FINRA Requests Comment On Brokercheck Enhancements

By
Samuel E. Cohen

Federal – Securities & Investment Professional Liability

Key Points:

  • BrokerCheck is a database available to the public through FINRA’s website which provides information regarding brokers and FINRA member brokerage firms.
  • BrokerCheck is used by investors to determine whether to do business with a broker. It is also used by the securities industry in evaluating potential new brokers and by attorneys in securities industry-related litigation.
  • FINRA is considering enhancements of the information available through BrokerCheck and, through Regulatory Notice 12-10, seeks comment as to the benefits/detriments of those enhancements.
  • The potential benefits of expanding the information provided by BrokerCheck must be counter balanced by the privacy and identify theft concerns it raises for brokers.

 

BrokerCheck is a publicly available search engine available through FINRA's website which provides information regarding registered representatives and FINRA member firms. It is used by investors, securities industry professionals and attorneys to obtain information on brokers and FINRA member broker-dealers. On February 22, 2012, FINRA published Regulatory Notice 12-10 titled "FINRA Requests Comment on Ways to Facilitate and Increase Investor Use of BrokerCheck Information." Pursuant to Regulatory Notice 12-10, FINRA has announced that it is seeking comment on proposed enhancements to its BrokerCheck system.

FINRA established the BrokerCheck Program (then known as the Public Disclosure Program) in 1988 to provide investors and the general public with information on the professional background, business practices and conduct of FINRA member firms and their associated persons. Through BrokerCheck, FINRA releases to the public information reported on uniform registration forms to the Central Registration Depository (CRD). The uniform registration forms are Form BD (Uniform Application for Broker-Dealer Registration), Form BDW (Uniform Request for Broker-Dealer Withdrawal), Form BR (Uniform Branch Office Registration Form), Form U4 (Uniform Application for Securities Industry Registration or Transfer), Form U5 (Uniform Termination Notice for Securities Industry Registration) and Form U6 (Uniform Disciplinary Action Reporting Form). Among other things, a goal of BrokerCheck is to help investors make informed choices about the individuals and firms with which they currently conduct or are considering conducting business.

Since establishing BrokerCheck, FINRA has made numerous changes in an effort to improve the program. For example, BrokerCheck reports are now available instantly online. FINRA has also increased the amount of information available on BrokerCheck. Previously, the information available consisted of a limited employment history, final disciplinary actions and criminal convictions. The information currently available to investors, pursuant to FINRA Rule 8312, includes registrations brokers hold and the examinations they have passed and disclosure information regarding various criminal, regulatory, customer disputes, termination and financial matters on current and former FINRA-registered brokerage firms and brokers.

The information, which is collected by FINRA and used for registration and regulatory purposes, is available for ten years after the broker has left the securities industry, and in those cases where a broker has been involved in certain disclosure events, the information is available permanently. Information on brokerage firms provided through BrokerCheck includes locations, ownership, registrations, types of business, clearing, introducing and industry arrangements, affiliates and disclosure information similar to that provided for brokers. Until recently, BrokerCheck was the only regulator-provided, comprehensive online tool that enabled investors to check the backgrounds of financial service industry professionals. In 2010, the SEC expanded the Investment Adviser Public Disclosure (IAPD) database to include information on investment adviser representatives.

In January 2011, SEC staff released a study and recommendations on providing investor access to investment advisor and broker-dealer registration information, as required by the Dodd-Frank Wall Street Reform and Consumer Protection Act. In the study, SEC staff made three recommendations to improve investor access to registration information through BrokerCheck:

  • Unify search returns for BrokerCheck and the IAPD databases;
  • Add the ability to search BrokerCheck by zip code or other indicator of location; and
  • Add educational content to BrokerCheck, including links and definitions of terms that may be unfamiliar to investors.

 

The Dodd-Frank Act mandates that these recommendations be implemented within eighteen months after completion of the study, and according to Regulatory Notice 12-10, FINRA will put them into effect before the July 2012 deadline. Moreover, SEC staff recommended that FINRA continue to analyze the feasibility and advisability of expanding BrokerCheck to include additional information available in the CRD system, such as the reason for and comments related to a broker's termination and scores on industry qualification exams.

Based on the study's recommendations, FINRA has initiated a review of its BrokerCheck Program which prompted the issuance of Regulatory Notice 12-10. FINRA's goal is to determine how to facilitate and increase investor use of BrokerCheck information. According to Regulatory Notice 12-10, FINRA recently engaged a market research consultant that conducted focus groups and surveyed investors throughout the country to obtain their opinions on the BrokerCheck Program. Through Regulatory Notice 12-10, FINRA seeks further input from interested parties, including investors who currently use or may use BrokerCheck on the following changes:

  • Should changes be made to the categories of CRD system information that are displayed through BrokerCheck or the time frames for which such information is displayed? If so, what information should be added or deleted from BrokerCheck, and how long should the information be available on BrokerCheck?
  • Would it be beneficial for investors if FINRA BrokerCheck reports included links to other websites, such as websites maintained by financial industry regulators or organizations that provide investor education? Further, FINRA seeks comment as to what types of links would be most helpful.
  • Should a broker's educational background and/or professional designations, such as Chartered Financial Consultant and Chartered Financial Analyst, be available in BrokerCheck?
  • What terms or phrases used in BrokerCheck reports are most difficult for public users to understand? What educational or other materials should FINRA provide to help public users?
  • What changes, if any, should be made to the design, format or content of the BrokerCheck summary report and/or the full detail report?
  • Would it be helpful to include in the summary report a concise summary of a broker's or brokerage firm's disclosure events (for example, a matrix setting forth the number and types of disclosure events), if any?

 

FINRA also seeks comment on the improvement of investor awareness of BrokerCheck. FINRA held focus groups with investors and found that the consensus among participants to be that investors should use BrokerCheck when considering whether to work with a new broker or brokerage firm. The participants in the focus group stated that it was important for BrokerCheck to be more widely known among investors.

With regard to investor awareness concerns, FINRA seeks comment on the following:

  • How can FINRA best increase investor awareness of BrokerCheck?
  • Should FINRA make basic BrokerCheck information (such as registration status, employing firm, employment location) available in such a way that would enable an investor to enter a broker's name in an internet search engine, see the basic information on the search results, and be directed to BrokerCheck for more detailed information?
  • Should changes be made to FINRA Rule 2267 to further increase investor awareness of BrokerCheck? If so, should such changes involve the items of information disclosed, the frequency and/or manner of distribution of information, and/or the member firms covered by the Rule?

 

BrokerCheck is a tool that is used by public customers, as well as by attorneys representing investors, firms and registered representatives in securities industry-related lawsuits and arbitrations. Providing information to the public regarding a registered representative's reason for termination and disclosure of such information may be a benefit to public customers, as well as the industry and attorneys representing clients in securities industry related disputes. However, among the possible downsides to the increase in information available to the public through BrokerCheck is the possibility of identity theft. FINRA is seeking comment on both the benefits and concerns regarding the enhancement of publicly available information. The benefit/detriment analysis of the enhancements to BrokerCheck will be a delicate balancing act between the benefits to public customers and the industry and the privacy concerns of the affected brokers. The comment period expires April 6, 2012.

 

*Sam is a shareholder in our Philadelphia, Pennsylvania, office. He can be reached at 215.575.2587 or secohen@mdwcg.com.

Defense Digest, Vol. 18, No. 2, June 2012