July 14, 2015
VIA ONLINE SUBMISSION ONLY
Brent J. Fields, Secretary
Securities and Exchange Commission
100 F Street, NE
Washington, DC 20549-1090.
Re: File No. 265-28
Dear Mr. Fields:
This letter is being submitted on behalf of the undersigned organizations in support of the Investor Advisory Committee’s (“IAC”) recommendation that the SEC:
• develop a disciplinary database for violations of the securities laws that will allow elders and other investors to easily conduct searches of any person or firm sanctioned for these violations;
• take steps to reduce the complexity of background searches by taking steps to simplify the search process, including steps to ensure comparable quality between BrokerCheck and IAPD and the development of an appropriately named site that will permit elders and other investors, through a single search, to access information in all databases supervised in whole or in part by the SEC;
• seek to obtain the agreement from other federal regulators, self-regulatory organizations, and state regulators for the development of a single site that will permit a search of all relevant databases that provide background information on financial market professionals.
We believe that creating a comprehensive, simple, and accurate one-stop-shop for consumers to conduct free background checks on their trusted financial professional(s) is critical to protecting investors. As a result, we applaud the IAC’s recommendations to improve the quality and consistency of this important type of publicly available information.
The undersigned also recognize that carrying out the above recommended improvements will take time to accomplish. As a result, improvements can and should be made in the short-term that are consistent with the goal of improving the overall quality and consistency of information to the investing public, particular the elderly.
As described in more detail below, the undersigned organizations implore the IAC to recommend that the SEC exercise its regulatory authority to require FINRA to improve the disclosures contained in its BrokerCheck Reports. In March 2014, PIABA released a report entitled The Inequality of Investor Access To Information (“PIABA Report”), which thoroughly explained how FINRA omits critical information from its BrokerCheck Reports even though the information is publicly available from some state securities regulators in the form of CRD Snapshot Reports. Importantly, the information contained in BrokerCheck Reports and CRD Snapshot Reports are derived from the same database. The PIABA Report provides real examples of how CRD Snapshots provide more complete information than FINRA’s BrokerCheck Reports. See, e.g., pgs. 7-12, PIABA Report attached hereto. The PIABA Report correctly concludes that FINRA’s BrokerCheck Reports should be harmonized with the reports from states that provide the most information so that all investors have equal access to the same important background information. A copy of the full PIABA Report is attached. Highlights from the PIABA Report as well as new information about FINRA’s efforts to promote BrokerCheck are discussed below.
A. FINRA Markets BrokerCheck Reports As An Important And Comprehensive Tool For Investors To Obtain Background Information About Financial Professionals.
As the IAC is aware, FINRA holds out BrokerCheck as an important investor education and protection tool. FINRA actively markets BrokerCheck Reports to consumers as a way for investors to conduct due diligence in selecting financial professionals. In its online brochure about BrokerCheck Reports, FINRA states:
Smart investing starts by selecting an investment professional or firm who is right for you. That’s where BrokerCheck comes in.
On June 1, 2015, FINRA launched a national ad campaign promoting BrokerCheck. In its press release, FINRA described its BrokerCheck Reports as “FINRA’s free online tool that allows investors to access information about every broker’s employment history, certifications and licenses, as well as regulatory actions, violations or complaints made against them.” The release also boasts that BrokerCheck can be used to avoid hiring “bad brokers”, saying that if investors are to avoid “leap-before-you-look mistakes when choosing a broker—they should use BrokerCheck.”
In a print advertisement available on FINRA’s website, FINRA states:
You wouldn’t [e.g. select a hairdresser without checking first.] So why would you invest without checking BrokerCheck. Especially since BrokerCheck® by FINRA® is so easy. Simply visit the site and type in your broker’s name. Then presto! You’ve got information on employment history, certifications, licenses and complaints. You can also get information about your broker’s firm. These days, you check everything, so there’s no reason not to check your broker with BrokerCheck®
There is no question FINRA portrays BrokerCheck Reports as important, accurate and comprehensive. As explained in more detail below, despite FINRA marketing efforts, FINRA continues to omit material information about brokers in its BrokerCheck Reports even though this same CRD information is publicly available from many state securities regulators. FINRA does not alert investors that more complete information is available from other sources. The lack of complete information in FINRA’s BrokerCheck Reports has the potential to mislead investors into believing that all relevant information has been disclosed when it has not.
B. States Make Information Available through a CRD Snapshot Reports
As the IAC is aware, information in BrokerCheck is derived from the Central Registration Depository (“CRD”), an online registration and licensing database. Operated pursuant to policies “developed jointly with the North American Securities Administrators Association,” the CRD system consists of information reported by broker-dealers, associated persons, and regulatory authorities on uniform registration forms. Through the CRD, firms and individuals are able to register with multiple states and self-regulatory organizations.
Broader access to the CRD system’s information may be obtained from a number of states which disclose information about brokers licensed to do business in their state. These more comprehensive reports are commonly referred to as CRD Snapshot Report(s). Some states, such as Florida and Iowa, provide consumers with CRD Snapshot Reports that disclose substantially more information from the national CRD system than the FINRA BrokerCheck system discloses. These states’ CRD Snapshot Reports exclude only personal information such as social security numbers and home addresses.
Assuming that consumers are even aware state regulators may provide more complete information about financial professionals, states differ on what information is provided in the CRD Snapshot Report because each state is governed by its state public records laws. In addition, most states only provides information about brokers licensed by that state. Therefore, consumers cannot always contact a state securities regulator such as Florida, which is governed by very broad public records laws, and obtain the more expansive CRD Snapshot Report.
Importantly, unlike BrokerCheck where the information is provided instantaneously and for free, CRD Snapshot reports requested from some states cost consumers money; must be requested either by telephone, by email, or through the state securities regulator’s website; and may not be delivered for hours or days after the request.
All of this leads to the conclusion that FINRA’s BrokerCheck Reports should be as comprehensive as the CRD Snapshot Reports provided by states such as Florida and Iowa so that all investors have equal access to the same crucial background information.
C. FINRA Excludes Important Information from BrokerCheck
In contrast to the states with the most comprehensive disclosure of information, FINRA exercises it statutory authority to exclude information contained in CRD Snapshot Reports. To date, it appears FINRA’s rationale for not disclosing the same amount of information as these states is based on “personal privacy and fairness” to FINRA members. This rationale, however, is flawed given that the same information excluded from the BrokerCheck Reports is already publicly available from these states. Moreover, FINRA has designated itself as an advocate for investor protection, and, as a result, the SEC should mandate FINRA place the interests of the investing public above any vague notion of privacy or fairness to the financial advisors entrusted with clients’ life savings and retirement accounts.
In January 2011, the SEC released a study pursuant to the Dodd Frank Act entitled, SEC Study and Recommendations on Improved Investor Access to Registration Information About Investment Advisers and Broker-Dealers, January 2011 (the “SEC Study”). The SEC Study correctly states that not all information in the CRD is disclosed to the public through BrokerCheck. The SEC Study stated:
• Reasons and Comments Related to Termination. In situations where a broker-dealer terminates a registered representative, BrokerCheck Reports exclude the reason for the termination and any comments from the former registered representative regarding the termination, although this information is reported on Form U5. FINRA also excludes from BrokerCheck, generally, information on Form U4 for registered representatives who have terminated registration more than ten years ago.
It is important for consumers to know all reportable facts and circumstances surrounding brokers’ terminations from their firms. For example, investors considering whether to hire a new broker to manage their life savings have a legitimate interest in knowing whether that person has been fired from a previous firm and the circumstances surrounding that termination. In addition, existing customers commonly follow terminated brokers to their new firm(s) and they certainly have a legitimate need to know this information to be able to determine whether the broker is trustworthy.
• Formerly Reportable Information. Certain information that was, but is no longer required to be, reported through the registration and licensing process is not disclosed through BrokerCheck. This information includes, for example, judgments and liens originally reported as outstanding that have been satisfied and bankruptcy proceedings filed more than ten years ago.
Reasonable investors would have good cause not to engage or hire a broker who has demonstrated that he or she cannot properly manage their own finances. For example, a reasonable investor would want to know whether their financial advisor has ever filed for bankruptcy, not just in the last 10 years. Similarly, reasonable investors would also want to know if their broker has ever had IRS tax liens levied against them or judgments that arise from, for example, a breach of duty. Once again, this information is publicly available on CRD Snapshot Reports regardless of whether, for example, an IRS tax lien was levied more than 10 years ago and/or has been satisfied.
• Examination Details. Scores on industry qualification examinations, and failed examinations, are also excluded from BrokerCheck Reports, although BrokerCheck displays industry examinations that a registered representative has passed.
CRD Snapshot Reports include much more information about scores on industry qualification examinations including information about failed exams. Reasonable investors may believe this type of information speaks to the basic competency of their broker. If an investor decides this information is an important factor to consider when choosing a broker, they should be permitted to have access to the information in making a better and more informed decision.
Additionally, even though it was not discussed in the SEC Study, unlike CRD Snapshot Reports, BrokerCheck does not release “Internal Review Disclosure” information. Rule 8312(d)(3) states:
FINRA shall not release "Internal Review Disclosure" information reported on Section 7 of the Form U5[.]
One of the questions in Section 7 contained in Form U-5 entitled, Internal Review Disclosure, asks:
7B. Currently is, or at termination was, the individual under internal review for fraud or wrongful taking of property, or violating investment-related statutes, regulations, rules or industry standards of conduct?
It is unimaginable that any reasonable investor would not want or need to know the answer to this question. Once again, this information, along with detailed descriptions about the nature of the investigated conduct under review, is publicly available from some state regulators.
Given that this information is already contained within the system, there is no reason that public investors located across the country should not have access to it, regardless of the state in which they reside. If a broker is not registered with Florida, or another state with a similar system, such information will continue to remain unavailable to the public absent an expansion of BrokerCheck.
D. Continuing Calls for Greater Access
For many years, PIABA, the SEC, multiple academics, and NASAA have recognized the problem and called on FINRA to more fully disclose the CRD’s information through BrokerCheck. In 2010, PIABA and others called for FINRA to harmonize the BrokerCheck system with the information disclosed by Florida, because it is inequitable for many investors to be denied access to information within a national database merely because their state has not implemented the same disclosure laws and procedures as Florida.
Highlighting the issue’s importance, the SEC approved certain changes to the BrokerCheck system in 2010 and encouraged FINRA to harmonize BrokerCheck’s disclosures with those available from the states. It specifically stated that:
The Commission urges FINRA to consider the information as suggested by the commenters. This information is available from the individual states; however, it would be more accessible through BrokerCheck.
To date, FINRA has ignored its critics and failed to provide more detailed information and, yet, FINRA continues to market BrokerCheck Reports as comprehensive.
E. The Need For Action
As illustrated above, FINRA actively encourages investors to use BrokerCheck so they can make informed decisions about their brokers. FINRA also requires firms to notify investors repeatedly about the availability of BrokerCheck. Nevertheless, FINRA then misleads investors into believing they are obtaining complete and adequate information about their brokers. FINRA has chosen not to further expand BrokerCheck in an effort to protect the interests of its members in the securities industry, rather than the investors it has promised to protect.
Accordingly, the SEC should exercise its regulatory authority and require FINRA to harmonize the information on BrokerCheck Reports with the information already publicly available from states similar to Florida with broad public records laws. BrokerCheck Reports should, like Florida, only exclude personal information such as social security numbers, home addresses, etc. There is simply no valid reason that the same CRD information is a public record at the state level but is not publicly available from FINRA.
Thank you in advance for your attention to this important matter.
Jason R. Doss
President of PIABA Foundation
Co-author of PIABA Report
Consumer and Civil Justice Counsel
Public Citizen, Congress Watch division
Joseph C. Peiffer
Associate Professor of Clinical Legal Education
Director, Securities Arbitration Clinic
St. John's University School of Law
Co-author of PIABA Report
6. Recommendation of the Investor as Owner Subcommittee: Empowering Elders and Other Investors: Background Checks in the Financial Markets at pages 6-7.
7. See e.g. SEC Release No. 34-60462; File No. SR-FINRA-2009-050, August 7, 2009, Self-Regulatory Organizations; Financial Industry Regulatory Authority, Inc.; Notice of Filing of Proposed Rule Change Relating to FINRA Rule 8312 (FINRA BrokerCheck Disclosure); (“FINRA believes this measured expansion of BrokerCheck strikes a balance between, on the one hand, investor protection interests, and on the other hand, personal privacy and fairness to former registered persons.”)
8. See SEC Study at p. 21 (internal citations omitted).
9. See SEC Study at p. 21-22 (internal citations omitted); see also FINRA Rule 8312(d)(4).
10. See SEC Study at 21-22; see also FINRA Rule 8312(b)(2).
11. Id; see also FINRA Rule 8312.
12. See Cmt. Ltr., William A. Jacobson, Esq., Associate Clinical Professor of Law, Cornell Law School, and Director, Cornell Securities Law Clinic and Adisada Dudie, Cornell Law School, 2011, available at http://www.sec.gov/comments/sr-finra-2010-012/finra2010012-8.pdf (“In our comment to the Securities and Exchange Commission ("SEC") dated September 8, 2009 regarding File Number SR-FINRA-2009-050, the Clinic asked FINRA to modify its proposal and make the entire BrokerCheck record available indefinitely”); Cmt. Ltr., Lisa A. Catalano, Director, Associate Professor of Clinical Legal Education and Christine Lazaro, Supervising Attorney, Securities Arbitration Clinic, St. John's University School of Law, available at: http://www.sec.gov/comments/sr-finra-2010-012/finra2010012-7.pdf (“Certain states, such as Florida, will make the broker’s CRD available to investors that request it, while other states do not . . . We urge FINRA to consider expanding BrokerCheck to ensure that the investing public has equal access to the information available about brokers regardless of where they do business.”); Cmt. Ltr., Joelle B. Franc, Student Attorney; Jonathan P. Terracciano, Student Attorney; and Birgitta K. Siegel, Esq., Visiting Asst. Professor; Securities Arbitration & Consumer Law Clinic, Syracuse University College of Law, available at: http://www.sec.gov/comments/sr-finra-2010-012/finra2010012-10.pdf (“the full information available through a request to state regulators should likewise be made available directly through BrokerCheck.”); Cmt. Ltr., Scott R. Shewan, President, Public Investors Arbitration Bar Association, available at: http://www.sec.gov/comments/sr-finra-2010-012/finra2010012-4.pdf (“Because FINRA is the gatekeeper for this information, it should endeavor to ensure that the investing public has equal access to the information available. Investors in Florida should not be more protected than investors in New York.”); Cmt. Ltr., Melanie Senter Lubin, Maryland Securities Commissioner and Chair, NASAA CRD/IARD Steeling Committee, available at: http://www.sec.gov/comments/sr-finra-2010-012/finra2010012-3.pdf (“We also remain concerned with FINRA's decision to exclude other critical information. . . “).
14. SEC Release No. 34-62476; File No. SR-FINRA-2010-012, at 15.