Forbes (July 23, 2014 10:01 am) -- Is your investment representative’s bankruptcy your business? It should be. But Wall Street—as usual—is fighting full disclosure, and bankruptcy courts may be helping them temporarily do it.
According to a recent article in Investment News, a broker with multiple complaints for unsuitable investments and churning filed for federal bankruptcy, which evidently froze customers’ pending complaints that could total up to $5 million. The broker’s alleged actions occurred while he worked for the now defunct John Thomas Financial, which closed shop a year ago for allegedly not meeting the Securities and Exchange Commission’s net capital requirements, among other supposed misdeeds.
This unintended result of bankruptcy law can freeze action on investor complaints, keeping them pending until a bankruptcy judge decides otherwise. Resolving a bankruptcy in court can take months or it can take years, depending on the backlog of cases and their complexity.
How could this affect you? First, do you want to trust advisors with your money if they can’t manage their own financial affairs? Second, financial troubles could tempt an unscrupulous individual to trade more than normal, costing you commissions for trades that might not be in your best interest.
Let Investors Decide
Wall Street, in the form of self-regulatory agency Financial Industry Regulatory Authority, isn’t a big help, either. The industry believes it does enough to alert viewers about bankruptcies and bad credit. Industry critics would like investors to decide which data it needs to make their decisions, starting with major events such as bankruptcies remaining on the record longer than 10 years.
Why should you care? FINRA’s BrokerCheck reports provide fairly thorough backgrounds on brokers However, investors won’t know the specifics of any infraction—or any rebuttal by a representative—without clicking on a link to see the full report. There are always two sides to every story. Plus, BrokerCheck isn’t foolproof. Sometimes, the industry self-regulatory agency won’t provide all the information investors want, such as the following from the Public Investors Arbitration Bar Association.
PIABA issued a report that found discrepancies in brokers’ records recorded by FINRA and state regulators; the latter are considered more thorough outlets for disclosures. For example, FINRA excluded the reason for termination of one broker and didn’t disclose a $100,000-plus federal tax lien of another broker. States typically will include this information.
Why No Public Records Are Foolproof
Even if you get the information, there are a number of reasons why your due diligence through public sources won’t get you all the information that you might need. This is because:
- Firms are responsible for self-reporting infractions.
- Other records are incomplete. FINRA, for example, doesn’t disclose the number of times representatives fail basic industry exams. Some of this information may seem trivial, but the Wall Street Journal showed, for example, that representatives failing a basic test more than twice were much more like to have felonies or financial misdemeanors than brokers who pass their exam the first time.
- Even the most complete records can’t predict the future. Some of the biggest con men in industry history didn’t have smudges on their records before bilking investors of millions and sometimes billions of dollars.
What’s An Investor To Do?
A combination of continued legislative action and recent pressure on regulators to make the industry more transparent may help in the future. But for now, investors should still search through publicly available records, including BrokerCheck and state securities’ agencies.
And don’t let anybody tell you a broker’s history is none of your business. A bankruptcy can happen to anyone for any reason; it isn’t necessarily indicative of a broker’s character or trustworthiness. But other events may tell you more about bad character, which can lead to investor abuses. Whatever, it’s your right to get all the information you want to make an informed decision.
Need to fill in the blanks? That’s where an independent broker watchdog may help. This watchdog can uncover complete information on your current or prospective advisor to help you make the right choice.