[Post updated March 2020] A feature story in this morning’s Wall Street Journal, “Keeping Bad Brokers from Fading into Background” tells the sad truth about what industry professionals already know: Information about bad brokers can disappear in as little as 2 years. Thankfully, all that changed in 2010. Currently FINRA discloses broker’s bad behavior for at least 10 years.
It’s was ironic that a 17 year old having consensual sex with a 16 year old in some states will be labeled a sex offender and have to register as such for life; register and be stigmatized with such a label often associated with violent sexual predators and serial rapists. But steal or embezzle funds from an 82 year old woman or illegally “churn” or gamble away someone’s inheritance monies and your record could disappear in just 2 years. How was this possible?
FINRA (the Financial Industry Regulatory Authority) is the watchdog of stockbrokers. FINRA operates a free service for consumers, BrokerCheck, that allows consumers to see if their broker has faced discipline by FINRA or state authorities, filed bankruptcy, criminal charges and even complaints from other consumers. Until the 2010 rule changes, BrokerCheck did not keep information if the broker left the industry for two or more years. Unfortunately, many bad brokers get forced out of the industry but simply come back to prey on the unsuspecting after their suspensions (or jail sentences) are over.
We found several instances of brokers leaving the industry, selling virtually the same products as an insurance agent and then coming back two years later with a clean record.
Since the financial meltdown of 2008, a wary public has used BrokerCheck over 14 million times this year. But the information they find can be very misleading if the broker voluntarily or involuntarily left the industry for a couple years. Worse, a “clean” record on Broker Check can lead to a false sense of security.
After the economy collapsed in 2008, there was a big push to have FINRA to disclose past records. The Securities and Exchange Commission had the final say in the matter and thankfully dramatically expanded disclosures. Senior citizen and consumer advocates were deservedly livid about the failure of the government to provide accurate background information on brokers.
We entrust these folks to invest and safeguard our accounts. And the government already requires that brokers undergo rigorous background checks. So why wasn’t this information be made public? Didn’t consumers have a legitimate right to know everything about a broker to help them decide if they should invest? That is the question asked by Jason Zweig of the Wall Street Journal and thousands of others. Thankfully, the SEC and FINRA listened.
Today, disclosures include information about customer disputes, disciplinary events, and certain criminal and financial matters on the broker’s record. Some of these items may involve pending actions or allegations that have not been resolved or proven.
What isn’t disclosed includes (1) non-investment-related civil litigation, (for example, a family law protective order); (2) customer complaints that do not allege sales practice violations, fraud or theft; or (3) arrests that did not result in a charge or conviction, and misdemeanor charges or convictions that are not investment-related or do not involve theft or a “breach of trust,” (for example, disorderly conduct). Previously reported information that is no longer required to be reported includes judgments or liens that have been satisfied.
Regarding judgments and liens, investors should consider whether an open or unsatisfied judgment might make a broker more likely to steal or churn accounts for excess commissions.
MahanyLaw protects the elderly and investors from all varieties of financial fraud. From whistleblower awards to stockbroker fraud to investment recovery, we can assist you or your loved anywhere. Visit our stockbroker fraud page for more information or contact us directly. Investment frauds can be handled on a contingency fee basis meaning no legal fees or costs unless we win.