Letting Investors See Behind the Curtain

By Dowdy White, Spring 2018 IAC Student Intern

The Wizard of Oz is considered by many people to be one of the greatest movies of all time. Many people enjoyed Judy Garland’s singing, while many young people liked the cowardly lion and the tin man. For me, my favorite part of the movie was when Dorothy and her group of friends discovered the “great and powerful Oz.” When they found Oz’s castle in Emerald City, they found a wizard with a giant projected floating head and speaking with an astoundingly deep voice. While the wizard was speaking with Dorothy and her group, Dorothy’s dog, Toto, tipped over a screen and uncovered a tiny old man behind a curtain who was providing the head and voice for the projection of the wizard. When this occurred, the wizard stated: “Pay no attention to the man behind the curtain.”

In the large world of financial investing, many investors, both large and small, feel that they are giving their money to people behind a curtain. Additionally, some investors even feel that FINRA itself has a transparency problem with the public. One of the most prominent complaints from investors is that FINRA refuses to allow members of the general public to access its databases other than a mere FINRA BrokerCheck.

But have no fear! FINRA has taken a small step forward in removing part of the curtain seen by many investors. In May 2017, the FINRA Board approved a proposed amendment that would require an update to FINRA’s Form U4. This form is required for every broker-dealer in order for him or her to become registered with FINRA. This proposed amendment would require the disclosure of more information by brokers to “alert investors to associated persons who have failed to pay customer arbitration awards, settlements, and judgments” in order to help investors make more informed decisions about where to invest and with whom.

Additionally, under current FINRA rules, if a party has entered into a pre-dispute arbitration agreement with a broker, that party may waive his right to pursue a claim against the broker in court. In October 2017, FINRA issued a proposed rule change that would “permit a customer to withdraw an arbitration claim against an inactive associated person, and file in court, despite the existence of a pre-dispute arbitration agreement.” Additionally, this proposed rule change would treat claims against inactive brokers the same as claims against inactive firms. Customers would actually be encouraged to seek redress against inactive brokers and firms outside of FINRA.

FINRA is well aware of the problem many investors are having when it comes to collecting on unpaid arbitration awards. Instead of merely stating to investors to pay no attention to the brokers behind the curtain or their past history of paying (or failing to pay) arbitration awards, FINRA is moving towards requiring brokers to be more transparent. Of course, we all want FINRA to go farther and take more steps toward transparency for investors and hey, maybe there will be a yellow brick road involved. Who knows?