Wednesday, February 17, 2010

Brokers Being Trashed Again By FINRA

We all know that FINRA, along with the SEC, has been taking a beating over the past year for its failures to uncover significant frauds that have costs investors millions of dollars. There is no need to re-hash all of that, but now FINRA is attempting to do something to fix its image.

And that something is to expand BrokerCheck. Not increased survelliance of brokerage firms, not better education of examiners, not more training for the examination teams - they are going to expand the disclosures on BrokerCheck to further defame and discredit individual brokers.

There has been a discussion over recent months to keep brokers information on BrokerCheck for more than two years after a broker leaves the industry. There are a number of good arguments on both sides of that debate, but FINRA is going ahead with a proposal to keep those records online for an undisclosed period of time after the broker is no longer under its jurisdiction.

At the same time FINRA also announced that it wants to expand the civil and criminal complaint histories of its BrokerCheck service, which would give the general public more information on brokers. Sure, more information is always good, right?

Wrong. FINRA is proposing to include information that is not reportable on Form U-4 and is going to do so on the Internet. Certain reporting items, such as customer complaint letters that are filed, but never pursued, are not reportable on Form U-4 after two years have passed. The rationale for non-disclosure is clear and simple - a customer filed a complaint, he never filed an arbitration or a lawsuit, and the firm and broker never paid him any money. There is no reason to continue to report that complaint, since there is no finding of wrongful conduct, and an implication that the complaint was not a meaningful complaint, since the customer never pursued it.

Having taken that position for decades, and while continuing to maintain that position, FINRA is now proposing to disclose these non-meaningful, unsworn and unproved complaints on BrokerCheck! A customer sends a complaint letter, accusing his broker of all sorts of wrongful conduct, never pursues the complaint, never files an arbitration, and FINRA wants to make that complaint public. Sure, that will ehance the public's respect for FINRA, at the expense of the tens of thousands of brokers who have such an item in their history.

FINRA also takes the position that an arbitration claim that is settled for less than $15,000 is not reportable, for similar reasons. Suddenly, while maintaining that these decisions are not meaningful or significant, they are proposing to put them on BrokerCheck as well.

The disclosures that brokers must make are intrusive, and unnecessary to the regulatory purposes. The argument has always been that the information about arrests that are dismissed, complaints that are never proven, are all part of the mix of information that is necessary to properly regulate the industry. Fair enough, and since the information was not going to be publicly disclosed, there was not too much of a debate about the disclosures.

Now FINRA is changing course, and going to make that information public, as if that information would have stopped the 50 billion dollar fraud that FINRA's examiners missed year after year.

Why is it that FINRA attempts to address its own regulatory failings by trashing brokers. Why not clamp down on misconduct at the firm themselves?

Could it be that brokers are easy targets, with no trade organization, and have no meaningful voice in the process that affects them so profoundly?


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