Investor Rights Update: Investor Choice and a Uniform Fiduciary Standard

Investor Choice. Since 1987, when the Supreme Court decided McMahon v. Shearson Lehman Brothers, investors have been denied their Constitutional right to a jury trial. Instead, if they have lost money through the fraud or negligence of a FINRA-licensed stockbroker, financial advisor or brokerage firm, investors are required to bring their cases through the FINRA arbitration process. Although we have seen benefits for many of our clients in using the FINRA arbitration forum over the last 23 years, some cases are better resolved in court by a judge and jury. Investor Choice simply allows investors to choose between FINRA arbitration and court. Congressman Ellison from Minnesota has introduced the Investor Choice Act, which would give investors that choice. There is no legitimate reason for barring investors from the courthouse doors. Congress should side with individuals and not with Wall Street firms. Call your representatives and urge them to support Investor Choice!

Uniform Fiduciary Standard. A fiduciary standard requires nothing more than putting the investor’s needs ahead of the brokerage firm. That is what investors expect from a financial adviser, and that is what brokerage firms claim to provide. But, that is not what happens in reality. PIABA prepared and distributed to Congress and the press a compelling report that collected advertisements of brokerage firms, all of which declare that they put investors first. When those same firms face FINRA arbitration claims from investors for mismanagement and fraud, however, they deny that they owe any fiduciary obligations to their clients. The PIABA report includes specific examples of the defenses that the firms file. We see the same tired defense routinely raised when we include claims for breach of fiduciary duty. The Wall Street firms claim that their only obligation is to make “suitable” investment recommendations.

What’s the difference between a suitability standard and a fiduciary standard?

Commissions and fees. A suitable investment must be in line with an investor’s investment objectives and risk tolerance levels, but it need not necessarily be in the investor’s best interest. Say that there are two mutual funds, each consisting of a similar broad mix of stocks and bonds. One charges the investor a 3% commission and the other 1%. Under the pure suitability standard, the financial advisor may be able to recommend only the higher commissioned product, even if he is fully aware of the lower cost fund and it is readily available. Under a fiduciary standard, he could not. Does that matter? It does. The White House issued a report recently that explained that even a 1% difference in commissions results in many thousands of dollars in the value of a retirement account over time. Jason Zweig, an insightful columnist on investor issues at The Wall Street Journal, has made similar observations. Currently, registered investment advisors are held to a fiduciary standard, but financial advisers who work at a brokerage firm are not, at least under federal law.   Investors don’t know the difference between investment advisors who are registered with the SEC and financial advisors who are FINRA licensed.  And, practically speaking, there is no difference. Both provide investment advice to their clients. SEC Chairperson Mary Jo White and the White House have stated that we need a uniform federal fiduciary standard for all advisers, whether they are FINRA licensed or SEC registered. PIABA agrees, and I agree. You should too. The claims of the financial services industry that a fiduciary standard would prevent middle class Americans from getting financial advice is bunk. Many states, including Oregon and California, already impose fiduciary obligations on advisers that advise their clients on what investments to make, and investors in those states get the same advice and service as investors in non-fiduciary duty states.

Darlene Pasieczny’s practice at Samuels Yoelin Kantor LLP focuses on all stages of corporate and securities law issues, securities litigation and FINRA arbitration, fiduciary litigation in trust and estate disputes, and complex civil litigation. Darlene’s practice includes representing investors nationwide in investment disputes through FINRA arbitration.

Investor Confusion from Misleading Brokerage Industry Advertising – When is Your Advisor a Fiduciary?

On March 25, the Public Investors Arbitration Bar Association (PIABA) released its study of confusing advertising messages by major broker-dealer firms like Allstate, UBS, Morgan Stanley, Berthel Fisher, Ameriprise Financial, Merrill Lynch, Fidelity Investments, Wells Fargo, and Charles Schwab. While these firms advertise that they put their clients’ interest first, excerpts from FINRA arbitration filings by these same firms show that when there’s a customer dispute the firms disavow any fiduciary obligation to the client.

Why should you care? Customers expect that financial advisors act in their client’s best interest when making investment recommendations. But that’s not always true. The “fiduciary” standard is the highest level of legal duty, with important ramifications as to the responsibilities of the advisor and types of claims that can be made in court or FINRA arbitration. But, the current reality is there is no uniform fiduciary standard among financial advisors. FINRA-registered brokers and brokerage firms selling investment products have no such duty imposed by federal law. Brokers can essentially put their own interest first – such as the incentive of high commissions for selling products like non-traded REITs, high-fee proprietary mutual funds, or variable annuities – so long as they meet a much lower FINRA standard of reasonably suitable recommendations. In contrast, SEC-licensed Registered Investment Advisors and RIA firms, which provide investment advice but can’t sell products the way a broker can, do have fiduciary duties under the federal Investment Advisers Act of 1940. State law differs, with some states holding brokers to the higher fiduciary standard based on the circumstances.

What happens when your financial advisor is both a FINRA-registered broker and SEC-licensed RIA? Well, that’s where it gets even trickier.   Depending on the type of investment account, the firm may hide behind the advisor wearing only a “broker” hat (for example, in a non-discretionary brokerage account) despite charging wrap fees or other “managed” fee arrangements.

US News & World Report picked up the PIABA study and Daniel Solin wrote about it, saying “It’s funny that there’s even a “debate” over whether brokers should be required to act in the best interest of their clients. It’s even more nonsensical that many investment advisors to retirement plans don’t have this obligation.”

Darlene Pasieczny’s practice at Samuels Yoelin Kantor LLP focuses on all stages of corporate and securities law issues, securities litigation and FINRA arbitration, fiduciary litigation in trust and estate disputes, and complex civil litigation. Darlene’s practice includes representing investors nationwide in investment disputes through FINRA arbitration.

Supreme Court decides Omnicare Securities Case, Clarifies Section 11 Claim Standards

Was it a victory for investors? It seems so. Justice Elena Kagan’s written decision issued on March 24, 2015 in Omnicare, Inc., et al. v. Laborers District Council Construction Industry Pension Fund, et al. clarified the standards for investor claims under Section 11 of the Securities and Exchange Act of 1933.   Pension fund representatives and legal counsel for institutional investors kept a close eye on the case because of its potential to limit investor claims under Section 11 relating to “untrue statements of material fact” or omissions of material fact “necessary to make the statement therein not misleading” in the SEC registration statements filed by companies before issuing securities. 15 U.S.C. 77k(a). Over a dozen amicus briefs were filed by such groups as AARP, Public Citizen, Inc., the United States, and a brief was filed on behalf of over 40 institutional investors collectively managing approximately $2 trillion of assets of over 15 million individuals. Huge pension funds investing in primary offerings have a lot at stake as Section 11 provides a cause of action for recovery of investment losses.

At issue in Omnicare was certain “we believe” statements made in Omnicare’s registration statement. Namely – could the pension fund parties who purchased Omnicare stock sue under Section 11 claim because Omnicare’s registration statement included statements that it “believed” its contracts with pharmaceutical manufacturers “are legally and economically valid” when those statements were objectively false at the time of filing. Omnicare argued that its “we believe” statements were opinion only, and since the plaintiffs didn’t allege that Omnicare’s officers subjectively knew they were violating the law, they failed to state a Section 11 claim.

The Court disagreed with Omnicare on that argument – and with how the lower courts had analyzed the Section 11 claim standards. Remanding the case back to the Sixth Circuit, the Court outlined a new standard which includes that an issuer’s opinion statement may imply facts about an inquiry conducted or the issuer’s knowledge, and as such the opinion becomes misleading by omission if the real facts are otherwise but not provided in the statement. And whether an omission makes an opinion statement misleading is considered from a reasonable investor perspective in light of a fair reading of the entire registration statement as a whole. See the full text of the Court’s slip opinion on the Supreme Court website.

Samuels Yoelin Kantor attorneys Robert S. Banks, Jr. and Darlene Pasieczny have combined over 35 years of experience in representing investors in securities industry disputes in court and FINRA arbitration. Our clients include institutional investors, pension funds, municipalities, fiduciaries, as well as individual investors. Contact us and visit our investment claims site for more information about SYK’s Investor Defenders litigation team and securities litigation.

New FINRA Report: $50 Billion Lost Yearly to Financial Fraud… Victims Suffer “Non-Traditional” Costs as Well as Direct Financial Losses

The FINRA Investor Education Foundation issued a new research report, “Non-Traditional Costs of Financial Fraud,” based on a survey of 600 self-reported fraud victims. The survey details the emotional tolls and indirect costs (bounced checks, lost wages, lost opportunities, bankruptcy filings) that may come from losing money in a fraud.

Victims who lost the greater amounts in the financial fraud reported greater levels of interaction with the fraudster (e.g. communicating many times, filling out lots of paperwork, etc.) And the most frequently cited ways victims came into contact with the fraudster was through a friend or family member (18%) or a professional contact (13%).

Other significant survey results:

  • 19% of survey respondents reported having between $50,000 and $100,000 invested in non-retirement securities accounts
  • 40% of the survey respondents reported having more than $100,000 invested in non-retirement securities accounts

When asked whether they felt they had been defrauded in certain “red flag” scenarios, the survey participates responded:

  • 28% “yes” and 19% “maybe” to having been defrauded by investing in a product or service (e.g. a vacation timeshare, annuity product, etc.) that they learned about from a free lunch seminar
  • 23% “yes” and 17% “maybe” to having been defrauded by a stranger who called on the phone to offer an investment opportunity
  • 15% “yes” and 18% “maybe” to having been defrauded in an investment that guaranteed a daily rate of return of over 10%
  • 13% “yes” and 14% “maybe” to having been defrauded in an investment that involved a promissory note
  • 13% “yes” and14% “maybe” to having been defrauded by someone offering “Prime Bank” or “bank guarantee” investments
  • 13% “yes” and 14% “maybe” to having been defrauded in an investment that involved oil or gas exploration

Only 35% of victims reported the incident to some kind of authority. For those who didn’t report, the most common reasons were feeling like it wouldn’t make a difference, wanting to put it behind them, and being embarrassed.   Self-blame was a common reaction: 61% agreed with the statement that “I was defrauded because I was too trusting”. Anger, feelings of betrayal, and high stress were also highly reported by fraud victims.

The survey results are no surprise to the securities litigation & FINRA arbitration attorneys at Samuels Yoelin Kantor LLP, who have combined over 35 years of experience in recognizing, advising, and recovering investment losses due to securities fraud, broker negligence, defective investment products, or other unlawful conduct across the country. “Victims of investment fraud often feel they were at fault for trusting the recommendations of their financial advisor, or they don’t want to “make trouble” for their advisor despite significant red flags,” says SYK attorney Darlene Pasieczny. “But acting quickly for a second opinion or consultation with a securities attorney can mean the difference between losing an entire retirement savings or recovering enough to rebuild and regain peace of mind.”

In addition to the red flag scenarios noted above in the FINRA survey results, other red flags might include:

  • Discovering that you can’t easily sell an investment that you thought you could
  • Excessive trading or high fees charged in an account
  • Pressure from a financial advisor to make investment decisions quickly or without understanding the investment or paperwork you are asked to sign
  • Having a lot of “alternative investments” like non-traded REITs, private placements, and interests in limited partnerships in your portfolio
  • Having multiple accounts opened for you without a clear explanation why
  • Seeing a swing in portfolio value of more than 10% in any account statement when you are a conservative or moderate investor
  • Having investments that don’t appear on your brokerage company’s account statements

Contact the Investor Defender attorneys Robert S. Banks, Jr. and Darlene Pasieczny at Samuels Yoelin Kantor if you have concerns about your financial advisor or securities portfolio. We have the experience of representing over 850 clients in securities arbitration (now FINRA arbitration) and court, and our clients include individual investors from all backgrounds and across the United States, as well as pension funds, fiduciaries, municipalities, retirement plans, and other institutional investors.