Commentary: What The Nasd Rap Sheets Don't Tell You

Too many investors have lost their savings to a bad broker, only to find out later that the rogue had a history of putting money in risky investments. The National Association of Securities Dealers (NASD) wants to help people avoid these bad apples by making disciplinary records of all brokers available on the Internet by early next year. But while the NASD's motives are admirable, the plan has a way to go before it's truly investor-friendly.

The NASD and state regulators already jointly compile a broker's job and disciplinary history into a rap sheet, known as a central registration depository, or CRD. Each year about 140,000 people call or E-mail the NASD to get broker records, even though less than 10% of brokers have any disciplinary action recorded (table). It now takes about a week to receive a report. Once the CRD database goes online, access will be immediate.

JARGON. The biggest problem with CRDs is they're loaded with jargon and acronyms. For instance, a report may refer to a fired broker as a CAF (for "censure and fire"). The NASD says it has a program to improve the reports. But even though CRDs now contain a simpler summary section, they're still difficult to fathom. As the NASD prepares to put them online, it should step up its efforts to use plain English.

An ongoing controversy is how much information to disclose about a broker's past. In recent years, broker groups have had some success in getting the NASD to water down CRDs. As of 1997, written complaints alleging sales practice violations involving damages of at least $5,000 are reported for two years, then expunged from the public record. The same goes for complaints alleging theft or misappropriation of funds. Previously, they were listed indefinitely.

Brokers argue that written complaints can be frivolous and often don't result in disciplinary action. But sales practice violations and theft are exactly the kinds of allegations investors need to know about, especially because multiple occurrences would suggest a pattern of abuses. Instead of placing such a short limit on the time the complaints appear, the NASD should develop a process to eliminate frivolous claims, then keep the serious ones on the record longer. Says NASD President Mary Schapiro: "It's a `he said, she said' situation, and we're not in a position to judge every complaint."

Over the next month, the NASD has a chance to move toward more disclosure. Brokers want the watchdog group to wipe out nonsecurities-related criminal violations more than 10 years old. Currently, anyone with a criminal record less than 10 years old would have trouble getting registered as a broker. "We're trying to balance the public's need to know with the brokers' concern over privacy and how it will impact their lives," says Schapiro. Brokers argue that old charges of pot smoking or driving while intoxicated are irrelevant. However, investors have a right to determine if something is relevant to their decisionmaking and the NASD should rule in favor of openness. Even if the NASD decides to restrict the reports further, in most cases you can still get full, unedited versions by going to your state regulatory agency.

CRDs can screen out the worst brokers, but they don't replace the due diligence you should perform before signing up with any investment adviser. A CRD won't tell you how well a broker's stock picks have performed, or if your financial goals match his or her style. To ferret out that information, interview the broker and do a thorough reference check. Still, getting a CRD is a vital step in determining if a broker is right for your financial future. Now if only the NASD would recognize that fully and improve the quality and quantity of the information it's handing out.

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