A battle is unfolding over potential reforms to the Central Registration Depository’s (CRD) expungement process. At odds are FINRA, which is responsible for the CRD program and the database behind BrokerCheck, the SEC, and the Public Investors Advocate Bar Association (PIABA) who are debating whether the expungement process has become too lenient.
“FINRA is committed to limiting the expungement process so that it operates as intended - as an extraordinary remedy, only appropriate in limited circumstances when the CRD information is clearly inaccurate,” the self-regulatory organization recently said in a statement. Others are advocating for a more restrictive process.
Perhaps the proposed reforms should also address instances where an “extraordinary remedy” should never be necessary in the first place?
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The FINRA BrokerCheck system, and by extension the SEC’s Investment Adviser Public Disclosure website, was built with a noble cause in mind: Help protect the investing public from unscrupulous brokers and investment advisors (which, for simplicity, I will call “advisors”). With the sheer quantity of advisors in the marketplace, there are bound to be some bad apples in the mix and there is utility to having a system such as BrokerCheck.
My beef is not with BrokerCheck's existence. But it harms certain advisors that fall well below any reasonable level of concern.
Over my roughly 20-year career, I estimate I’ve seen at least 1,000 BrokerCheck (and/or CRD) records. I’ve seen it all; spotless records and others, if printed on paper, that would exceed 50 pages (not a good thing!). And plenty of records that fall on a spectrum I want to highlight.
Any reform under consideration should make the expungement process easier, not harder in certain situations. There should be a “common person” review process to challenge specific types of disclosure items. Would the common person on the street think that this was a necessary piece of information to be shared to protect the investing public? (Note, this would be a cheaper and faster approach than the traditional expungement process.)
Historically, a common example of expungement process failure was Auction Rate Securities settlements. In almost every instance of an ARS complaint, it was settled by an advisor’s firm (without input or financial contribution from the advisor). The client was generally always made 100% whole, and the client was often more than happy to continue working with their same advisor.
A formal complaint was filed not out of angst towards their advisor, but perhaps solely out of a need to access liquidity they could not tap without taking such a formal step. And yet, that can still appear as a disclosure item on an advisor’s record.
For those of us that were around during the time of ARSs — who understand how they were utilized prior to the freeze-up and understand how the associated matters were generally resolved — the issue might not be of concern (from an advisor assessment perspective).
However, a less-informed investing public might not see it that way. Instead, they see a "Disclosure" on their advisor’s record!
Maybe you’re not very persuaded by that example and think such things should still be disclosed. OK, let me give you a few more examples I’ve come across over the years.
Roughly 20 years ago, one advisor committed the reportable act of “theft” (the timing of which would suggest the advisor was in their early 20s). As the comment section of the disclosure noted, the advisor admitted to having paid for a bar tab with a credit card he found in the bar. Yes, that was indeed theft; it was a stupid thing to do. But now, more than 20 years later, and without a single additional blemish on his record, he still must explain that theft clients, employers, and potential partnering firms alike. I think we can all agree that his ill-advised night of free beer is perhaps not a grave threat to his current clients.
Another: an advisor visiting a bookstore was looking at a potential book to buy when his cell phone rang. He answered it but had poor reception. So, he made his way toward the front of the store and walked briefly outside to finish the call.
Unfortunately, he took the book with him. Now, mind you, he didn’t go anywhere. He was standing there on the phone, with plans to walk right back into the bookstore once his call concluded. Unfortunately, the store had a zero-tolerance shoplifting policy and considered his act of walking outside with a book an act of theft. All these years later, he still has to explain a book “heist” from the prior decade!
I’ll combine two with this example, as they’re both equally ridiculous. Again, going back more than 20 years, long before either was an advisor, these two unrelated individuals were found guilty of theft.
One was guilty of stealing a $3 beef sandwich from a convenience store. (The BrokerCheck record actually notes the type of sandwich it was.) The other stole $8 in gas from a gas station. Yes, shame on both for committing a crime. They should not have done it.
But decades later, they perhaps have to explain to clients why they have a “criminal” mark on their BrokerCheck, which doesn’t even consider potential clients that might have seen the “criminal” disclosure and simply moved on to another advisor without even researching it further.
I am not advocating expungements should be easier across the board. I suspect there are good arguments being made on where the existing process could be strengthened.
I also realize trying to “fix” all grievances about the system might be an impossible task. After all, there are plenty of voices to be heard in any such debate.
What I would argue, though, is that an otherwise stellar advisor career should not be blemished by minor, often youthful transgressions committed long before an individual even became an advisor in the first place.
Brad Wales is the founder of Transition To RIA, a consulting firm focused on helping financial advisors considering starting or joining an RIA. Prior to starting his own company, he worked for 16 years in compliance, finance and business development for RIAs at Raymond James. @TransitionToRIA