On April 6, the comment period on FINRA’s proposed changes to its BrokerCheck system will close. Changes FINRA is exploring with regard to its database on registered representatives and dually registered RIAs include adding more in-depth background information (such as test scores for various license exams).
The regulator has also asked for input on whether information should be shared with third-party companies. While there are many reasons registered representatives and the investing public alike may benefit from increased use of BrokerCheck — educated consumers can have confidence in the integrity of the market — there is still much debate and controversy about the proposed changes.
Compliance consultant and securities attorney Jennifer Woods Burke, President of CompliGuide LLC, spoke with Financial Planning about her thoughts on the matter:
Q: How much do investors really rely on BrokerCheck when choosing a registered representative?
It’s hard to tell. Empirical analysis gathered for FINRA in the 2009 study Financial Capability in the United States suggests that the number of public consumers who rely on BrokerCheck is nominal. According to FINRA, only 15% of the responding customers used BrokerCheck to research their financial professional.
BrokerCheck is used by a lot of people in the industry for a lot of different things — from reporters and recruiters to claimants’ attorneys and compliance professionals. So while online BrokerCheck may have a significant number of hits, presently there is no way that I am aware of to know who is actually using it and for what purpose. Online users are not required to identify themselves or disclose why they are using the site.
Q: Of the proposed new disclosures, what’s getting the most attention or reaction?
Certainly the request for online disclosure of examination scores is getting a lot of attention. The tests themselves are not static and historically people have typically taken the exams with the objective of passing, not getting a perfect score. Can you say that because advisor A got an 80 on the Series 7 exam he took 30 years ago he is better or more qualified than advisor B who got a 75 when he took it 10 years ago? But beyond that, if, for example, you look at FINRA’s content outline for the Series 7 exam it states that the purpose of the exam is to “assess the competency of entry level general securities representatives.” If you passed the exam FINRA deemed you competent. Introducing the concept to the investing public that an entry level exam taken in one’s youth could possibly be an indicator of proficiency years later is a slippery slope and I have not seen any studies that indicate in the financial industry there is a correlation between exam scores and frankly anything. In fact, the efficiency or ability of these types of standardized test formats to accurately predict success as a professional is continually studied and often the results indicate that there is no correlation between the two. Recently I attended a conference where studies on this very subject were discussed. The body of work by NYU associate professor of applied psychology Joshua Aronson regarding anxiety and test-taking seems to suggest that with standardized tests there may not be as strong a correlation between scores and "success" as people believe. Clearly other factors can negatively impact performance and his studies seem to suggest that most groups feel these different kinds of stress. Unfortunately if the new BrokerCheck rules are approved, many customers may rely on scores as a predictor of proficiency and may neglect or not even know to ask the type of questions that can probably more accurately predict whether their relationship with a financial professional will be satisfactory.
Q: If the changes pass, what impact, if any, do you think the sharing of BrokerCheck info with third party vendors will have?
In the post-Madoff era, people view the financial industry with a level of skepticism. Even today, the ability for a customer to “kick the tires” by visiting a financial advisor face to face in his or her office provides many investors with a false level of security that nothing is amiss. From a fraud perspective it really does not make much difference whether the individual is in your town or across the country, but investors do not realize that. Does providing public customers with the ability to search for representatives by, for example, zip codes or highest level of education, really do anything to protect the public? Given the proliferation of affinity fraud — fraud against a group such as members of a church or community — the answer is probably not.
That said, if significant numbers of public customers start searching for representatives by for example, location, education level, or exam scores, it could ultimately lead to strategic and cultural changes at firms.
Q: Can we expect to see a lot of comments from registered representatives?
If history is our guide, the answer is no. Firms and the organizations that represent the firms’ interests spend significant time lobbying for change when it is in their interest to do so. The typical registered representative, however, is unfortunately not actively involved in this regulatory process, a process that can nonetheless potentially help make or break his or her career. Until such time as they start to speak out, individually and collectively, and grab the attention that their sheer number demands — then representatives and dually registered RIAs cannot expect that changes will be implemented that are fair to them.
Danielle Reed writes for
