Richard Ketchum, head of the Financial Industry Regulatory Authority Inc., recently warned brokerage firms that they need to create a culture of compliance which prevents high-risk advisers from harming investors.
As quoted in InvestmentNews, Mr. Ketchum said: “No firm that tolerates such a concentration of 'high-risk' advisers should do so without expecting searching questions from Finra as to the special supervisory steps they have taken to ensure no further bad actions.”
With the Securities and Exchange Commission likely to soon announce their own version of a fiduciary standard for non-ERISA accounts on the heels of the recent Labor Department rule, there appears to be a tremendous amount of momentum around exposing and eliminating bad behavior by bad brokers. One of the tools to expose problem brokers is BrokerCheck.
Finra's BrokerCheck used to be an obscure tool used only by industry insiders to check the employment and compliance history of financial advisers. For the last year or so, Finra has run humorous 15 second commercials on television urging the public to use BrokerCheck to check out their advisers before investing. And a new regulation now requires a link to BrokerCheck to appear on an adviser's website, making it even easier for a client or prospect to check out an adviser's record. Finra clearly wants BrokerCheck to be used by every investor as the first line of defense to check out an adviser's compliance, criminal and credit histories.
While BrokerCheck gives relatively up-to-date and accurate information on a given adviser's record, it also publishes mere accusations, convenient settlements and decades-old misdemeanors side by side with true malfeasance.
For example, an unhappy client (or an unhappy former boyfriend or girlfriend for that matter) can allege that an adviser promised her that IBM would double in price over the next two months. Outrageous? Yes. But if submitted formally in writing, the complaint will show up on the adviser's BrokerCheck record. The formal response may very well say that the accusation was denied, or without merit, yet it stays on the adviser's record — a permanent stain.
Billboards in Florida ask the public if they have lost money in the stock market, and if so, compensation is a mere phone call away. Plaintiff attorneys use the system to create a quick payday. They are aware that brokerage firms who are there to protect their employees are often motivated to settle these frivolous cases in order to avoid the expense of litigation.
My review of dozens of BrokerCheck records shows that this very language is used time and time again. Common sense dictates that a claim for $1 million that was settled for $50,000 probably had very little merit; a solid complaint would generate a settlement much closer to the alleged loss. That adviser is then forever marked with that settlement, even though the language clearly states that the allegation was without merit and settled for convenience.
If you are an adviser and once stole some gum on a dare, or was arrested for possession of a controlled substance when you were 21, your youthful indiscretion is on BrokerCheck for all of your prospects and clients to see. Surely both Finra and the public understand that not all criminal behavior is pertinent to an adviser's background.
Finally, BrokerCheck is also full of complaints which, though on a given adviser's record, had nothing to do with the adviser at all but with their parent firm or just the world at large. Auction rate securities, limited partnerships, the “research scandal” — all are examples of complaints that still appear on advisers' records but had nothing to do with their individual ethics.
Of course, there are bad brokers, at both good and bad firms, whose behavior is repugnant to ethical practitioners in the industry. Efforts to differentiate the skilled and ethical from the unethical hacks should be applauded. However, I urge Finra to recognize that BrokerCheck is not perfect, and to make the proper disclosures and explanations available to the public that explain the flaws and idiosyncrasies of their own highly publicized yet imperfect system.
Danny Sarch is the founder and owner of Leitner Sarch Consultants, a wealth management recruiting firm based in White Plains, N.Y.