You May Know About Your Broker, But How Much Do You Know About Your Brokerage Firm?


There is an interesting point in this week’s Wall Street Journal titled “Brokerage Files Don’t Give The Full Pictures,” which talks about the how brokerage firms and individual brokers are held to different standards, when it comes to their BrokerCheck records. BrokerCheck, the online search tool from FINRA for brokers and brokerages, reports arbitration decisions that are not in a securities firm’s favor but not the negotiated legal settlements, whereas every settlement in a broker’s record is clearly delineated. So why does this gap exist in reporting and how does it continue to happen?

FINRA is not a government body, but it is overseen by the Securities and Exchange Commission (SEC). Within 30 days of reaching a settlement, brokerage firms are obligated to report agreements to FINRA, if the amount meets a certain threshold. However, BrokerCheck records pull information from an SEC document named “Form BD” that doesn’t ask brokerage firms about negotiated settlements. The agreement that gets reported to FINRA in the event of a settlement is not currently a part of SEC approved list of documents. This loophole in communication and reporting allows brokerage firms to maintain clean BrokerCheck records, without disclosing settlements to investors. As far as brokers are concerned, the BrokerCheck information comes from a different FINRA form that does require brokerages to disclose if they paid settlements on behalf of any employees over $15,000. It should be noted that many or most settlement payouts for brokers are actually paid for by brokerage firms and these firms are listed as co-defendants or only defendants in the FINRA arbitration proceedings.

Many individuals in the securities industry feel that data about brokerage firms should be more transparent so that they can be ranked based on this information. There are others who are “shocked” by this gaping hole in the BrokerCheck that does not paint the “full picture”, as per the WSJ story. Those in favor of the current scenario, argue that brokerage firms settle for many reasons without admitting to wrongdoing, so reporting settlements would create an unfair perception about the brokerage firm in an investors’ mind.

Jenice Malecki, the founder of Malecki Law and a prominent securities attorney says, “This is another example of how uneven rules are in the industry. It is fairly easy to spot settlements that were of ‘nuisance’ value, which seems to be the concern in the brokerage community; however, the balance should tip in favor of disclosure to investors and even brokers. For example, in a ‘product case’ involving the failure of a firm’s proprietary product, it is useful for both investors and brokers, both of whom may have been misled by the firm, to be able to show the scale of the harm to the investing public and other brokers to support their cases being tried on an individual basis, just as is happening in Puerto Rico with the UBS Close Ended Bond Funds. The question really is –‘was everyone crazy, investors and brokers alike, or is it more likely that UBS was hiding known risks to protect its own balance sheet, at the expense of investors and employees alike?’ ”