Reimbursement for Unauthorized Activity by Discount Brokers: Guaranteed or Just an Empty Promise?

Friday, October 10, 2014

All the major discount broker-dealers offer some form of investor protection against unauthorized activity in customer brokerage accounts.  These guarantees protect against theft by cyber criminals and hackers, who might gain access to thousands or even millions of accounts in a single security breach.  They protect against employees of a broker-dealer who might gain access or trade in customer accounts.  These guarantees are also broad enough to protect against one-off criminals who might gain access through phishing or other online identity theft scams, and even rogue family members, such as the the ex-husband or ex-wife who might know enough personal information to gain unauthorized access.

What do these guarantees actually say and how do they compare to one another?  Let's take a look at the key language (for actual terms and conditions follow the link and check your account agreement):

TD Ameritrade -- Asset Protection Guarantee

If you lose cash or securities from your account due to unauthorized activity, we'll reimburse you for the cash or shares of securities you lost. We're promising you this protection, which adds to the provisions that already govern your account, if unauthorized activity ever occurs and we determine it was through no fault of your own.  Of course, unauthorized activity does not include actions or transactions undertaken by or at the request of you, your investment advisors or family members, or anyone else whom you have allowed access to your account or to your account information for any purpose, such as trading securities, writing checks or making withdrawals or transfers.

Fidelity -- Customer Protection Guarantee

Fidelity will reimburse your Fidelity account if we conclude that there was unauthorized activity resulting in a loss and that the activity occurred through no fault of your own. We will also need to ensure that the activity was not initiated by you (the account owner) or by someone you allowed to access your account.

E*Trade -- Complete Protection Guarantee

E*TRADE Securities will restore to your account cash and/or shares of securities equal to the amount of cash and/or shares of securities in your account at the time of any unauthorized activity. "Loss" does not include any tax consequences. Any unauthorized trades will be reversed and positions will be reinstated.

Schwab -- Security Guarantee

We want you to have the highest level of confidence when you do business with Schwab. So we offer you this simple guarantee: Schwab will cover 100% of any losses in any of your Schwab accounts due to unauthorized activity.


Any investor who suspects that his or her account has been compromised by unauthorized activity should immediately report the breach to the broker-dealer, protect the account from any further unauthorized activity, and consider involving law enforcement.  Investors should also seek broker-dealer reimbursement under any available guarantee against unauthorized activity.  There have been reports of broker-dealers honoring their investor guarantees, but there have also been FINRA arbitrations filed where broker-dealers have rejected legitimate requests by investors for reimbursement under a guarantee.  Arbitrators will (after considering the facts and circumstances) hold broker-dealers accountable for not standing behind their guarantees.  

FINRA and other regulators should consider auditing broker-dealers' guarantee programs.  How many claims are reported?  How are they investigated?  How long do investigations take (is reimbursement reasonably prompt)? How many claims are approved and, if approved, how much reimbursement is actually provided (compared against the amount sought)?  For what reasons are claims denied or only partially allowed?  Are these unauthorized activity guarantees empty promises, honored only in the breach, or are broker-dealers providing the robust level of protection they would have investors believe?  At this point no one except the broker-dealers themselves know.

Public Investor Study Finds that FINRA Arbitrator Pool Is Homogenous

Tuesday, October 7, 2014

Earlier today the Public Investors Arbitration Bar Association (PIABA) released a report raising questions about the mandatory arbitration process that virtually every retail investor in America is required to use to resolve disputes with brokerage firms.  That process is administered by the Financial Industry Regulatory Authority (FINRA), which is responsible for recruiting, vetting, training, and appointing (and removing) arbitrators from its roster of arbitrators.  An arbitrator is for all intents and purposes a private judge -- a neutral person who resolves disputes filed with FINRA.

A few key findings in the Report:
  • the recruitment of arbitrators and disclosure of arbitrator bias was not, at all, transparent or reliable;
  • the arbitrator pool is not diverse -- the PIABA analysis showed that the pool is 80% men / 20% women. The average age of the arbitrator in the public pool is 69 years old with over 12% of arbitrators being over 80 years old.
The Report has received substantial news coverage including from (among others): Reuters, Fox News, CNBC, Financial Advisor magazine,  USA Today, and the Wall Street Journal.

FINRA released a statement today defending its efforts to recruit a diverse panel of arbitrators and arguing that it has worked with many organizations, including PIABA, "to recruit the best arbitrators possible."  In defense of the age of the arbitrator pool FINRA accused PIABA of borderline "age discrimination" and wrote that "[i]t stands to reason that a good portion of those able to make [the] time commitment on an ongoing basis for the pay offered [to serve as arbitrators] are likely to be retirees."

The North American Securities Administrators Association ("NASAA") posted this comment on the PIABA Arbitration Study, “NASAA has consistently raised concerns about the mandatory predispute resolution process and the report issued by PIABA notes additional important issues related to arbitrator disclosure and transparency that merit further review. NASAA continues to support the Investor Choice Act, introduced by Rep. Keith Ellison (D-MN) and supported by 30 House members, which would provide investors an opportunity to seek resolution of their claims through the court system.”