Far too many of the clients who approach us with a new case involving investment fraud and broker misconduct have never done even a basic background check on their broker. Since your broker is the keeper of your lifesavings, this seems very ill-advised. Not to mention, it’s extremely easy to view the most prominent details of your broker’s background on a single website, FINRA’s BrokerCheck.
Rogue Brokers Responsible for Majority of Infractions
It’s hard to give an accurate estimate, but we think perhaps a quarter of all the cases we see where investors lose money might have been at least partially prevented had investors simply taken a peek into their broker’s past. That’s because, in a shocking number of cases where investors lose money, there is a broker with a history of infractions, disciplinary actions, terminations, or disputes behind it. In other words, by the time we see the case, this is usually not the first time the broker has gotten caught with his hand in the cookie jar. Or the second. Or the third. Indeed, it is an emerging truism of the securities industry, which has been getting a lot of regulatory attention lately, that so-called “rogue brokers,” or those with a discernible pattern of misconduct, are responsible for a disproportionate number of scams and disputes.
The Limitations of FINRA’s BrokerCheck
This being the case, investors with a keen eye who use broker check to look into their broker’s history can fairly easily tell if they’re dealing with a rogue or not. Just look at his or her employment history, but especially the history of customer complaints and any disputes or terminations. These will tell you a lot about who is handling your money.
However, BrokerCheck is not perfect. As a recent article in Kiplinger online addressed, BrokerCheck can be missing key information that might reveal your broker’s true character. That’s because of a process called “expungement,” which allows brokers to request that certain disputes and complaints against them be dismissed or expunged from the permanent public record. Often, in settling a case, expungements are used by brokers as a bargaining chip. For example, they along with their brokerage might agree to settle a case for a somewhat larger sum of money if the claimant agrees to entertain expungement after the fact. While it may not be completely ethical, such negotiations are far from uncommon. About ten years ago, expungement was even more common than it is today. According to the Kiplinger’s article, approximately 70% of expungement requests were granted by FINRA. For an “extraordinary remedy,” that’s an extraordinarily high figure.
Other Ways to Do a Background Check on Your Broker
So, while BrokerCheck is certainly your best bet, and the first stop you should make on your tour of your broker’s professional history, it is not the only place. You should also check the SEC website, and conduct a basic Google search. If you’re really motivated, you can also use FINRA to search all of its public arbitration awards (www.finra.org/arbitration-and-mediation/arbitration-awards). There, you might find your broker involved in a claim that was subsequently expunged.