I read with great interest the recent flurry of articles in the financial news, including one appearing on the front page of the Wall Street Journal, about the supposed flaws with FINRA’s BrokerCheck due to the fact that it omits from public view some items, e.g., certain misdemeanor convictions and financial issues (unsatisfied liens or judgments or bankruptcy filings), that are disclosed in registered reps’ Form U-4. According to my friends at PIABA (not to mention the author of that WSJ article), this is potentially disastrous, as it prevents members of the investing public from making informed decisions about those to whom they would trust their capital.
In typical fashion, rather than argue that the existing scope of BrokerCheck is adequate (although such an argument would be eminently reasonable, given the abundance of information about brokers already available to the public), FINRA has, instead, reacted, putting additional burdens on already strapped member firms. Although FINRA characterizes its new steps to ensure greater disclosure by registered representatives – enacting new Rule 3110 and including an item in its 2015 Examination Priorities Letter – as evidence that it is being proactive, it seems clear that, once again, FINRA has simply reacted to pressure from interests outside its ranks of member firms.
I will address new Rule 3110 and the Examination Priorities letter in another post. But, as an initial issue, let me address the elephant in the corner: Does anyone really use BrokerCheck? As anyone in the securities industry can attest, very, very few customers actually seem to use BrokerCheck. Indeed, FINRA itself has expressly acknowledged this. Regulatory Notice 12-10 was largely devoted to the subject of figuring out ways to increase the investing public’s use of BrokerCheck. The big joke among attorneys who handle customer arbitrations, on both sides of the table, is that we lawyers are the only ones who actually use BrokerCheck. We both scour the record of the broker involved (claimant’s counsel to argue it, me to defend it), looking for some blot from a decade ago that might be highlighted to the arbitration panel as supposed evidence of the broker’s predilection for misconduct.
But, does someone who is really trying to determine whether to give her hard-earned retirement dollars to Mr. X vs. Ms. Y use BrokerCheck? No, my 30-year experience suggests those decisions are generally made as a result of word-of-mouth referrals from friends or family, not by reviewing the information on BrokerCheck. Given this, the notion that the existing universe of data available about registered persons, which is already rather broad, is somehow inadequate for an investor to make an informed decision seems a bit preposterous.