• Dodd-Frank Wall Street Reform: Do You Know Who Your Broker Is?
  • August 16, 2011 | Author: Robert J. Carlson
  • Law Firm: GableGotwals - Tulsa Office
  • Last month, the Dodd-Frank Act celebrated its first birthday. Like other anxious parents, those in the financial services have watched every move of the development of new law carefully and with great expectations. After all, the Dodd-Frank Act promised 73 new studies and literally hundreds of new rules, including the possibility that the SEC will impose a universal fiduciary standard of care for all advisors, be they mere order-takers or full-service investment managers (see here). Currently, investment advisors registered with the SEC are subject to fiduciary standards under the Investment Advisors Act of 1940, while the far larger class of financial advisors affiliated with broker-dealers are only required to provide “suitable” investment recommendations.

    Unfortunately, the progress of the new law during the intervening year has been slow at best - and considerable confusion about the applicability of fiduciary standards to broker-dealers persists. Within the last several weeks, however, the pace of progress appears to be picking up. Following a letter in May from Rep. Barney Frank advising the SEC that it should not simply adopt the ’40 Act standards for broker-dealers, the SEC has apparently accepted the challenge. On July 21, 2011, Chairman Shapiro publicly announced that an initial rule imposing a universal fiduciary duty for anyone providing retail investment advice is expected to be released sometime this fall. Finally some progress? Not so fast.

    In order to implement the new law, Chairman Shapiro has testified to Congress that the SEC will need  some 700 additional staff. Meanwhile, the House Appropriations Committee has frozen the SEC’s 2012 fiscal budget at 2011 levels. With debt ceiling deals and the fear of a double-dip recession becoming all too real, it looks like it may be a little longer before anyone really knows who their broker is.

    Expanded BrokerCheck System Up and Running
    In the meantime, and with only minimal elbow grease, you can at least figure out where your broker has been. While the mechanics of Dodd-Frank have been ginning out studies and recommendations regarding fiduciary standards, FINRA quietly expanded its public disclosure program for broker-dealer types -- known as BrokerCheck. The service has always included detailed information taken from the Central Registration Depository (CRD), including a broker’s qualifications and licenses, registration and employment history, and, to the extent a broker has had a run in with regulators or other customers, that information should appear as well.

    The expansion of the BrokerCheck system was designed to make this sort of information available for a greater number of brokers and for a longer period of time. Some of the more far reaching changes to BrokerCheck included:

    • Disclosure of all complaints against any broker since 1999 for all brokers who are either currently registered with FINRA or have been at any time during the preceding 10 years. Now, disclosures are provided for any broker who has worked in the industry for the past ten years, even if they are no longer in the securities industry.
    • Permanently disclose all reportable criminal convictions, pleas of guilty or nolo contendere, civil injunctions, or findings of involvement in any investment-related statute or regulation, and all arbitration awards and civil judgments based on a broker’s involvement in alleges sales practice violations.

    Investment Advisors Registered with the SEC
    In the event that your broker is actually an investment advisor subject to the fiduciary standards described in the ’40 Act, the SEC provides access to their track records through the Investment Advisor Public Disclosure program (“IARD”) on its website.

    State Regulators
    State regulators also may have pertinent information about your investment professional, including whether or not that individual is properly licensed to do business in the state you’re in. The North American Securities Administrators Association (“NASAA”) provides contact information for all state securities regulators on its website.

    Insurance Against Broker-Dealer Insolvency
    If your planning on doing business with a brokerage firm, you should also determine whether the firm is a member of the Securities Investor Protection Corporation (“SIPC”). The SIPC provides limited protection for a customer in the event a brokerage firm becomes insolvent and is liquidated. With several recent failures of small broker-dealers over the past few years, SIPC membership has become much more important.