ELITE ADVISOR BEST PRACTICES

Study Finds FINRA Broker Disclosures Faulty

Questions arise about whether the BrokerCheck service, run by FINRA, gives investors all the information they need to make an informed decision about choosing a broker.

By Steven J. Insel

Key Takeaways:

  • The new study from a public investor attorney group indicates that FINRA does not go as far as state securities regulators do in some of its disclosures.
  • Experts say FINRA is constantly catching people and acting on such situations. But the resources available to it, compared with the number of brokers it must monitor, is a big challenge.
  • As with any investment you and your clients make, due diligence is imperative. But always verify the quality (and source) of the information you’re using to make decisions.


As we discussed in February, it’s imperative that you and your clients understand the context in which BrokerCheck data is compiled, updated and used to vet the integrity of financial advisors you work with or are considering.

Now, a new study released by the Public Investors Arbitration Bar Association (PIABA), a group of attorneys who represent investors in securities arbitration cases, has raised questions about whether the BrokerCheck service, run by FINRA, gives investors all the information they need to make an informed decision about choosing a broker.

The study indicates that FINRA does not go as far as state securities regulators do in some of its disclosures. For example, BrokerCheck does not typically disclose specific reasons why a broker was fired, nor does it reveal bankruptcies from more than 10 years ago, PIABA says, although those items would turn up in state disclosures.

While we don’t work with any of the PIABA attorneys, our advisor compliance expert, Steve Insel, Of Counsel to Elkins Kalt Weintraub Reuben Gartside, LLP in Los Angeles, told us, “FINRA is constantly catching people and acting on such situations. But, the resources available, versus the number of brokers it must monitor, is a problem.” A longtime advisor to financial advisors, broker-dealers and accounting firms, Insel added that FINRA is a “self-regulatory organization.”

ELITE ADVISOR REPORT: How is this latest challenge to BrokerCheck likely to affect compliance?

STEVE INSEL: Broker-dealers are supposed to do background checks on brokers, and they have responsibility related to reporting to the Central Registration Depository, from which the information on BrokerCheck is taken. I think the response from FINRA is likely to be tougher with broker-dealers with respect to background checks and sanctions for reporting omissions. A primary mission of FINRA is to impose self-policing on the industry.

EAR: Do we ever get to the point at which we’re collecting too much information to be helpful to investors?

SI: In terms of what should be included, I believe the information is already over-inclusive in terms of unproven, ancient allegations and items in which the adviser was as much a victim of their firm as the customer was.

EAR: Any examples you can share with us?

SI: Sure. Inclusion of 10- and 20- year-old test scores seems more a way to embarrass people than to provide truly useful information. Can you imagine the FTC requiring every reporter who writes a story for consumers to put their SAT scores after their byline? Would this really help consumers evaluate the validity of the reporter’s information and advice? Should an IQ test for everyone in the securities industry be published on the database? It does seem it could reach a level of absurdity.

EAR: Do those test scores you mentioned have much correlation to the broker’s proficiency and success?

SI: I doubt that it could be scientifically proven that [decades-old test scores] have a very significant correlation to the performance of an adviser. The strong and unbiased, conflict-free supervision of the broker-dealer and investment adviser in my experience would have a much higher correlation.

Conclusion

According to Insel, BrokerCheck is sometimes used “after the fact, when it is too late and something bad has already happened, often by the lawyers that bring arbitrations.” As with so many well-intentioned rules to protect the investing public, the burden of complying with the rules has to be weighed against the benefits of those rules—and that’s rarely fast, easy or cut-and-dried.

Note to Reader

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

Circular 230 Disclosure: To ensure compliance with Treasury Department rules governing tax practice, we hereby inform you that any advice contained herein (including in any attachment) (1) was not written or intended to be used, and cannot be used, by you or any taxpayer for the purpose of avoiding any penalties that may be imposed on you or any taxpayer and (2) may not be used or referred to by you or any other person in connection with promoting, marketing or recommending to another person any transaction or matter addressed herein.


About the Author

Steven J. Insel is a partner in the corporate and securities law practice at Elkins Kalt Weintraub Reuben Gartside LLP in Los Angeles where he specializes in investment adviser and broker‑dealer matters, in addition to other areas of financial and professional services regulation.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

Circular 230 Disclosure: To ensure compliance with Treasury Department rules governing tax practice, we hereby inform you that any advice contained herein (including in any attachment) (1) was not written or intended to be used, and cannot be used, by you or any taxpayer for the purpose of avoiding any penalties that may be imposed on you or any taxpayer and (2) may not be used or referred to by you or any other person in connection with promoting, marketing or recommending to another person any transaction or matter addressed herein.