There’s a simple way to bolster the credibility of brokers’ records, however: Give every broker the opportunity to challenge allegations of misconduct.
Here’s what I propose. A new legal division of the Financial Industry Regulatory Authority, or Finra, the brokerage industry’s self-regulator that oversees the arbitration process, would appoint a lawyer to represent aggrieved brokers in arbitration. If arbitrators find that the brokerage firm falsely accused the broker, the firm would be required to reimburse Finra for the legal and other costs of representing that broker and pay a nontrivial fine. On the other hand, if arbitrators find that the allegations are valid, the broker would pay Finra a fixed fee of, say, $25,000 — enough to deter frivolous challenges but not so high as to discourage honest ones.
My guess is that the cost to Finra would be offset by the reimbursement and fines it collects. But it should cover any shortfall by raising the fees it fetches from member firms. It would be a small price to pay for the integrity of the industry’s cherished disclosure system.
None of this is to say that there aren’t dishonest brokers, just as there are bad actors in every profession. But if investors are to tell the good ones from the bad, they must first trust the information provided to them. And right now, it isn’t clear what to believe.
Nir Kaissar is a Bloomberg Opinion columnist covering the markets. He is the founder of Unison Advisors, an asset management firm. He has worked as a lawyer at Sullivan & Cromwell and a consultant at Ernst & Young.