Posts Tagged ‘FINRA’

I’m no fan of binding arbitration in the securities industry or elsewhere. It’s unfair to consumers and subverts the judicial process, which is a foundation of the constitution.

Unfortunately, it is a reality, though the situation has been improving somewhat over the past several years. Another sign of movement within the status quo to at least provide more of an appearance of fairness may be in the works.

Investment News reported yesterday that FINRA may decide to tighten standards around who can serve as a “public” arbitrator in a securities case. This is a move in the right direction, because a public arbitrator is supposed to be someone who is independent without an agenda or bias towards either party in a securities case.

Currently, former securities industry attorneys, brokers and others who have been affiliated with the industry can serve as arbitrators, it illustrates just how broken the system is. Pending a favorable outcome on the FINRA vote tomorrow, this system will get a bit more fair.

I’m hopefully, perhaps naively so, that the SEC may take steps to strike down or severely restrict the use of binding arbitration in securities disputes and allow Americans to access the justice system to pursue claims against the brokerage industry. That’s ultimately the only just forum to hear disputes between some of the world’s largest financial services corporations and others and consumers.

It could actually serve to level the playing field, and give consumers a chance to be heard and receive some justice. Stay tuned…

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.”


When an investor affiliates with a new financial advisor, a take it or leave it mandatory arbitration clause is part of the contract. This means that investors must submit any disputes to arbitration run by the financial services industry self-regulating agency, FINRA. 

In arbitration, investors and financial advisors and broker-dealers must submit to their dispute to a panel of arbitrators, a potentially expensive process that circumvents the traditional judicial system. Mandatory binding arbitration has been a sacred cow of the investor-financial advisor relationship for decades.

Until, perhaps, now. The Wall Street Journal reported that federal Securities and Exchange (SEC) Commission Luis Aguilar has called for an end to binding arbitration clauses. Aguilar cites the 2010 Dodd-Frank Act, which authorizes the SEC prohibit or restrict these types of agreements for broker-dealers and investment advisors. 

I started writing about binding arbitration clauses in business to consumer contracts nearly 10 years ago and believe it’s an inherently unfair practice for consumers and investors. I don’t object to arbitration per se, when arbitration contracts are freely entered into by parties with equal power in a relationship, such as in business to business contracts.

But when they are forced on consumers and investors en mass and the consumers and investors have few if any choice but to accept mandatory binding arbitration clauses in a contract, they just aren’t fair. This country was founded with a judicial process meant to provide the maximum amount of fairness to all parties involved. It’s not perfect, but consumers and advisors deserve to have the ability to avail themselves of it to solve disputes.

Instead, investors and advisors are forced into what is essentially a private judicial process with it’s own opaque rules and procedures, where conflicts of interest on the part of arbitrators are difficult, if not impossible to determine and decisions aren’t fully explained and are incredibly difficult to appeal, regardless of the justice of the ultimate verdict.

So I’m with Commission Aguilar: end binding arbitration in investment advisor and broker-dealer to consumer contracts. Now.

When the federal Securities and Exchange Commission gave permission for corporations to disclose market-moving material on social media platforms, it finally fully legitimized a mode of communication that’s become routine for millions of business and casual users. So if you’re a financial advisor who isn’t using social media or who is just dabbling, realize that when the SEC arrives at a party and you’re not there yet, the party may be nearly over.

Ok, maybe I’m exaggerating…a bit. My point is that when glacially-slow moving federal regulators are moved to bless a method of communications, it means that pretty much everyone else is already there.

All too many financial advisors have freely used the fig leaf of compliance (read the SEC and FINRA) to explain their absence from social media. And really, there hasn’t been much excuse in the past few years as FINRA and the SEC have issued more guidance about social media. Now there is none. 

There are a lot of reasons why financial advisors need to be on social media, I won’t go into all of them today. What I will offer is that there is an opportunity cost to NOT being there. Today’s savvy high net worth individual — very likely your potential client — isn’t going to meekly show up in your office in response to a referral from a friend and turn over all their assets to you. 

No, that individual — in possession of a referral to you — will seek to do some due diligence before contacting you. That due diligence will likely include a simple Google search, which is usually informative and revealing. If that Google search shows links to an attractive, focused website, presence on major social media platforms and thought leadership on topics of interest to that individual, a phone call or an e-mail to you may very well follow, which could lead to a client relationship.

If instead it leads to an outdated, clunky website, no social media or sketchy social media (an abandoned egg profile on Twitter, perhaps) and outdated links, that call or e-mail may not come.

Look, I’m not saying social media is the sole reason that clients will sign on with you. I’m saying that by not engaging with potential clients in the arenas where they are gathering information and poised to gather more (re the SEC’s announcement), you’re leaving yourself vulnerable to the competition and giving potential clients an excuse NOT to engage with you.

In this day and age of increasing competition in the financial advisory space and commoditization of financial advisory services, it behooves you not to give them one. 

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…