FINRA BrokerCheck Under Attack By Investor Advocates

July 15, 2015

You may have seen some of the recent television ads for the Financial Industry Regulatory Authority's ("FINRA") online disclosure website BrokerCheck.


As noted on the self-regulatory organization's "About BrokerCheck" website page:

BrokerCheck is a free tool from FINRA that can help you research the professional backgrounds of brokers and brokerage firms, as well as investment adviser firms and advisers.

Where BrokerCheck Information Comes From

The information about brokers and brokerage firms that you find in BrokerCheck comes from the Central Registration Depository (CRD®). All brokers must be licensed and registered by FINRA, and CRD is the securities industry online registration and licensing database, Information in CRD is obtained through forms that brokers, brokerage firms and regulators complete as part of the securities industry registration and licensing process.

The information about investment adviser firms and representatives comes from the Securities and Exchange Commission's Investment Adviser Registration Depository (IARD) database.

Except for . . .

The "About BrokerCheck" page offers in punchlist fashion the many disclosures that are online.  Not every tidbit of information about a stockbroker or brokerage firm is posted, however, and the FINRA page offers this reservation:

What information is NOT disclosed through BrokerCheck?

Information that has not been reported to the CRD system, certain personal or confidential information (for example, Social Security Numbers, residential addresses), and certain information that is no longer required to be reported (for example, judgments or liens that have been satisfied) is not disclosed through BrokerCheck.

In addition, FINRA reserves the right to exclude information that contains confidential customer information, offensive and potentially defamatory language or information that raises significant identity theft or privacy concerns that are not outweighed by investor protection concerns.

Under FINRA's current public disclosure policy, in certain limited circumstances, most often pursuant to a court order, information may be expunged from the CRD system.

Industry Angst

For registered representatives and member firms in the FINRA community, BrokerCheck is not always a popular tool.  For many industry participants, the online database takes on the unwelcome role of an invasion of their privacy and the disclosures sometimes present an unfair depiction of their record of dealing with public customers and regulators.  

Investor Advocates Want More

Public investors and Wall Street reform advocates generally favor the online disclosure of such items as criminal charges and convictions, customer complaints, litigation and regulatory settlements, and a host of personal financial items pertaining to bankruptcies and unpaid judgments/liens. For some investors and their advocates, however, BrokerCheck does not go far enough. On July 14, 2015, I received the following Press Release:

4 GROUPS URGE SEC INVESTOR ADVISORY COMMITTEE TO IMPROVE INFORMATION UNDER FINRA BROKERCHECK, CREATE NEW ONE-STOP DATABASE FOR INVESTORS TO  CHECK FINANCIAL PROFESSIONALS

Leaving Out Terminations, Past Bankruptcies and Other Details: Joint Letter Says FINRA "Misleads Investors" About "Obtaining Complete and Adequate Information" About Brokers; SEC Should Override FINRA on Putting Interests of Brokers Ahead of Those of Investors.

WASHINGTON, D.C. - July 14, 2015 - The Securities and Exchange Commission (SEC) should require fuller disclosure of information to investors under the FINRA BrokerCheck Reports system and also develop a unified national disciplinary database allowing older Americans and other investors to check out the backgrounds of financial market professionals, according to a letter submitted today to the SEC Investor Advisory Committee (IAC) by the Public Investors Arbitration Bar Association (PIABA), Public Citizen, the PIABA Foundation, and the Securities Arbitration Clinic of the St. John's University School of Law.

In the joint letter available online at www.piaba.org, the four groups point out that FINRA currently is conducting a national advertising campaign that inaccurately suggests that the FINRA BrokerCheck Reports provide complete information about brokers to investors.  The group urges the SEC to remedy the situation by requiring full disclosure of all publicly available background information about financial professionals.

The letter concludes:  "… FINRA actively encourages investors to use BrokerCheck so they can make informed decisions about their brokers.  FINRA also requires firms to notify investors repeatedly about the availability of BrokerCheck.  Nevertheless, FINRA then fails to provide complete and adequate information about their brokers.  FINRA has chosen not to further expand BrokerCheck in an effort to protect the interests of its members in the securities industry, rather than the investors it has promised to protect.  Accordingly, the SEC should exercise its regulatory authority and require FINRA to harmonize the information on BrokerCheck Reports with the information already publicly available from states similar to Florida with broad public records laws. BrokerCheck Reports should, like Florida, only exclude personal information such as social security numbers, home addresses, etc.  There is simply no valid reason why the same … information is a public record at the state level but
is not publicly available from FINRA."

In March 2014, PIABA released a report detailing how FINRA omits critical information from its BrokerCheck Reports even though the information is publicly available from some state securities regulators in the form of CRD Snapshot Reports.  This happens even though the information contained in BrokerCheck Reports and CRD Snapshot Reports are derived from the same database.  The PIABA Report correctly concluded that FINRA's BrokerCheck Reports should be harmonized with the reports from states that provide the most information so that all investors have equal access to the same important background information.

On June 1, 2015, FINRA launched a national ad campaign promoting BrokerCheck.  In so doing, FINRA described its BrokerCheck Reports as "FINRA's free online tool that allows investors to access information about every broker's employment history, certifications and licenses, as well as regulatory actions, violations or complaints made against them." The release also states that BrokerCheck can be used to avoid hiring "bad brokers", saying that if investors are to avoid "leap-before-you-look mistakes when choosing a broker-they should use BrokerCheck."

Attorney Jason Doss, a letter signer and co-author of the 2014 PIABA report, said:  "There is no question FINRA portrays BrokerCheck Reports as important, accurate and comprehensive.  Despite FINRA marketing efforts, FINRA continues to omit material information about brokers in its BrokerCheck Reports even though this same CRD information is publicly available from many state securities regulators.  FINRA does not alert investors that more complete information is available from other sources.  The lack of complete information in FINRA's BrokerCheck Reports has the potential to mislead investors into believing that all relevant information has been disclosed when it has not."

The joint letter continues:  "In contrast to the states with the most comprehensive disclosure of information, FINRA exercises it statutory authority to exclude information contained in CRD Snapshot Reports.  To date, it appears FINRA's rationale for not disclosing the same amount of information as these states is based on 'personal privacy and fairness' to FINRA members.  This rationale, however, is flawed given that the same information excluded from the BrokerCheck Reports is already publicly available from these states.  Moreover, FINRA has designated itself as an advocate for investor protection, and, as a result, the SEC should mandate FINRA place the interests of the investing public above any vague notion of privacy or fairness to the financial advisors entrusted with clients' life savings and retirement accounts."

One glaring omission in BrokerCheck files is information about terminations.  According to the groups:   "It is important for consumers to know all reportable facts and circumstances surrounding brokers' terminations from their firms.  For example, investors considering whether to hire a new broker to manage their life savings have a legitimate interest in knowing whether that person has been fired from a previous firm and the circumstances surrounding that termination.  In addition, existing customers commonly follow terminated brokers to their new firm(s) and they certainly have a legitimate need to know this information to be able to determine whether the broker is trustworthy."

The groups also are concerned about past information that is either never reported or omitted after a period of time.  "Certain information that was, but is no longer required to be, reported through the registration and licensing process is not disclosed through BrokerCheck. This information includes, for example, judgments and liens originally reported as outstanding that have been satisfied and bankruptcy proceedings filed more than ten years ago. Reasonable investors would have good cause not to engage or hire a broker who has demonstrated that he or she cannot properly manage their own finances.  For example, a reasonable investor would want to know whether their financial advisor has ever filed for bankruptcy, not just in the last 10 years.  Similarly, reasonable investors would also want to know if their broker has ever had IRS tax liens levied against them or judgments that arise from, for example, a breach of duty."

The four groups also are concerned that FINRA withholds information about examination scores on industry tests, failed exams, and internal reviews from its Brokercheck Reports.

READ the FULL-TEXT PIABA Joint Letter

According to PIABA's website, the organization offers this characterization of itself;

About PIABA

PIABA is an international bar association whose members represent investors in disputes with the securities industry. Currently, there are members from 44 states, Puerto Rico and Japan.

PIABA was established in 1990 as an educational and networking organization for securities arbitration attorneys who represent the public investor in securities disputes. Many PIABA members are involved in promoting the interests of the public investor in securities and commodities arbitration through Association, State and National Committee service.

Mission Statement

The mission of PIABA is to promote the interests of the public investor in securities and commodities arbitration by protecting public investors from abuses in the arbitration process, such as those associated with document production and discovery; making securities and commodities arbitration as just and fair as systematically possible; and creating a level playing field for the public investor in securities and commodities arbitration.

PIABA Board of Directors

PIABA is governed by an elected Board of Directors. . .

Bill Singer's Commentary

On Page 17 of the PIABA Joint Letter, we find this assertion:

As illustrated above, FINRA actively encourages investors to use BrokerCheck so that they can make informed decisions about their brokers. FINRA requires firms to notify investors repeatedly about the availability of BrokerCheck. FINRA then misleads investors into believing that they are obtaining complete and adequate information about their brokers. In an effort to protect the interests of its members in the securities industry, FINRA has purposely chosen not to further expand BrokerCheck.

To ensure that the BrokerCheck system functions as intended, Congress needs to act to ensure that the public has complete and uniform access to the national CRD database. Congress could achieve uniform disclosure by requiring FINRA to harmonize its disclosures with the disclosures available from the states with the most robust public records laws. As discussed above, in 2010, the SEC urged FINRA to consider harmonizing the information it makes available with the information the states make available to investors. Notwithstanding that more than three years have passed, FINRA has not acted to do so. More than a decade ago, NASAA requested that FINRA make this information available:

Almost all the information filed on forms U-4, U-5, U-6, BD and BD-W is public information understate freedom of information or sunshine laws. Investors should be able to view all of this public information in one easy to access site. Because [FINRA] operates Web CRD, it is in the optimal position to manage this central gateway for investors and potential investors to access public information. 45

FINRA has chosen not to do so because it is a self-regulatory trade association that is driven in part by the "personal privacy and fairness" interests of its members (brokers and broker-dealers), who presumably prefer to have less information provided to the investing public. Accordingly, Congress must step in and act where FINRA and the regulatory process has failed.

Frankly, it's hard to refute those allegations because they are largely on point.  As I have argued over nearly two decades of advocacy for the reform of the old NASD and the current FINRA, the self-regulatory organization is little more than a glorified trade organization. As the PIABA Joint Letter so aptly notes, much of FINRA's purported regulatory conduct seems "an effort to protect the interests of its members . . ." 

Where PIABA and I likely differ is that I literally view FINRA as a proxy for its larger member firms and I pointedly question the self-regulator's legitimacy because it is not only antagonistic to the legitimate business needs of its smaller member firms but it has totally disenfranchised the men and women who constitute the registered representatives of its member firms. To be quite clear: No individual registered representative has any vote for any FINRA elective office or on any proposed rule. The FINRA voting franchise is solely reserved for member firms. Moreover, I have long criticized FINRA's Board as a gerrymandered excuse to preserve the power of a minority of larger member firms at the expense of the organization's smaller and mid-sized member firms.

Further, the PIABA Joint Letter makes the following arguments:

It is important for consumers to know all reportable facts and circumstances surrounding brokers' terminations from their firms. For example, investors considering whether to hire a new broker to manage their life savings have a legitimate interest in knowing whether that person has been fired from a previous firm and the circumstances surrounding that termination. In addition, existing customers commonly follow terminated brokers to their new firm(s) and they certainly have a legitimate need to know this information to be able to determine whether the broker is trustworthy.
Page 4 of the PIABA Joint Letter

Reasonable investors would have good cause not to engage or hire a broker who has demonstrated that he or she cannot properly manage their own finances. For example, a reasonable investor would want to know whether their financial advisor has ever filed for bankruptcy, not just in the last 10 years. Similarly, reasonable investors would also want to know if their broker has ever had IRS tax liens levied against them or judgments that arise from, for example, a breach of duty. Once again, this information is publicly available on CRD Snapshot Reports regardless of whether, for example, an IRS tax lien was levied more than 10 years ago and/or has been satisfied.
Page 5 of the PIABA Joint Letter

I find myself in an odd and somewhat uncomfortable predicament and position. I have a well-known aversion for hypocrisy, which often forces me to speak candidly and objectively no matter my clients or adversaries at a particular moment in time. Without question, I largely agree with PIABA's positions on BrokerCheck and overwhelmingly concur with the allegations and assertions in the PIABA Joint Letter. At best, BrokerCheck can be a very useful tool for investors but it comes up short in terms of its overall functionality and it seems designed to frustrate an easier, more direct access.  I still do not understand the need for a user identification protocol or the multi-layered interface.

The signatories to the joint letter assert that "reasonable investors" have a "legitimate interest" to know if a stockbroker has been fired and the circumstances of that discharge. The rationale set forth is that such disclosures help the investor formulate an opinion as to the stockbroker's trustworthiness. Similarly, it is argued that "reasonable investors" have "good cause not to engage of hire a broker" if there is a history of bankruptcy, tax liens, or judgments.

I believe that the PIABA Joint Letter makes a strong case through valid points. What I am asking the signatories to understand is that hundreds of thousands of registered men and women in the FINRA community feel under siege and unfairly singled out. They have no voice or vote at FINRA. Perhaps if they were better vested in the self-regulatory process they might better understand the salutary impact of an online disclosure system in enhancing the credibility of those with clean records and serving to cleanse the industry of recidivist as a function of informed consumers.

Finally, PIABA should create a LawyerCheck database for all PIABA lawyers and law firms and disclose the very same information as is now being demanded of FINRA member firms and registered persons. After all, turnaround is fairplay and "reasonable clients" of PIABA's lawyers and law firms have legitimate interests and expectations that their legal counsel is trustworthy. The PIABA online database should easily and directly disclose when a member law firm or lawyer was successfully sued by clients,filed for bankruptcy, or has tax liens or unpaid civil judgments.  I have recently called for the same protocol to be applied to FINRA staff as well.  See, "1 Registered Rep, 5 Days, and 9 NSF Checks" (BrokeAndBroker.com BlogJuly 10, 2015).

Ultimately, nothing speaks louder than "do as I do."  It is leadership by example. It is commanding the high ground in a debate about ethics and disclosure. Wall Street and its customers has been victimized time and time again by policies that are premised upon far too many winks and nudges.  Let's restore integrity to the process. PIABA and FINRA should put their money where their mouths are. Whatever you ask by way of online disclosure from the industry, you should readily impose upon your own membership and employees. I can think of no more powerful message.