A Financial Industry Regulatory Authority (Finra) official made headlines yesterday by announcing the agency had internally ranked all of the nation’s brokers and was doubling down on those most likely to commit misconduct.

Securities experts remain unimpressed. “Finra has had this information since 2015 and continues to refuse to make these rankings available to the public or any group, even Lipper, Morningstar or news outlets, so we could flag those brokers most likely to commit misconduct,” said one securities expert who wishes to remain anonymous.

A white paper published last year in the Journal of Investing by Craig McCann, founder of the Securities Litigation & Consulting Group, found numerous limitations with Finra’s BrokerCheck program. “If Finra unshackled BrokerCheck, researchers would come up with innovative ways to reach and inform unsophisticated investors about high-risk brokers and brokerage firms,” McCann said.

“The problem is by not disclosing the bigger picture to investors, or allowing anyone in the industry to do the analysis, Finra is protecting not only firms but predators, and I think someone ought to call them out on it,” said the unnamed securities expert.

Right now, all Finra makes available is one broker background report at a time, through its BrokerCheck tool (https://brokercheck.finra.org/).

“Publishing a list with people’s names, where we haven’t proven any violations, there would be challenges to that,” Susan Axelrod, Finra’s executive vice president for regulatory operations, said at the National Society of Compliance Professionals’ National Conference in Washington, D.C., yesterday. “That being said, if we are showing up at a firm asking for information on a particular registered person and coming on-site to interview that person, that’s a clue they’re on our high-risk broker list,” she added.

The problem is that neither investors nor securities analysts would have any idea Finra examiners are showing up at a broker’s door. Nor would there be any “unproven” violations in a BrokerCheck report. Such reports contain prior disciplinary actions, regulatory infractions and disclosures in addition to brokers’ employment histories.

The Finra Office of the Chief Economist published “Do Investors Have Valuable Information About Brokers?” in 2015; it found that “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.”

“If they announced in 2015 that they had the ability to ID bad brokers, why is Finra announcing in 2017 that they are just starting to focus on these brokers?” the anonymous securities expert asks.

“Finra promotes a perception of BrokerCheck that is a classic example of the fallacy of composition,” McCann said in his white paper. “It suggests that since information on each of the 1.2 million brokers is accessible, the information on all 1.2 million brokers is accessible to rank brokerage firms on the risk of fraud.”

Releasing the potential of BrokerCheck to protect investors would also benefit some brokers and brokerage firms, McCann said.  Brokers with clean CRDs would have an incentive to move to firms with a lower proportion of bad brokers so they would not be penalized in the rankings for associating with bad brokers.

“Brokerage firms would compete to hire better brokers and fire brokers with prior settlements and awards to improve their quality rankings,” McCann said. “Continuing with the analogy above, proposals to supplement data items available on BrokerCheck or add a search term miss the mark badly.”

Currently, research also finds that instead of leaving the industry, bad brokers are often re-employed at lower compensation and by less prestigious firms than brokers who do not have customer complaints.

“Rather than weeding bad brokers out of the industry, the regulatory environment and labor market sifts bad brokers down the quality ladder over time into brokerage firms with loose hiring practices and lax compliance ethics, and these bad brokerage firms specialize in preying on unsophisticated investors,” McCann says.