I heartily endorse this post from my colleague, Chris, who’s been quiet of late. It says a lot about FINRA, in terms of how it deigns to spend your assessment money, how fairness in the Enforcement process can be completely illusory, and how it is consistently unable to convince much of the investing public that it is serving any real function. – Alan
FINRA’s mission is “investor protection.” In furtherance of that goal, FINRA has devoted significant resources to its BrokerCheck database, which allows investors to look up their broker, or potential broker, and check his or her background for any red flags that might give the investor reason to shy away from that broker. Basically, FINRA wants you to know which brokers might be “bad seeds” so that you, as an investor theoretically concerned with safeguarding your money, will avoid giving it to anyone with a less than perfectly clean past. And by perfectly clean, I mean perfectly – not only does FINRA want investors to know about past customer claims and regulatory actions brought against the broker, but also past terminations, tax liens, and bankruptcies. In theory, if an investor sees any of these things on his broker’s BrokerCheck report, the investor will run the opposite direction with his or her money. But does that really happen?
A recent Complaint suggests the answer is “no.” FINRA’s Complaint alleges that two brokers, Kim Kopacka and Beth Debouvre, allowed Ms. Kopacka’s husband to conduct securities business and sell securities through a member firm, despite the fact that FINRA barred him from the industry in 1998. In essence, the Complaint alleges that after Mr. Kopacka was barred from the industry, his wife became registered and set up an office where Mr. Kopacka continued meeting with clients and selling them securities. Allegedly, his wife had no involvement with the clients and simply listed her name on paperwork as the registered representative of record handling those clients and those transactions. The Complaint alleges that from 2002 to 2016, Mr. Kopacka sold over $40 million in private placement securities to over 280 different customers – all while being barred from the industry.
If the conduct alleged in the Complaint is true (and that’s a big “if”), it raises several interesting questions. The first question that comes to mind is, why did it take FINRA 15 years to figure this out? The office where Mr. Kopacka was allegedly operating consisted of only himself, his wife (who was almost never present, allegedly), and a supervisor. Didn’t any FINRA audits of the office take place in 15 years? Didn’t anyone notice that a registered rep who was barred from the industry has a spouse who only took interest in becoming registered after her husband was barred, and that she suddenly started selling millions of dollars of unregistered securities, despite the fact that she had zero experience in the industry? And, how can FINRA bring a case against these reps for conduct that started (and arguably should have been detected) over 15 years ago? What about statutes of limitations? If you are interested in that issue, check out our prior blog post here. The short answer is, traditional statutes of limitations do not apply to FINRA Enforcement actions. So, yes, you might be forced to defend something that you did in the prior millennium.
The other interesting question is, how did over 280 customers allegedly think it was a good idea to take investment recommendations from someone who was barred from the industry? There are only two answers: either they didn’t know that Mr. Kopacka was barred, or they didn’t care. Now, BrokerCheck has been available online since 1998, and it was significantly updated in 2007 to include many additional disclosures about brokers. If you search BrokerCheck for a person who has been barred, it is hard to miss the warnings that FINRA provides: on the search result page, the broker’s name will be inside a red box, and the word “BARRED” will appear in bright red directly under his or her name. If you click on the details for that person, FINRA will explicitly tell you that “FINRA has barred this individual from acting as a broker or otherwise associating with a broker-dealer firm.” It’s pretty hard to miss.
So, in Mr. Kopacka’s case (if FINRA’s allegations are true, and again, that’s a big “if”), the fact that Mr. Kopacka was barred was available to 280 customers and yet they allegedly decided to hand Mr. Kopacka over $40 million anyways. It’s probably safe to assume that 280 customers would not knowingly invest with someone who was barred from the industry, just like 280 people probably would not go to a doctor or any attorney if they knew his or her license had been taken away. So those 280 customers either didn’t know that BrokerCheck existed, or they chose not to use it. Both of those scenarios pose a problem for FINRA and its goals of protecting investors, particularly the casual investor.
FINRA often considers increasing the amount of information available on BrokerCheck. FINRA also makes it difficult for brokers to expunge information from their CRD records that appears in BrokerCheck (and FINRA is considering additional rules that will make expungement even more difficult). But, if customers are not actually using BrokerCheck to research their brokers, like the 280 investors in this case apparently didn’t do, then it doesn’t matter how many disclosures are made on the system.