Advertisement
investing

Vetting a Broker Is Harder Than It Looks

A lot of negative information is expunged from popular search tool BrokerCheck.

We spoke with Colleen Honigsberg, an assistant professor at Stanford Law School, where she studies corporate and securities law. Here are excerpts from our interview.

Many investors use BrokerCheck.finra.org, a search tool managed by the Financial Industry Regulatory Authority, or Finra, to investigate complaints and disciplinary actions against brokers. Is it true that a lot of these actions have been erased or expunged? If you’re a broker, clearing your infraction record is surprisingly easy. We found that 70% of expungement requests were granted by Finra arbitrators between 2007 and 2016. Finra’s website says expunging records is an “extraordinary remedy,” so I was shocked that the success rate was so high. Sometimes, a recorded infraction is truly an error, but we found that errors accounted for only 5% of granted expungements. In our review, certain arbitrators granted expungements for 100% of infractions, while others never granted one. And there’s no way for investors to find out through BrokerCheck if a broker had a record expunged or had tried and failed to expunge an infraction. That’s important because brokers who were denied expungement had high rates of repeat infractions—almost five times higher than average.

Given what you found, should investors still use BrokerCheck? Yes. There are some types of misconduct, such as criminal or regulatory infractions, that cannot be expunged using the arbitration process. BrokerCheck can also help you determine whether a broker has a pattern of misconduct.

Advertisement
Advertisement - Article continues below
Advertisement - Article continues below

What else can investors do to vet the brokers they might hire? It doesn’t hurt to search Google for your broker’s name to see if they’ve made the news. Finra has another search tool (www.finra.org/arbitration-and-mediation/arbitration-awards) that investors can use to look up arbitration awards and theoretically see expungement results. The search function isn’t great, but it’s better than nothing.

Finra has proposed changes that would make it harder for brokers to scrub their records. Would those address the problems you found? Not fully. They might make a dent, but Finra doesn’t have a lot of regulatory power over the expungement process right now. That could change if Congress were to give Finra more authority. Some lawmakers have shown an interest in doing that, but they haven’t introduced legislation to change the status quo.

Advertisement

Most Popular

2020 Stock Market Holidays and Bond Market Holidays
Markets

2020 Stock Market Holidays and Bond Market Holidays

Is the market open today? Take a look at which holidays the stock markets and bond markets take off in 2020.
July 1, 2020
HSAs Get Even Better
Financial Planning

HSAs Get Even Better

Workers have more options with flexible spending accounts, too.
July 2, 2020
What Are the Income Tax Brackets for 2020 vs. 2019?
tax brackets

What Are the Income Tax Brackets for 2020 vs. 2019?

The IRS unveiled the 2020 tax brackets, and it's never too early to start planning to minimize your future tax bill.
June 20, 2020

Recommended

3 Municipal Bond Funds for Rich, Tax-Friendly Yields
Investing for Income

3 Municipal Bond Funds for Rich, Tax-Friendly Yields

Municipal bond funds allow you to enjoy the benefits of tax-exempt income. By investing CEFs, you can sweeten the pot even further.
July 2, 2020
Is the Stock Market Closed for the Fourth of July?
Markets

Is the Stock Market Closed for the Fourth of July?

Independence Day falls on a Saturday in 2020. As a result, the bond and stock markets are closed for a long holiday weekend. Here's a look at the mark…
July 2, 2020
2020 Stock Market Holidays and Bond Market Holidays
Markets

2020 Stock Market Holidays and Bond Market Holidays

Is the market open today? Take a look at which holidays the stock markets and bond markets take off in 2020.
July 1, 2020
For Financially Responsible Kids, Do NOT Do These 3 Things
family savings

For Financially Responsible Kids, Do NOT Do These 3 Things

The key to putting your kids on the right financial path can be boiled down into one sentence.
July 1, 2020