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.

Pasicezny Recognized For Her Work To Protect Investors

Investor Defender attorney Darlene Pasieczny was recognized recently at the 2013 Annual Meeting of the Public Investors Arbitration Bar Association (PIABA), in Orlando, Florida.

Pasieczny was commended for her work on PIABA’s SRO Committee, which monitors FINRA and SEC arbitration rule-making proposals that are of significant interest to the PIABA membership and investing public. With the approval of its Board of Directors, committee members research and prepare PIABA’s comment letters on proposed securities regulation rule changes.

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.

FINRA’s BrokerCheck Under Fire

Sen. Edward J. Markey, D-Mass, who was instrumental in FINRA’s development of its BrokerCheck database and a proponent of investor protection, issued a letter today to FINRA’s Chairman Richard Ketchum and forwarded to SEC Chair Mary Jo White. Senator Markey’s letter criticizes improper expungement of arbitration awards from BrokerCheck records, a practice that the Public Investors Arbitration Bar Association (PIABA) targeted in its recent expungement study. This study found that arbitrators granted expungement of the arbitration claim from the broker’s record in 90% of settled cases where the broker requested expungement. As FINRA has stated multiple times, expungement should be an “extraordinary” remedy, and the PIABA study suggests that it is almost routine. The result of this practice, as Senator Markey notes, “is to hide bad brokers from the investing public.”

The Senator also stated that he was “appalled” at a reported $51 million in arbitration awards granted to investors in 2011 that remains unpaid. “Investors are required to participate in FINRA’s arbitration program if they have a claim against their broker. If an investor successfully proves their claim but is never paid, the integrity of the entire system is threatened.”

Senator Markey’s letter can be viewed by clicking here

PIABA’s 2013 Expungement Study can be viewed by clicking here

Attorneys Robert S. Banks and Darlene Pasieczny are PIABA members with a combined experience of over 35 years in recovering investment losses nationwide.