I. Overview of Topic
In a profession that's so directly and unapologetically about money and nothing but money it's surprising there aren't a lot more unethical and manipulative brokers than there are. But there are some, and they can be extremely detrimental to your financial health. You may have noticed the news item recently about unscrupulous brokers targeting blue-collar Baby Boomers in certain large companies via seminars and referrals, promising them 15%-20% on their nest egg savings, thereby allowing them to retire in their mid-50's. These brokers managed to convince numerous workers to turn over their life savings to them, then proceeded to invest the money entrusted to them in risky stocks, junk bonds, etc., and in many cases lost virtually all of it for their clients over a period of 2-3 years. Unfortunately, in most cases when something like this happens, there's just no way to recover the money.
Of course, not even the best, most ethical broker really knows what the stock market is going to do over the short run - nobody does. Even over the long run, it's next to impossible to predict when the next bear market will start and when it will end. Thus whenever you take a broker's investment advice, you're aware he or she may turn out to be wrong. But you implicitly believe that the broker - with the research staff of an investment firm behind him/her - knows more about investing and current market conditions than you do, so you accept his/her advice on that basis.
That is reasonable enough perhaps but at the same time it's a good idea to find out as much as you can about your broker's background before placing all that trust in that person. And it's also a good idea to know as much as you can about the brokerage he/she works for. Yet few people bother to take the fifteen minutes needed to do the research. In the past that's been understandable, but nowadays the Internet makes checking out stockbrokers and their firms so easy there's really no excuse anymore.
Basically, you're looking for red flags that might warn you away from this person or this brokerage, such as a history of disciplinary actions or some sort of licensing problem or employment problem (e.g., the broker was fired from a previous job).
The source of this type of background information is the Central Registration Depository System (CRD). This computerized database, maintained by the North American Securities Administrators Association (NASAA), contains licensing and registration information on virtually all stockbrokers and brokerage firms in the U.S. You can access the database for free or for a nominal fee through your state securities regulator. Click here for a complete list of state securities regulators in the U.S. You can obtain a report on your broker and/or brokerage firm by calling the appropriate state securities regulator. Your broker will not be advised or this request. (Alternatively, you can visit NASAA and click on "Find Regulator.") Yet another way to access this type is info is FINRA's Broker Check Program (see below).
Incidentally, if you should ever need to file a complaint regarding a broker, you can usually do so through your state regulator's website.
CRD Data Available
What background information can you get from a CRD report? Available information varies somewhat by state but usually you can get the following--
Brokers:
- Employment history for the past 10 years
- Securities examination scores
- Licensing or registration status
- Disciplinary history (if any)
Brokerages:
- Final disciplinary actions relating to securities or commodities businesses that have been taken by federal, state, and foreign regulators as well as self-regulatory organizations.
- Civil judgments and arbitration decisions in securities and commodities disputes involving public customers.
- Criminal convictions or indictments against registered or licensed brokerage firms and their associated persons.
- Settlements of $10,000 or more among the parties to arbitrations, civil suits, and customer complaints involving securities or commodities transactions.
- Employment terminations after allegations involving violations of investment-related statutes or rules, fraud, theft, or failure to supervise investment-related activities.
- Bankruptcies filed within the last 10 years and outstanding liens and judgments
- Pending disciplinary actions taken by industry regulators that relate to securities or commodities business.
- Pending arbitrations and civil proceedings involving securities or commodities transactions.
- Pending written complaints alleging sales practice violations and compensatory damages of $5,000 or more.
FINRA's Broker Check Program
The Financial Industry Regulatory Authority (FINRA)
is the U.S. security industry's self-regulatory body. It was created in July 2008 through the consolidation of the National Association of Securities Dealers (NASD) and the regulatory/enforcement division of the NY Stock Exchange. FINRA has 15 offices throughout the country and employs over 3,000 people.
FINRA offers a BrokerCheck report, which is essentially the same as the CRD report discussed above, however, you may find it a bit easier to access. Click here to access a BrokerCheck report online.
Investment Advisor Public Disclosure Program (IAPD)
The Securities & Exchange Commission (SEC) regulates investment advisers that have in excess of $25 million in assets under management. Those which do not meet this threshold are regulated by the states. Through the IAPD
you can (1) search for an investment advisor firm, (2) check the adviser's registration status, and (3) view the advisor's current disclosures made through its Form ADV filing. If the firm you're checking is not listed through the IAPD
you can contact the SEC at (202) 551-6825 or contact the appropriate
state securities authority.
Note: The information provided in this report is for informational purposes only and should not be construed as legal or professional investment advice.
That's it - our ten minutes are up! (OK, maybe twelve or thirteen if
you're a slow reader.) Below is a listing of Web resources to help you
continue your research on checking out stockbrokers.
II. For Additional Research
This Section provides reviews and recommendations of Web sites and other
online resources
U.S. Securities and Exchange Commission (SEC)
The vast SEC website should be one of the first stops for any serious financial researcher. Its EDGAR service provides SEC filings online for all public security companies, and in addition the site offers the most in-depth info anywhere on regulatory actions, litigation, investor publications, exchanges, over-the-counter markets, and many other industry topics.
North American Securities Administrators Association (NASAA)
NASAA's website says the organization is "the voice of state securities agencies responsible for efficient capital formation and grass-roots investor protection. [Our] fundamental mission is protecting consumers who purchase securities or investment advice, and [our] jurisdiction extends to a wide variety of issuers and intermediaries who offer and sell securities to the public." Visit the NASAA website for comprehensive info on state securities regulation in the U.S.
Financial Industry Regulatory Authority (FINRA)
As discussed previously, FINRA is the security industry's primary self-regulatory organization (what better way to fend off increased government regulation than self-regulation?). FINRA oversees more than 5000 brokerage firms and almost 700,000 brokers ("registered securities representatives"). The huge FINRA website is an outstanding research tool if you're interested in securities regulation, regulatory systems, education programs, arbitration/mediation, or any of numerous other securities-related topics.
Recommended Reading
III.Discussion
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