February 1, 2013 / 12:45 PM / in 5 years

FINRA plan to spotlight brokers' pasts draws praise, ire

(Reuters) - A proposal by Wall Street’s industry-funded watchdog designed to strengthen protections for investors would make it easier for them to research the backgrounds of brokerages and advisers.

The Financial Industry Regulatory Authority (FINRA) recently proposed a rule that would, in part, require brokerage websites to link to FINRA’s free online disclosure database known as “BrokerCheck.” That would enhance investor awareness of the service, according to a regulatory filing. It could also provide easier access to details such as regulatory sanctions and certain customer complaints involving a firm and its brokers.

The move, which is subject to approval from the U.S. Securities and Exchange Commission, would solve a concern among regulators about making FINRA’s database - meant to be a tool for investors - more readily available. Even so, the plan concerns some industry professionals who say it would draw more attention to disclosures that they say are not always fair.

The regulator, which oversees about 630,000 brokers and 4,290 firms, is also considering a controversial plan that would require brokers to tell certain clients about generous bonuses they receive for joining a new firm.

“It’s part of a broader campaign to focus on more informed investor choices,” said Barbara Roper, director of investor protection for the Consumer Federation of America, an advocacy group that has promoted investor education through enhanced disclosures and other steps.


FINRA, last May, imposed changes including a feature that lets investors search for brokers by entering geographic locations and ZIP codes. Previously, investors had to search for a specific adviser or a brokerage. But further study by FINRA led to a troubling conclusion: investors do not always know about FINRA’s free service.

About 14.6 million reviews of broker or firm records were conducted in 2012 using BrokerCheck. It is unclear how many users were investors versus employers, regulators or others. Still, getting the word out to as many people as possible is important, said Roper.

A focus group concluded that making BrokerCheck more widely known to investors was critical, according to a FINRA regulatory notice. Websites for FINRA and the SEC explain the service to investors, but people have to know enough about the securities industry to even look on those websites and find the link.

FINRA’s new proposal would not only require that brokerage websites link to the BrokerCheck site, but that they also include a prominent explanation of the site, according to its recent regulatory notice. The links will connect not to the BrokerCheck home page, but directly to the disclosure reports for specific firms or individuals. That could save investors the hassle of searching for details on their own. The rule would also apply to firm-related social media pages.


While investor advocates are pleased by the move, it could shine an even brighter spotlight on certain disclosures that some securities industry professionals say are unfair.

They are concerned about certain unflattering details that appear on brokers’ disclosure reports after customers filed arbitration complaints against their firms.

“This is hideous,” said Jeffrey Bischoff, a brokerage recruiter in Old Greenwich, Connecticut. “This is not cigarette smoking where there should be a warning statement printed everywhere,” Bischoff said.

Some of complaints that can be seen involve products that later caused problems for waves of investors, such as auction rate securities, which firms promoted to investors and their brokers as safe. Industry rules require details about arbitration complaints appear on brokers’ records if they sold the securities that lead to an arbitration dispute, even if investors file their cases against the brokerage and not the broker.

A report for one such broker discloses three major auction rate securities settlements between the broker’s firm and regulators, Bischoff said. That conveys a message to clients that the broker was in the wrong even though it was only the firm at fault, Bischoff said. Hundreds of brokers who sold auction rate securities - long-term debt issues that act like shorter-term issues because their interest rates are generally reset about every month - face a similar conundrum.

Arbitration claims against brokerages piled up after the $330 billion auction rate market failed in 2008, leaving thousands of investors with securities that could not be sold. Bischoff is among some who say FINRA, before making those disclosures even more obvious, should include explanations in the reports about the firm’s responsibility in the case.

A FINRA spokeswoman declined to comment on that issue but said BrokerCheck is an important investor protection tool and the information disclosed is critical for choosing a broker or securities firm.

Getting information to investors can be also addressed more easily than through website links, said Brian Buckstein, a lawyer in Wellington, Florida, who represents brokers. But he said a rule requiring brokers and firms to tell prospective clients about their professional records - rather than the direct BrokerCheck link - would accomplish the same goal.

The SEC’s comment period for the proposal ends on February 15.

Reporting By Suzanne Barlyn; Editing by Jennifer Merritt and M.D. Golan

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