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Understanding Public Disclosures
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Understanding Public Disclosures on FINRA’s BrokerCheck

 

Submitted by the Financial Services Litigation PAC

 

By: Mauricio Beugelmans, Beugelmans LLP

 

Providing the public with relevant information about securities professionals and their firms is a central component behind BrokerCheck, a free tool administered by the Financial Industry Regulatory Authority, Inc. (“FINRA”).[1]  Over the past several years, FINRA has promoted BrokerCheck through national advertising campaigns and by giving it prime real estate on its website’s home page.  On FINRA’s BrokerCheck, a customer can find important and relevant information on brokers and brokerage firms. 

I.  Overview of Information Available on BrokerCheck

BrokerCheck’s information on brokers and their firms comes from the Central Registration Depository (“CRD”), while information about investment adviser firms and representatives comes from the SEC’s Investment Adviser Registration Depository (“IARD”).   The CRD and IARD make up the securities industry online registration and licensing databases.  Brokers, investment advisers and their firms are required by various rules to disclose to the CRD and IARD certain information, some of which is made public through BrokerCheck. 

FINRA maintains and operates the CRD pursuant to FINRA rules and an agreement between FINRA and the North American Securities Administrators Association (“NASSA”), an association whose members include state and other securities regulators in the United States, as well as securities regulators in North America. 

With respect to brokers, the public can use BrokerCheck to find the following information for any broker who has been registered with FINRA within the last 10 years:

·         A report summary which will include a brief summary of the broker’s qualifications;

·         The broker’s qualifications section which includes the broker’s current registrations or licenses and the industry exams that he or she has passed;

·         The broker’s registration and employment history which includes a list of registered securities firms where the broker is and/or was previously registered in the past, and any other employment history reported by the broker in the past 10 years (including full time and part time work); and

·         The disclosure section, which contains information about certain criminal, civil, or customer complaints involving brokers, as well as certain types of employment termination disclosures.

The public can also access certain information on brokers whose registration was terminated more than ten years ago:

·         A report summary which will include a brief summary of the broker’s qualifications;

·         The broker’s prior registrations and licenses, including the exams they passed;

·         The broker’s past registration and employment history; and

·         The disclosure section, which contains information about certain criminal, civil, or customer complaints involving brokers, as well as certain types of employment termination disclosures and bankruptcy discharges.

Lastly, when looking at a brokerage firm on BrokerCheck you will find:

·         A report summary that provides the overview and background of the firm;

·         A brief description which provides you with information such as where and when the firm was established, and the important individuals who control and influence the firm;

·         The firm’s history, including any mergers, acquisitions and any name changes;

·         Any active licenses and registrations it may have, a list of the types of businesses it is engaged in, any clearing and industry arrangements, and any organization affiliations; and

·         The disclosure section which contains any arbitration awards, regulatory events and pending actions.

 II.  Pros and Cons of BrokerCheck Disclosures and Expungement

BrokerCheck is a beneficial tool as it provides information about brokers and brokerage firms to the public.  Through BrokerCheck customers can learn about whether an arbitration panel or a regulator has found that the broker engaged in wrongful conduct, whether a broker was terminated for certain wrongful conduct, whether a broker filed for bankruptcy, has liens against him, or engaged in certain types of criminal conduct.  BrokerCheck also provides additional information useful for a customer to know, such as a broker’s employment history and the amount of time he or she has spent working in the business.

BrokerCheck also has its drawbacks.  For example, the mere allegation of wrongdoing will often time result in a public disclosure.  Customer complaints and arbitrations that are denied or settled remain disclosed even if the claim has no merit and/or was resolved for business purposes, and termination disclosures do not allow for a broker to fully defend themselves.  These types of disclosures thus have the potential to mislead the general public into thinking the broker was engaged in wrongful conduct when such may have not been the case. 

While brokers can seek to expunge certain types of disclosures, the burden for doing so is high, particularly in regards to customer dispute information.  In order to expunge customer dispute information Brokers must establish through an arbitration proceeding that the claim or allegation is factually impossible or clearly erroneous, that the broker was not involved in the alleged act or that the claim or allegation is false.  If an arbitration panel agrees to an expungement request the broker must then seek to confirm the expungement award in court, thus making the expungement process difficult and time consuming.

Due to pressure, primarily from NASSA, FINRA has tightened the standards for expungement multiple times, beginning in 1999.  As such, the need for competent representation in expungement proceedings is more important than ever.

III.  The Impact of BrokerCheck Disclosures

Disclosures on BrokerCheck, or the lack of such disclosures, can significantly impact a broker’s career.  First, these disclosures are often considered by potential employers in connection with hiring decisions.  This applies to brokers who are looking for another job in the securities industry, as well as brokers looking to leave the industry. 

Disclosures on BrokerCheck are also often used in FINRA arbitrations involving a broker or firm as evidence that the broker or firm either has a propensity to engage in wrongful conduct, or that their record is “clean.”  It is often argued by counsel in arbitrations that a broker or firm with a lot of disclosures should be viewed in a negative light and thus more likely to have engaged in the wrongful conduct alleged.  Conversely, counsel in arbitrations will argue that a broker or firm with a “clean” record should be viewed in a favorable light and thus less likely to have engaged in the wrongful conduct alleged.  Furthermore, disclosures are also considered by regulators in the same manner. 

Perhaps the most important intention of BrokerCheck is to allow customers to use it to determine whether their broker (or potential broker) is trustworthy.  BrokerCheck and its disclosures are intended to guide that analysis.  However, customers typically lack an understanding as to why certain items such as settled or denied customer claims/arbitrations are disclosed.  In some situations, this can lead to an incorrect conclusion that the broker is not trustworthy.  At the same time, it is reasonable for customers to take the existence of these disclosures into consideration when determining who to work with.  The balance is thus a delicate one.  Ultimately, the system is set up to provide more information rather than less, and to let the reader determine for themselves how to react to the existence of any disclosures.

 

Mauricio Beugelmans is a partner with Beugelmans, LLP.  Beugelmans, LLP has offices in New York, Chicago and San Francisco and represents broker-dealers, registered investment advisors, financial advisors and individuals in all aspects of securities regulation, employment counseling and related litigation/arbitration.

BEUGELMANS, LLP

 



[1] Information about investment advisory firms and their representatives can be found on the SEC’s Investment Adviser Public Disclosure website.  


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