New FINRA Senior Help Line

By Christopher Palomo

This year FINRA proudly launched its first ever help line for seniors. The helpline is a source of free information and is FINRA’s latest effort in protecting investor rights. The program is designed to address the unique needs of one of the fastest growing communities of investors – senior citizens. With an estimated 10,000 Americans turning 65 every day and the unique concerns associated with this class of investors, such as lack of income, health concerns, and computer illiteracy, the need for action has never been greater. The helpline aims toward addressing these concerns by expediting the attention given to these investors by placing them a phone call away from the help they need. While the hotline is intended for seniors, no callers are turned away, regardless of their age.

The free hotline provides information ranging from:

  • understanding how to review your investment portfolio or account statements;
  • concerns about the handling of a brokerage account; and
  • investor tools and resources from FINRA, including BrokerCheck.

There is no experience level necessary to use the help line. The staff is not only knowledgeable and friendly, but also more than willing to answer any questions; from simple inquiries about the benefits of an IRA, to more complex questions concerning the suitability requirements for brokers.

While FINRA has and continues to make a variety of informational resources available to all investors, the hotline is specificall geared to address the unique needs of the senior community. Accordingly, it provides a means to cut through both the red tape and hundreds of pages of FINRA packets and instead allows seniors to speak to a real person about questions and concerns. Ultimately, the hotline is a gateway to the FINRA arsenal of resources. For instance, after calling, particular callers may be referred to various departments within FINRA, such as dispute resolution, to better serve their needs. However, most questions can be quickly addressed by the hotline staff.

The hotline information is as follows:

Call 844-57-HELPS (844-574-3577)
Monday – Friday
9 a.m. – 5 p.m. Eastern Time

Does Arbitrator Diversity Matter? PIABA’s Study Finds Roughly Homogenous Roster of FINRA Arbitrators

By Jessica Neer

Last fall, the Public Investors Arbitration Bar Association (PIABA) released a study titled “The Importance of Arbitrator Disclosure”.  The study analyzed the backgrounds of current Financial Industry Regulatory Authority (FINRA) arbitrators and the arbitrator recruitment and disclosure process.  The emphasis on the make-up of arbitrators stems from the concern that arbitration can only be as fair as the arbitrators that dictate the outcome of disputes.  This is particularly important to aggrieved investors that must resolve disputes with their brokers or brokerage firms through FINRA Dispute Resolution.

The study found a fairly homogeneous pool of arbitrators that “put them out of touch with the average investor.”  More specifically, 80% of the arbitrator pool are men; the average age of a FINRA arbitrator is 67, with 40% of the arbitrators over 70 years old and about 17% over 80 years old.  Furthermore, 73% of arbitrators have advanced degrees.

The implications of the lack of diversity include one-sided rulings by arbitration panels, according to PIABA President Jason Doss.  The overall “win rate” for investors has dropped from about 60% in the early 1990s, fell as low as 37% in 2007, and was approximately 42% in 2013.  Mr. Doss asserts, “There is no question that having a pool of arbitrators with diverse backgrounds and experiences will result in improved decision making.”

The study proposed a series of recommendations, including congressional action to give investors the option to go to court.  The Investor Choice Act of 2013 would prohibit mandatory pre-dispute agreements that force investors to arbitrate.  Other recommendations included the Securities Exchange Commission (SEC) developing an independent group to oversee FINRA’s arbitration process and commissioning an independent study about arbitrator diversity.

In response to PIABA’s report, FINRA counters it has an aggressive recruitment campaign to reach potential arbitrators from diverse backgrounds.  Specifically, FINRA provided an Appendix of over 100 organizations and websites it utilizes to recruit arbitrators, which include PIABA, Working Mother Magazine, and more.

Moreover, FINRA offers explanations for how their neutral policy may reflect a less diverse panel despite their substantial efforts of diverse candidates.  It cites the “reality” of “win rates increas[ing] or decreas[ing] depending upon the controversy involved, market events and counsel.”  Also, FINRA’s emphasis on educational and experience requirements for arbitrators paired with the time commitment appeals to retirees.

In July, FINRA formed a Dispute Resolution Task Force. The task force was formed “to suggest strategies to enhance the transparency, impartiality, and efficiency of FINRA’s securities dispute resolution forum for all participants.”  In Fall 2015, the task force plans to make recommendations to FINRA’s Standing Board Advisory Committee: the National Arbitration and Mediation Committee (NAMC). Currently, the task force is soliciting information and viewpoints from the general public and arbitration participants by email at


Counter-suing Investors Jeopardizes Integrity of Arbitral Forum

By Neda Ghomeshi

Investors take their cases to arbitration before the Financial Industry Regulatory Authority, (FINRA), as they are typically required to in any dispute with their broker or brokerage firm. Often, investors sue their brokerage firms for suitability, fraud, negligence, breach of fiduciary duty, failure to supervise, among many other causes of action. Recently, however, some brokerage firms have been responding by countersuing investors and accusing them of reneging on their indemnification commitments.

FINRA records show 13 examples of firms counter-suing investors for breach of indemnification obligations. However, this number is not an accurate reflection of the frequency with which this tactic is being used; cases that are settled before a hearing are generally not recorded in FINRA’s databases.

This method practiced by brokers is intended to intimidate investors and discourage them from suing. Although this practice is not common, it has the potential of becoming widespread. This practice can and likely will dissuade investors from suing their brokers, even when they are potentially entitled to relief.

Essentially, brokers are claiming that the investor signed a private placement memorandum and therefore counter-suing is warranted. This strategy is based on a questionable interpretation of the language in the documents that investors sign when opening their accounts.

Berthel Fisher & Company, based in Marion, Iowa, has been applying this strategy. Berthel Fisher seized on the language in their documents to bolster two counterclaims against 32 investors from Midwestern states who had lost all of the money they had invested in a private placement in a cellphone company. Although Berthel Fisher did not prevail on its counterclaims, it escaped liability on the investors’ claims in both cases last year. The investors said they had been pitched the product by Berthel Fisher brokers who had an obligation to sell them a suitable investment.

This strategy that is being applied by several firms goes against FINRA’s policies. Michelle Ong, a FINRA spokeswoman, explained that indemnification clauses do not shield firms from their legal and regulatory obligations to comply with federal securities laws and FINRA rules. She stated, “The use of any clause or tactic designed to intimidate or keep a customer from exercising his/her right to proceed in arbitration would violate FINRA conduct rules and we may investigate the use accordingly.”

Not only is this a dangerous tactic against FINRA’s policies, but it is against public policy. An investor trusts their broker and relies on their broker to purchase suitable investments on their behalf. Indemnification clauses should not be designed to protect brokers who sell unsuitable investments. Countersuing amounts to a scare tactic designed to prevent investors from taking action for losses they suffered at the hand of their brokers. If this strategy becomes more prevalent, it will jeopardize the integrity of the FINRA arbitration forum.

Investors Eager for Puerto Rico’s $70 Billion Debt?

By Fernando Langa

The Puerto Rican economy has significantly suffered because of the territory’s $70 billion debt.  The debt has constrained the island, which has been in recession since 2006, crimping tax revenue and pushing the jobless rate well into double digits.

Rating agencies have reacted to the territory’s economic crisis.  On February 2014, Standard & Poor, Moody’s, and Fitch downgraded Puerto Rico’s debt to junk status.  Standard & Poor believed that liquidity constraints did not warrant an investment grade rating.  Puerto Rican officials and market analysts believed that Puerto Rico would face significant challenges in obtaining any type of investments because of the economy’s inability to portray any type of recovery.

However, on March 11, 2014, Puerto Rico issued $3.5 billion of general-obligation bonds and received more than $16 billion in orders.  Hedge fund managers who received half the amount they requested considered themselves lucky.  Market advisors believe that the fears of widespread default are misplaced.  Moreover, these bonds are tax-exempt and are yielding at 8.73%, which is double the rate of general municipal bonds. Since the last quarter of 2013, Puerto Rico has implemented measures that have already had an impact on the economy: increasing retirement age, raising taxes, and cutting bonuses for public officials.

FINRA is currently examining the trading and demand for these bonds.  The prospectus for the bonds states that the debt would be issued in minimum denominations of $100,000 unless Puerto Rico’s credit rating was upgraded.  However, recent activity shows that the bonds are trading in denominations as low as $5,000.  FINRA fears that these bonds, which are junk-rated, are currently being sold to individual investors as safe, conservative investments (which they are not).

Because Puerto Rico is relying on the credibility and success of these bonds to improve its credit rating and attract investors to its territory, it will be quite unfortunate if FINRA finds some type of violation in the trading of these bonds.

FINRA Announces New Focus on Cockroaches – Recidivist Offenders in the Securities Industry

By Alexander Cook

Cockroaching is an aptly crass name for a behavior in which some of the most devious brokerage firms and brokers have engaged.  The name is given to a pattern of conduct in which less-than-ethical brokers move between less-than-ethical brokerage firms at a rapid pace, allowing them to more effectively avoid detection while repeatedly perpetrating the same type of crimes.

In a January 2, 2014 regulatory letter to members, FINRA announced the expansion of the High Risk Broker program and the creation of a six-member enforcement team devoted to prosecuting such cases.  In its release, FINRA announced that “A small number of brokers have a pattern of complaints or disclosures for sales practice abuses and could harm investors as well as the reputation of the securities industry and financial markets.”  An October 2013 Wall Street Journal exposé demonstrated that from 2005 until the end of 2012, FINRA had expelled 173 brokerage firms for wrongdoings which ranged from the firm’s refusal to pay regulatory fines to fraud committed by individual brokers.  Of the brokers employed by those firms, more than 5,000 were still licensed to sell securities in 2013.  Most startlingly, about 12% of those brokers had been employed by at least two of the expelled firms.  In one case described by the Wall Street Journal, a single broker moved between expelled firms at least ten times in little more than a decade.  The report also found that many cockroaching brokers continued to trade securities even after being involved in several arbitrations or declaring bankruptcy multiple times.  This cockroaching has now been red flagged by FINRA subsequent to the January 2014 announcement, resulting in a heightened examination process in which FINRA “will review the firm’s due diligence conducted in the hiring process, review for the adequacy of supervision of higher risk brokers, […] and […] place particular focus on these brokers’ clients’ accounts in conducting reviews of sales practices.”

Beyond simply fearing that a few brokerage firms may condone unethical behavior, FINRA also proclaimed anxiety that the small percentage of cockroach brokers in the securities industry may pollute the culture of formerly ethical firms by bringing their illegal practices with them.  For instance, the WSJ found that brokers who had left at least two previously expelled firms averaged more than eight times as many arbitration claims against them compared to the rest of the industry.  Moreover,  an October 2013 PIABA study which found that roughly $50 million of arbitration awards are left outstanding every year, as offending firms often shutter their business and allow transgressing brokers to drift to more innocuous firms.  The outcome for investors is lost capital with little to no recourse against the offenders.  FINRA’s renewed attempt to track, investigate, and halt cockroaching brokers before they have the chance to do more damage is certainly admirable and commendable.  Of the dozens of issues and problems FINRA regularly deals with, eliminating recidivist brokers and firms should be one of the most solvable.  There is no justification for allowing unethical brokers to remain brokers simply because they are able to outsmart the regulatory system; finally the regulatory system may be outsmarting them.

One Size Does Not Fit All: Supervisory Failures Added to Risks Associated with REITs

By Katia Ramundo

On March 24, FINRA announced that it hit LPL Financial with a fine of $950,000 for supervisory deficiencies in the sales of alternative investments. According to FINRA, the deficiencies are related to sales of a broad range of products, including non-traded REITs, oil and gas partnerships, business development companies, hedge funds, managed futures, and other illiquid investments.

FINRA found that between January 1, 2008, and July 1, 2012, LPL Financial violated NASD Rule 3010(a) and 3010(b), NASD Rule 2110 and FINRA Rule 2010 by failing to properly supervise the sale of alternative investments that violated investor concentration limits set forth both at the state level and by LPL itself. LPL created its own automated review system, but the database was not frequently updated to accurately reflect suitability standards. This often meant relying on outdated and inaccurate information. FINRA also stated that LPL failed to adequately train its supervisory staff to properly analyze state standards within their suitability reviews of such products.

REITs, and other alternative investments, may be good for the sales representative, but this does not mean they are suitable for every investor. Various securities regulators have been scrutinizing non-traded REITs sales at LPL for the past year and a half. The firm was one of the six broker-dealers that eventually settled with the Massachusetts Secretary of State and the Massachusetts Securities Division over these sales practices, agreeing to pay $4.8 million in restitution to clients.

REITs are of interest to investors because of their high dividend yield, simple tax treatment, and diversification. However, investors should be cautious of these selling points and balance them against numerous risks and complexities that these investments carry. The values of the REIT shares and dividends depend on the strength of the real estate market. In a bad commercial real estate market, rising vacancy rates would cut into income collected by the REIT, which would reduce the size of dividends offered. FINRA warns that older investors should be particularly cautious about investing large portions of their retirement income in non-traded REITs because the initial investment in a non-traded REIT is not guaranteed and may increase or decrease in value at any time.

Before investing in REITs and various other alternative investments, investors should properly assess their risks. FINRA has started to help underserved investors that have been improperly placed in these highly volatile investments, but investors should also do their part by staying informed. Investors should always inspect a REIT’s website, stay updated on the REIT’s dividend payment history and fees, and should also read the REIT’s prospectus.

FINRA May Collect Massive Amounts of Confidential Customer Data in the Future

By Tanner Forman

FINRA has proposed the creation of a new form of market regulation known as the Comprehensive Automated Risk Data System (“CARDS”).  If the system is created, FINRA would be allowed to mine massive amounts of client data from investment firms in hopes of using that data to better protect investors and to detect and fight risks that could cripple firms and the market.  A FINRA regulatory notice published in December of 2013 provides, “the CARDS system would download customer trade data from clearing firms and analyze it to identify churning, pump-and-dump schemes, excessive markups and mutual fund switching.”  FINRA believes that the system would help it deter both investment firms and brokers from engaging in questionable behavior.

However, not everyone shares FINRA’s same enthusiasm for the CARDS system.  The brokerage industry is hoping to convince FINRA that the system would cause too many privacy concerns.  What the brokerage industry isn’t saying is that the industry is opposed to the system because the increased oversight could uncover broker misconduct and could harm the investment firms’ overall profits.

Some investors are also opposed to the creation of the CARDS system because of the system’s apparent resemblance to the data collection process of the National Security Administration.  In particular, investors are concerned with the idea of FINRA possessing large amounts of sensitive data.  If there was a breach in the security of the database, a hacker could have access to highly confidential customer financial information, including holdings and transactions.  Unauthorized access to that information could cause serious damage to individual customers and to the overall confidence in the stock market.

At this point, CARDS is only a concept and not a formal rule proposal.  FINRA solicited comments on the CARDS system with the deadline to comment expiring on March 21, 2013.  It will be interesting to see whether FINRA creates the CARDS system and whether the system’s higher risk will lead to higher returns in regard to market regulation.

A Recent Flood of Cases Has Caused FINRA to Freeze New Arbitrations in Puerto Rico

By Myles Burstein

On March 18, 2014, FINRA announced that due to the recent flood of cases in Puerto Rico, claims would be delayed until FINRA could find additional arbitrators.  In particular, there have been a lot of claims by bondholders who have lost money as a result of misrepresentations as to the risks involved.

Since the city of Detroit filed bankruptcy last summer, Puerto Rico’s municipal bond market has been struggling.  This has provoked investor fears for Puerto Rico’s $70 billion in municipal debt and has set off a wave of claims against the broker-dealers that have sold the bonds.

According to Irvin Jackson, author of the article “Puerto Rico Bond Arbitration Claims Overwhelming FINRA,” “[a]t least 165 Puerto Rico bond fund cases have been filed by investors against UBS and other brokerage firms, claiming that false and misleading information was provided about the safety and security of the investments.  However, some estimates suggest that more than 500 arbitration claims are likely to be filed in the coming months.”  UBS continues to face lawsuits coming from Puerto Rico stemming from the Puerto Rico bond funds.  These types of claims involve the misrepresentation of the risks associated with investing in these bonds.  Generally, these investments were being pitched to elderly investors as safe and secure ways to save for their retirement.

Typically, FINRA arbitration panels have three arbitrators, and a single arbitrator can only hear small claims of $20,000 or less.  According to Linda Feinberg, President of FINRA dispute resolution, FINRA has two ways to handle the shortage of arbitrators in Puerto Rico: it can either recruit locally or send arbitrators to Puerto Rico from nearby locales like Florida.  In the past, this strategy has worked.

FINRA’s BrokerCheck Needs a Gut Check

By Jennifer Allegra

On March 6, 2014, the Public Investors Arbitration Bar Association (PIABA) issued a warning to the investing public regarding FINRA’s failure to disclose “red flag” information in a broker’s background check.  PIABA conducted an analysis and found that FINRA has elected to limit disclosure despite opposition from the SEC.

The FINRA website boasts: “We Believe in Protecting America’s 90 Million Investors, Because That Is Our Job.”  FINRA also encourages investors to protect themselves.  Indeed, the number one tip is for investors to use BrokerCheck to research their brokers’ backgrounds.  In a sense, FINRA is not only inducing the investing public into believing that FINRA is looking out for their best interest, but it is also encouraging investors to rely on BrokerCheck as the holy grail of vetting a broker.  However, an investor would be remiss to rely on BrokerCheck because BrokerCheck fails to include many “red flag” disclosures that could impact an investor’s decision to trust a broker with his life savings.

FINRA is not disclosing all of the information in its possession. Consequently, FINRA is misleading the public to believe that BrokerCheck provides full disclosure.  FINRA maintains a Central Registration Depository (“CRD”), which is a comprehensive national database consisting of information that FINRA gathers as well as the information that each state collects.   However, FINRA has chosen to disclose only a portion of the information it receives from the states.

According to PIABA, FINRA defends the lack of disclosure by protecting the “personal privacy” and “fairness” to its members.  However, it may not be fair to investors who have been induced into relying on BrokerCheck as the number one way to protect their investment. For example BrokerCheck fails to report the reason for which a broker was terminated.  From a logical perspective, FINRA, which has access to this information, should have an obligation to disclose it to the investing public.  FINRA also does not disclose broker bankruptcy and tax liens unless they occurred within the past ten years.  Yet, the investing public should have the opportunity to make a fully informed decision as to whether they want a broker who cannot manage his own finances to be entrusted with the the task of managing theirs.

The problem of inaccurate disclosures are further compounded because often disclosure events slip through the cracks and never make it into CRD’s.  Indeed, the Wall Street Journal recently reported that over 1600 stockbrokers failed to disclose bankruptcy filings, criminal charges, and other red flags.   The report further stated that there was a high correlation between unreported bankruptcies and unfavorable disciplinary records.  Because FINRA relies on self-reporting, brokerage firms have a duty to report this information.  However, much of this important information is falling through the cracks, which makes BrokerCheck disclosures incongruent with FINRA’s purported mission of investor protection.

Possible FINRA Reform On Expungement Records Coming Soon

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.