By Jennifer Allegra
On March 6, 2014, the Public Investors Arbitration Bar Association (PIABA) issued a warning to the investing public regarding FINRA’s failure to disclose “red flag” information in a broker’s background check. PIABA conducted an analysis and found that FINRA has elected to limit disclosure despite opposition from the SEC.
The FINRA website boasts: “We Believe in Protecting America’s 90 Million Investors, Because That Is Our Job.” FINRA also encourages investors to protect themselves. Indeed, the number one tip is for investors to use BrokerCheck to research their brokers’ backgrounds. In a sense, FINRA is not only inducing the investing public into believing that FINRA is looking out for their best interest, but it is also encouraging investors to rely on BrokerCheck as the holy grail of vetting a broker. However, an investor would be remiss to rely on BrokerCheck because BrokerCheck fails to include many “red flag” disclosures that could impact an investor’s decision to trust a broker with his life savings.
FINRA is not disclosing all of the information in its possession. Consequently, FINRA is misleading the public to believe that BrokerCheck provides full disclosure. FINRA maintains a Central Registration Depository (“CRD”), which is a comprehensive national database consisting of information that FINRA gathers as well as the information that each state collects. However, FINRA has chosen to disclose only a portion of the information it receives from the states.
According to PIABA, FINRA defends the lack of disclosure by protecting the “personal privacy” and “fairness” to its members. However, it may not be fair to investors who have been induced into relying on BrokerCheck as the number one way to protect their investment. For example BrokerCheck fails to report the reason for which a broker was terminated. From a logical perspective, FINRA, which has access to this information, should have an obligation to disclose it to the investing public. FINRA also does not disclose broker bankruptcy and tax liens unless they occurred within the past ten years. Yet, the investing public should have the opportunity to make a fully informed decision as to whether they want a broker who cannot manage his own finances to be entrusted with the the task of managing theirs.
The problem of inaccurate disclosures are further compounded because often disclosure events slip through the cracks and never make it into CRD’s. Indeed, the Wall Street Journal recently reported that over 1600 stockbrokers failed to disclose bankruptcy filings, criminal charges, and other red flags. The report further stated that there was a high correlation between unreported bankruptcies and unfavorable disciplinary records. Because FINRA relies on self-reporting, brokerage firms have a duty to report this information. However, much of this important information is falling through the cracks, which makes BrokerCheck disclosures incongruent with FINRA’s purported mission of investor protection.