Thursday, November 11, 2004

NASD's “BrokerCheck” is a Fraud

By Dan Jamieson

The online disciplinary reporting system from the National Association of Securities Dealers can often alert consumers to crooked stockbrokers/financial planners. ( ) If you see a stockbroker with multiple problems, that's a red flag. Keep in mind, tho, that much of what goes on the database regarding individual brokers are unproven allegations.

Plus, BrokerCheck misses some key information both brokers and consumers need--the dirt on brokerage firms. Loopholes in reporting rules allow firms to avoid reporting most pending problems.

Reporting rules require virtually any complaint or allegation made against an individual to be publicly reported on the BrokerCheck database (also known as the CRD). Many of these incidents are unproven customer complaints and termination allegations.

Not so for firms. Regulators can be all over a firm for suspected wrongdoing and the public usually won't be told anything.

A recent series of stories in The New York Times on First Command Financial Planning illustrates the problem. This brokerage firm sells high-cost products to military personnel. Former military officers run the company and sell its wares to impressionable troops at mandatory sales meetings. According to the Times, the NASD opened an inquiry into First Command in the summer of 2003, and as of early October 2004 the NASD and SEC are close to completing an investigation.

An investor would definitely be wise to check out First Command before sending money. So what does the BrokerCheck report of First Command look like?

It is absolutely clean.

Huge loopholes in reporting rules allow a firm to avoid reporting most pending problems. The way most investigations of brokerage firms are done, firms do not have to report anything until they settle, or until formal charges are filed. I petitioned the SEC two years ago to close the loopholes firms use to keep a clean record, but the agency brushed me off.

My question for the regulators is this: What good is BrokerCheck if consumers can't see customer complaints or regulatory investigations regarding the firm they are about to do business with? A bucket shop can have hundreds of unauthorized trading complaints—but a potential victim won't see it. An outfit like Command Financial Planning is under investigation for abusive sales practices, but our troops won't learn anything from BrokerCheck.