FINRA Arbitration and Confidentiality: the Exception Not the Rule

Arbitration is typically "private" in the sense that there is no First Amendment right of the public to access to arbitration hearings or arbitration documents, but that doesn't mean that arbitration is strictly confidential either.  Just the opposite, confidentiality in arbitration is the exception not the rule, according to guidance available from FINRA here.

While arbitrators and FINRA staff have an obligation to "respect the privacy of the parties before whom they serve" and not to "personally disclose the details of arbitration proceedings" -- much the same obligation applicable to Judges and clerk's offices in civil litigation in court -- the parties themselves "are generally free to disclose details of their own proceeding as they see fit."  Arbitrators should rarely, if ever, grant orders requiring that everything pertaining to a dispute be kept confidential by the parties to the dispute.  So-called "blanket orders of confidentiality" may be entered only upon a showing of truly exceptional circumstances.

Although discovery in arbitration is often conducted according under agreed-to confidentiality orders, the parties may not always agree on what documents or information deserves to be treated as confidential.  When the arbitrators are called upon to decide whether particular information should be treated as confidential, they must engage in "a serious and case-by-case consideration of the issues."

Why? Unnecessary secrecy is burdensome and contrary to important public interests.  According to FINRA, "A ruling that documents are confidential may impose burdens and limitations on the receiving party, such as requiring special handling or limiting the ability of the party to discuss the documents with witnesses and others who may assist in developing the case. Likewise, such a ruling may keep regulatory officials from learning of conduct in violations of statutes and rules."

What factors should be considered?  According to FINRA, in considering questions about confidentiality, the arbitrator should consider such factors as:

1. Is the information so personal that disclosure would constitute an unwarranted invasion of personal privacy (e.g., an individual's social security number, tax return, or medical information)?
2. Is there a real threat of injury attendant to disclosure of the information?
3. Is the information proprietary containing confidential business plans and procedures or a trade secret?
4. Are there essential competing interests at stake that require confidential treatment of certain portions of the proceedings?
5. Is the information already public (e.g., has it previously been published or produced without confidentiality) or is it already in the public domain?
6. Would an excessively broad confidentiality order be against the public interest in disclosure? Keep in mind that securities arbitration is highly regulated by the Securities and Exchange Commission. The former SEC Director of Enforcement, William R. McLucas, has stated: "[P]rivate [securities] actions will continue to be essential to the maintenance of proper investor protection."
7. Are there first amendment or other issues which might be raised by excessive restrictions on the ability of parties to comment freely upon matters in which they are involved?
8. Would an unduly extensive confidentiality order impair the ability of counsel to represent other clients?

"Arbitrators should not routinely designate all discovery as confidential. Where confidentiality is appropriate, bear in mind that it should generally be accomplished in the least restrictive manner."

CFPB and SEC Jointly Issue a Consumer Advisory and Investor Bulletin on Diminished Capacity

The Consumer Financial Protection Bureau’s Office for Older Americans and the Securities and Exchange Commission’s Office of Investor Education recently issued a bulletin to help investors and consumers understand the potential impact of diminished capacity on their ability to make financial decisions and to encourage investors and consumers to plan for possible diminished financial capacity well before it happens.

The advisory bulletin makes the following recommendations to help avoid or minimize problems: (1) organize your important documents (this includes bank and brokerage statements and account information, mortgage and credit information, insurance policies, pension and other retirement benefit summaries, Social Security payment information and contact information for financial and medical professionals); (2) provide your financial professionals with trusted emergency contacts; (3) consider creating a durable financial power of attorney; (4) think about involving a trusted relative, friend, or professional; (5) keep things up to date; and (6) speak up if something goes wrong (i.e. if you ever think someone is taking advantage of you, or that you’ve been the victim of a fraud)

With regard to helping others who may have diminished capacity, the CFPB and SEC make the following recommendations: (1) have an open conversation about investments and other financial matters sooner rather than later; (2) help your relative or friend with managing finances; (3) if your family member or friend has named you to manage money or property, understand your responsibilities and how you can protect your loved one from financial exploitation. 

Finally, if you are someone who has been asked by a loved one or friend to help out with his or her finances, the CFBP and SEC notes you can do the following to help: (1) help with ongoing financial responsibilities (you may need to take on immediate tasks, such as helping to pay bills, arranging for benefit claims, preparing tax returns, or helping with investment decisions); (2) review their investment portfolio; (3) assess the riskiness of their investment portfolio; (4) contact their investment professional.

How Do I Find a Lawyer for a Securities Litigation or Arbitration?

According to the Financial Industry Regulatory Authority (FINRA), "You should consider hiring an attorney to represent you during the arbitration or mediation proceedings to provide direction and advice. Even if you do not choose to hire an attorney, brokerage firms are generally represented by an attorney. If you cannot afford an attorney, some law schools provide legal representation through securities arbitration clinics."

I agree.  At the very least "consider" hiring a lawyer if you have a securities or brokerage firm, insurance, or similar dispute!

How do you find a suitable lawyer?  For customers and brokerage firm employees, a great place to start is the Public Investors Arbitration Bar Association (PIABA).  PIABA's website includes a "FIND AN ATTORNEY" search tool that allows searches by state or zip code. 

Other options, suggested by FINRA on its website include:

• Consult with your lawyer, if you have one, about your options and whether you need a lawyer who specializes in securities arbitration or litigation.
• Call several bar associations to obtain a varied listing of lawyers in your area. Many lawyers will offer to consult with you initially for free or for a minimal fee.
• Broaden your list of potential securities lawyers by consulting directories of attorneys. The Martindale-Hubbell^® Law Directory can be found at many libraries or at at its website. It lists lawyers by state and jurisdictions. Some state and local bar associations also compile directories and may list attorneys according to specialty.

Other selective law directories include Chambers USA, Super Lawyers, Best Lawyers, and Avvo.  Attorneys are listed by location and practice area.

For customers with small claims and who are unable to afford a lawyer a number of law schools host securities law clinics.  Many of the law school clinics will only accept claims demanding less than $100,000 for claimants with a household income below $100,000, or where the customer has been unable to find counsel.  It never hurts to ask, however, since clinics offer pro bono (free) representation -- customers who may qualify and have a claim should consider representation through a clinic.  FINRA lists all the law school clinics here.

Obama Administration Proposes Rules to Tighten Broker Standards for Retirement

One source notes that the Department of Labor is moving full steam ahead with a proposed fiduciary standard for anyone giving retirement investment advice. As the Wall Street Journal notes, at present, brokers’ recommendations only have to be “suitable.”

The proposed rule would require financial advisers dealing with retirement savings to do so in their clients' best interests and disclose any potential conflicts of interest. It also calls for several prohibited transaction exemptions that would allow retirement advisers and service providers to continue arrangements like revenue sharing and fees.

The rules come as individuals have become increasingly responsible for their own retirement security as traditional pensions have mostly disappeared in favor of IRAs and 401(k)s. Such products either didn’t exist or were brand new when the department wrote its rules for retirement advice 40 years ago but now contain about $11 trillion in assets.

Labor Secretary Tom Perez notes that the rule is “intended to provide guardrails but not straitjackets, so we know consumers are getting advice that is in their best interest.

The DOL sent its proposed rule to the Office of Management and Budget for regulatory review on Feb. 23, which typically can take up to 90 days. The proposed rule is now being released for a 75-day public comment period, followed by a public hearing and further public commentary.

 

 

Former Old Town, Maine Mill Owner Faces SEC Fraud Charges

As the Bangor Daily News and other media outlets reported recently, Lynn Tilton -- the force of nature behind a brief ray of hope for Maine's Old Town paper mill -- is now facing Securities Exchange Commission fraud charges.   Tilton's firm had tried but failed to breath new life into the Old Town mill and, ultimately, sold the facility as reported here.

The SEC's press release says, "The Securities and Exchange Commission today announced fraud charges against an investment adviser and her New York-based firms accused of hiding the poor performance of loan assets in three collateralized loan obligation (CLO) funds they manage." 

Tilton has responded, as Reuters reports, by suing the SEC over alleged constitutional defects in that agency's administrative justice system.

White House: "conflicted advice leads to large and economically meaningful costs for Americans’ retirement savings."

In a report issued in February 2015 the White House concluded that conflicted investment advice harms investors to the tune of billions of dollars.  The White House estimates losses at between $8 billion and $17 billion or between 1 percent and 0.5 percent of the $1.7 trillion dollars of IRA assets under management.


The report suggests that mandated disclosures are not a solution. They may actually backfire by providing a false sense that advice is unbiased.  Disclosures are not read by investors.  They are often are not understood.  They are in fine print or in legalese and may not be understood.   


The report also suggests that the American public receives much less protection against conflicts of interest than our neighbors in Canada, Europe, and India.


This report supports a push by the White House, as widely reported, to have the Department of Labor move forward with rules that will impose a fiduciary standard on all stock brokers handling retirement accounts.  

Maine Securities Regulator Testifies Before U.S. Senate Committee on Aging; Touts Success of Maine Program to Combat Senior Financial Exploitation

As the North American Securities Administrators Association (NASAA) reports, on February 4, 2015 Maine Securities Administrator Judith Shaw testified before the U.S. Special Committee on Aging. Shaw emphasized the difficulty in addressing senior financial exploitation, noting that many elderly individuals are vulnerable, socially isolated and distant from family and other supportive networks. According to Shaw, financial exploitation is one of the most serious issues facing seniors.

Of note, Shaw discussed the approach Maine is taking to address this growing issue. In particular, Shaw noted the success of Maine’s “Senior$afe” program (a partnership between the Maine Department of Health and Human Services’ Office of Aging and Disability Services, the Maine Department of Professional and Financial Regulation, the Maine Bankers Association, the Maine Credit Union League, Maine’s Legal Services for the Elderly, and Maine’s five Area Agencies on Aging). The “Senior$afe” program is a training and outreach effort intended to increase identification and reporting of elder financial exploitation by financial institutions. It provides training for tellers, other front-line staff and managers on the red flags of elder abuse and financial exploitation.

According to Shaw, over 200 bank and credit union employees in Maine have received Senior$afe training. The program has been so successful that Senior$afe program materials have been shared with NASAA for revision and co-branding so that it can be made available to NASAA members in the United States, Canada and Mexico. According to one source, Shaw “strongly believe[s]” the program could be a model for other states.

According to U.S. Senator Susan Collins, “Maine is on the cutting edge of helping to combat financial abuse of seniors though programs like the innovative Senior$afe program, which is the first of its kind in the nation.”

Shaw’s testimony can be viewed by video by clicking here.