FINRA: Do Investors Have Valuable Information About Brokers?

Updated on

Do Investors Have Valuable Information About Brokers?

Hammad Qureshi


Jonathan S. Sokobin


August 20, 2015

FINRA Office of the Chief Economist Working Paper, August 2015


We examine the value of information available to investors through BrokerCheck: the most comprehensive source of information about brokers’ professional background and regulatory history that helps investors make informed choices about which brokers to use. We do so by assessing the predictability of investor harm associated with brokers based on BrokerCheck information. We find that BrokerCheck information, including disciplinary records, financial disclosures, and employment history of brokers has significant power to predict investor harm. The 20% of brokers with the highest ex-ante predicted probability of investor harm are associated with more than 55% of the investor harm cases and the total dollar investor harm in our sample. Our findings suggest that investors have access to valuable information that allows them to discriminate between brokers with a high propensity for investor harm from other brokers. We also assess the impact of releasing additional non-public information on BrokerCheck and find that investors may benefit from information about harm associated with brokers’ coworkers.

Do Investors Have Valuable Information About Brokers? – Introduction

The brokerage industry in the United States represents one of the largest segments of the U.S. financial services sector.2 At the end of 2014, the revenue generated by the brokerage firms exceeded $200 billion dollars.3 Brokerage firms have more than 160,000 branch offices that employ more than 630,000 individual brokers. These brokers offer financial advice to and transact a variety of securities on behalf of millions of investor households.

To help investors make informed choices about the brokers with whom they conduct business, the Financial Industry Regulatory Authority (FINRA) provides an online tool, BrokerCheck, to investors. BrokerCheck provides information on the professional background, including disciplinary history and customer complaints, of more than 1.2 million current and former brokers.4 FINRA describes BrokerCheck as an important tool for enhancing investor protection and encourages investors to use it just as consumers readily use online tools, such as Yelp or Trip Advisor to compare service providers in other industries.5 More than 29 million broker searches were conducted on BrokerCheck in 2014, with approximately 18.9 million summary records viewed and approximately 7 million downloads of detailed reports on brokers.6 BrokerCheck represents the single most complete source of information about brokers available to the public.

The information FINRA makes available through BrokerCheck is derived from its Central Registration Depository (CRD®), a central licensing and registration system for the U.S. securities industry. The CRD system contains qualification, employment and disciplinary records of brokers and firms and FINRA makes a significant portion of this information available to the public through BrokerCheck.8 The type and amount of CRD information FINRA releases to the public, is governed by its BrokerCheck Disclosure Rule and instructions from the SEC. FINRA has revised this rule several times in the last decade to expand the scope of information available on BrokerCheck.9 Nonetheless, BrokerCheck does not include certain CRD information about brokers, such as some financial events and performance on qualification examinations.

Given that BrokerCheck is considered to be the most comprehensive source of information available to investors about brokers’ professional histories, it is important to examine the value of BrokerCheck information to investors and to assess whether BrokerCheck would be enhanced by the inclusion of additional non-public information.10 This paper is in part motivated by public comments that have questioned the value of information available to investors through BrokerCheck.

In this paper, we examine the following research questions: Do investors have access to valuable information about brokers through BrokerCheck today? Would expanding the information provided by BrokerCheck to include other non-public information required to be filed in CRD enhance the value of BrokerCheck to investors?

To address these questions, we construct an annual panel of information from 2000 to 2013 about brokers who likely have direct dealings with the public. The panel includes 181,133 such brokers who registered with FINRA in 2000 or later and tracks their information since their first registration. The panel includes data publicly released on BrokerCheck as well as other non-public CRD data. To our knowledge, the data used in this paper represents the most comprehensive dataset on brokers used in an academic study, and allows us to contribute to the economically important but not well-studied literature on the brokerage industry.

To assess the value of information available to investors through BrokerCheck, we examine the predictability of investor harm associated with brokers based on BrokerCheck information. We measure investor harm using complaints filed by customers against their brokers and their subsequent outcomes. Since some customer complaints may lack merit or suitable evidence of investor harm, we only count complaints that led to awards against brokers or settled above a de minimis threshold. This allows us to focus our analysis on outcomes that are likely associated with material investor harm. Less than 1.5% of the brokers in our sample meet this definition of being associated with investor harm in the fourteen-year panel. In this context, harm does not imply malfeasance on the part of the broker. Instead it only suggests that a third party (regulator, arbitrator or the firm) considered the claim to be worthy of remuneration.

Valuable Information About Brokers

See full PDF below.

Leave a Comment