When a broker defrauds investors, or is otherwise sanctioned by the Financial Industry Regulatory Authority, the decision becomes publicly available on FINRA's website through a program called "Broker Check."
The same is true for a broker-dealers-the company's record becomes available online.
But there is one missing piece that could be of interest to investors: There is currently no requirement that brokers who have been disciplined or who have settled with investors in arbitrations be listed on the company's own broker-check document.
Absent this information, an investor considering going with a particular broker-dealer firm would have to obtain a list of all the names of that firm's brokers-assuming that was even possible-and then run a check on each of those names.
That's not all. Another piece of information is also unavailable. If a broker-dealer hires a broker or multiple brokers from a firm that has been cited by FINRA for "failure to supervise," the new firm is required by FINRA to exercise extra supervision of those newly hired employees. But there is no requirement that this special supervision mandate be reported on the firm's broker-check page.
A spokeswoman at FINRA acknowledged that these pieces of information are not required, but attributed this decision to the SEC, which she said provided FINRA with the forms that broker-dealer firms need to file with FINRA.
However, a spokeswoman at the SEC countered: "The form BD [filed by broker-dealers with FINRA] is not just an SEC form, but one that is jointly used by the SEC, state securities regulators, and self-regulatory organizations, including FINRA."
Meanwhile, FINRA argues that to the extent that a brokerage firm has a number of brokers with disciplinary records, those problems would likely be reflected in the firm's own records as failure to supervise actions or as other disciplinary measures against the firm as a firm.
Certainly this might be true, but there is no requirement that it happen, unless the firm itself was sanctioned for "failure to supervise."
Barbara Roper is director of investor protection at the Consumer Federation of America. "If you have a broker-dealer that has a number of brokers who have had enforcement problems, that should be known to investors," she says. "I'm sure that most investors would want that information disclosed by the broker-dealer. But, of course, most investment firms would not want to have to do it." Roper adds, "I've thought for a long time that it ought to be easier for investors to evaluate firms, rather than just individual brokers. It ought to be much easier to identify firms that have high compliance problems among their brokers, because that kind of environment begins at the top."
Mark Tepper, a securities law attorney who represents investors in cases brought before FINRA, says, "The more full disclosure there is, the greater the limits there are on those who might step over the line. I favor full disclosure for both the broker and the broker-dealer. That would have two public benefits: Investors could make intelligent decisions about choosing a broker-dealer and also there would be a chilling effect on brokers and companies that might think of crossing the line."
Tepper recently won an arbitration settlement before FINRA involving a broker working for Questar Capital, a Minneapolis-based broker dealer. The broker in question had pleaded guilty in Suffolk County (N.Y) to operating a $1.8 million Ponzi scheme that defrauded his Questar clients. And in a consent agreement with FINRA, the broker was permanently barred from the financial services business. That decision was recorded on the broker's record filed with FINRA, but there is no mention of it on Questar's corporate record with FINRA. Nor are any similar sanctions of brokers listed on other broker-dealers' records.
Roper says, "I get why this isn't at the top of the SEC's agenda. When they get a little breathing room after implementing the Dodd-Frank Act, this is something they need to look at."
Don Blandin, president and CEO of Investor Protection Trust, an organization that instructs investors in how to protect themselves, offered another observation, saying, "The whole self-regulation thing for investment companies is a little dicey."
Asked for comment, FINRA spokeswoman Nancy Condon said the idea of requiring broker-dealers to post broker sanctions on their company's BD record was "an interesting suggestion." She added, "Right now we're looking at a number of recommendations arising from the study required under the Dodd-Frank legislation. We're always looking for a way to improve broker check and increase transparency."
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