Finra is considering giving up its proprietary lock on BrokerCheck data, paving the way for a higher level of scrutiny of brokers' disciplinary information, observers said.
The Financial Industry Regulatory Authority Inc. this month
requested comments on the idea of giving private vendors access to an expanded database of licensing and disciplinary information.
With wider access to the raw BrokerCheck data, commercial users could make the famously dense BrokerCheck reports, which disclose customer complaints, arbitrations and regulatory actions, much more user-friendly. Vendors also could create industrywide comparison data, which don't exist now.
In addition, some firm-level complaint data could be revealed for the first time.
“We're talking about exponentially increasing the value of this data,” said Edward Siedle, founder of Benchmark Financial Services Inc., who investigates financial advisers for institutional investors.
The request for comments, Finra Regulatory Notice 12-10, is part of a larger review of BrokerCheck mandated by the Dodd-Frank financial reform law. Among other things, Finra wants to add ZIP code searches and disclose items such as broker termination information, exam scores and more historical data.
Comments are due by April 6.
Until now, Finra has guarded its disciplinary data carefully, limiting use to one-off data requests by individuals. It blocks the BrokerCheck database from automated downloading technology such as screen scraping.
Critics think that this restriction has helped the industry avoid embarrassing revelations about troublesome brokers and firms.
Release of the data is “clearly sensitive for member firms,” said Mike Alfred, founder of Brightscope Inc., which last year launched a broker-rating service that includes disciplinary information.
“If you're an adviser with 12 complaints, you don't want that information to be easy to find,” Mr. Alfred said.
It isn't possible to sort data to show patterns, such as behavior occurring in a particular firm, the system's critics note.
“Do brokers at [The Goldman Sachs Group Inc.] have more or less bad behavior than [brokers] at [Bank of America] Merrill Lynch?” Mr. Siedle asked.
CRITICISM OF FINRA
“That's the No. 1 complaint we hear — the [database] doesn't allow for any grouping or aggregation of the data,” said Mr. Alfred, who, along with Mr. Siedle, charges that Finra has stymied efforts to allow access to the entire database.
Finra is not trying to protect the industry, Finra spokeswoman Nancy Condon wrote in an e-mail.
“We have steadily expanded the information released through BrokerCheck over the years and made it easier for investors to access,” she wrote, adding that Finra recently enhanced BrokerCheck reports by adding links to disciplinary actions and arbitration awards.
Having better comparison data might help the industry's image, Mr. Siedle said.
“If you've been in business 30 years and been sued three times, where do you fall on the risk curve?” he asked, noting that such a figure may be quite normal for an industry veteran.
“Now the system doesn't establish behavioral norms,” Mr. Siedle said.
Brightscope's listing of advisers incorporates a conduct rating, using a horizontal bar to graph an adviser's disciplinary record in one glance. A full-length bar shows no past problems but shortens with each dispute or termination.
The Paladin Registry, which certifies and lists a limited number of advisers, checks all of its advisers' compliance records before admitting them into the service, said founder Jack Waymire.
Both services charge advisers monthly fees.
Mr. Siedle said it is a challenge for private providers to use the massive amount of disciplinary information found in BrokerCheck.
“They have to use a scalable business model” that limits how much investigation they can do on any one broker, he said.
Brightscope takes BrokerCheck information as Finra provides it, said Mr. Alfred, whose firm was criticized by advisers last year (
InvestmentNews, May 2) for providing what they said was incomplete information on its website and then charging advisers to correct it. The company later said it had changed its policy and makes corrections at no charge.
There is a general consensus that BrokerCheck needs to be more user-friendly. Its data are “convoluted” with jargon and difficult for investors to interpret, Mr. Waymire said. He said his surveys show that less than 5% of investors check the compliance records of advisers before they hire them.
A 2009 survey by the Finra Investor Education Foundation found that just 15% of surveyed investors checked up on their broker's background.
In the end, Mr. Alfred doubts that Finra will open up its database to commercial vendors.
“They would have done [that] years ago if they were genuinely interested in protecting the best interests of investors,” he said.
PRESSURE TO UNIFY DATA
But Finra is under the gun to unify BrokerCheck search results with the Investment Adviser Public Disclosure database, which is based on Form ADV information filed with the Securities and Exchange Commission. Since it is public information, the IAPD data are not blocked from automated downloads, as is BrokerCheck data. IAPD data on individuals have been available only since 2010, however.
Finra may have to resolve the differences in access policies.
In a January 2011 report, the SEC floated the idea of merging the two systems into a single public database but, for practical reasons, recommended that for now, the two databases should be maintained separately and search results unified.
Ms. Condon said Finra welcomes comments on how to handle the access issue.
djamieson@investmentnews.com
