Investors trying to research a broker’s background in the U.S. don’t receive complete information from the industry self-regulatory organization, says a group of plaintiff’s lawyers in a new report.
The Public Investors Arbitration Bar Association (PIABA), which is a voluntary association of lawyers who represent plaintiffs in securities arbitration proceedings and litigation, issued a warning Thursday alleging that the U.S. industry SRO, the Financial Industry Regulatory Authority (FINRA), omits crucial information from its BrokerCheck service, which investors are encouraged to use to research prospective brokers.
The PIABA reports that it compared the disclosures available through FINRA’s BrokerCheck service and the information available from state agencies, and found that certain information is not available from the BrokerCheck service that is available from the states. For example, it says that when a dealer fires a broker, BrokerCheck reports exclude the reason for the termination and other information regarding the termination, although this information is available from states. It says that information about whether a broker was ever under internal review for fraud or other violations is not reported by BrokerCheck, but is disclosed by states.
Additionally, it says that personal bankruptcies filed by brokers, and federal tax liens of more than $100,000, are not reported by BrokerCheck, but are revealed in state reports. Finally, it says that information about failed tests for industry qualification exams is not disclosed through BrokerCheck; it reports that BrokerCheck only shows which exams were passed, but not the score, or how many times a broker may have failed before finally passing (which state reports do reveal).
The PIABA says that all of this information could impact an investor’s decision about hiring a broker to run their portfolio. Indeed, it argues that the omitted “red flag” background information “is so serious that unwitting investors relying on BrokerCheck may very well select brokers with whom they would not do business if they had access to the more complete picture available to FINRA but now being hidden.”
The PIABA report says that its analysis found that “FINRA has elected to provide limited information about brokers even in the face of calls for fuller disclosure from the Securities and Exchange Commission (SEC), state securities regulators, consumer groups, and other organizations.”
It argues that the only way for the BrokerCheck system can fulfill its investor protection goals is by requiring that “FINRA disclosures be made consistent with the more complete reporting provided by state securities agencies.” And, it calls on Congress and the SEC to require improved disclosure.
FINRA issued a statement defending BrokerCheck noting that it has invested in improving its usability in recent years. “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,” it says.
It concedes that state regulators do provide information not available through BrokerCheck, but notes that it provides information that’s not available from state regulators, including: information regarding arbitration awards against firms; links to arbitration awards in its arbitration database; and, links to its disciplinary actions.
FINRA also says that it encourages investors to both use BrokerCheck and to consult their state securities regulator before doing business with a broker.
Nevertheless, the PIABA says that it should be required to provide more complete information on broker backgrounds. “All investors should be able to obtain complete and consistent information about brokers. Period. The quality of the disclosure you get about brokers should not depend on which state you live in. There is no rational basis for FINRA to hide key ‘red flag’ information that investors in some states can get from state-level agencies,” said PIABA president, Jason Doss. “Given that FINRA has failed repeatedly to take action to increase the disclosures in BrokerCheck, Congress and the SEC need to compel them to do so if necessary.”
“It really is appalling that FINRA is given the authority to collect detailed information about financial professionals yet is not required to make a full disclosure of that information,” said Denise (Denny) Voigt Crawford, former Texas Securities Commissioner (1993-2011) and former president of the North American Securities Administrators Association (NASAA). “This practice is very detrimental to the interests of investors, policy makers and the public generally.”