FINRA Stockbrokers' Background Not Always Reported

March 13, 2014 by Thomas F. Burke, P.C.

FINRA Stockbrokers' Background Not Always Disclosed

The Wall Street Journal has run articles about the deficiencies of reporting negative information on stockbrokers' backgrounds. The Financial Industry Regulatory Authority ("FINRA") requires all stockbrokers to report "red flag" information that will appear on a data base of information that is available to potential investors through the FINRA website called "BrokerCheck". Red flags can include bankruptcies, criminal charges, regulatory actions, terminations, tax liens and customer complaints.

The Journal gathered information from 21 states, relating to more than 500,000 stockbrokers. The investigation found that more than 1,500 stockbrokers had personal bankruptcies from 2004 through 2012 that were not reported to FINRA. These brokers had higher-than-average rates of customer complaints and other red flags in their history. Stockbrokers that had filed for bankruptcy also were twice as likely to have been fired as other stockbrokers. They were also more likely to have three or more red flags on their records, such as customer complaints or terminations on their regulatory histories, more than 65% higher than other brokers according to the Journal.

Criminal charges not reported include burglary, forgery, larceny, theft, bad checks, identity theft, assault with a deadly weapon, stalking, sexual battery, false imprisonment, bail jumping and drug offenses.

In one example, an investor lost his life savings with a broker who had failed to report a judgment for unpaid debt and a criminal guilty plea. FINRA didn't know about the red flags until it was alerted to them by the investor. Although FINRA took disciplinary action by suspending the broker for 13 months, that did nothing to help the investor regain his lost investment.

FINRA last year took disciplinary action against 129 brokers and firms for "reporting and filing violations". The Journal found at least 103 brokers still working last year who had managed to enter the industry without their regulatory record showing that they had filed for bankruptcy.

In a different investigation conducted by a legal organization that represents investors, it concluded that FINRA routinely does not require some possible red flags on brokers in its database. For instance, FINRA does not require stockbrokers to report misdemeanor charges and convictions, such as assault, sexual contact without consent, hit-and-run driving and habitual substance abuse. Other black marks include internal investigation for fraud or wrongful conduct, and failed industry-qualification exams. The red flags can be accessed in some states that do require such reporting. FINRA defends its reporting and points out that the reporting rules are set by the Securities Exchange Commission.