Thursday, October 8, 2009


The Financial Industry Regulatory Authority (FINRA) is a private regulatory body charged with protecting investors and keeping an eye on the financial industry. As part of its services, FINRA offers BrokerCheck, an online database where investors can obtain information about registered brokers. The information made available is known as a CRD Report and contains information about employment and registration history, qualifications, as well as reportable customer disputes, disciplinary, and regulatory events. BrokerCheck allows users to access a full report and a consolidated report. Currently, under Rule 8312, this information is available for two years after a broker’s registration expires.

A recent proposal to amend the rule would make the consolidated reports available for a longer period of time, but the full reports will still be removed after the two year time period. However, this proposed change would only apply to brokers who have had a final regulatory action against them. Full reports would still be available through state agencies as they are now.

A recent Wall Street Journal article discussed the changes being made and the author took the position that the amendment was a step in the right direction, but still insufficient. In the article, the WSJ follows an insurance agent who was a former broker, but was banned from the securities industry after misappropriating $9,000. His CRD report was no longer available, but WSJ obtained it from Kentucky state regulators. After the Journal disclosed his expulsion to his current employer, he was fired from his job even though both he and his company acknowledged he had never provided financial advice in his then-current position.

One of the concerns with the proposed amendments is that only consolidated reports will be available. Consolidated disclosure does not mean better disclosure. The consolidated reports do not disclose the details about customer disputes, disciplinary, and regulatory events. Instead, the report merely states “customer dispute” or “criminal.” Because there is no full disclosure into the details of the criminal action, the information available can be very misleading. Those looking at the CRD will likely develop a bias against that person as they will not know if the criminal action is relevant to the practice of brokering. The Wall Street Journal’s chronicle ironically demonstrates this potential bias in that the former broker was fired from his job after the WSJ author disclosed the man’s CRD report.

Advocates of this amendment claim it will help delineate the “bad” brokers from the “good” brokers and better protect investors. However, this is flawed logic as more disclosure does not mean all the “bad” brokers will turn up. For example, a quick search on BrokerCheck reveals that Joseph Cassano, a former A.I.G. executive who was recently indicted for securities fraud, had a clean CRD report until the Department of Justice filed a complaint against him recently. Until the DOJ suit, there was no evidence on his consolidated report or his full report that suggested he was a “bad” broker. Our firm has also seen where incomplete or inaccurate information in the consolidated CRD report or other “public records” can have misleading results to the detriment of a “good” broker. Because the CRD also requires the reporting of information unrelated to brokers’ ability to perform their jobs well, irrelevant information in little to no context unduly punishes registered persons and does not provide real value to consumer protection.

If consumer protection is truly the goal, this proposed change would not meet that goal and would in fact provide more confusing information to the public. A more comprehensive approach would better serve all parties involved.

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