April 12, 2012 / 4:03 PM / 6 years ago

Making a buck on brokers' disclosures

(Reuters) - Nervous brokers are worried that Wall Street’s top regulator could let companies use details about their professional backgrounds for commercial ventures.

What many do not realize is that state regulators already make that information available to companies that do everything from marketing to providing research services for investors. Handing over details has been a longstanding practice, but brokers worry that some information could be wrong.

Now the Financial Industry Regulatory Authority, or FINRA, Wall Street’s industry-funded regulator, wants the industry’s view on a possible change that could make disclosures to companies such as marketers and recruiters even easier - an idea that has brokers on edge.

The controversy erupted this month in response to a FINRA request for public input about a range of possible improvements to its free online disclosure system, known as BrokerCheck.

Investors can use the service to research brokers’ backgrounds, including their employment and disciplinary histories. Brokers, however, are sensitive about that information because details about customer complaints and disciplinary actions could be wrong, they say. Moreover, commercial users, such as marketers, are not required to fix mistakes.

State public information laws require many state regulators to disclose information about brokers’ professional histories when companies ask. The practice could deflate the brokerage industry’s arguments that FINRA should not sell information it includes in a database of nearly 630,000 brokers.

FINRA is not required to provide the same details that states must provide. As a private entity, it is not subject to state or federal laws requiring the production of certain government documents to the public.

“I can’t control 50 states, but certainly FINRA should not be complicit in encouraging use for commercial purposes,” said Raymond Thompson, senior vice president at Dorsey & Company Inc, a New Orleans-based wealth management firm.

The retail brokerage industry’s trade group last week added its voice to the debate. Providing details about brokers to commercial users “presents substantial potential for abuse,” wrote Ira Hammerman, general counsel of the Securities Industry and Financial Markets Association, or SIFMA, in letter to FINRA on April 5.

The regulator recently extended its comment deadline to April 27.


Businesses that serve the financial services industry routinely use open records laws in states such as Florida and North Carolina to obtain the information they need. A common request is a list of all brokers who have licenses in the state.

Requesting that information from state regulators is effectively a backdoor approach to getting the information from FINRA. State regulators and FINRA co-own the information, which is stored on a separate database for regulators. Most, but not all of the information available in the database also appears in BrokerCheck, which the industry so vehemently opposes to sharing for commercial purposes.

FINRA and state regulators must even work together, in some cases, to compile the information, especially when states do not have the technology to generate information in certain formats.

While many reports are available for free, FINRA charges states a $120 per hour processing fee for certain customized reports. States typically pass that cost on to companies that request the information.

Regulators usually strike out some personal details from brokers’ records, such as Social Security numbers, before passing along the information.


Websites that offer investors an alternative to BrokerCheck’s clunky format is another commercial use of broker data that could become more widespread. BrightScope Inc, a San Diego-based financial information company, started this type of service last year. Its “BrightScope Advisor Pages” lets investors search advisers by assets under management, geographic area and other criteria.

The company gathered its data from several resources, including state regulators and information in FINRA’s BrokerCheck system, according to Mike Alfred, its co-founder and chief executive. The service is free to investors, but advisers can subscribe to packages that let them add more content to their listings. Fees can run about $100 per month.

Industry professionals, however, worry that inaccuracies in BrokerCheck could be passed on to commercial users. “I have heard more than a few stories of misleading or even inaccurate entries” in the regulatory database, wrote G. Donald Steel, president and chief executive of Planned Investment Co Inc in Indianapolis, Indiana, in a letter to FINRA.

BrokerCheck includes information that firms, brokers and regulators report, said FINRA spokeswoman Michelle Ong, in an emailed statement. FINRA checks that information against the separate database for regulators. An appeals process is in place for disputing the information, she said.

Some errors in BrightScope have occurred because of how a broker filed regulatory documents, said Alfred. In that case, the company directs brokers to correct information with their regulator and then updates its database, he said.

Still, that can become onerous for brokers to track if sites such as BrightScope and other commercial ventures proliferate.

Reporting By Suzanne Barlyn in New York; Editing by Walden Siew and Matthew Lewis

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