(FORTUNE Magazine) – Given the catastrophes that have slammed the securities industry over the past few months, it's no surprise that investor confidence has hit rock bottom. Enron is just the tip of the iceberg. In early 2002 a rogue Lehman Brothers broker was charged with bilking his clients of some $125 million over a period of years. Retirement accounts have been eviscerated by a series of shocking stock collapses--with analysts often screaming buy to the bitter end. Even with the inquiries by the SEC and several state attorneys general into analysts' conflicts of interest, investors can't help but feel that only part of the sordid story is emerging.

And they're right.

There's more at stake now than ever before. We used to rely on banks to guard the bulk of our savings, stashing hard-earned money in these highly regulated, federally insured institutions. No more. Dissatisfied with the modest returns banks provide and encouraged by retirement plans, Americans have poured more than three-quarters of their liquid assets--some $12 trillion--into stocks, bonds, mutual funds, and money markets. Pause for a moment and consider how much of your money is there--not safely tucked in a passbook savings account but in the hands of brokers.

Yes, the overwhelming majority of securities dealers are ethical, law-abiding professionals. However, as the recent news makes eminently clear, there are unscrupulous operators: brokers who trade stocks without their clients' permission, plow customers' money into unregistered securities, or "churn"--excessively trade--stocks to earn greater commissions. Sometimes they simply steal. Now for a critical question: How can you find out if the people you've entrusted with your money are on the level?

The way the system works now, investors often have no clue. The National Association of Securities Dealers (NASD), the self-regulating body that oversees the brokerage business, does provide some answers on its Website, www.nasdr.com. But to get the full story, the average investor has to piece together complicated data from a host of different sources. (More on that later.)

First, a tiny bit of background on how the industry is regulated. Contrary to what you may think, the Securities and Exchange Commission--the ultimate stock market watchdog--doesn't spend much time keeping an eye on brokerage firms. For the most part, day-to-day policing is in the hands of the NASD. While all 50 states and the District of Columbia also have their own regulators to watch over brokerages in their jurisdictions, the state agencies tend to be small and strapped for resources. The expectation is that the NASD, with its large enforcement division, will do the job.

But here's the rub. The NASD is also a trade group. So it has the dual--and seemingly contradictory--responsibilities of representing both its members (virtually every brokerage in the country) and the investing public. Critics say that it is this conflict of interest that keeps investors in the dark.

"The lack of public information is no accident," warns Edward Siedle, a former SEC attorney who also worked as the director of compliance for Putnam Investments. Siedle now advises institutional investors on suspected fraud cases and has conducted hundreds of such investigations. "Wrongdoing in the securities industry is far more pervasive than the public realizes," says Siedle, who himself owns a Florida-based brokerage firm, Benchmark Financial Services, and is an NASD member.

NASD officials insist that the interests of investors come first. "Our primary responsibility is regulatory," says Derek Linden, an NASD senior vice president. The NASD, he adds, provides far more information about its members than does any other financial services organization.

Siedle, however, has powerful evidence to suggest that the NASD isn't doing nearly enough to keep investors informed. FORTUNE obtained an advance copy of the report he drafted on the nation's 5,000-plus securities dealers, which outlines among other things their regulatory histories, bankruptcies, and criminal actions. More important, in a 50-page introduction, the report details what the NASD doesn't reveal through its highly touted public disclosure program. "What I offer is a road map to where the bodies are buried," says Siedle.

It's a book the NASD doesn't want you to see. In a recent letter to Siedle, the organization warned that it has "not in any way authorized" him to sell the data he has compiled from the NASD's public-disclosure system and "will pursue all legal remedies available to it" if he proceeds with publication. Siedle is pushing ahead despite the threats.

It's not that the NASD is trying to guard state secrets. The necessary information about broker misconduct is already out there. Broker disciplinary records are kept in a database known as the Central Registration Depository (CRD). Each brokerage firm must send its broker records--including regulatory actions, which are typically fines, suspensions, or censures; arbitrations; and complaints that investors have filed--to this central database. (Yes, you got that right. It's up to the brokerage firms to rat on themselves!) The state regulators and the NASD have full access to this data, and they in turn decide what information to supply to the public.

As Siedle documents, the information you--the average investor--can obtain depends entirely on which regulatory body you ask. Start with the number of regulatory actions against a given firm. Siedle compared NASD and state-provided disclosures for four large brokerage firms: Salomon Smith Barney, Merrill Lynch, Morgan Stanley, and Prudential Securities. According to the NASD data, the firms had a total of 747 regulatory actions taken against them. Violations include not just churning and burning but more subtle sins, like having too little capital in reserve or hiring brokers without the proper qualifications.

Contrast that with the information from the state agencies: They count almost 2,400 actions for those same four firms over the same time period. The massive discrepancy arises in part from what is considered "reportable" and "nonreportable" under the byzantine requirements of the CRD. A reportable event becomes nonreportable in any number of circumstances--for example, the CRD decides it's out of date, reported in error, or that "some change occurred in either the disposition of the underlying event after it was reported or in the question on the form that elicited the information." (Got that?) The NASD provides only reportable events; the states include both.

"The NASD is taking you on a tour through its system, and the tour doesn't include the basement," says Joseph Borg, the state securities regulator for Alabama and president of the North American Securities Administrators Association (NASAA), which represents the 50 state regulators. The NASD's Linden responds, "We tried to identify what would be of most interest to investors and came up with what we felt was the right balance."

The way the NASD reports arbitrations can also gussy up a firm's past. Brokerages require customers who open accounts to agree in advance to deal with any future disputes with the firm through an arbitration panel, not in court. The NASD--not the states, in this case--keeps and discloses information on these arbitrations. But Siedle's research indicates that it's virtually impossible to get an accurate count of the arbitrations against any one brokerage. He went through NASD's public disclosure system, counting arbitrations firm by firm, and found 9,267 since 1990. However, even the NASD concedes there have been some 64,000 arbitrations filed against firms over the same time period--almost seven times as many as disclosed in the NASD's firm listings!

The main reason for the vast gap: Arbitrations against firms that are settled--about 70% of all cases--do not show up on the NASD system.

None of the above takes into consideration the written customer complaints filed against brokerages that don't end up in arbitration. The NASD won't track these gripes--and there are many. Some are resolved before arbitration becomes necessary; others are simply dropped. The legal fees in taking on a brokerage firm can be steep, and some investors don't have the means to take their case to arbitration. Poof! Any suggestion of possible misconduct disappears.

The brokerage industry says publishing complaint data on the firms is irrelevant. "It's not the firm people are concerned about, it's the individual broker," scoffs Amal Aly, associate general counsel of the Securities Industry Association, the trade group that represents the country's largest brokers.

Such information, however, can be important to investors. A raft of complaints about account churning at a specific firm can indicate that something is truly wrong. The states, unlike the NASD, will provide the data, although getting it can be a slog. Investors must request it on a state-by-state, firm-by-firm basis.

Siedle tried it for one state--Florida--asking for a summary of complaints issued against the four firms cited above (Prudential, Merrill Lynch, Morgan Stanley, and Salomon Smith Barney) since 1986. He counted a total of 1,676 in the Sunshine State alone. Similar data obtained by FORTUNE and dating back to 1993 showed that the most common complaints involve allegations of brokers trading in unregistered securities, followed by the firms misrepresenting themselves, and finally, steering customers into unsuitable investments. That's just four firms--out of 5,000 or so--in one state.

Now, if you want to find complaints against individual brokers, in most cases the NASD will oblige. But here too there's a problem: Brokers can force the deletion of complaints from the books under the terms of arbitration settlements. That means if a broker settles with a client, a firm can buy not only that client's silence but a clean record. The NASD now says it's joining with state regulators to put an end to such deletions except in cases where a clear factual error exists. "It's a very serious matter," says the NASAA's Borg. "We're concerned about brokers who use fraud and deceit as a way of making money and don't mind paying big bucks to not let anybody know about it."

Doing away with this practice won't be easy. No surprise, the brokerage industry is up in arms about the proposed rule changes, arguing that they'd make it too difficult for brokers whose reputations have been tarnished by trumped-up customer complaints to set the record straight. "Anybody can name anybody in a customer complaint, and it's part of the broker's record forever," says the SIA's Aly. "If you're going to sweep in every single allegation, then you have to have an equally expeditious means of erasing falsities."

Despite all the roadblocks, Siedle says investors can still benefit from the information currently available. As a first check, they should access the information provided by the NASD's disclosure program, available through the organization's Website. He also urges investors to call their state regulators, which will mail brokerage disclosure records on request. In the meantime, Siedle says, he's hoping his directory will help pave the way to a better level of disclosure--one that won't handicap investors trying to get the straight goods on the people handling their financial future.

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