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What you should know about your adviser


In an ideally-transparent world, you’d know as much about your broker as you know about the ingredients in packaged junk food label: All of the bad stuff would be instantly on display.

But in the U.S., some of the most important information about a broker is off limits to individual investors.

At present, you can do broker background checks through a web-based system run by the Financial Industry Regulatory Authority, the trade group that regulates the securities industry (FINRA), called BrokerCheck.

Or contact your state securities regulator. FINRA’s site contains incomplete records, since it’s self-reported. And while state regulators often have fuller reports, most investors will probably not know that they are available, and those regulators may not always be accessible nor may their reports be user-friendly.

The information gap between state authorities and FINRA has existed for years. FINRA, which has been slowly improving disclosure, is now seeking comments – send emails to – from the public on how to improve the service.

What kind of information is essential? Here’s what you need to know that isn’t being fully disclosed by FINRA:

* Reasons for termination. Say a broker is fired from a firm. BrokerCheck won’t give you the specific reason. If I were considering a broker, I’d want to know if he was fired for churning accounts and fleecing investors.

* Records that date back to time of registration. FINRA records may not have a complete chronological history of brokers. You need a “legacy” file that includes all of the actions against a broker since he obtained his registration.

* Complete court actions. BrokerCheck does not include complete details on everything an investor might want to know about, including disclosure of all felony charges; misdemeanor charges involving investment related business, fraud, wrongful taking of property, bribery, perjury, forgery, and other crimes of property; employment terminations relating to allegations of violations of investment related statutes or fraud or bankruptcy and unsatisfied judgments or lien information, according to John Cronin, a Vermont securities regulator and chair of the committee that works with FINRA for the North American Securities Administrators Association, a regulator’s group. State securities offices should have this background information.

* Expunged Records. Brokers can petition to have customer disputes involving arbitration awards expunged, and after a process is followed, the records can be taken out of the Central Registration Depository, a database at the heart of BrokerCheck. According to Nancy Condon, FINRA spokesperson, the number of expungements soared to 220 last year “due to the large number of post-crash customer claims,” compared to 77 in 2009. Investors should be able to find out why claims were expunged.

State securities regulators have been frustrated over the years in urging FINRA to offer full broker files. Since FINRA is a trade organization funded by the brokerage industry – with oversight by the Securities and Exchange Commission (SEC) – it has a built-in conflict of interest in also regulating it.

This pernicious conflict was not resolved by Dodd-Frank and is unlikely to be addressed as the financial services industry badgers Congress and federal regulators into delaying, watering down or eliminating financial reforms. FINRA is also lobbying for the authority to regulate registered investment advisers.

As a non-governmental, self-regulatory organization, Freedom-of-Information Act requests can’t be used to pry valuable data from FINRA. So you have little chance of getting complete complaint information on the worst brokerage firms and non-published dispute settlements.

Ryan Bakhtiari, a Los Angeles lawyer and president of the Public Investors Arbitration Bar Association, a trade group of attorneys who represent investors, said brokers can often game BrokerCheck by not reporting investor complaints if they determine the matter involves less thanĀ $15,000.

“We ought to be telling the public the whole truth about the people in this business,” Bakhtiari told me. Increasingly, he said, brokerage firms that lose large cases in arbitration go to court to have the awards overturned or “vacated.”

Although PIABA doesn’t have statistics on how many awards are challenged outside of the arbitration forum, his firm notoriously handled an $11 million case filed by actor Larry Hagman against Smith Barney/Citigroup, which succeeded in having the arbitration award thrown out in court. The two parties later settled out of court.

Bakhtiari said one of the best moves regulators could make would be to repeal the mandatory arbitration clauses investors are required to sign when they open brokerage accounts. At present, you don’t have direct access to the court system when you have a dispute with a broker and must work directly with the firm or go through FINRA’s difficult and often costly arbitration process. Still, other lawyers argue the proceedings are still less costly and time-consuming than court.


Opening up broker records should be a no-brainer for an industry still under fire for the myriad sins of 2008 and missing scams by Bernie Madoff and Allen Stanford. “When registrants understand that their misconduct will be made available to potential investors, there is a strong incentive to avoid violative conduct,” Cronin added.

The SEC is currently studying the option of scrapping mandatory arbitration provision and is developing a rule that would require brokers who give personalized investment advice to become fiduciaries – making them legally responsible for protecting client’s interests first. Both proposals are ideas whose time have come.