Stock Watch


Checking Up on Your Broker

Kathy Kristof

Finra’s popular BrokerCheck tool is a start, but it might not reveal everything you need to know about an investment adviser.



Responding to horror stories of brokers who run wild with customer assets—by, say, churning accounts or recommending inappropriate investments—Americans have gotten good at doing a little research before hiring. Millions of people turn to the Financial Industry Regulatory Authority’s online BrokerCheck tool each year to get background info on investment professionals.

See Also: No Day in Court for Injured Investors

However, recent research uncovered troubling gaps in the disclosures provided by Finra, the brokerage industry’s self-regulatory arm. A Wall Street Journal investigation found that the database failed to include criminal records or personal-bankruptcy filings for 1,600 brokers. The study also confirmed what one might have expected—that brokers who repeatedly failed licensing examinations had worse complaint histories than those who passed their exams on the first try. A separate study by the Public Investors Arbitration Bar Association, a group of securities lawyers, found that information reported by state securities regulators—including tax liens, bankruptcies, results of broker licensing exams and the reasons brokers were fired from previous jobs—was often excluded from this public database, too.

Finra says it does disclose termination data when brokers leave in the wake of fraud or misconduct allegations. But it wouldn’t necessarily report a case of a supervisor who found a broker incompetent. Some state regulators would.

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Finra originally defended its disclosure policies, saying they reflected an appropriate balance between customer and broker rights. But now it says it’s launched an internal study to determine whether there’s a “meaningful relationship” between currently undisclosed data, such as failed examinations, and broker misconduct.

In addition, the self-regulatory organization is now requiring member firms to do background checks on new hires. It is also launching a nationwide database search to make sure that criminals have not been able to infiltrate the industry by simply failing to disclose past transgressions. Once this initial search is complete, Finra says, it will conduct periodic reviews of public records to ensure that the disclosures in BrokerCheck are kept up-to-date and complete.

Finra says it has long urged investors to take the extra step of supplementing the information they find on BrokerCheck with information filed with their state securities departments. State securities regulators often disclose more information about financial professionals than is available through BrokerCheck. The North American Securities Administrators Association maintains an online listing of state securities offices. But don’t expect easy going at the state level. Most state securities offices can be contacted only by phone, and some charge to copy and mail files.



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