Court Ruling Tightens Investors' Safety Net

A recent decision by a federal appellate court goes a long way to protect investors.

The U.S. Court of Appeals for the District of Columbia reversed a lower court that had ruled a stockbroker could have a customer's complaint purged from his record.

At its core, this case -- Karsner v. Lothian-- is about transparency. With so much emphasis on the need for people to save and invest, the regulatory safety nets designed to protect investors from unethical and unscrupulous brokers and advisers shouldn't be compromised.

The appeal arose when Melanie Lubin, the Maryland securities commissioner, sought to oppose a stockbroker's attempt to obliterate an arbitration case from his state licensing record.

The case involved a Maryland mutual fund broker who, according to court documents, allegedly put an investor in unsuitable investments and performed negligently in managing the investor's account, resulting in the investor losing more than $104,000.

The investor complained and the case went to arbitration. The two sides agreed to a settlement, with the investor receiving $47,000. But in exchange for settling, the investor was asked to agree to a stipulation that all references about the dispute be dropped from the broker's Central Registration Depository record.

The depository is a system used by states and other regulators to process applications for securities industry licenses. The North American Securities Administrators Association (NASAA) maintains the database in an agreement with the Financial Industry Regulatory Authority (FINRA), the securities industry's self-regulatory organization.

After the arbitration panel approved the settlement, Lubin stepped in, objecting not just to this case but in general to the pattern of such complaints and settlements being expunged.

"People shouldn't be able to buy a clean record," Lubin said.

Federal or state securities laws require brokers, investment advisers and their firms to be licensed or registered, and to make important information public. Regulators caution investors that before they give their money to anyone or pay for investment advice, they should first check the firm's or individual's record.

To help investors, FINRA has set up a database called BrokerCheck ( http://brokercheck.finra.org). The information, which is free, is derived from the Central Registration Depository. In addition to searching BrokerCheck, Lubin said you should also contact your state's securities regulator, which often has information not listed in the central depository. To contact your state regulator, go to http://www.nasaa.org.

When you check these sources you can find out whether a broker is licensed in your state. You can find information about the broker's educational background and where he or she has worked previously. And most important, you can look for complaints from other investors. Many who lost money to con artists or bad brokers could have avoided being scammed or put into inappropriate investments had they just checked the person's record first.