Entities Mount Legal Challenge to Labor Fiduciary Rule in Federal Court

Friday, June 24, 2016

As we posted earlier, the U.S. Department of Labor, which regulates tax-advantaged retirement savings accounts, is holding more financial advisors to a "fiduciary standard" that requires financial advisors to put clients' best interests ahead of profits.

Although the Rule will take effect in part on April 2017, with full implementation in January 2018, there are already legal challenges to it.

According to BusinessWire, various entities led by the U.S. Chamber of Commerce filed a lawsuit in federal court challenging the Department of Labor’s fiduciary rule for brokers and registered investment advisers serving Americans with Individual Retirement Accounts (IRAs) and 401(k) plans.

The CEOs of several of the above plaintiffs issued a statement claiming “support for the creation of a uniform best interest–or fiduciary–standard of customer care for financial professionals providing personalized investment advice to retail investors.” But they objected to the length and content of the Department of Labor’s rule and claimed that the Rule would limit the options and guidance provided by advisors to retirement savers.

Among other things, in the Complaint, the Plaintiffs assert that the Rule:
  • would “upend” “well-developed regulatory framework, with harmful consequences for retirement savers, small businesses, and tens of thousands of businesses . . . that provide retirement advice, products, and services,”
  • “will limit consumer choice by forcing those who need retirement investment assistance to obtain it only by entering a fiduciary relationship, and bearing the accompanying costs, or to forgo it entirely,” and that
  • “small businesses in the United States will be hampered in their ability to maintain retirement plans for their workers.“

This litigation was not unexpected, as InvestmentNews reports. The Labor Department has said it expected legal challenges over the rule and is confident that it will prevail in court.

Labor Department Sets New Fiduciary Standard for Retirement Advice

Monday, May 9, 2016

The U.S. Department of Labor, which regulates tax-advantaged retirement savings accounts, is holding more financial advisors to a "fiduciary standard," which requires financial advisors to put clients' best interests ahead of profits. A new set of rules regulates any investment advice that is a recommendation to a plan, plan fiduciary, plan participant and beneficiary and IRA owner for a fee or other compensation, as to the advisability of buying, holding, selling or exchanging securities or other investments, including recommendations as to the investment of securities or other property after the securities or other property are rolled over or distributed from a plan or IRA, recommendations as to the management of securities or investment property, including recommendations on investment policies or strategies, portfolio composition, selection of other persons to provide investment advice/investment management services, selection of investment account arrangements and recommendations with respect to rollovers, transfers, or distributions from a plan or IRA.

Until now, financial advisors were subject to a fiduciary standard on an ad hoc basis, depending on state law, and when registered as investment advisors with the SEC. Many brokers and other self-described financial advisors are held only to a “suitability standard,” under which they need only make investment recommendations that are suitable for their clients, but not necessarily the best option.

Highlights of the rule include:

  • Financial brokers must now act in clients' "best interest" when giving retirement investment advice. 
  • Firms must ban financial incentives for advisers not to act in the client's best interest. 
  • Firms must disclose compensation arrangements on a webpage and by making sure customers are aware of their right to all fee information. 
  • Firms and advisors may continue receiving the most common forms of compensation for offering investment advice to retail customers and small-plan sponsors. The rule also does not limit the types of assets they can invest in. 
  • Firms are allowed to sell insurance products like variable and indexed annuities under the best interest rule. 
  • The rule allows firms and their advisers to recommend proprietary products. 
  • Education is not included in the definition of retirement investment advice, allowing advisers to offer basic information without acting as fiduciaries. 
  • Under the rule, financial advisers may communicate with potential clients before signing a contract. However, firms must eventually tell new clients in writing that they are acting in their best interest, and any advice given before a contract is signed must be covered by the contract and meet the best interest standard. 

Firms have a year or more to adjust to the new rule. It will take effect in part on April 2017, with full implementation in January 2018.

The Problem of Unpaid Securities Arbitration Awards

Sunday, March 13, 2016

The big players in the securities industry have deep pockets and can afford to settle or pay securities arbitration awards when the lose.  But a recent report shows that there a plenty of small brokers who either can't or won't meet their obligation to pay customers harmed by their misconduct.  Unlike other licensed professionals brokers are not required to carry insurance and their firms may have surprisingly little cash or other assets available to satisfy claims.

A recent report by the Public Investors Arbitration Bar Association (PIABA) reveals that nearly $1 out of every $4 awarded to customers in arbitration went unpaid in 2013  The report describes the scope of the problem, provides context, and reviews and recommends solutions.  Brokers who fail to pay are barred from the industry, but the PIABA report suggests that regulators should not tolerate the status quo.  The problem has been around too long and hurts too many investors.  It concludes:

 “Allowing one in three awards to go unpaid is unconscionable.  FINRA’s cures:  barring from the industry those who fail to pay awards, and notifying claimants that they can pursue actions in court against former FINRA members, have failed to cure, or put a meaningful dent in, the problem.  Steps must therefore be taken to put forth a new division of FINRA to craft and administer a National Recovery Pool.”

Per PIABA, a small per-broker fee would quickly generate a large fund, which could be used to reimburse investors unable to collect on their awards.

FINRA has issued figures suggesting that the problem is not quite so grave.  According to a Wall Street Journal article, FINRA's figures put the prevalence of unpaid awards at about 15%.   FINRA continues to "study" the problem.  That is little solace to investors who obtain an award, often at significant legal expense and cost, but find that the award is noncollectable.

Expelled Stockbrokers vs. Disbarred Lawyers

Tuesday, March 1, 2016

Earlier this year, USA Today reported that FINRA suspended a record number of brokers in 2015, but the FINRA chairman, Richard Ketchum, responsible for the crackdown is retiring. 

A review of FINRA statistics, including data on investor protection, shows that FINRA got results more or less on par with 2014.  In 2015, 492 brokers were barred from Wall Street. That compares with 481 brokers barred in 2014, only eleven fewer.  In 2015 FINRA levied fines of $93.9 million.  That compares with $134 million in fines in 2014.  The numbers of firms expelled from 2010 to 2014 varied between 14 and 30.

Just to be fair to registered representatives -- and because there are bad apples in any profession -- I took a look at how many lawyers have been disbarred for the sake of comparison.

In 2011, according data reported in an American Bar Association (ABA) article, 652 lawyers were involuntarily disbarred nationwide, up from 503 in 2010. By comparison, 329 brokers were expelled in 2011 up from 288 brokers in 2010.  The Boston Globe reported that in 2011 there were about 1.22 million lawyers in the United States, which matches ABA data.  This compares with about 630,000 brokers in 2011, according to FINRA data

The conclusion from this very unscientific survey, looking at 2011 only, lawyers were suspended at about the same rate as stockbrokers! No further comment.


Friday, February 26, 2016

Anyone who has done much securities arbitration work knows about FINRA's mediation program, and of course mediation can be arranged directly by the parties without involving FINRA.

But what about mediation of discovery disputes?  This emerging field invokes mediation for use in discovery of electronically stored information, sometimes referred to as e-Mediation.  The potential benefits include reducing motion practice and fights over discovery, particularly over electronically stored information.  That can save time and money.  Such mediation can be issue based, not time-based to control costs. 

An e-Mediation process to  is worth a look and could benefit all sides (and the court or arbitration panel) under the right circumstances.

FINRA Dispute Resolution Statistics

Friday, December 18, 2015

I'm sharing a few observations on FINRA's dispute resolution statistics (through October, 2015), which are worth a look here

  • 80% of cases mediated through FINRA in recent years are settled;
  • 15% fewer customer cases were filed in 2015 as compared to 2014;
  • the average time to hearing is 17.6 months, but about half that time in simplified decisions (for smaller cases);
  • breach of fiduciary duty is the #1 type of controversy in each year form 2011-2015;
  • municipal bond funds have been the #1 security in customer disputes (thanks in large part, no doubt to Puerto Rican bonds) in 2014-2015, but prior to that time municipal bond funds were nowhere close to the top of the list;
  • a steady 18-19% of cases have been decided by hearing from 2011-2015;
  • recent statistics (2015) show that customers win about half the time, but FINRA does not report more information that might shed light on why some customers win and others do not (such, as, whether the customer appeared with or without an attorney -- presumably the win rate is much lower for customers representing themselves).

New Hampshire Adopts Uniform Securities Act - Effective January 1, 2016

Monday, December 14, 2015

On July 27, 2014 New Hampshire’s Governor signed into law a new Uniform Securities Act. The new Act repeals and replaces New Hampshire’s current Uniform Securities Act which is based on the 1956 model securities act. The new Act is based on the Uniform Securities Act of 2002, drafted by the Uniform Law Commission of the American Bar Association, which is a model statute designed to guide each state in drafting its state securities law.

The new Act goes into effect on January 1, 2016 and is intended to simplify and facilitate capital-raising by small-and medium-sized companies, better align securities offering rules with regulatory interests, update and clarify securities compliance requirements, and preserve and enhance investor protections. It is also expected to eliminate any disincentives for companies to operate in New Hampshire and bring consistency between New Hampshire securities law and the securities law of many other states.

A link to the new Securities Act is here.