Finra's BrokerCheck comes under fire

Database omits bankruptcies, tax liens, and other vital information, lawyers group claims

Mar 6, 2014 @ 11:54 am

By Mason Braswell and Mark Schoeff Jr.

Finra's BrokerCheck system does not go far enough in disclosing important information needed by investors, a group of plaintiff's attorneys who represent investors said in a report released Thursday.

The Public Investors Arbitration Bar Association said that the database, which is publicly available through Finra's website, does not include enough information on brokers' past conduct, including older bankruptcies, tax liens, firings and investigations.

The information is available through state securities regulators but is “sanitized” from Finra's online BrokerCheck database, which is more readily available, said PIABA president Jason Doss.

“The information that Finra is omitting on BrokerCheck is objectively important to investors seeking to make an informed decision,” Mr. Doss said. “The items being omitted would raise a red flag to any reasonable investor.”

The Financial Industry Regulatory Authority Inc. is responsible for maintaining BrokerCheck, which is the publicly accessible database of information from the limited-access Central Registration Depository, which includes data from state securities regulators and Finra arbitration.

Finra decides what information from the CRD appears on an adviser's BrokerCheck report.

For individual brokers, BrokerCheck includes information on a 10-year employment history, felony charges and convictions, disciplinary actions, investment-related civil and judicial actions and proceedings, customer-initiated complaints, and items related to arbitration.

Finra said in a response to the PIABA study that it makes decisions about what to publish by carefully considering the balance between what investors need to know and what could be seen as a violation of advisers' right to privacy.

“While the system may not be perfect, we do have to make determinations on what information about registered representatives is appropriate to release, while at the same time balancing fairness rather than ignoring it,” the regulator wrote.

The regulator has, in fact, made a push in recent years to increase the level of disclosure. In the most recent move, Finra received approval from the Securities and Exchange Commission to include disclosures for brokers who had reached settlements in civil actions brought by state regulators. That rule goes into effect June 14.

Last year, the Investment Adviser Registration Depository and BrokerCheck were integrated, which was a big improvement for investors doing background checks on their financial advisers, according to Robert Plaze, former deputy director of the Securities and Exchange Commission's Division of Investment Management.

Now, when people use one of the two systems, they don't have to know whether the person they're researching is an adviser or a broker.

“The system is better than it ever was before, and it keeps getting better,” Mr. Plaze said.

Still, Mr. Doss said that PIABA and others were not convinced the move went far enough. The information contained in state filings is more comprehensive, he said. It includes information about personal bankruptcies, liens in excess of $100,000, information about failed licensing tests and more detailed explanation of why brokers were terminated, according to PIABA's report.

Finra's database excludes bankruptcies older than 10 years.

PIABA said that the Securities and Exchange Commission, and even Congress, should push Finra for more disclosure.

Moreover, PIABA's report was released the same day that the Wall Street Journal made claims that the database was incomplete because a large number of brokers failed to report infractions such as bankruptcies and liens.

More than 1,500 brokers had personal bankruptcy filings from 2004 to 2012 which were not included on regulatory records, the newspaper reported.

Jeffrey Kaplan, an attorney from Dimond Kaplan & Rothstein PA, said that it makes sense that investors would want to see some of that information.

“If a broker can't manage their own finances, one would question whether you should entrust your money to that very broker,” he said.

Regulators have ready access to whatever additional information is contained in state filings. Investors are able to obtain those details in state records from the CRD that may not be available on BrokerCheck by filing requests with state securities regulators.

“Finra works closely with our partners in the states on our joint core mission of protecting American investors,” Finra's announcement said. “Finra has consistently, and for many years, encouraged investors to both use BrokerCheck and consult their state securities regulator before doing business with an investment professional.”

That process, however, can be arduous and may require investors to go to multiple states, said Denise Crawford, a former Texas securities commissioner.

But there are reasons for adding an extra step for some of that information, according to some attorneys. It is unfair that brokers be required to disclose that information when other licensed professionals such as doctors and attorneys do not, said Mark Astarita, an attorney with Beam & Astarita.

“When you put it on BrokerCheck, your next-door neighbor sees it,” he said. “It's borderline defamatory.”

A broker's record will remain available to the public even after he or she leaves the industry, according to a 1999 rule made by Finra's predecessor, the National Association of Securities Dealers.

A number of those who are outspoken on regulatory issues said that they sympathized with Finra, which finds itself in a tough position.

“It's kind of hard to say where the optimal amount of information is,” Mr. Plaze said on the sidelines of the Investment Adviser Association Compliance Conference on Thursday.

He used the topic of bankruptcy as an example. He recalls talking to an adviser who questioned whether it was fair that he must put the bankruptcy he filed during the Depression on his registration form.

“Is a lot of bankruptcy information good information or bad information?” said Mr. Plaze, who is now a partner at Stroock & Stroock & Lavan. “It depends on how you value that information and what you'll do with it. Ultimately, when you put together a system like this, one has to make judgments like that.”

Knut Rostad, president of the Institute for the Fiduciary Standard, said that there will always be widely varying opinions on the kinds of information that investors should be able to access.

“In a sense, you can never get it right,” Mr. Rostad said in an interview at the IAA conference. “Someone's always going to want more, someone's always going to want less.”


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