When John Osmar retired to Florida and opened an account with a large, highly respected brokerage firm in 1990, he didn't even consider checking the background of his new broker. Now, a few thousand dollars poorer in legal costs and a good deal more cynical, the 71-year-old former executive of a multinational chemical company wishes he had.
Osmar alleges that his broker removed $15,000 from his account to buy a proprietary mutual fund without his consent. After four months of haggling, the money was returned, without interest or an explanation. Although Osmar didn't lose any money, it was only after going through a costly and ultimately unsuccessful arbitration that he learned the broker had recently been accused of similar violations. "Now I'm not even going to the doctor until I know his background," Osmar says.
Unfortunately, many people spend less time researching the background of the person they hire to invest their money than they do assessing the credentials of a plumber. And while an incompetent or unethical plumber may do a shoddy or exorbitantly expensive job, an unscrupulous broker could cost you your life savings.
Luckily, there are ways to protect yourself. The best place to start is the Central Registration Depository (CRD), a database run by the National Association of Securities Dealers (NASD) that details brokers' employment and disciplinary histories. Currently, the NASD is spending millions of dollars to expand the scope of information available on the CRD and to make the system easier to access, says R. Clark Hooper, senior vice-president of NASD Regulation's office of disclosure and investor protection.
In August, NASD Regulation launched a Web site (http://www.nasdr.com) that, in addition to providing investor protection information, allows consumers to request a free CRD report on both a broker and his or her brokerage firm. Requests for data can be made either electronically or by calling the NASD Regulation hot line (800 289-9999) between 9 a.m. and 5 p.m. EST. The information will be sent to you by fax or mail. By early next year, you will be able to get the same data via the Web site.
You may also obtain a CRD report by calling your state securities agency. In many instances the information you receive will be identical to the NASD report. However, only the state is required to disclose all the information in a broker's CRD file. But pending approval from the Securities & Exchange Commission, which is expected this year, the NASD version will match the state's and include the following: all pending and settled arbitrations (even if the charges were dismissed), civil proceedings, and customer complaints alleging damages of $5,000 or more; all settlements over $10,000; any current criminal or regulatory investigation; resignation or termination as a result of investment-related violations; and bankruptcies and outstanding judgments or liens.
After obtaining both versions of the CRD report, you will likely need some help deciphering them. You can write to the National Council of Individual Investors (NCII) for a comprehensive booklet that explains the different abbreviations and types of violations and disciplinary actions (table). The CRD report may include descriptions of broker misconduct ranging from minor infractions to more egregious violations such as unauthorized trading or misrepresentation.
4SMART ENOUGH. Once you are satisfied with the information in the CRD report, you should still meet with any potential broker in person. Don't hesitate to ask about a past minor infraction or pending allegation; sometimes there's a good reason. While Merrill Lynch's director of regulatory policy, Ray Vass, believes the disclosure system benefits everyone, he is concerned that some of the information may be misinterpreted. "Anyone can make allegations, and they aren't always correct," he says. "Since the information in the report is so abbreviated, you need to consider the CRD in light of the broker's overall experience and career."
Indeed, the securities industry worries that good brokers may be unfairly slandered in the CRD by the inclusion of pending or unproven charges. But Jeff Duncan, legislative director for Representative Ed Markey (D-Mass.), a vocal proponent of improved public disclosure, contends that "people are smart enough to distinguish between the securities equivalent of a traffic violation versus the securities equivalent of a felony." And surely brokers are smart enough to know that the growing number of informed consumers will hold them accountable.