If you’re reading this column, you probably know that FINRA is the 3,400-person agency that oversees the ethics and business practices of stockbrokers and their firms. FINRA creates and administers rules intended to protect investors. Its most popular service is an online database called Broker Check that allows investors to view the compliance records of hundreds of thousands of current and former stockbrokers.
What you may not know is that FINRA—formally, the Financial Industry Regulatory Authority—is a self-regulatory organization. In other words, the primary oversight body for the financial industry is sponsored by the financial industry. The conflict of interest is glaring: Several FINRA executives who earn more than $1 million per year control the group’s policymaking. Wall Street firms pay the fees that produce the million-dollar salaries. Do FINRA execs work for investors or the financial service firms that pay them?
The issue is raised anew by a recent pattern of FINRA decision making. In recent months, according to a detailed report in the New York Times, a growing number of FINRA members who’ve had complaints lodged against them have asked FINRA to purge those complaints from Broker Check and in the vast majority of cases, FINRA has done so.
One example involved Michele Kief, a Wells Fargo stockbroker in Florida who had nine client complaints on her Broker Check compliance record. Investors who checked would likely not select her to be their advisor, so Kief and Wells Fargo asked for FINRA’s help—and got it. Last May, a FINRA panel of arbitrators granted their request to remove a complaint from Kief’s record. In the dispute, Wells Fargo had agreed to pay a $125,000 settlement to an investor who accused the bank of negligence and fraud related to Kief’s advice. But the arbitrators concluded that the investments she had suggested were actually “suitable and safe” and recommended that the complaint be deleted from her record.
In another recent case, FINRA arbitrators recommended deletion of a complaint against Kimon Daifotis, a former Charles Schwab mutual fund manager who allegedly cost investors hundreds of millions of dollars for misleading them about the risk involved in certain investments. Without admitting guilt, Daifotis had agreed to be barred from the securities industry and to pay $325,000 in penalties. But FINRA arbitrators have made eight recommendations in Daifotis’ favor since August 2012.
This surge in broker requests is an unintended consequence of the fact that Broker Check is working: Investors like it. And as more and more of them use Broker Check, more and more brokers are petitioning FINRA to cleanse their records. How big is the problem? The Times reported that Seth Lipner, an attorney who represents investors in cases against brokers, analyzed 150 requests to purge Broker Check data in 2011 and 2012. Lipner found that FINRA arbitrators approved deletion in 145 of the cases.
Due to the contracts they sign when starting with a firm, investors cannot sue stockbrokers or their employers; they are forced into arbitrations controlled by FINRA. The arbitration hearings are closed, and no documents are made public. So Broker Check is an investor’s sole means of examining a broker’s record. If it’s not accurate, investors have an increased risk of selecting unethical stockbrokers and advisors—and the industry will be seen as less transparent and trustworthy.
Brokers argue that complaints lodged against them can be misleading and don’t present an accurate picture. If they’re right, the answer is to put more information online, not less.