by Jesse LeVine
Having a reliable and honest broker is crucial for investing. Brokerage firms want brokers who make the firm money without compromising the firm’s reputation and subjecting it to a lawsuit. Investors want honest brokers that make their clients money and look out for their best interest. In an attempt to incentivize investors and ease concerns on the integrity of investing, the Financial Industry Regulatory Authority (“FINRA”) offers a free “Broker Check” service that allows investors to look up any broker who works for a FINRA member firm. FINRA’s Broker Check is available on FINRA’s website and provides a list of broker transgressions and employment history. However, the current regulations on FINRA’s Broker Check have been the subject of much scrutiny in recent months.
Under FINRA’s current rules, settlement disputes between investors and brokers can include provisions that enable brokers to expunge conduct that would otherwise be found in a FINRA Broker Check. This policy has generated so much criticism that FINRA is considering tighter regulations that may take effect as soon as April 2014. FINRA rule changes must be approved the U.S. Securities and Exchange Commission (“SEC”). It is unlikely that the SEC would oppose the rule change; however, brokers will likely challenge the proposed changes to settlement agreements and broker records. According to a study by the Public Investors Arbitration Bar Association, FINRA granted expungement relief in 96.9% of cases from May 2009 through December 2011. This statistic is particularly concerning because investors are not able to see the broker conduct that gave rise to the dispute and expungement.
On January 6, 2014, Senators Jack Reed and Chuck Grassley wrote a letter to FINRA’s Chairman and Chief Executive Richard Ketchum urging reform to FINRA’s current rules on broker records. In part, the Senators stated: “We share FINRA’s view that ‘expungement is an extraordinary remedy that should be granted only under appropriate circumstances,’ and that it should be permitted ‘only when it has no meaningful investor protection or regulatory value.’ However, we believe that meaningful investor protection includes the disclosure of whether a customer dispute was settled. Not just for transparency sake, but also to help prospective investors make informed decisions about which individuals or firms with whom to do business.”
FINRA has yet to make an official decision on the requests made by Senators Reed and Grassley. However, the issue of expungement in broker records has generated enough attention that a resolution is likely to come within the next few months. The letter written by Senators Reed and Grassley can be viewed on Senator Grassley’s website. FINRA Chairman Richard Ketchum wrote a detailed letter in response shortly after receiving the Senators’ letter. Ketchum assured Senators Reed and Grassley that FINRA was reviewing the issues raised in the letter sent by Reed and Grassley. FINRA’s response can be found on Senator Grassley’s website.
by Jackson Siegal
FINRA has recently revealed that only 42% of the cases that go to hearing result in “some” monetary relief for the customer. This statistic is even more concerning when you consider the fact that customers rarely recover the full amount of damages that they seek.
In turn, lawyers must now have a firm grasp on FINRA’s recovery statistics in order to adequately counsel their clients. For example, a client who is opposed to settlement may change her mind if she knew that only 23% of cases in 2013 were decided by arbitrators whereas 77% were resolved by other means. Only 18% of cases were decided after a hearing. Indeed, 52% of cases were settled by the parties prior to hearing in 2013.
Also of note, FINRA’s statistics reveal that there was a 14% drop in the number of new cases filed between 2012 and 2014. The most common type of controversy was a breach of fiduciary duty and the most common type of security involved in arbitration cases were mutual funds. Lastly of note, the average turnaround time for hearing decisions was 20.2 months for cases closed through January.
You can find FINRA’s latest statists here.
by Jackson Siegal
The National Examination Program (“NEP”) published its 2014 examination priorities on January 9. The priorities are based upon an assessment of information varying from reports by registrants in required filings with the SEC to industry and media publications. Understanding the priorities that the NEP outlines in its publication might be helpful to anticipating the SEC’s activities in the year ahead, particularly for investors, the legal community, and broker-dealers. The report is can be found here.
For example, the report included what InvestmentNews’ correspondents Mason Braswell and Mark Schoeff Jr. called “some surprising topics” including the fact that the SEC “will work to uncover different ways that business models, practices and products may provide incentive for financial advisers to act outside their clients’ best interests.” The report unsurprisingly continued to focus on these conflicts of interest. You can view their article here.
The focus on conflicts of interest should be obvious to those who have been following the SEC for the past several years. For example, in July 2010, Goldman Sachs and the SEC agreed to a $550 million settlement over claims that the company misled investors in its Abacus CDO. Goldman Sachs failed to disclose information about a third party’s role in selecting underlying securities or that Henry Paulson, former Secretary of Treasury, had taken a short position against the CDO, according to the SEC.
The report indicated that the SEC will focus on fraud detection and prevention, corporate governance, conflicts of interest, enterprise risk management, technology changes, and dual registrants in the year ahead. Technological oversight will continue to be a focus given that markets operate efficiently when there is trust in the system, and no such trust in financial exchange system is possible when individuals believe that the system is vulnerable to data breaches and frequent outages. Retirement rollovers are a concern as advisers and broker-dealers have incentives to recommend that employer-sponsored 401(k) plans be moved into higher cost investments such as IRAs issued by their firm. Here is a link to a detailed look at the report.