Does FINRA Deliver the Right Information to Investors?
FINRA, which stands for Financial Industry Regulatory Authority, is the watchdog that regulates 3,895 broker/dealers and 641,761 registered representatives.
FINRA/BrokerCheck is your best online resource for viewing the compliance records of financial firms and representatives who hold active securities licenses.
What should you know about FINRA before you rely on the information it publishes to help you select a competent, ethical financial professional and avoid representatives who are less knowledgeable or ethical?
The Wall Street Connection
What FINRA does say: “It is not part of the government. It is an independent, not-for-profit organization that is authorized by Congress to protect America’s investors by making sure the securities industry operates fairly and honestly.”
What FINRA does not say on its main About page is that it is a Self Regulatory Organization that it is funded by Wall Street firms and professionals. Wall Street executives are well-represented on its Board of Governors by JPMorgan, Barclays, and Merrill Lynch. This disclosure may be in the fine print somewhere on the FINRA website.
You are correct if you concluded Wall Street regulates itself. Consequently, it is reasonable to assume FINRA has potential conflicts of interest that impact the services that it provides to investors.
FINRA does have one unique characteristic. It is your primary source of public data that documents the compliance records of broker/dealers and registered representatives.
There are a few other sources, but their information is difficult to access and understand: ADVs at SEC.gov, state securities commissioners, state insurance commissioners.
FINRA Compliance Records
The financial representatives’ compliance record should help you determine if the professional is trustworthy. To keep it simple, multiple investor complaints could mean the representative is not trustworthy. On the hand, the complaints could be absolutely meaningless. It is up to you to know the difference. Consider the following examples.
Is the professional trustworthy if she or he has had one complaint in 20 years?
Is the professional trustworthy if the complaint occurred after the financial meltdown in 2008 and the investor was trying to recover some losses.
Or, how about frivolous complaints that were rejected by FINRA’s arbitration boards? Some compliance experts believe more than 80% of all complaints are frivolous that are initiated by disgruntled, unhappy clients who lost money in market downturns.
The longer a financial representative is in the industry the higher the probability the professional will have a complaint on his or her licensing.
It pays to remember Bernie Madoff had active securities licenses when he turned himself in. Madoff also had a large number of complaints on his FINRA compliance record that were settled quickly and quietly.
Apparently, 11,000 investors were so enthralled with his marketing pitch and references that they failed to check his record of compliance.
What is more disconcerting, the complaints must not have been serious enough to cause FINRA to revoke his securities licenses.
Therefore, knowing the representative has active securities licenses is not enough. You have to view his compliance record and determine if any complaints were serious ethical breaches that should be cause for your concern.
There is additional information that resides on the FINRA website that can help you select a competent, ethical financial professional or firm:
- Investor education
- Current and past employers and years of employment
- Qualifications that are determined by industry registrations
- Years of experience based on previous employment
- Industry examinations and licensing
- Professional designations
- Disclosure history for criminal charges and convictions, formal investigations and disciplinary actions initiated by regulators, customer disputes and arbitrations, and financial disclosures such as bankruptcies and unpaid judgments or liens
- Other business activities
Written by Jack Waymire | Founder, Paladin Research & Registry | A leading provider of information services to investors who rely on financial advisors.