Deep Background

Could FINRA do more to inform the public about business risk?


August 14, 2017

Background screening is all about assessing the risk of doing business with someone. A recent article by Reuters says that a leading financial regulator is withholding from public view potential red-flag data about brokerage firms that could be helpful to investors and others who are gauging risk.

The news service reported that the Financial Industry Regulatory Authority (FINRA), the industry’s self-regulating entity, has compiled lists of U.S. brokerage firms employing large numbers of brokers who have been previously punished for improprieties or who engaged in risky activities. (A brokerage with a high percentage of employees with past troubles is a potential indicator of current impropriety, because employees with violations are shunned by circumspect companies and often flock to the same fly-by-night operations, experts say.)

FINRA is the clearinghouse for investors seeking insight into the people asking to invest their money. FINRA’S public BrokerCheck datatset offers information about individual brokers’ qualifications, job histories, and “disclosure events” such as violations. But FINRA makes it very hard to learn which firms are havens for riskier brokers, since it doesn’t release the data in bulk form, such as by firm in a database.

Reuters said FINRA acknowledged it had “identified 90 firms as posing the highest risk to investors and flagged them internally for higher scrutiny.” The internal risk ranking was not released publicly. So Reuters undertook a labor intensive analysis of thousands of records, and assembled a list of 48 brokerage firms where at least 30 percent of brokers have serious flags on their records (including what Reuters called “regulatory run-ins, legal disputes or personal financial difficulties”). Reuters cited one New York firm that FINRA has fined at least 25 times since 2000; 35% of its 714 brokers had a history of these problems.

Referring to Reuters’ list of 48 firms, Susan Axelrod, FINRA’s EVP of regulatory operations, said, “let’s just say those are not new names to us.” Reuters said FINRA officials stated they cannot stop firms from hiring high concentrations of possibly risky brokers because it is not illegal.

In a recent speech at Georgetown University, FINRA president and CEO Robert W. Cook touched on the group’s thinking on the subject. “We must consider fairness and due process,” he said. “FINRA does not possess a crystal ball — someone who we may identify as a high-risk broker for oversight purposes is not necessarily a bad actor.” He added: “A broker who has an unpaid lien because of a debt accrued due to a medical issue in her family must disclose that lien. That event should not be treated the same as fraud.”