Investors have access to free electronic search tools through self-regulatory organizations, federal, and state regulators to research investment firms and professionals. This post describes several free tools that give access to information beyond what you can learn using Google and other search engines.
FINRA’s BrokerCheck is a good starting place to learn about registration and reported discipline. BrokerCheck allows you to search for an investment firm or professional by name or CRD number. BrokerCheck will tell you whether a firm is a broker or an individual is a registered representative regulated by FINRA. If regulated by FINRA, a BrokerCheck search will include information about reported disclosures, such as arbitrations or customer disputes, and provide information about registration. Click on the “Detailed Report” link—as the name of the link implies—for more detailed information, including summaries of any complaints. Also, keep in mind that through expungement, a broker can ask FINRA to remove customer complaints and arbitrations from records available through BrokerCheck. This means that an expunged complaint will not show up in your BrokerCheck search. Further, customer complaints are not always timely reported and may be missing from BrokerCheck.
FINRA also provides a free search tool for certain disciplinary actions since 2005. This search tool is available at https://www.finra.org/rules-guidance/oversight-enforcement/finra-disciplinary-actions-online.
If a firm is registered as an investment adviser or an individual is registered as an investment adviser representative, searching for the firm or individual using BrokerCheck will provide you with a link to the SEC’s Investment Adviser Public Disclosure website. For investment adviser representatives, the SEC’s Investment Adviser Public Disclosure search provides information similar to what FINRA makes available about brokers and registered representatives using BrokerCheck. For investment adviser firms, the SEC’s search tool gives access to the firm’s Form ADV, brochure, and Form CRS. These documents include information about an investment adviser’s business, including information about fees.
You should also check with the division in your state that regulates investment advisers. Some state regulators make available free information about investment advisers licensed to conduct business in the state. For example, the State of Oregon provides a free search tool that gives access to limited license information here: https://www4.cbs.state.or.us/ex/dfcs/dfcslic/adviser/.
In Interactive Brokers LLC v. Saroop, No. 19-1077, 2020 WL 4668551 (4th Cir. 2020), the Fourth Circuit Court of Appeals recently confirmed that a violation of FINRA rules can be a breach of an agreement between an investor and a broker-dealer.
Three investors opened accounts with Interactive Brokers, an online broker-dealer. The investors’ agreements with Interactive Brokers had an arbitration clause. Trading on margin, a third-party investment manager invested the accounts in an exchange-traded note that moved based on the stability of the market and also sold naked call options. FINRA rules prohibit trades of some high risk securities on margin, including the exchange traded note. A large, one-day drop in the markets in August 2015 led to Interactive Brokers liquidating the accounts and a margin call.
The investors brought claims in FINRA arbitration against Interactive Brokers. The arbitration panel found for the investors. In dismissing a counterclaim brought by Interactive Brokers, the arbitrators referred to FINRA Rule 4210, which includes the prohibition against trading certain high risk securities on margin. Interactive Brokers challenged the award in federal district court.
The district court sent the case back to the arbitrators, seeking an explanation of the award. The arbitrators referred to FINRA rules in explaining the award and wrote, “To ignore a FINRA rule by the Panel would defeat the purpose of FINRA.” Interactive Brokers again moved to vacate the panel’s award. The district court did so, finding that by basing liability on FINRA Rule 4210, the arbitrators disregarded the law because there is no private right of action to enforce FINRA rules.
The investors appealed to the Fourth Circuit. The Fourth Circuit vacated the judgment of the district court and instructed the district court to confirm the arbitration award. In its opinion, Interactive Brokers LLC v. Saroop, No. 19-1077, 2020 WL 4668551 (4th Cir. 2020), the Fourth Circuit explained that the agreement between the investors and Interactive Brokers provided that all transactions were subject to rules and polices of relevant markets and clearinghouses, and applicable laws and regulation. The Court held, “[t]his, of course, includes the publicly available FINRA rules (citation omitted). As such, the clause could well be read as incorporation the FINRA rules, making a violation of the rules a breach of the parties’ contract.”