Thursday, January 27, 2011

SEC Staff Study Mandated by Dodd-Frank Recommends Enhancing Investor Access to Data on Brokers and Advisers

The SEC staff has recommended a unified public disclosure database for accessing information about brokers and advisers pursuant to a study on how to improve investors’ access to information about these financial intermediaries mandated by Section 919B of Dodd-Frank. Alternatively, the staff recommended unifying search returns for the existing BrokerCheck and IAPD tools while continuing to maintain them as separate databases. BrokerCheck and IAPD are Web-based disclosure systems providing investors access to information about brokers and advisers, such as employment history and disciplinary records, that help an investor investigate and evaluate these financial intermediaries.

The gold standard remains centralized access to registration information so that all of the data in the two systems would be in one place, making it easier for investors to obtain useful data. The current disclosure system comprises two distinct registration databases, requiring investors to know which database to search: BrokerCheck or IAPD. For investors who do not know whether their financial services provider is registered as a broker-dealer or an investment adviser, knowing where to conduct a background search may be problematic.

Moreover, not all financial services providers are required to register, including some service providers in the mortgage brokerage or futures industries. Some are exempt from registration or operate outside the Commission’s oversight. Centralizing access would make it more likely that investors could find data about a financial services provider who at any time was registered as a registered representative or investment adviser representative, whether or not they knew the provider’s registration status.

But since Section 919B mandates that any recommendations must be implemented 18 months after completion of the study, the SEC staff felt that practical difficulties would most likely prevent implementing a centralized unified public disclosure database within that timeframe. Thus, the staff recommended as a more feasible alternative the unification of search returns for BrokerCheck and IAPD and increasing the usefulness of these tools in two ways. First, by expanding search functions to permit searches for broker-dealers, investment advisers, registered representatives, and investment adviser representatives, based on ZIP code or other indicator of location. Second, by adding educational content, such as links and definitional material, perhaps embedded in alternate text tags, such as pop-ups or other kinds of hover text, which would appear automatically whenever a user’s electronic cursor hovers over certain text or items on the BrokerCheck and IAPD Web pages.

These functions would provide definitions or other explanatory content to help a user better understand the significance of a particular technical term or reference. Both Forms BD and ADV contain a glossary of terms that could be used to populate the hover text, suggested the staff.

The study also recommends that, subsequent to the eighteen-month implementation period, Commission staff and FINRA continue to analyze, including through investor testing, the feasibility and advisability of expanding BrokerCheck to include information currently available in CRD, as well as the method and format of publishing that information; and that SEC staff continue to evaluate expanding IAPD content and the method and format of publishing that content, including through investor testing. Potential modifications could include adding summary data for advisory firms on IAPD, hyperlinks between CRD numbers and SEC file numbers containing information related to a particular CRD number, and additional links to content available elsewhere on BrokerCheck or IAPD.

More broadly, the study reaffirmed that, because selecting a broker or investment adviser is one of the most important decisions that investors face, information to help them make this choice should be easy to find, easy to use, and easy to understand. The Commission recognizes that investors are entrusting financial intermediaries with their savings and should have sufficient pertinent information available to enable them to select a registered representative with whose background they are comfortable.

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