Articles Posted in FINRA

Hourglass-236x300When evaluating a potential securities arbitration case, the very first task we do is perform a statute of limitations analysis.  In a nutshell, a “statute of limitations” is a law that specifies the maximum amount of time that someone can wait before bringing a lawsuit.  Once the statute runs out, the legal claim is no longer valid.  The deadline for filing a lawsuit varies depending upon the claims or causes of action involved.

The table below lists the California statute of limitations that typically arise in FINRA arbitrations.

  • Breach of Written Contract – 4 years
  • Breach of Oral Contract – 2 years
  • Breach of Fiduciary Duty – 4 years
  • Fraud & Misrepresentation – 3 years

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The Financial Industry Regulatory Authority (“FINRA”) is taking steps to broaden the scope of their securities arbitration program to include more investment advisors. FINRA administers the single largest dispute resolution program for investors and securities firms. In 2011, there were 4,729 securities arbitration cases filed with FINRA. However, not all financial advisors are alike. FINRA’s arbitration program is mandatory, but only for stockbrokers and their customers. Investment advisors are not FINRA members–at least not yet. If a customer has a dispute with their investment advisor, they will need to pursue a lawsuit in court, unless the investment advisor included an arbitration clause in their advisory agreement. Many advisory agreements obligate customers to resolve disputes through the American Arbitration Association (“AAA”), which can be a costlier alternative to FINRA’s arbitration forum.

Voluntary Arbitration Program: FINRA has always offered up their arbitration program to investment advisors on a voluntary basis. FINRA has not established any new rules or procedures for arbitrating investment advisors disputes. FINRA did, however, recently issue “guidance” discussing the availability of their program. I am happy to see FINRA offer more competition in the arbitration field, especially because participation in the arbitration program is totally voluntary. In my opinion, FINRA’s entire arbitration program should be non-mandatory. Granting any one organization a monopoly over investor disputes is fundamentally unfair. Competition will help insure that the rights of financial services consumers are not diminished. Investors should be allowed to freely choose between arbitration and litigation.

Court vs. Arbitration: For the time being, only investment advisor customers have the opportunity to choose between going to court or arbitration. Each alternative has its benefits and drawbacks. When weighing which course of action to take, it is best to consult with a knowledgeable securities attorney who can thoroughly explore and discuss all available options.

FINRA’s Investor Education Foundation recently posted information on its website encouraging investors to discuss securities fraud with friends, family and colleagues. The posting is entitled Five Ways to Warn Others About Fraud. The best warning given to investors was the importance of asking plenty of questions before investing and, in particular, to verify whether the salesperson is properly registered. A good starting point is to use FINRA’s BrokerCheck, which provides a summary of the qualifications and disciplinary history of registered brokers and broker-dealers.

Today, the Financial Industry Regulatory Authority (FINRA) announced plans that should help level the playing field for investors pursuing securities arbitration claims against their stockbroker or financial advisor. FINRA’s proposed rule change would give investors the option of selecting an arbitration panel that is composed entirely of “public” arbitrators.

Under the existing rule, a three-arbitrator panel must include two “public” arbitrators and one “non-public” arbitrator. A “non-public” arbitrator is an arbitrator that is affiliated with the securities industry, such as a brokerage firm employee or a defense attorney. Many have argued that industry arbitrators have an inherent bias or tendency to favor brokers over customers. In my experience, having industry arbitrators on panels has been a mixed blessing. At a minimum, the presence of an industry arbitrator gives an appearance of bias. Giving investors the ability to choose whether or not to have an industry arbitrator on their panel is, in my opinion, a compromise solution meant to counter criticism that mandatory arbitration of securities disputes is fundamentally unfair.

FINRA plans to file the rule proposal with the Securities and Exchange Commission (SEC) next month. So far, as as many as 560 cases have already elected to to utilize “all public” arbitration panels under a pilot program established in October 2008 by FINRA through an arrangement with 14 brokerage firms that volunteered to participate in the pilot program.

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Thumbnail image for Thumbnail image for Thumbnail image for provident.jpgThe Financial Industry Regulatory Authority (FINRA) has finally expelled Provident Asset Management for committing outright securities fraud in a Ponzi scheme that involved the marketing of a series of private placements under the names “Provident Energy” and “Shale Royalties.” In typical FINRA-fashion, the expulsion was accomplished through a settlement in which the firm neither admitted nor denied any wrongdoing. FINRA’s expulsion did not come about until more than 6 months after the Securities and Exchange Commission filed a securities fraud lawsuit against Provident Asset Management in July 2009 and Provident Royalties, LLC filed for bankruptcy in June 2009. Meanwhile, FINRA also announced today that their head of enforcement, Susan Merrill, is stepping down to return to private practice.

According to FINRA, the self-regulatory agency is conducting a broader investigation into the more than 50 broker-dealers who sold the Provident Energy and Shale Royalties private placements to their customers, which may lead to more settlements and potential fines. Disgruntled investors have already begun filing securities arbitration claims against some of these broker dealers alleging unsuitability, fraud and misrepresentation.

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Here is a bit of good news for investors with securities arbitration claims against 14 of the largest brokerage firms, including Merrill Lynch, Morgan Stanley Smith Barney and Wells Fargo. The Financial Industry Regulatory Authority (FINRA) has agreed to extend its year-old pilot program established to give investors the option to request an arbitration panel composed entirely of arbitrators that are not affiliated with the securities industry. Currently, a 3-person arbitration panel must include one industry arbitrator and two public arbitrators. The pilot program was created in response to criticism over whether an industry arbitrator, such as a stockbroker or branch manager, can act impartially when a customer is complaining about securities fraud or account mismanagement by their broker. I’ve participated in arbitrations with both good and bad industry arbitrators. The trouble is, allowing an industry arbitrator to sit on a panel gives the appearance of bias and takes away from the legitimacy of the proceedings. That should be reason enough to dump the industry arbitrator. My California securities law firm is in favor of the pilot program and we have been actively encouraging clients to participate whenever possible.

The brokerage firms who have agreed to participate in the pilot program are:

Ameriprise Financial Services Charles Schwab Chase Investment Services Citigroup Global Markets Edward Jones Fidelity Brokerage Services LPL Financial Merrill Lynch Morgan Stanley Smith Barney Oppenheimer Raymond James TD Ameritrade UBS Financial Services Wells Fargo Advisors / Wachovia Securities

At the University of San Francisco Law School’s Investor Justice Clinic, where I am an adjunct professor and supervising attorney, I am seeing a disproportionately large number of senior citizens who are victims of securities fraud and account mismanagement. The oldest client at the clinic is in her 90’s. Elderly clients and those who are seriously ill have unique needs that require swift justice.

The typical securities arbitration claim filed with the Financial Industry Regulatory Authority (FINRA) takes about 1.25 years to complete. Fortunately, investors who are 65 years or older or seriously ill can request an expedited hearing under a program that was established in June 2004. So far, 701 customers have participated in FINRA’s expedited program and, according to FINRA, their cases have been resolved 31% sooner.

For eligible cases, FINRA assures investors that its staff will administer the hearing in an expeditious manner. This program is not specifically covered in the arbitration rules; however, FINRA has amended the Arbitrator’s Reference Guide to remind the arbitrators that they should avoid unnecessary postponements or do anything to delay the proceedings. In my experience, the program has been helpful but the expedited procedures should be included in the arbitration code. As it now stands, the burden rests on the investor’s attorney to insist on getting the earliest possible hearing dates while allowing enough time to adequately prepare the case.

The Financial Industry Regulatory Authority (FINRA) was established in July 2007 when the National Association of Securities Dealers (NASD) and the New York Stock Exchange (NYSE) were consolidated. FINRA is responsible for overseeing regulation and compliance of more than 4,800 brokerage firms and nearly 650,000 stockbrokers.

FINRA’s Investor Complaint Program

FINRA’s Investor Complaint Program investigates complaints against brokerage firms and their employees. Where appropriate, FINRA will take disciplinary action against brokers. Sanctions can include fines, suspensions and disbarment from the securities industry. FINRA’s Investor Complaint Program is a disciplinary program that is separate from FINRA’s Dispute Resolution Division. Whenever a disciplinary investigation is started, FINRA often sends investors a standard letter with the following disclaimer:

large_san_fransico.jpgHere are the results from my analysis of securities arbitration awards made in San Francisco, California, during the first half of 2009 before the Financial Industry Regulatory Authority (FINRA). The claimants that did the worst were the ones who handled their own cases on a pro se basis. Pro se is Latin for “on one’s own behalf.” I could find only one instance where a pro se claimant recovered anything at all during the first half of 2009. In that case, the claimant, who was asking for $37,500 in damages, was awarded a mere $792.

Excluding pro se cases, claimants who went to hearing before San Francisco arbitrators in the first half of 2009 with an attorney prevailed 37.5% of the time. This is well below the national average reported by FINRA. According to FINRA, claimants received favorable awards in 47% of all arbitration hearings held during the first half of 2009.

Another telling statistic is the amount recovered by claimants who did win. After weeding out claims with questionable or uncertain damage claims, I found that claimants who won in San Francisco received awards that averaged 59% of their claimed damages during the first half of 2009. Choosing the right arbitrators can have a large impact on the outcome of a case. In reviewing awards, I notice that some San Francisco arbitrators who sat on multiple cases consistently ruled against claimants.

Would you like to know whether your brokerage firm or stockbroker has had a history of customer complaints?

You can easily check a broker’s employment and disciplinary history online at FINRA BrokerCheck Website or call the BrokerCheck Hotline at (800) 289-9999.

The letters F-I-N-R-A stand for the Financial Industry Regulatory Authority. They are the non-governmental regulatory authority for securities firms and stockbrokers.

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