Transparency can't be one-sided
FINRA, WITH SEC approval, has opted for greater transparency in disciplinary actions against brokers and firms. The Securities and Exchange Commission has approved a Financial Industry Regulatory Authority Inc. rule change under which the self-regulatory body will greatly increase the information it publishes about disciplinary actions and customer complaints on its Finra disciplinary actions online database.
With two caveats, InvestmentNews approves of this rule change. Customers and potential customers of brokerage firms and their brokers must have access to complete, accurate and timely information about disciplinary problems or complaints about those firms and brokers.
The first caveat is that the disclosures must be fair to the firms and the brokers involved. Where a complaint has been lodged by a customer, the response from the firm or broker should be sought and prominently reported — generally a paragraph or two of brief description near the beginning of the complaint, not at the bottom of a full airing of the complaint where potential customers might not see it.
The second is that when complaints or disciplinary actions are withdrawn or dismissed, they also must be promptly and prominently reported on the disciplinary actions database, as well as on BrokerCheck, the online database of information about brokers and firms that is designed to help the investing public check on brokers they might consider using.
At present, all complaints and disciplinary actions brought by Finra are published in summary form on BrokerCheck. However, Finra releases unredacted information to the disciplinary actions database only on certain complaints or actions — for example, those alleging unauthorized trading or churning, material misrepresentations or omissions to a customer, front running, trading ahead of research reports, excessive markups, or “use of manipulative, deceptive or other fraudulent devices.” Finra can release full unredacted information on other complaints on the disciplinary actions database only in response to a specific request.
The new rule will permit Finra to publish full information on all significant complaints and actions, the results of its investigations and any corrective steps taken.
DISCLOSE WRONGDOING
What is best for the client is, in the long run, best for the industry and the brokers, advisers and firms within it — and the fullest possible disclosure of possible wrongdoing or rule breaking is best for the client.
The scandals in the industry in the past decade, as well as the market's volatility, have shaken investor confidence. One way to restore some of that confidence is to show that the industry is working assiduously to root out wrongdoing and takes seriously reports of such behavior, will publicly disclose incidents of it and will take action against bad apples.
The comment of the late Supreme Court Justice Louis Brandeis that sunlight is the best disinfectant may be a cliché now, but only because it is true. The Finra rule change allows more sunlight to shine through the industry.
At the same time, just because complaints have been lodged against brokers or firms does not mean they are guilty. It is easy for an investor, particularly an unsophisticated one, to misjudge his or her risk tolerance and, when the risk proves greater than expected, blame the broker or investment adviser.
Therefore, the results of any investigation into an allegation of wrongdoing must be published as prominently as the allegations, especially when the allegations prove to be unfounded. An allegation of wrongdoing attracts far more attention and can do far more damage than a report of exoneration can repair.
Overall, however, the new rule providing fuller disclosure of Finra actions and decisions is a step forward.
