FINRA Receives SEC Approval on Rule Proposal Addressing Financial Exploitation of Seniors

Monday, April 3, 2017

What Can FINRA do to curb financial exploitation by seniors?  The U.S. Securities and Exchange Commission recently (March 30, 2017) approved two steps to protect senior investors to be included in new FINRA Rule 2165 (Financial Exploitation of Specified Adults).

First, firms will be required to make reasonable efforts to obtain the name and contact information for a trusted contact person for a customer’s account. Second, firms will be permitted to place a temporary hold on a disbursement of funds or securities when there is reasonable belief of financial exploitation.
According to FINRA's announcement, here, "These rules will provide firms with tools to respond more quickly and effectively to protect seniors from financial exploitation. This project included input and support from both investor groups and industry representatives and it demonstrates a shared commitment to an important, common goal – protecting senior investors," said Robert W. Cook, FINRA President and CEO.
According to FINRA, The trusted contact person is intended to be a resource for firms in handling customer accounts, protecting assets and responding to possible financial exploitation of any vulnerable investors. The new rule allowing firms to place a temporary hold provides them and their associated persons with a safe harbor from certain FINRA rules. This provision will allow firms to investigate the matter and reach out to the customer, the trusted contact and, when appropriate, law enforcement or adult protective services, before disbursing funds when there is a reasonable belief of financial exploitation. It is a critical measure because of the difficulty investors face in trying to recover funds that they have inadvertently sent to fraudsters and scam artists.
FINRA will also amend its New Account Application Template, a voluntary model brokerage account form that is provided as a resource to firms when they design or update their new account forms, to capture trusted contact person information.
The Rule change is effective February 5, 2018.

New FINRA Aribrator Selection Process Improves Arbitrator Selection

Thursday, March 2, 2017

Effective January 3, 2017, the arbitrator selection process administered by FINRA changed to give parties greater choice in arbitrator selection and, by extension, a better likelihood of selecting higher ranked arbitrators.   The number of candidate arbitrators on the "public list" is increased from ten to fifteen and the number of strikes rises to six from four.   FINRA explains more about this update in Regulatory Notice 16-44, available here

Trends in FINRA Arbitration in Massachusetts, Maine, & New Hampshire

Tuesday, January 24, 2017

According to FINRA, arbitration case filings in 2016 (3,681) were about 7 percent ahead of the number of total case filings in 2015 (3,435).  The number of customer disputes, which account for 70% of the total number of disputes filed, is up about 8%.  The number of intra-industry disputes is up about 6%.  FINRA nearly kept pace with this modest bump in filings by closing 4% more cases in 2016 than it had in 2015.  The turnaround time from filing to a standard decision in 2016 was 16.7 months. The turnaround time from filing to simplified decision was less than half that time period, 7 months.  

How many cases were filed in New England states?  According to FINRA:

Augusta, Maine -- 5
Boston, Massachusetts -- 59 
Hartford, Connecticut -- 37
Manchester, New Hampshire -- 7
Montpelier, Vermont -- 3
Providence, Rhode Island -- 8

How many FINRA arbitration decisions were issued in 2016?

Augusta, Maine -- 2
Boston, Massachusetts -- 24
Hartford, Connecticut -- 9
Manchester, New Hampshire -- 5
Montpelier, Vermont -- 1
Providence, Rhode Island -- 7

This compares with hotbeds of FINRA arbitration in San Jan, Puerto Rico (890 case filings), New York City (536 case filings), and Boca Raton, FL (287 case filings).

Statute of Limitations in Maine Arbitration

Wednesday, January 4, 2017

How long is too long to wait before a securities arbitration claim can be asserted?  There's no simple answer.  Many factors go into the mix in fixing deadlines, including (of critical importance) the nature of the claim.  Another factor is whether the claim is subject to arbitration. 

In Maine -- as in many other states -- the generally applicable deadline for filing legal claims (the statute of limitations) does not apply in arbitration.  The default statute of limitations applicable to most Maine civil actions is six years after a cause of action accrues.  14 M.R.S. §752 (“All civil actions shall be commenced within 6 years after the cause of action accrues and not afterwards … except as otherwise specifically provided.”).  Under Maine law, however, the statute of limitations does not apply to arbitration because arbitration is not an action an action at law.  Lewiston Firefighters Assoc. v. Lewiston, 354 A.2d 154, 167 (Me. 1976) (“Arbitration is not an action at law and the statute is not, therefore, an automatic bar to . . . recovery.”).  

But under Maine law a claimant cannot wait forever to assert a claim.  Arbitrators may consider the equitable affirmative defense of laches, whether a claimant has waited “an unreasonable length of time” and thereby induced the other party to rely “in good faith on the other party’s non-action” and “change his position” accordingly.  Id. at 168.  A laches defense is equitable in nature and “addressed to the [arbitration panel’s] conscience.”  Id.  Its touchstone is “fairness” under the “particular factual circumstances” of a claim.  Id.  Because laches is an affirmative defense, the defendant bears the burden of proof to show that it applies.    In customer disputes it is almost always necessary for a panel to allow a claimant to present his or her proof at a final hearing before determining whether a claim is timely (in whole or part) or whether an award should be reduced for some reason due to the passage of time.

Why are investors hesitant to bring claims? Public Investor Foundation Video: "Trust Me!?"

Wednesday, December 28, 2016

On November 18, 2016, the Public Investors Arbitration Bar Association ("PIABA") Foundation posted a video that uses the recent Wells Fargo scandal to highlight that conflicts of interest are a root cause of many financial downturns and bad investment recommendations.  

The video features victims as well as many securities arbitration attorneys who explain why investors are hesitant to hold their brokers responsible for bad investment recommendations and fraud: 

Reason #1: Investors Blame Themselves.
Reason #2: Advertising Cultivates Trust.
Reason #3: Investors Do Not Understand their Legal Rights

The bottom line:  Investors who suspect that they have a problem should seek out an attorney in the experienced representing investors.  

Important First Circuit U.S. Court of Appeals Decision on Auction Rate Securities

Wednesday, December 14, 2016

On November 21, 2016, the U.S. First Circuit Court of Appeals issued an interesting and important securities decision involving state and federal securities fraud claims against Bank of America Securities (now known as Merrill Lynch, by merger).  The claims boils down to an allegation that Bank of America fraudulently sold tens of millions of dollars of auction rate securities ("ARS") to a large customer, Tutor Perini Corporation.

The decision provides a primer on ARS, risks associated with them, and what Bank of America knew (and when) about ARS.  The decision contains a great deal of nuanced discussion about risk disclosures, reliance, and other elements of securities fraud claims (and defenses).

Tutor Perini has a few more hoops to jump through, but should get its chance to present its claims to a jury, hopefully sometime in 2017 (in a case it filed in 2011, judging by the docket number).




FINRA Contemplates Creation of Fund for Unpaid Arbitration Awards

Wednesday, September 14, 2016

The Financial Industry Regulatory Authority (FINRA) is considering creating a fund to be used for unpaid arbitration awards. As it stands, some investors do not recover arbitration awards.

According to FINRA News, a study done by the Public Investors Arbitration Bar Association revealed that in 2013 alone a total of $62 million in awards went unpaid—about one in three awards. The Wall Street Journal found that more than $34 million of arbitration awards made to investors in 2014 remain unpaid, or 15% of the total awards granted that year. Of the awards granted to investors in the five years through 2014, almost $213 million, or 13% of overall awards, remain unpaid. A proposal aimed at solving this problem would require FINRA members to pay annual dues into a pool, amounting to about $100 per broker, to help compensate the award winners.

The fund may encourage additional arbitration claims, according to Nasdaq.com, since investors have little incentive to pursue claims that are uncollectable and securities lawyers may refuse to represent fraud victims when there is no chance of collecting from bankrupt firms or brokers.