In the past week, I ran across two discrete instances in which FINRA acts as a secret gatekeeper of sorts, exercising its own subjective judgment, without anyone knowing what, exactly, it is doing or why, employing unarticulated standards, and without providing any avenue for redress. And I find that really frightening.
The first involves CRD, which, although it is nothing more than a database of information, is a weird place. Over the years, it seems I have spent a crazy amount of time describing to people exactly what CRD is, where the information in CRD comes from, what information properly belongs in CRD, what information is in CRD but not in BrokerCheck, etc. With that said, clearly the most common issue I encounter when it comes to people calling me about CRD is that they feel they have required disclosures – typically a bogus customer complaint – that are inaccurate and wonder what, if anything, they can do about it. Remember: RRs are required to disclose customer complaints irrespective of their lack of merit. This situation only got worse with the advent of BrokerCheck, since the whole world can now view pretty much all of one’s negative U-4 disclosures, making inaccurate disclosures that much more impactful.
There is more than one answer to the question what to do when faced with a customer complaint that is flat out false, as it depends on whether the RR is still in the industry. If so, it’s easy, as the RR can, at a minimum, add a comment to the DRP (i.e., the disclosure reporting page) about the disclosure simply by having their BD amend their Form U-4. Typically, the comment goes something like, “I didn’t do what the customer claims I did and I intend to fight these scurrilous allegations vigorously.” Most BDs are happy to add that language, for what it’s worth. Interestingly, however, there are no rules, or even guidelines, regarding what can be included in a comment. As far as I can tell, an RR can say whatever he or she wants, and unless the BD has some problem with the comment, it is dutifully reported in CRD, and BrokerCheck, as well.
If the rep is no longer registered, however, the procedure is different and, frankly, odd. The RR still gets to submit a comment, but, because he is not registered, he has no ability to file, and therefore amend, a Form U-4 (because only BDs can make such filings). As a result, the comment has to be submitted directly to FINRA, which will then make sure that it makes its way to CRD and to BrokerCheck, so the world can see that the RR denies the allegations, etc., etc. But, that’s not the weird part. What is weird is that FINRA will not simply say whatever the RR wants. Rather, FINRA will review the proposed comment and decide whether or not it will be published, or perhaps just needs to be edited or redacted.
What? FINRA will “review” the comment, and then make a subjective determination whether or not it will be shown to the public? I am not making this up. The following language appears on FINRA’s website on a page called “Guidelines for Broker Comments on BrokerCheck”: “FINRA will review the comment and reserves the right to reject or redact a comment that it deems to be inappropriate or does not adhere to the following criteria.” Before I address “inappropriate,” let me talk about the “criteria.” There are five criteria listed, and all but the last are not particularly controversial. They require that:
- “The individual submitting the comment is not currently registered.” That is easy enough to establish.
- The proposed comment must “pertain to the BrokerCheck report of the individual submitting the request.” Again, easy peasy.
- The comment must address “information disclosed through BrokerCheck.” No problem with that.
- The comment must be “written in the first person narrative point of view to minimize any potential confusion on the part of the reader.” I like to write in the first person, so I can’t really complain about this criterion (although it is a bit amusing that FINRA cares about something like the perspective from which a comment is offer).
- “The comment does not contain confidential or identifying information about customers or others; offensive or potentially defamatory language; or information that raises significant identity theft, personal safety or privacy concerns.” Ok, not so fast.
What gives FINRA the right to decide whether a comment is “offensive or potentially defamatory?” And who, exactly, at FINRA is conducting the review and making these determinations? And what criteria are being employed to determine whether a comment is offensive? I am confident that there are things that would not offend me, but which other, more thin-skinned folks, would be bothered by. Take a very specific example: would FINRA deem it to be offensive if an RR called a complaining customer a “liar” (which, frankly, many complaining customers are)? I just can’t believe that FINRA can wield editorial power like this over an RR’s own words.
And that power only gets scarier when you consider the other standard, which is even loosier-goosier, i.e., that the comment not be “inappropriate.” Again, exactly what does that mean? Would a comment be inappropriate because the RR denies the complaint? Because he points a finger at, say, his former BD? Or at FINRA itself? We also face the same problem regarding who at FINRA is the one deciding whether a proposed comment is appropriate or not. Is it Robert Cook? Seems doubtful. Maybe it’s just some data entry clerk at CRD? And what happens if you disagree with FINRA’s determination to “reject or redact” a comment? There does not appear to be an appeal process. How can that be fair?
As I stated at the outset, this is not the only hidden situation in which FINRA acts like Big Brother, deciding the merits of things behind the scenes, away from public scrutiny. Just the other day, someone reminded me about mid-hearing disciplinary referrals made by arbitration hearing panels. Under FINRA’s Code of Arbitration Procedure, if a hearing panel hears evidence of “any matter or conduct . . . during a hearing, which the arbitrator has reason to believe poses a serious threat, whether ongoing or imminent, that is likely to harm investors unless immediate action is taken,” it may make an immediate disciplinary referral. But, that’s not the end of the process. Rather, FINRA Dispute Resolution first has to “evaluate” the referral before it is actually passed on to Member Reg or Enforcement. Presumably then, even though a hearing panel has decided that something it heard it so egregious, so potentially harmful to investors that it makes an immediate disciplinary referral, FINRA can summarily – and subjectively – decide that the panel is wrong, and the referral dies there on someone’s desk, away from the light of day.
I don’t know about you, but these secret administrative processes that FINRA has created in which it wields such complete control over decision-making without also providing some window into what’s happening and who is making the decisions, not to mention some avenue of appeal, scare me. FINRA is supposed to do the right thing, and usually does. But not every time. There should always be some sort of check on FINRA, to ensure that its decisions are made out in the open and subject to review by the SEC. The two circumstances I have described here do not fit within that construct. Who knows what else we don’t know?