Is FINRA’s BrokerCheck Broken?
Regulators have made it easier for investors to dig into financial advisors’ backgrounds, but even with the new disclosure rules, FINRA BrokerCheck doesn’t supply investors with all of the information that, in our humble opinion, they should be able to access. Furthermore, the multiple sources that investors or interested parties need to research to get a complete picture of an advisors’ disciplinary history make the current system unnecessarily burdensome and difficult to use.
Perhaps worst of all, an individual checking on an advisor will probably not be aware of the many sources or that each source can provide a very different picture.
Brief History Lesson
In this post-Madoff environment, people are more aware of the wisdom of checking up on their financial advisor’s background and for that matter, checking up on anyone in the financial industry who they are contemplating doing business with or hiring.
The most basic step is to check with FINRA’s BrokerCheck. The Financial Industry Regulatory Authority (FINRA) is the industry’s self-regulatory organization that oversees brokerage firms and brokers. It stores information on more than one million current and former FINRA brokers.
A second and less well-known step is to conduct a search through Investment Adviser Public Disclosure (IAPD). (Dig Deeper: Understanding the difference between investment advisors vs. brokers.) The IAPD database contains information concerning more than 11,000 SEC-registered and more than 14,000 state-registered investment advisors.
While most brokers are not investment advisors—and vice versa—it’s worth checking both just in case the person might have served in a different role in a previous position. The data available through BrokerCheck and IAPD includes general information about the registrant and any regulatory events, criminal convictions, and arbitrations or civil litigation that resulted in an award, decision, or judgment for a customer.
State Securities Regulators
In addition to the two resources mentioned above (and to confuse the matter even more), there are state securities regulators. State securities regulators have direct access to the Central Registration Depository (CRD) system, which is run by FINRA and used to compile the BrokerCheck Report. However, regulators collect more information—some of it critical information—on registration forms than is made available to the public on BrokerCheck. In some cases, that information is publicly available only on a CRD report from state securities regulators.
For example, BrokerCheck excludes information about the reason for termination and any comments from the formerly registered representative. As we outline below, some “disclosable” events do not get reported on BrokerCheck, but they do get reported on a CRD report.
You can retrieve a copy of a CRD report from state securities regulators, but the process is cumbersome. Most states provide investors with copies of CRD records upon request—on paper or by email—but many do not have an online system. In addition, in our experience, states will release the CRD only if the individual was/is registered in the state that is the subject of your inquiry.
This, of course, is despite the fact that state securities regulators have access to the centralized CRD system which maintains records of individuals registered in any state (if this defies commons sense, you are not alone).
SEC (and FINRA) Urge Investors to Check with State Securities Regulators
While you would think that all of the information relating to brokers would be centralized with FINRA and supplied on BrokerCheck, this is not always the case. In fact, both FINRA and the Securities and Exchange Commission (SEC) urge you to check with state securities regulators.
FINRA’s website indicates that “State securities regulators also have access to CRD and can sometimes provide more details about investor complaints.”
While BrokerCheck is a valuable tool for getting information about a firm or a registered person, even the SEC recommends that investors check with each state where the firm has done business—or where the sales person has been registered—for data about disciplinary history. A January 2007 release by the SEC encourages investors to check with state securities regulators for “a complete picture of [the advisor’s] disciplinary history.”
Case in Point
We were retained to conduct a background investigation on a native of South America who had spent more than 20 years in the United States working for an international investment bank.
Dig Deeper: Case Study: Preliminary Public Record Background Check Identifies Criminal Investigations
BrokerCheck reported only one disclosure on the individual: a $10,000 fine relating to trading unauthorized securities. Certainly that is nothing to make light of, but in the big picture, it was not a significant finding.
However, the CRD provided by state securities regulators painted an entirely different picture:
- South American federal officials investigated three different investment banking transactions involving the candidate. One—a criminal probe by a South American federal prosecutor—was ongoing.
- The candidate was terminated from his prior position at an investment bank due to a “loss of confidence.” According to various published reports and information provided by the candidate to our client, the candidate had “retired” from his position at the investment bank.
- The SEC and the U.S. Department of Justice had conducted an investigation into the candidate’s trading activities regarding two different investment banking transactions.
The events described above had occurred more than two years earlier and in a few cases more than four years earlier, so any argument that FINRA might make that these events were not “disclosable” would be absurd. (According to FINRA, a disclosable event includes “criminal, regulatory and civil actions, as well as certain financial incidents.”)
In addition to the example mentioned above, we have found numerous instances in which a CRD report contained important details that were simply not available on BrokerCheck.
Changes on the Horizon
In fairness to FINRA, over the last several years it has made more information available to the public. And the SEC recently completed a study (prompted by the Dodd-Frank Wall Street Reform and Consumer Protection Act) of ways to improve investors’ access to publicly available information.
Among the recommendations are to unify BrokerCheck and IAPD search results and to increase the amount of information available on BrokerCheck.
Closing Thought
As it stands today, a significant amount of public registration data is available, primarily through BrokerCheck and IAPD. But the changes have not gone far enough toward making critical information readily accessible to investors and the general public. Navigating the databases of federal and state regulatory agencies should be easier and more user-friendly—not akin to a “Buyer beware!” experience.
The bottom line is that even the most reputable sources have their flaws. It’s critical to understand that there may be other channels for accessing crucial information before you make decisions about whom to trust.
