How a unified public regulatory database will help investors — and advisors

SEC Commissioner Allison Herren Lee and FINRA CEO Robert Cook’s calls for streamlining the various regulatory databases highlight current barriers to transparent disclosures for investors.

Information about an advisor’s legal and regulatory disclosures are often a material component in an investor’s decision to hire or retain a financial professional. Therefore, it is very important that investors have access to clear and concise information to aid in their decision-making process.

While such legal and regulatory background is presently available through public databases, the information is maintained on various platforms and can be derived from different source documents. For example, information related to broker-dealers and their representatives is available through FINRA’s BrokerCheck site, whereas information related to registered investment advisors and their representatives is available on the SEC’s Investment Advisor Public Disclosure (IAPD) site. If a firm or individual is dually registered, an investor would need to visit both sites to get complete information about that firm or individual.

And even if they get that far, retail investors often do not fully understand the difference between designations, nor is it clear from the summary page of a search result the capacity in which the individual was working when a disclosure event was reported.

Other self-regulatory organizations to which a financial professional may belong, such as the National Futures Association, which governs the U.S. derivatives industry, have databases that are entirely separate from the BrokerCheck and IAPD sites, further obfuscating an investor’s ability to access information.

To obtain more detailed, comprehensive information, investors often need to cross-reference additional source documents such as Form BD (the Uniform Application for Broker-Dealer Registration); Form ADV Part 1A (the Uniform Application for Investment Advisor Registration and Report by Exempt Reporting Advisors); Form ADV Part 2 (the Uniform Requirements for the Investment AdvisorBrochure and Brochure Supplements; and Form CRS, the Regulation Best Interest-generated customer or client relationship summary. They all may offer similar, yet distinct, disclosure details because the reporting criteria among the forms may differ.

Although information on BrokerCheck and IAPD related to individuals are based on data from financial professionals’ Form U4 and U5, these forms are not public-facing. Therefore, the reporting criteria on which the disclosure is based is not apparent. The fact that only certain types of criminal, civil, regulatory and financial events are reportable may be useful to an investor when evaluating financial professionals.

Also, the forms themselves may not offer the level of transparency the SEC intended. For example, while Form CRS requires firms to disclose whether they or their financial professionals have legal or disciplinary histories, it requires a simple yes or no response with a link to the SEC’s Investor.gov website. Once an investor visits the site’s landing page, it is not readily apparent how to navigate directly to its financial professional’s disclosure information.

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In the past several years, significant improvements have been made to consolidate the information for B-Ds, RIAs and their respective representatives through the implementation of more prominent cross-references between BrokerCheck and IAPD. However, additional consolidation measures can be undertaken to provide investors access to more meaningful information critical to their evaluation of financial professionals.

Consolidating the BrokerCheck, IAPD and other self-regulatory organization databases into one interface, for instance, would help improve investor access to relevant information — particularly when searching firms or individuals with more than one industry affiliation. It would also help to improve access to material information. Providing plain English definitions to explain an individual’s role as a registered representative of a BD, investment advisor of an RIA or other financial services-related affiliation would offer more context and clarity regarding the role a financial professional was serving in when they reported legal or disciplinary events. Since these databases also offer important information regarding financial professionals’ registration history, the explanatory terms would also offer more clarity around their professional experience.

Additionally, providing easily accessible cross-references to the full questions on Forms BD, ADV, U4, U5 and other related forms prompting the disclosure responses would provide investors with better context surrounding the materiality of the disclosures and, more meaningfully, their ability to compare financial professionals. Finally, amending the similar, yet nuanced, disclosure questions on the various forms for consistency would also serve to enhance investors' understanding of, and access to, relevant disclosures.

Importantly, the benefits of unifying and streamlining the databases extend beyond educating investors. It would assist financial advisors of all stripes in performing due diligence on registered entities they may consider establishing professional affiliations with. Having access to consolidated data would help simplify, and possibly expedite, the due diligence process.

What Robert Cook described as a “one-stop shop” for investors could be a valuable resource for the broader financial services industry.