Advisers are alarmed that a new online reporting system that discloses their disciplinary records includes customer complaints that have not been substantiated.
The Investment Adviser Public Disclosure database, which state securities regulators launched last month, is an online system similar to the
Financial Industry Regulatory Authority Inc.'s BrokerCheck database, which tracks the disciplinary records of registered representatives.
Previously, investors seeking to obtain the records of individual advisers had to call state regulators. The IAPD can be found
here.
The easy availability of such disciplinary records caught many advisers by surprise. More important, they are worried because the database includes unsupported allegations from customers.
“I would be concerned about the unproven stuff,” said Saverio “Sam” Paglioni, a partner at Integer Wealth Advisors Group LLC, which has $170 million under management. “Someone could make up a situation that wasn't factual. That's disconcerting.”
The IAPD rollout is “a rude awakening” for investment advisers, said Bill Singer, an industry attorney with the law firm Gusrae Kaplan Bruno & Nusbaum PLLC.
“There's been no notice to investment advisers” or to adviser associations, said Lisa Roth, chief executive of Keystone Capital Corp. and an industry compliance consultant. She said she opposes the release of unsubstantiated complaints.
“We knew it was coming, but my membership is just now becoming aware of it,” said Susan John, president of Financial Focus Inc. and chairwoman-elect of the National Association of Personal Financial Advisors. She supports the online availability of disciplinary information but suggests that advisers check their records to see what is disclosed.
What's more, now investment advisers — like their registered-representative peers — also face online disclosure of unproven termination-related information filed by former employers.
The IAPD “takes all disclosure items ever filed and exposes them to public view,” said Ms. Roth, who is also chairwoman of the member advocacy committee of the National Association of Independent Broker/Dealers Inc. “To disclose items that were not adjudicated, were withdrawn by an investor or where an adviser prevailed does nothing more than confuse the public.”
State regulators disagree.
“If you're an investor trying to discern a pattern of behavior, that information can be especially important,” said Denise Voigt Crawford, Texas securities commissioner and president of the North American Securities Administrators Association Inc.
Of course, for the brokerage industry, such online disclosure is nothing new. Customer allegations, as well as a host of other regulatory actions and arbitrations, have long been revealed to the public online via the BrokerCheck system.
The new system of adviser representatives is “like BrokerCheck for [advisers],” said Melanie Lubin, Maryland securities commissioner and co-chairwoman of the NASAA committee that oversees disclosure systems.
Regulators, investor advocates and the plaintiff's bar consistently have pushed for more regulatory disclosure, arguing that the information is vital for investor protection. But a disciplinary record that contains several negative events, even if the incidents are unproven, can hurt a financial professional's ability to get hired or attract clients.
Under the new IAPD system, unsubstantiated complaints made against advisers going back as far as 2002 are disclosed online.
For registered reps, such complaints are disclosed for only two years through BrokerCheck. However, in a Finra rule change approved by the Securities and Exchange Commission last week, unproven complaints that date back to 1999 will now be available through BrokerCheck. Finra will be announcing a phase-in of the additional disclosures.
The Finra rule change will “even out the disclosure pretty much on each side,” Ms. Lubin said.
The new online IAPD system closed a “significant loophole” enjoyed by advisers, Ms. Roth said.
In the past, she said, a broker with a disciplinary history could become an adviser and avoid online disclosures. The disparity in disclosures has long been used by the brokerage industry to argue that advisers are more lightly regulated than brokers.
“Part of what prompted migrations of [registered reps] to advisers was this sense that ... too many records were being given to the public and too many questions were being asked about [their backgrounds],” Mr. Singer said.
Individual investment advisers report to regulators the same type of customer complaints, regulatory actions and job termination data as individual brokers. Both must file the U-4 disclosure form and are subject to the U-5 termination report.
But lack of online disclosure prior to the IAPD system made access to adviser data much harder.
Meanwhile, more disclosure obligations for both brokers and advisers could be in the offing. The pending financial-reform bill would call on the SEC to study the disciplinary- disclosure system for both advisers and brokers, and “identify additional information that should be made publicly available.”
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E-mail Dan Jamieson at [email protected].
