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Six ways to predict your brokerage is about to crash
November 8, 2011 / 11:31 PM / in 6 years

Six ways to predict your brokerage is about to crash

NEW YORK (Reuters) - The blow up of now bankrupt-MF Global proves that vetting a financial firm isn’t ever simple. Companies use accounting tricks and other machinations to hide problems until the last possible moment.

While no one expects individual investors to become forensic accountants, there are usually warning signs before a disaster strikes -- you just have to know where to look.

Here are some things you can do to protect yourself:


If you just do a general search, you’ll be inundated with emails. But you can curate the feed with a few terms (SEC, enforcement action, lawsuit) to keep the search focused and help you identify red flags.


BrokerCheck is one of the best places to do some sleuthing. While most people tap this free online database (see for the scoop on current and former FINRA-registered individual brokers, you can also get detailed information on 4,501 FINRA-registered firms. (The Financial Industry Regulatory Authority is a self-regulatory group for securities firms.) You may not find the right information on your first try - a search for Merrill Lynch, for example, yields 11 different iterations of Merrill-related businesses.

But once you’ve identified the right financial institution, click “Get a Detailed Report,” to take a deep dive (up to thousands of pages) into a firm’s disciplinary actions, criminal charges and other important information, including details about arbitration claims filed by investors.

Another website with essential information is the Securities & Exchange Commission's website ( Here you can access information either on individual advisers or whole firms. You can quickly see if individuals have ever been fined or suspended, pleaded guilty or no-contest to a crime, or have violated any investment-related statutes or regulations.

A firm penalized for minor violations, such as a bookkeeping error, may still be trustworthy, but beware of any institution with a string of penalties in a short time period.


Some private services now also offer free information about financial advisers. For example, BrightScope, a financial information company, introduced a free service in April that lets investors search for advisers by assets under management, geographic area and other criteria. The company, based in San Diego, gathers information from BrokerCheck and the SEC database, including disciplinary histories, but allows investors to search in different ways. Investors can also use the service to compare advisers. (See: here)

You can also check out the regulatory financial examinations from CME Group. The derivatives marketplace performs these assessments to effectively monitor a firm’s financial records and determine if accounts are appropriately divided up, which in industry speak is known as segregated.

The CME also monitors any corrective actions. If there are any signs of trouble, CME may uncover these first, as CME rules require clearing firms to calculate their customer segregated position daily - and notify both the regulator, the Commodities Futures Trading Commission (CFTC), and CME in the event of a problem.


For many people, the appeal of reading a financial statement ranks right up there with going to the dentist. But you’ll need to do some sleuthing to understand what makes a company tick if you want to get a handle on the financial health of a firm.

For example, MF Global revealed in public filings that it had a long position of $6.3 billion in short-duration European sovereign debt -- more than five times the firm’s book value, or net worth. New York-based MF Global, which was run by former Goldman Sachs chief Jon Corzine, disclosed its position in European debt as early as May, which could have provided an advance warning to eagle-eyed investors.

Net capital is one gauge the professionals use to measure financial health. “The best way to check out a firm’s financial stability is to find out what kind of net capital requirements they have,” says Gerri Walsh, FINRA’s vice president of investor education.

Regulators require firms to keep a financial cushion to stay in business. One place you can often find reference to net capital is a quarterly earnings release (10-Q), which is available on the SEC’s website. But the net capital ratio often varies by numerous factors, such as a firm’s type of business and risk profile.

Futures brokers, like MF Global, must report net capital on the CFTC website - providing the most up-to-date information the CFTC has. There are financial reports from futures commission merchants (FCMs) and retail foreign exchange dealers (RFEDs), which are required by law to file monthly. It’s easy to download by PDF or Excel files.

There’s a catch: The most recent data might not be made public for a full 29 business days - as firms have 17 business days after the month to file, and the CFTC needs up to 12 business days to post those filings.

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