Resources/Facts: Compliance


Ethics & Compliance Records

Financial advisors have compliance records that document investor complaints and actions by regulatory agencies and broker/dealers. You should select a financial advisor without checking his compliance records at the appropriate regulatory agency.

Does every advisor have a compliance record? In theory, the answer is yes, if they have active securities licenses. The answer is still yes, if they are IARs without active securities licenses, but the data is much tougher to access at the state level.

No Disclosure Requirements

Advisors are not required to volunteer information about their compliance records. It is up to investors to ask the right questions and they should require documented responses. Advisors are supposed to tell the truth if investors ask the right questions. But, verbal information is easy to manipulate. This is why it pays to require documented responses and check compliance records at FINRA before selecting advisors.


FINRA is the Financial Industry Regulatory Authority. It regulates all advisors and firms (broker/dealers) that have active securities licenses. It maintains records on former sales representatives who have given up their licenses. It maintains permanent files on representatives who have disclosures on their records.

There is no FINRA for IARs who do not have active securities licenses.


SEC is the Securities & Exchange Commission. It regulates registered investment advisory firms that are responsible for more than $100 million of assets. It is important to note that the SEC regulates firms and not individuals unless the individual owns his own RIA firm.

State Securities Commissioners

Each state has a securities commissioner. The names may vary by state. Commissioners duplicate some of the functions at FINRA for sales representatives and they regulate RIAs with less than $100 million of assets. Most of the states operate in the dark ages. They do not have online databases and communications may be limited to telephone, facsimile, and email.


In general, the various regulatory agencies respond to client complaints. They have regulations that are supposed to prevent client abuse, but they have limited resources for enforcing the regulations. The result is headline after headline that documents abuse after it happens.

Client Complaints

There are five types of complaints that investors make against their financial advisors:

  • Frivolous Complaints – This is the most common type of complaint. An investor loses money and files a complaint to try to recover his losses. Investors never win this type of complaint, but they appear on the advisors’ compliance records.
  • Less Serious Complaints – The advisor made a mistake that did not damage investors. These mistakes are frequently administrative.
  • Firm Complaints – Investors file complaints against firms and name advisors in their complaints. The firms pay any settlements.
  • Serious Complaints – There complaints require advisors to participate in settlements that are paid to investors.
  • Really Serious Complaints – Advisors pay settlements to investors and are suspended by FINRA and/or terminated by their firms.

CRD Numbers

CRD is Central Registry Depository. Every advisor, who has securities licenses, has a CRD number. The CRD number makes it easy to check compliance records at FINRA.

Paladin says.....

Very few investors check advisor compliance records before they select them. They select advisors they like so there is no reason to check their records. This is a major mistake. Personalities have nothing to do with ethics.

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