How to check a broker’s background

Some securities specialists say that unearthing complete information about any stock broker’s background is difficult and that most consumers don’t realize that the industry is largely self-regulated.

We believe there is a conflict of interest inherent in self-regulation, and as long as the brokerage industry is allowed to control that data, the system will always understate the amount of wrongdoing and the risks involved in doing business with a brokerage firm.

The National Association of Securities Dealers (NASD) defends its system, saying in a statment that the information it releases to the public meets federally approved parameters. However, the statement also said that it would be a “good idea” for investors to check with their state’s securities regulators, because state regulators may disclose more information.

Brokers are required to report complaints against them to the Central Registration Depository, a nationwide computerized database. State regulators say they rely on brokers to accurately report complaints to the depository. However, the North American Securities Administrators Association, the organization that represents state regulators, is pushing for new rules that would close a loophole in the reporting system and provide consumers with more critical information. Regulators are working on changes that would require the identities of brokers who are involved — but not officially named in a complaint — to also be listed in the nationwide depository report that details the arbitration. The current system does not include brokers’ names in these reports.

Lawyers often use a strategy of not naming the brokers in complaints; instead, they tend to list their employers, to win faster settlements for their clients. Current industry rules do not require brokerage firms that are named in complaints to disclose those cases in the same way that brokers are required to report them.

If somebody is going to do due diligence in getting information from state regulators, they should also ask a broker, Have you had any information expunged from your [file]? Has your firm been sued, based on accounts you have handled?”

A lot of people spend more time figuring out what their next toaster or washing machine will be . . . rather than whether they will have the money for a toaster or washing machine when they retire.