Finra Rule 8312 governs the information Finra releases to the public via its BrokerCheck database, which contains information on the professional background, business practices, and conduct of Finra member firms and their associated persons (i.e., financial representatives, stockbrokers, advisers, etc.). Finra claims that, among other things, “BrokerCheck helps investors make informed choices about the individuals and firms with which they may wish to do business.”
Finally recognizing that BrokerCheck was intentionally designed to protect Finra members and brokers (not customers), Finra recently amended Rule 8312 (as approved by the Securities and Exchange Commission) to disclose more information about brokers. While this amendment is a step forward, the information now required to be disclosed on BrokerCheck still does not go far enough to protect investors.
Background
Pursuant to Finra Rule 8312, “historic complaints” are defined in two ways: (1) customer complaints that were reported on a uniform registration form (i.e., U4, U5, U6, Form BD, Form BDW and Form BR) and have not been settled or adjudicated within 2 years from the date of the complaint, and (2) customer complaints, arbitrations or litigations that have been settled for an amount less than the $10,000 prior to May 18, 2009 or $15,000 on or after May 18, 2009 (and therefore are no longer reportable on a uniform registration form).
Before the amendment, Rule 8312 provided that “historic complaints” must be provided on BrokerCheck only after each of the following conditions had been met: (1) a matter became a historic complaint on or after March 19, 2007; (2) the most recent historic complaint or currently reported customer complaint, arbitration or litigation is less than 10 years old; and (3) the person has a total of three or more currently disclosable regulatory actions, currently reported customer complaints, arbitrations or litigations, or historic complaints (subject to the limitation that they became historic complaints on or after March 19, 2007), or any combination thereof.
This may be one of the most difficult to understand rules on Finra’s books, and it relates to one of the most important (if not the most important) piece of information an investor may want to know before doing business with a particular broker.
In addition, prior to the amendment, BrokerCheck provided information regarding current and former member firms, as well as associated persons and persons who were associated with a member firm within the preceding 2 years. Further, BrokerCheck makes public on a permanent basis certain information about former associated persons who were the subject of a final regulatory action as defined in Form U4 that has been reported to CRD via a uniform registration form.
Effect of the Amendments
Effective August 23, 2010, Finra eliminated the conditions set forth above, which resulted in the disclosure of all historic complaints via BrokerCheck that became non-reportable after the implementation of Web CRD (i.e., on or after August 16, 1999). Removing the conditions is a step in the right direction, but brokers will still avoid having to disclose complaints if those complains do not fall under the definition of “historic complaints.” There are many types of customer complaints that never make it to the historic complaint bucket and that are material and relevant to prospective customers in determining whether to trust a particular broker with their savings.
Effective November 6, 2010, Finra expanded the post-registration disclosure period to 10 years from 2 years. Further, Finra now permanently makes publicly available certain information about former associated persons who were registered on or after August 16, 1999 if, as reported to CRD on a uniform registration form, the person was (1) convicted of or pled guilty or nolo contendere to a crime (unless expunged via court order), (2) the subject of a civil injunction in connection with investment-related activity or a civil court finding of involvement in a violation of any investment-related statute or regulation, OR (3) named as a respondent or defendant in an investment-related, consumer-initiated arbitration or civil litigation which alleged that the person was involved in a sales practice violation and which resulted in an arbitration award or civil judgment against the person.
Conclusion
BrokerCheck will be more informative today as a result of the amendments than it has been in the past, but it cannot be relied upon to provide full and complete disclosure (or all material and relevant information) about any particular broker. For one thing, many complaints never become historic complaints. For a second thing, when brokers settle claims initiated by customers, the settlement agreement often requires that the customer must not dispute the brokers request for expungement. When expungement requests go uncontested, arbitration panels regularly stamp their approval on them. For a third thing, BrokerCheck does not disclose certain criminal convictions such as those relating to drugs and alcohol (which information is critically important to know when deciding whether to trust a person with your savings), or judgments a liens that were originally reported as outstanding that have been satisfied and bankruptcy proceedings filed more than ten years ago. There are many other things to consider as well.
If you are being solicited by a broker, or want to know more about your current broker, contact Wittenberg Law and ask how you can learn more about any particular broker’s background.