PROVED TO BE TRUE time and again, Justice Louis Brandeis' statement that “sunlight is the best disinfectant” has become almost a cliché. Exposing bad behavior, error or potential wrongdoing through publicity remains a major
step toward correcting misdeeds.
The Financial Industry Regulatory Authority Inc.'s BrokerCheck database of licensing and disciplinary information is designed to shine the sunlight on brokers, allowing investors to check out those they might be using, or considering using, and to help remove from the industry those brokers who might be bending or breaking the rules consistently.
Therefore, the Finra proposal that it give private vendors access to its BrokerCheck data seems to be a no-brainer. It would provide greater dissemination of the data about brokers and would allow deeper analysis of the information by the vendors, perhaps uncovering systemic problems in the industry.
In doing so, the self-regulator would be following the lead of the Securities and Exchange Commission, which, unlike Finra at present, does not place limitations on an individual's use of its Investment Adviser Public Disclosure database and, in fact, allows the use of automatic data collection tools (screen scrapers).
Finra's proposal is a response to near-term recommendations made in an SEC study on improving investor access to investment adviser and broker-dealer registration information. The study was mandated by the Dodd-Frank Act.
The SEC study recommended that the BrokerCheck and IAPD databases be linked, that the BrokerCheck database be searchable by ZIP code or other indicator of location, and that educational content be added to BrokerCheck.
The Dodd-Frank Act mandates that these recommendations be implemented within 18 months of the completion of the study, a deadline that arrives in July.
The study also included an intermediate-term recommendation that Finra continue to study the feasibility and advisability of including in BrokerCheck additional information such as the reason for, and comments related to, a broker's termination, and scores on industry qualification exams.
CONCEPT HAS MERIT
No one can argue with the concept of making more accurate and balanced information accessible to investors, and making it available in more ways.
However, judging by the comments on the proposal submitted to Finra, and to InvestmentNews in the wake of last week's story about the proposal, some brokers feel the information currently reported in BrokerCheck is often misleading, if not inaccurate, and that they are unable to correct it. (See IN Voices on Page 6.)
One adviser commented to Finra that his BrokerCheck record showed him as having under Disciplinary Actions a “criminal” entry, despite his blemish-free 25-year career in the industry. The entry related to a conviction for driving under the influence that subsequently was dismissed on appeal.
Another reported that he had been a whistle-blower against an employer and was dismissed by the firm in retaliation. However, his Finra record shows the reason for termination as “lack of production.”
Others complain that it's too easy for frivolous complaints to end up in a BrokerCheck record, it's too difficult to get them removed, and there is no due process.
Before the BrokerCheck information is more widely disseminated, Finra must make sure it is accurate. Brokers and investment advisers must be able to challenge any information they regard as inaccurate, unbalanced or misleading — without incurring inordinate legal expense. Reasons for termination other than criminal behavior, regulatory breaches or actions that directly affect clients should be excluded from BrokerCheck.
If Finra cannot guarantee accuracy and fairness in its records, it cannot in good conscience release the data to outside vendors, and it should spare no effort to correct errors.
Finra would be wise to remember that sunlight also reflects on those letting the light in.
