May 16, 2013 / 12:02 PM / 6 years ago

COMPLY-Brokers' legal woes can trigger sticky conversations

May 16 (Reuters) - The Financial Industry Regulatory Authority’s public disclosure database, BrokerCheck, is a tool to help investors research the background of brokers. Nonetheless, it can also be a headache for brokers whose records are not squeaky clean.

Client conversations about BrokerCheck disclosures could become more common if FINRA has its way. Wall Street’s self-imposed watchdog is retooling a proposal that would require brokerages to include a link on their websites to BrokerCheck along with a prominent description of the service.

Even so, a less-than-perfect record does not mean the end of a broker’s career, said Marc Dobin, a lawyer in Jupiter, Florida who represents brokers in arbitrations and regulatory actions. “It’s not a bar to new business. It just requires greater use of your selling skills,” Dobin said.

FINRA, in April, withdrew the initial proposal it filed with the Securities & Exchange Commission after some brokerage executives said they were concerned about ways to apply the proposed requirement in the context of social media.

FINRA, which oversees about 630,000 brokers at 4,250 firms, is mulling over those concerns and plans to refile the proposal [ID: nL2N0DB2MU].

BrokerCheck disclosures may include details about everything from arbitration complaints by customers - in which the broker may, or may not have been at fault - to regulatory fines and suspensions. BrokerCheck can provide a window into certain personal matters such as a broker’s bankruptcy filing or even a misdemeanor plea for, as in one real-life case, shoplifting a jar of olives in a prank.

It is unclear how many brokers have disclosures on their reports. The regulator sanctioned a total of 1541 brokers and firms in 2012.

Reports for thousands of brokers also disclose details about arbitration cases customers filed against their firms stemming from transactions in which the broker was involved.

Overall, about 14.6 million reviews of broker or firm records were conducted in 2012 using BrokerCheck, according to FINRA. A growing number of privately-run adviser directories, such as BrightScope or AdviceIQ, are also making it easier for investors to check out brokers.


Brokers do not have a legal obligation to initiate conversations with clients about their BrokerCheck reports, unless the client asks, according to Jonathan Schwartz, a Los Angeles-based lawyer who represents brokers in regulatory actions. Brokers, in most cases, should not broach the subject, Schwartz said.

Sometimes volunteering BrokerCheck details, however, is a personal choice, especially in an age when information easily surfaces online. “It’s a complete judgment call,” Schwartz said.

That may be the case when brokers suspect a client will find out anyway. “Sometimes, from a practical standpoint, you want to get out in front of it,” said Dobin, the Florida-based attorney who represents brokers.

For example, brokers who are trying to lure clients from other firms may want to air the truth about their not-so-perfect BrokerCheck reports before the firm that stands to lose the account shows the client first, Dobin said. Brokers may also want to raise the subject with research-savvy clients who might find the report anyway, Dobin said.


Lawyers point to two general rules to follow when answering clients’ questions: tell the truth and keep it simple.

Some problems are easier to explain than others. It is perfectly fine, for example, for brokers to explain that their firms made business decisions to settle customer arbitration cases, instead of racking up steep legal bills during a long fight, said Patrick Burns, a lawyer in Beverly Hills, California who advises brokers. But that explanation would not be enough if the case stemmed from a brokers’ fraud.

Brokers may also be able to cite certain market events as the prime reason for a string of customer arbitration complaints, such as when many dot-com stock values plunged around the year 2000.

Admitting to past mistakes, while awkward, is also sometimes necessary. That may include discussing behavior that a broker has never again repeated, such as a suspension for borrowing money from a client. Or stealing olives.

Being truthful, however, does not mean being verbose, said Brent Burns, a lawyer in Alpine, New Jersey, who represents brokers in regulatory cases.

That is especially true when answering questions about customer arbitration complaints. Brokers may breach the duty of confidentiality by disclosing too much about the transaction at issue, he said. Settlements in those cases may also require confidentiality. His advice: stick to the responses that firms allow their brokers to include about the case in the report, Brent Burns said. Some brokers, for example, include an explanation that the complaint was frivolous, or that the broker was not involved in the transaction.

Brokerage compliance departments typically review those responses in advance, Burns said. Sticking to these comments can spare brokers from not inadvertently revealing anything they should not, Burns said.

Sometimes clients still won’t back off. Brokers, in that case, should explain that they do not know what else they are allowed to say and must check with their compliance departments.

“It may not be the best client experience, but it protects the broker,” Burns said. (Reporting by Suzanne Barlyn. Editing by Lauren Young and Andrew Hay)

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