Archive for the ‘Financial Industry Regulatory Authority’ Category

Charles Schwab has given up – at least for the moment – on forcing its customers to waive their right to a class action lawsuit in case of a dispute. While it’s hand was forced by the Financial Industry Regulatory Authority (FINRA), Schwab could have retained the class action ban in its securities agreements until its dispute with FINRA is fully resolved.

As reported by The Wall Street Journal, FINRA brought a compliant against Schwab early last year, alleging that the the class action ban was against FINRA rules. FINRA rules prohibit the use of class action waivers by brokerages and investment banking firms and requires firms to only require arbitration of individual claims.

In February, part of the FINRA complaint against Schwab was dismissed as the FINRA panel hearing the dispute said that it couldn’t stop Schwab from forcing its customers to waive those rights. FINRA has appealed that decision.

Then came the Schwab decision to modify its customer agreements to remove the class-action ban beginning May 15 and “in the foreseeable future.” Of course, if they ultimately win they are likely to reinstate the class action ban — a company spokesperson said, “We have chosen to voluntarily remove the waiver going forward until the issue is resolved by the appropriate regulatory and/or court decision.”

Regardless of the outcome of this dispute, it’s clear that the binding arbitration system in securities dispute needs to be throughly examined and eventually discarded by the federal Securities and Exchange Commission (SEC).

FINRA is the administrator and a major stakeholder in the current binding arbitration system, which requires customers of brokerage and investment banking firms to arbitrate disputes rather than take them to court. I’ve written about binding arbitration, which is biased against consumers, unfair and serves to abrogate the right of investors to access the U.S. justice system in a post entitled SEC should end mandatory arbitration clauses in brokerage contracts.

According to the consumer rights group Public Citizen, more than 7 million Schwab customers have been affected by the class action ban. In a letter urging new SEC Chairwoman Mary Jo White to take up the subject of either banning or modifying the use of arbitration in brokerage contracts, Public Citizen and 14 other organizations, including AARP, Consumer’s Union and the Consumer Federation of America, notes that “The 2008 financial crisis, the effects of which the country continues to wrestle with five years later, should be enough to motivate the Commission to restore investors’ legal rights.

“Brokerage firms were responsible for many fraudulent actions that led to or arose from the financial crisis. Indeed, the Commission identified Schwab as one of the firms that misled investors and ‘concealed the extent of risky mortgage-related and other investments in mutual funds and other financial products.’ Ensuring that investors can choose the forum in which to resolve disputes with broker-dealers and investment advisors is critical to both to remedying those past abuses and deterring future misconduct.”


With the market reaching new highs, wirehouses are engaged in a race to recruit financial advisors with the largest followings, dangling record signing bonuses in front of them to encourage defections. Currently, when brokers switch firms, clients know nothing about the reasons behind the change and the financial incentives involved unless the broker chooses to disclose information.

That’s about to change. The Financial Industry Regulatory Authority, the self-regulating organization for the industry, is seeking comments on a proposed rule change that would require brokers changing firms to disclose “enhanced compensation” worth more than $50,000 awarded as an incentive to move from one firm to another, according to The Wall Street Journal.

What this means is that when any broker who jumps ship to a new firm contacts a client he or she worked with at a previous firm, a disclosure about the amount of compensation involved in the move would have to be made in the first contact between that client and the broker. The intent of the rule is to more fully inform clients about material information surrounding a move to a new firm, so the client could make a more informed decision about whether to move his or her account with the departing advisor or stick with the current firm.

I think the rule is overdue. For financial advisors and their clients, the trust is an important currency in the relationship. The best advisors want their clients to believe in them and fully trust them, so revealing material information involved in a switch to a new firm seems like a no-brainer to me.

I would imagine that for many advisors switching firms, compensation isn’t the only driver. So disclosing compensation along with the other reasons for the switch to clients, placing all the information in context, isn’t too heavy a burden to place on advisors seeking to retain their clients. If it was me, I would want to know all the relevant information behind the switch and for me, significant compensation is part of relevant information. Being honest and forthcoming with clients in explaining the reasons for a move to another firm, in my opinion, can only benefit the advisor-client relationship.

Critics of the proposal note that other financial professionals, such as investment bankers, aren’t required to disclose this information. Financial advisors, of all of the financial professionals, occupy — or should occupy — a unique position of trust in their client’s lives. Turning your money over to a financial advisor places that advisor in a unique position in a client’s life and confers on that advisor a responsibility to act in an honest and trustworthy fashion. Let’s get these rules in place as soon as possible.

Washington, DC has long been known for the revolving door that catapults former regulators into high-powered lobbying positions. The Wall Street Journal reported Tuesday that Mary Schapiro, the former chief of the federal Securities and Exchange Commission (SEC) and the Financial Industry Regulatory Authority (FINRA) was hired as a managing partner by Promontory Financial Group LLC.

Promontory has become known as the “shadow” financial regulator because it’s executive ranks are loaded with former high-level regulators who peddle their insider knowledge and connections to their clients, according to illuminating articles in American Banker and Business Insider. Their knowledge is so deep that they can give clients the inside track on the direction of future regulation and how clients can manage regulatory risk in a more proactive and less reactive fashion.

For firms that can afford their fees, such knowledge is nearly priceless. Financial firms, especially, have been on the hot seat ever since the financial crisis in terms of potential regulation, even though a lot of that heat hasn’t translated into tough regulations and prosecutions.

Promontory’s executive ranks are so loaded with smart, former high ranking government officials that they are actually called on by congressional committees and federal financial agencies to advise on financial and regulatory matters. So what, you say? This happens all the time.

It does, and it doesn’t. Apparently few lobbying firms possess the specialized niche, knowledge, experience and connections that Promontory does. This elevates lobbying and influence-peddling to an unprecedented¬†level. Promontory doesn’t appreciate being referred to as a lobbying firm; it’s CEO told American Banker that the firm endeavors to influence it’s clients to do what the government wants them to do.

It’s amazing how even the smartest, most savvy individuals can convince themselves that what they are doing is right and in the public interest.

My belief is that you can’t have it both ways and that the public interest is in no way, shape or form being served by the proliferation of lobbying firms, especially those that operate at such a high level. Regardless of their motives and intentions, the fact is that wealthy individuals and corporations have the ability to purchase access and influence at an outsize level.

That disenfranchises the vast majority of us who can only vote, make a phone call and write a letter in the hope of getting the ear of our elected representatives. It’s not right that the size of your lobbying budget determines what access and influence you have on our elected representatives.

Ultimately, that means that too much of regulation and legislation is in play for those with the resources, while the rest of us look in from the outside. If you’re wondering why not much has changed since the financial crisis in terms of the government reigning in the too big to fail firms that precipitated it, this is one of the reasons.

And it’s a reason why we’re likely to see the same thing — another global financial crisis — happen again…