BrokerCheck: Does FINRA Make It Possible for Brokers to Hide Bad Records?

BrokerCheck tells us everything we need to know about financial advisers and brokers, right?

Not necessarily.

The Financial Industry Regulatory Authority (FINRA) regulates securities firms and their members, i.e. broker-dealers, brokers, and financial advisers. To that end, FINRA maintains BrokerCheck, which is a public record of customer disputes with investors, along with felonies, employment separations, and investment-related civil judgements. But according to some analysts, FINRA isn’t as helpful as it could be. BrokerCheck doesn’t always make it easy to find all of the relevant information, nor does it give analysts the chance to evaluate all of the data that FINRA gathers about its members.

According to FINRA, BrokerCheck is designed to create “a safer environment for investors in today’s complex investment landscape” and to “help investors to determine whether to conduct business with these brokerage firms and brokers.”

BrokerCheck is a good place to start research into an investor, but it’s almost never the complete picture. Even if you have a good relationship with your investor, it’s worth checking out their BrokerCheck record and reviewing your portfolio about once every quarter.

Expungement: Brokers Can Hide Past Misconduct

The main problem with BrokerCheck? It’s sometimes heavily edited.

Brokers accused of misconduct often try to have their BrokerCheck record expunged. One broker recently vented that his disclosures were due to a “compliance witch hunt” in a “hypersensitive regulatory environment.” We’re not in a position to evaluate those claims, but as the article points out, firms might be motivated to ding a broker’s record if they’re worried that same broker might take investor clients with them when they move to a different firm.

That said, there is also reason to believe that many brokers who have their records expunged are especially prone to customer complaints. One study showed that FINRA approved expungement requests 84% of the time, and that brokers who had their misconduct records expunged were 3.3 times more likely to receive a new customer complaint than the average broker.

This study prompted Senator Elizabeth Warren to write a letter to FINRA CEO Robert Cook. She wrote, “Given FINRA’s crucial role in promoting safe markets and regulating the securities industry, it is of utmost importance that the organization consider the impact of broker expungement on the future misconduct of industry brokers.”

Why Not Release the Bulk Information for Analysis?

FINRA is not a government agency, but a self-regulator. It obtains its budget mostly from dues paid by its members. FINRA therefore does not have to follow the same public records laws as a government agency. FINRA does not allow companies that specialize in data analysis to review their information in bulk. If they did, it would be possible to rank firms according to the employ brokers with spotty records.

For instance, Reuters pointed out that 48 firms employ 30% of brokers with disclosures on their BrokerCheck records. Reuters reported that FINRA has “identified 90 firms as posing the highest risk to investors…But FINRA declined to name the firms publicly or to release statistics showing the concentration of brokers with a history of FINRA flags within each firm.” Why shouldn’t FINRA be more proactive about warning investors away from these firms?

A FINRA representative told Reuters that they have their own special unit for monitoring these firms internally, but that they don’t want to publicize their names over concerns of fairness and due process. After all, hiring brokers with multiple disclosures is not illegal, and as Cook has stated, “…someone we may identify as a high-risk for oversight purposes is not necessarily a bad actor.”

While FINRA might determine that a broker made a bad call when they recommended an unsuitable investment recommendation, it’s impossible to say for certain if they did so for self-serving reasons (like a commission) or if they simply did not perform their job as well as they should have.

FINRA Enforcement Actions Have Gone Down in the Past 5 Years

According to FINRA statistics, the number of sanctions they have issued have dwindled in the past 4 years. They collected 173.8 million in fines in 2016, and has collected less each subsequent year, down to $39.5 million in 2019. This coincides with fewer sanctions imposed, with a 10% reduction in individuals barred and a 12% reduction in individuals who were suspended.

FINRA’s head of sanctions, Jessica Hopper, told Financial IQ that doesn’t necessarily reflect a reduction in the regulator’s effectiveness. She says that while the number of overall sanctions has dropped, the dollar amount of restitutions paid to customers has increased. Since investor restitution is her department’s main goal, Hopper says, the decrease in the number of sanctions shouldn’t be viewed as a reflection of the regulator’s effectiveness when it comes to consumer protection.

What This Means for Consumers

No matter what FINRA says, consumers should take this information as motive remain vigilant. Check BrokerCheck before agreeing to work with a financial adviser, but keep in mind that FINRA’s public record doesn’t always have the complete story. If you’re concerned about your broker’s handling of your investments, get in touch with an experienced securities attorney.