BrokerComplaints - How we analyze the data FINRA doesn’t want you to see

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BrokerComplaints – How we analyze the data FINRA doesn’t want you to see

May 8, 2023 Broker Complaints

FINRA requires brokers to disclose 23 types of incidents that might give investors concern, such as regulatory sanctions, lawsuit judgments and bankruptcies. The regulator then publishes those disclosures on its Brokercheck website, allowing investors to search the backgrounds of individual investment advisors.

But FINRA refuses to release that data in bulk form, which would allow for database analysis to find patterns at brokerages that might also trouble investors – such as a firm’s propensity to hire brokers with a history of client complaints or regulatory run-ins.

Reuters obtained bulk FINRA data from researchers at Columbia University Law School Datalab, who wrote code to extract it from FINRA’s Brokercheck website.

To analyze it, reporters Benjamin Lesser and Elizabeth Dilts chose to analyze only 12 of the 23 required FINRA, isolating only those incidents that might cause investors the most concern.

The reporters examined firms with at least 20 brokers, and FINRA-mandated disclosures between the years 2000 and 2015.

The FINRA flags included regulatory sanctions, customer complaints that resulted in a payment, criminal cases that resulted in a plea agreement or conviction, and bankruptcies. For a full list, with definitions, click here.

The incidents analyzed by Reuters varied in severity. Some involve final legal determinations of misconduct, such as criminal convictions, civil judgments or regulatory fines. A very small percentage of those cases remained under appeal by the broker or firm involved, according to the FINRA data.

The analysis also included incidents with no finding of misconduct, but that did come at a cost to the firm or employee involved – such as broker terminations after allegations of misconduct, or settlements in which firms paid restitution to customers but admitted no wrongdoing.

Reuters applied the same metrics to every firm overseen by FINRA and identified those where at least 30 percent of brokers had one or more of the 12 flags.

Reuters used the data provided by Columbia Law School researchers to identify firms meeting the above criteria. Reporters then manually updated the data, using the Brokercheck site, to include FINRA-mandated disclosures by brokers at those firms through the beginning of 2017.

The Financial Industry Regulatory Authority, or FINRA, requires brokers to publicly disclose 23 different incidents that the regulator believes could cause investors concern. Reuters identified 48 financial firms where at least 30 percent of brokers had disclosed one of the 12 most serious incidents among those 23. Here are the definitions – written by FINRA – of the 12 incidents used in the Reuters analysis.

Customer dispute – settled: A consumer-initiated, investment-related complaint, arbitration proceeding or civil suit containing allegations of sale practice violations against the broker that resulted in a monetary settlement to the customer.

Customer dispute – award/judgment: A consumer-initiated, investment-related arbitration or civil suit containing allegations of sales practice violations against the broker that resulted in an arbitration award or civil judgment for the consumer.

Regulatory – final: A final, formal proceeding initiated by a regulatory authority for a violation of investment-related rules or regulations.

Judgment/lien: An unsatisfied and outstanding judgment or lien against the broker

Employee separation after allegations: The broker voluntarily resigned, was discharged, or was permitted to resign after being accused of (1) violating investment-related statutes, rules, regulations or industry standards of conduct; (2) fraud or the wrongful taking of property; or (3) failure to supervise in connection with investment-related statutes, regulations, rules, or industry standards of conduct.

Financial – final: Involves a bankruptcy, compromises with one or more creditors, or Securities Investor Protection Corporation liquidation involving the broker or an organization the broker controlled that occurred within the last 10 years.

Criminal – final disposition: Involves a criminal charge against the broker that has resulted in a conviction or plea arrangement.

Civil – final: Involves (1) an injunction issued by a court in connection with investment-related activity. (2) a finding by a court of a violation of any investment-related statute or regulation or (3) an action brought by a state or foreign financial regulatory authority that is dismissed by a court pursuant to a settlement agreement

Civil bond: Involves a civil bond for the broker that has been denied, paid or revoked by a bonding company.

Critics say broker checks incomplete

Amid some skepticism, regulators are promoting their online tool that lets consumers check out investment advisers.

The Financial Industry Regulatory Authority, known as FINRA, is running a series of funny print, TV and online ads in June that chide consumers for not checking out potential advisers as thoroughly as they research a restaurant or a contractor.

One ad features a bride who doesn’t check out her organist and her reaction when her organist plays the baseball “Charge!” theme at the wedding.

The ads urge consumers to use FINRA’s online BrokerCheck system (brokercheck.finra.org) to investigate the background of a broker or investment adviser before hiring one.

“People immediately go online to check out a new restaurant where they might spend $25 for a meal, but don’t think to use BrokerCheck when they’re handing over $2,500 — or $25,000 of their life’s savings or even more — to an investment professional. That has to change,” Richard Ketchum, FINRA’s CEO, said in a statement.

FINRA also has recently requested permission from the Securities and Exchange Commission to require brokers to include a link to BrokerCheck on their websites. The regulator also established a hotline specifically for seniors with concerns about their investments (844-574-3577).

Critics, however, wonder just who’s checking the checkers.

Attorneys who represent investors in securities disputes and at least two adviser industry publications, Financial Planning and ThinkAdvisor.com, quickly pointed out previously reported gaps in BrokerCheck’s coverage. The gaps include missing information on brokers’ previous bankruptcy filings and certain records that brokers petition to have expunged.

Ketchum said FINRA is performing a records review of its entire broker database and that only a small fraction of records are turning up with missing information.

Investor advocates and others say there’s more work to be done.

“FINRA has gotten a ton of bad press on its BrokerCheck system and they’ve tried to correct some of the flaws, but it’s still not perfect by any stretch of the imagination,” said Andrew Stoltmann, an attorney who represents investors in securities fraud cases. “Just Googling a broker’s name is almost a better source of information.”

Professor William Jacobson, director of the securities law clinic at Cornell University, said BrokerCheck is a limited resource, but it can still be a good consumer tool.

“It doesn’t always contain a broker’s total (record), but I do think it’s useful for finding employment history, if someone has moved frequently from firm to firm, which is a warning sign,” he said.

Individual state securities departments also help consumers check out brokers, but it’s not an instant process. The North American Securities Administrators Association maintains a list of these departments’ phone numbers at nasaa.org, but not all states have enough workers to respond quickly to consumer requests.

Joseph Borg, longtime director of the Alabama Securities Commission, said his department employs enough staff to generally be able to mail out requested reports to consumers within a day of receiving a request.

Because his department puts fewer filters on the data search, the reports often turn up older records and smaller claims than FINRA’s reports, he said.

The department might charge someone a fee for a huge data request on a firm with a large number of brokers, for example, but most searches are free and consumers don’t have to reside in Alabama to call, he said.

“We’re the first state that comes up on the list, so we get a lot of these calls,” he said, referring to the online NASAA directory.