By Priscila Bandeira
On October 16, 2017, FINRA’s Executive Vice-President for Regulatory Operations, Susan Axelrod, announced that FINRA had ranked all 634,403 registered representatives based on risk. The factors used by FINRA to develop the ranking included prior regulatory disclosures, disciplinary actions, and employment history, among others. The goal was to crack down on the industry’s bad apples. The ranking appeared to be a great tool for the agency on behalf of investors; however, in view of recent data breach scandals, is this initiative safe for investors whose information is associated with these brokers?
Just this year, Equifax faced an enormous scandal over a data breach that compromised extensive information from the company’s customers and which affected nearly half of the American population. Now, after FINRA’s announcement that the rankings already exist, one question must be raised: what about all of the information on investors which is related to the factors described above? This is a relevant question, because such ranking most likely concentrates a large amount of sensitive data in one database.
The ranking initiative is following a number of other actions taken by FINRA to raise pressure on firms and brokers to comply with the Authority’s regulations. In July 2017, FINRA’s board authorized FINRA to propose and enforce changes to its application process for memberships, forcing firms to file a continuing membership application before hiring a broker with any disciplinary history. The board also authorized initiatives allowing FINRA to deny new membership to a firm with pending arbitration claims.
The primary purpose of the ranking is for FINRA’s internal use, so that it can target potential rogue brokers for more thorough examinations. However, even though the large amount of information collected for this purpose will remain private, all information related to investors is still at risk because it will all be held in one place. Although brokers seem to support the list, some have raised questions about how FINRA will keep the rankings secured, in light of many recent data breaches. If a breach occurs and the lists goes public, brokers have argued that it could harm the reputation and careers of advisers who may have not yet have had an opportunity to defend themselves or seek counsel.
Additionally, this becomes worrisome for investors, because in order to create a ranking of brokers as explained by Ms. Axelrod, the database will likely include data on US investors’ brokerage accounts, their personal financial information, details of stock and bond transactions made by brokerage firms, and customer complaints, etc.
When talking about the initiative, Ms. Axelrod briefly addressed the concern, assuring that the list will remain private. Moreover, the question of privacy was mainly raised regarding the brokers’ ranking number, which does not actually ensure how FINRA plans to deal with cyber security and investor’s privacy. This issue is something that FINRA needs to address and that investors should keep an eye on.