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Wednesday, June 11, 2014

Should Broker's exam scores and failures be added to BrokerCheck?

As we approach the end of the academic year, students are turning their attention to final exams.  They know that these exams will test their mastery of the material they were supposed to have learned.  They also know that their exam scores will soon be reflected on report cards and, in most cases will be sent home to students' parents.  But what if those exam scores never went away?  What if they could be reviewed by prospective employers or anyone else?

There has been a fair amount of controversy over how much information BrokerCheck should include. The debate appears to be heating up again. In a recent InvestmentNews article, Professor Ben Edwards of Michigan State University College of Law argues that BrokerCheck should include information about brokers' exam scores and failures. Prof. Edwards runs a law clinic focused on protecting the interests of small investors.

In March, the Public Investors Arbitration Bar Association released a study arguing that FINRA's BrokerCheck should disclose all material public information about a broker that it possesses. More on PIABA's study can be found here. The PIABA study was co-authored by Prof. Edwards, Jason Doss, PIABA's president, and St. John's Law School Professor, Christine Lazaro, who is also the Chairwoman of PIABA's Legislation Committee.

The PIABA Study highlighted categories of information, such as broker exam scores and failure rates that are contained in FINRA's Central Registration Depository database (CRD), but are not disclosed through BrokerCheck. Edwards argues in InvestmentNews that exam scores and test failures are indisputably material information for investors citing a recent Wall Street Journal study which found that brokers "who failed the test at least three times . . . were about two-thirds more likely than brokers who passed the first time to have three or more red flags on their record."

However, the Securities Industry and Financial Markets Association (SIFMA) opposes the exam disclosures. According to an earlier InvestmentNews article, SIFMA's Managing Director and Associate General Counsel, Kevin Carroll does not feel such information is relevant or helpful to investors and could in fact be prejudicial to brokers and their firms. Carroll gave a hypothetical example of a broker who failed an exam 15 years ago, but has been successfully performing ever since. "What's the point? Are you saying he's not competent now?"
In his InvestmentNews piece, Edwards seems to be responding to this argument when he writes that including exam scores should not cause brokers to "panic" because a "reasonable investor would expect someone to get better over time." Putting a different angle on the issue, Edwards notes that "in cases where an industry veteran keeps flunking exams by wide margins, investors might want to exercise a bit more caution."

Edwards opposes what he views as the paternalistic decision to draw a modest curtain over exam scores and failures. He argues that this information is useful "input for investors--presumably competent adults who should be able to make their own decisions." He believes that "a higher score points to something--perhaps greater mastery" and that "many investors probably would deem the information material."

It remains to be seen whether FINRA will agree with Edwards and "make it easier for investors to get the gritty truth" or if FINRA will agree with SIFMA's Mr. Carroll that "there's more potential for that information to be misused and abused than to help investors make informed decisions."

(This post is a mostly a reprint of a post I made on the Securities Litigation & Arbitration Blog of the New York State Bar Association) 

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