More On Legal & Compliancefrom The Advisor's Professional Library
- Trading Practices and Errors When SEC-registered investment advisors conduct annual audits of firm policies and procedures, they should pay close attention to trading practices. Though usually not required to, state-registered advisors should look at their trading practices and revise policies that do not fully protect clients.
- Client Communication and Miscommunication RIA policies and procedures must specify what type of communications should be retained. The safest course of action is for RIAs to retain all communicationsto clients, from clients, and about client accounts. To comply with fiduciary obligations, communications must be thorough and not mislead.
Two recent initiatives are intended to work in investors’ favor when it comes to the controversial practice of arbitration agreements.
First, the Financial Industry Regulatory Authority will review a controversial proposal in arbitration cases that allows brokers to expunge black marks from their record. Second, is the Investor Choice Act of 2013, a bill intended to ensure that investors have access to the judicial system by prohibiting use of mandatory pre-dispute securities arbitration agreements.
Linda Fienberg, president of FINRA’s dispute resolution unit, told a gathering of industry attorneys at a New York event held by the Practising Law Institute in early August that FINRA is “looking at the issues raised by investors concerning settlement negotiations when an expungement request is involved,” according to Reuters.
Feinberg said to expect a new rule proposal on the subject as soon as April.
Reuters reported that according to a review by Seth Lipner, a New York lawyer who represents individuals in arbitration claims against the industry, brokers who asked arbitrators for expungement after investors’ cases settled succeeded 93% of the time. “Expungement is just too easy after settlement,” Lipner told Reuters.
But independent broker-dealer recruiter Jonathan Henschen told Investment Advisor that “in today’s environment, getting any marks expunged from [a broker’s] record is very difficult.” To say that “it is too easy to erase some of the criticism made against them is simply not true—it is very difficult to get anything removed.”
Henschen said that in his dealings with brokers and advisors, he “comes across advisor situations frequently where we recommend that the advisor obtain a securities attorney to get frivolous marks removed from their record. Customer complaints that are denied or never pursued have no business on a rep’s record.” Other situations “such as issues between a product company and the client where the rep is not involved are also prime examples where expungement is appropriate.”
While FINRA’s expungement review and the Investor Choice Act, introduced by Rep. Keith Ellison, D-Minn., a member of the House Financial Services Committee, are not “directly” related, Michael Canning, director of policy for the North American Securities Administrators Association, told Investment Advisor that they both highlight the “long-standing concerns that, for various reasons, the arbitration forum is skewed in favor of the industry.”
Arbitration, Canning added, “acts to delay [actions by] bad actors from becoming public and deprives other investors [from getting] certain information about certain brokers. That’s one of the reasons why, in many cases, other dispute forums like court are superior because there’s not the same ability to sweep things under the rug.”
Ellison said in a statement that the Investor Choice Act “helps level the playing field” because “investors want to get back in the market, but they’re rightly wary that the game is rigged against them.” Investors, he continued, “shouldn’t have to sign away their rights in order to work with a financial advisor or broker-dealer to build a secure retirement. By removing some of the unfair advantages, consumers will be more eager to invest, which will create jobs and strengthen our economy.”
The Investor Choice Act amends Section 921 of the Dodd-Frank Act to statutorily prohibit the use of mandatory pre-dispute agreements in broker-dealer and investment advisor customer contracts that restrict investors’ ability to pursue claims in the lawful forum of their choosing.
NASAA said in a statement that the Act “would not in any way prevent investors from voluntarily electing to resolve a dispute through arbitration or mediation after the facts and circumstances of the dispute have been discovered.”
Heath Abshure, NASAA president and Arkansas securities commissioner, added in the same statement that “investors deserve better than the current ‘take-it-or-leave-it’ approach to securities dispute resolution. Ellison’s legislation will ensure that investors have the unencumbered right to seek redress in the appropriate and desired forum.”
NASAA says it has long been concerned with the widespread use of mandatory pre-dispute arbitration clauses in customer contracts used by broker-dealers and, more recently, investment advisors.
Section 921 of the Dodd-Frank Act gave the Securities and Exchange Commission explicit rulemaking authority to prohibit, condition or limit the use of mandatory pre-dispute arbitration agreements if it finds that doing so is in the public interest and for the protection of investors.
But Abshure noted that “although Congress gave the SEC an important tool to act in this area, in the three years since the Dodd-Frank was passed, the SEC has not exercised its authority to conduct rulemaking or, at a minimum, undertake a finding to determine the impact of mandatory arbitration on investors and the public.”
The need to address this area, Abshure said, is “especially pressing given the actions by Charles Schwab” to prevent its customers from participating in class action lawsuits.