaints that the organization has filed against registered reps and firms.

“I don't think it's fair or effective to be publishing complaints that involve unproven allegations,” said Peter Chepucavage, general counsel at Plexus Consulting Group LLC.

An attorney who represents brokers, Patrick Mahoney of the Law Office of Patrick R. Mahoney, also is leery about raising the public profile of complaints.

“Just because a complaint is issued doesn't mean the allegations are necessarily true,” Mr. Mahoney said.

Another sticking point for critics of the rule is that it allows Finra to publish complaints that have been withdrawn or dismissed. The SEC okayed this approach because BrokerCheck posts them.

In one of five comment letters that the SEC received on the rule, the Financial Services Institute argued that complaints that did not hold up should not live on in Finra's disciplinary action notices and database.

“FSI has long supported protecting investors through efforts to increase disclosure and information that clients can easily access,” said FSI spokesman Chris Paulitz. “Unfortunately, Finra decided to further publicize certain complaints, even if they are withdrawn or outright dismissed on the merits. This is a lose-lose for investors and advisers alike.”

Finra will announce the effective date of the rule in a regulatory notice that will be published in the next 60 days.

The SEC already provides public notice of most complaints it receives against its disciplinary targets. The new Finra rule would allow the organization to make similar disclosures.

Mr. Chepucavage, however, said that that is an apples-and-oranges comparison.

“It is much harder for the SEC to file a complaint than for Finra to file a complaint,” Mr. Chepucavage said. “The SEC is dealing with more serious matters.”


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