Does Finra’s online BrokerCheck tool do more harm than good? The answer to that question depends on who you’re asking.
Many broker-dealers have voiced the opinion that because even unfounded customer or employer complaints can be included in BrokerCheck records, they can indeed be more harmful than helpful. But Finra believes BrokerCheck’s potential to save investors from unscrupulous broker-dealers more than makes up for any broker-dealer having a false claim listed in their record.
BrokerCheck serves as a tool for investors and other interested parties to conduct a background check on their broker-dealers and broker-dealer firms.
The information on BrokerCheck comes from Finra’s Central Registration Depository (CRD). BrokerCheck’s reports on broker-dealers include information such as employment history, professional qualifications, disciplinary actions, criminal convictions, civil judgments and arbitration awards. BrokerCheck's reports on broker-dealer firms include information on a firm’s profile, history, operations and disclosures.
The information contained in BrokerCheck may include pending actions or allegations that may be contested, unresolved or unproven. These disclosures may later be proven false or may be resolved in favor of the broker-dealer or the firm through a negotiated settlement with no admission or finding of wrongdoing.
Finra tells FA-IQ that BrokerCheck must strike a balance between regulation and investor protection on one side, and the privacy and interests of broker-dealers on the other side. But investor protection must prevail if that balance is tipped, according to the self-regulator.
“BrokerCheck is designed as a tool for investors and Finra errs on the side of transparency when publishing disclosure information, such as all customer complaints – even those that are denied” by the broker-dealer or the firm, according to a Finra spokeswoman.
That’s difficult to accept for many broker-dealers because a huge part of their success or failure in the business depends on their ability to build and nurture a relationship of trust with their clients. And many broker-dealers have grumbled about the challenges of expunging their records of false or mistaken claims.
A case in point is the ongoing battle between Finra and Merrill Lynch advisor Patrick Dwyer. Dwyer, who according to court filings manages more than $2.5 billion in client assets, has been fighting for years to wipe clean his BrokerCheck record.
Dwyer’s record is currently stained with seven customer complaints from 2001 to 2009 – including six disputes involving alleged unsuitable investments (two of the customer claims were denied while four were closed with no resulting action) and one dispute involving the timing of an investment, which was settled by Merrill Lynch for $111,000.
In what has been a five-year – and counting – road to expungement for Dwyer, he first tried but failed to gain victory in court before turning to Finra’as arbitration forum, where he succeeded. But that victory has been short-lived because Finra is aiming to block in court the expungement of the customer complaints from Dwyer’s records by arguing "impermissible forum shopping" and "fraud," among other charges. The case remains pending.
Finra and the SEC, as expressed in explanatory notes to relevant rules, view the expungement of broker-dealer records as an "extraordinary measure" and not one that should be expected to be routine.
Kay Gordon, a New York-based partner at Nelson Mullins Riley & Scarborough and co-head of the law firm’s investment management group, says she believes BrokerCheck is indeed a valuable tool for investor protection.
“Investment advisors and broker-dealers, those kinds of investment professionals, often deal with unsophisticated and not very wealthy retail investors and clients. Those investors don’t have the ability to do extensive due diligence to understand fully what the broker-dealer may be doing,” she says. “So, it’s very helpful to know by checking BrokerCheck if there has been a serious issue with your broker who you are about to entrust with a significant amount of money.”
Gordon says it’s understandable that Finra would err on the side of investor protection because “that is their mandate.”
While its “unfortunate” that there are people who “use the public airways to settle unfounded disputes,” Gordon believes it is important to have a system in place – even if it’s not perfect – that could help investors.
“If a broker-dealer is being harmed by the BrokerCheck, the question is does that invalidate the whole system? I don’t think so,” Gordon says.
Having tainted BrokerCheck records can sometimes be unavoidable, especially for broker-dealers who either have serviced thousands of customers or have been in the industry for a long time, according to Gordon. “That’s probably just going to be a part of it.”
Gordon believes broker-dealers don’t always have to be weighed down by dents in their BrokerCheck records.
“If you have been in the industry for a long time and are well known, then the customers will probably just disregard it,” she says. “But if you are somebody who is very new and unknown, and if you have a few or many complaints, that will be more notable for a retail investor.”
However, Bill Singer, New York-based of counsel at Herskovits PLLC Law Firm, believes BrokerCheck is inherently rigged against broker-dealers.
Singer says BrokerCheck could potentially be used by both investors and broker-dealer firms to make false claims against broker-dealers. He says the reporting process doesn’t provide a “meaningful opportunity” for broker-dealers “to object and to challenge what a reasonable person would deem to be defamatory and false information.”
When it comes to disputes between broker-dealer firms and broker-dealers, Singer believes Finra – which he describes as a “trade organization more than a watchdog” – is a “puppet of large brokerage firms” because of these large firms' influence at the board level and in terms of membership fees collected.
“On occasion, broker firms use inappropriately negative comments” that end up in BrokerCheck “either to retaliate against a former employee or to prevent that employee from going to another firm and competing,” Singer says. “And on occasion broker firms will solicit customer complaints against a broker by promising customers refunds to make up losses or by intimating that their former broker had done something improper.”
Herskovits PLLC Law Firm
Large broker-dealer firms are able to get away with this because “Finra is a stooge and does the bidding of its large member firms,” Singer says.
Finra disagrees with Singer’s characterization that it is a puppet or a stooge of large member firms, noting that the self-regulator’s “activities are overseen by the SEC.” This SEC oversight is exercised in rule proposals and operations, among other things, according to the Finra spokeswoman.
The Finra spokeswoman defends the composition of the self-regulator’s Board of Governors by saying that out of the 24 seats, 13 are allocated to public governors, which is more than the 10 allocated to industry governors. The remaining seat is reserved for the Finra CEO. Out of the 10 industry governors, seven represent broker-dealer firms: three from large firms with more than 500 registered employees; one from a midsize firm with 151-499 registered employees; and three from small firms with fewer than 150 employees. The rest of the industry governors are made up of one floor member, one independent dealer/insurance affiliate member, and one investment company affiliate member.
But the Public Investors Arbitration Bar Association (PIABA) – a group for lawyers who represent investors in disputes with the securities industry – highlighted in a November 2017 report why the public isn’t as well-represented in the Finra board as the structure suggests.
“Finra’s public governors join the board after long careers in the securities industry. Although some academics and former regulators do serve on Finra’s board as public governors, the board only infrequently includes persons primarily identified as investor protection advocates,” PIABA says in the report. “This absence is troubling for an organization that publicly characterizes itself as dedicated to investor protection.”
Nelson Mullins Riley & Scarborough
The Finra spokeswoman says broker-dealers “have the opportunity to submit written comments” that are then added to the disclosures on BrokerCheck, whether a claim is made by a customer or by a broker-dealer firm. She adds that broker-dealers have a recourse if they are subjected to false claims by broker-dealer firms.
“If firms submit information regarding a termination disclosure via the Form U5 that may be false or defamatory, a registered representative can sue the firm and the firm could be subject to disciplinary action by Finra,” the spokeswoman says.
There are at least four Finra arbitration awards this year in favor of broker-dealers that filed a case of defamation – among others – against broker-dealer firms because of what these employers reported in the Form U5. Broker-dealer firms are required to submit this form whenever a registered employee leaves the firm for any reason.
In the unrelated cases of Beverly Hunnewell v. Park Avenue Securities, Cheryle Anne Brady v. Ameriprise Financial Services, Christian Gherardi v. Citigroup Global Markets, and Mihail Naumovski v. JPMorgan Securities, four different sole public arbitrators in the Finra arbitration forum ruled in favor of the broker-dealers that filed the defamation complaints. The arbitrators ordered the records containing the false reasons for termination be expunged. The defamation complaints in all four cases were part of other allegations for which the broker-dealers received monetary awards for damages.
Despite the process that allows broker-dealers to seek expungement of their records or sue broker-dealer firms, Singer still believes the process is flawed.
“The remedy is like giving the condemned the right to say a few words before you hang them,” he says. “The defamatory comments against the broker are posted for a long period of time. You can’t turn the clock back and undo the damage. A person’s career is already harmed and, in some cases, destroyed.”
Singer says the tool also appears to be ineffective as an investor protection measure because customers tend to use it only after there has been a problem.
A case in point is Anthony Diaz, who was barred by Finra from the industry in May 2015, but not until amassing an incredible 55 disclosures on his BrokerCheck record. His customer dispute records started piling up in 2004.
Diaz was barred by Finra from the industry for multiple reasons. For example, he allegedly induced customers into variable annuity exchanges without a reasonable basis for doing so and often subject to significant surrender charges. He allegedly falsified or caused the falsification of his customers’ net worth so they could meet investment eligibility requirements. He allegedly intentionally or recklessly made untrue statements related to guaranteed returns or specific rates of returns.
In January this year, a sole public arbitrator in the Finra arbitration forum ordered Diaz and First Allied Securities – where Diaz worked from 2005 to 2009 – to pay 17 clients a total of $4.3 million in damages due to unsuitable investment recommendations, misrepresentation and other complaints. The arbitration award order notes that the clients received an undisclosed settlement amount from First Allied Securities in November last year. Diaz has failed to comply, according to Finra.