A quasi-governmental agency that polices the investment industry has come up with a plan to make it simpler for consumers to avoid shady money managers — but it includes no provisions to make the underlying data available to the public.
The Financial Industry Regulatory Authority (FINRA), a Self-Regulatory Organization (SRO) that polices the investment industry, was charged to come up with a proposal to make it simpler for consumers to find out whether the broker-dealers and investment advisers they consult have a history of disciplinary problems. This could be anything from multimillion dollar fines levied by authorities to felony counts to slaps on the wrists for failing to file proper paperwork.
Last year the Sunlight Foundation reported that at one out of ten investment adviser firms has a disciplinary history. Similar information was not available about broker-dealers because of the way FINRA mantains that data.
SUNLIGHT'S VIEW: Read Executive Director Ellen Miller's comment.
This is exactly where the rub is. Most consumers don't necessarily know the difference between investment advisers, who provide advice to clients in making investments, and broker-dealers, who execute trades on behalf of a customer. Often a particular professional will wear both hats, or a firm will provide both services to clients through its various employees. But the two professions are regulated under different regimes, with the Securities and Exchange Commission (SEC) watching over investment advisers and FINRA managing oversight of broker-dealers.
Currently, it is nearly impossible to do a comprehensive analysis of both investor adviser and broker-dealer data. While available via web searches, the information is split up between the SEC's and FINRA's websites. Much of it is locked behind proprietary interfaces and generated on PDFs that make it difficult to manipulate.
To make things even more complicated, FINRA is the contractor that maintains investment adviser data for the SEC. As a non-governmental entity, it is not subject to the Freedom of Information Act (FOIA). To date the Sunlight Foundation has been unsuccessful in its efforts to obtain the detailed underlying data from the SEC via the open government law.
FINRA top executives earn seven-figure incomes that are at least partially underwritten by the industry the group regulates. According to the most recent available annual report, the group collected more than $800 million in industry fees in 2010, its main source of income. FINRA is also a lobbying force in Washington, reporting hiring several high-powered firms and spending more than $1 million pursuing its agenda and Congress and federal agencies,
FINRA’s proposal, which follows a January 2011 report from the SEC and is mandated by the Dodd-Frank financial law, asks the public to comment by April 6 about a number of issues. For example, it asks what sort of educational background information should be provided to investors, how to format reports so they are more digestible, and whether it should be possible for a consumer to look up a name on an Internet search engine, such as Google and Chrome, and be directed that way to the FINRA website.
And in a nod to groups such as Brightscope, a for-profit Internet firm that provides consumers with ratings for financial professionals, FINRA asks whether and how underlying data should be provided for commercial use.
But the proposal does not anywhere discuss the idea of making data available in electronic, machine-readable format for non-commercial use—so that journalists, developers, and others like the Sunlight Foundation can use it to do analyses that inform the public, free of charge.
To Mike Alfred, a founder of Brightscope, which has resorted to using technical tools to get data from FINRA and SEC websites, the FINRA proposal falls far short of what’s needed. “[I]n general, FINRA is disingenuous in saying that they would like to 'facilitate and increase investor use' because they are spending a tremendous amount of money trying to keep that from happening," he said. "Essentially, I don’t expect FINRA to all of a sudden change and become true investor advocates.”
“They are paid by the large broker-dealers and will continue to look out for their interests over the interests of the everyday investor. BrightScope will continue to fight against their monopolistic control over financial advisor data.”
About the data
What: Investor adviser and broker-dealer disciplinary actions
Where: SEC oversees investor adviser data and the Financial Industry Regulatory Authority (FINRA), a self-regulatory organization (SRO), oversees broker-dealer data. However, FINRA is contractor for the SEC maintaining all of these data.
Availability: Available via public websites
Usability: Most underlying data locked behind proprietary interfaces, not downloadable in machine readable format