Dodgy brokerages with dishonest sellers are rightly criticized for systematically failing to pay the money ordered by the regulator to the investors they cheated.
But independent consulting firms with sketchy financial planners are just as bad at failing to hand out required rewards – a problem that is both murkier and worsening, according to a report released Wednesday by a a group of prominent lawyers who represent investors in claims and lawsuits against financial firms.
The Public Investors Advocate Bar Association report focuses on brokers and brokerage houses, which are overseen by the Financial Industry Regulatory Authority, the industry’s self-regulating oversight body. At the same time, PIABA’s findings on advisers, who are not required to be members of FINRA, point to an emerging problem for the wealth management industry: a misperception that advisers are ‘safer’. As brokers.
“It is fair to conclude from regulatory actions and discipline that RIAs behave badly at the same rate as brokers”, The report said, referring to independent registered consulting firms.
More difficult to collect
Independent advisors, who are held to the stricter fiduciary standard that the best interests of the client must always come first, are seen as less likely to defraud clients. The standard requires that conflicts of interest be not only disclosed but avoided. Advisors and their firms are overseen by the SEC or, if they manage less than $ 110 million in client assets, by state securities regulators.
In contrast, brokers are required to adhere to the âbest interestâ standard, according to which the investments and fund management services they recommend should simply be âfitâ for clients. Brokers are expected to disclose conflicts of interest, but they are not required to avoid them.
The COVID pandemic ended FINRA’s in-person arbitration hearings last year, reducing the number of awards rendered compared to 2019.
Still, PIABA found that more than $ 5 million of the nearly $ 21 million FINRA ordered brokers and brokerage houses to pay to scammed investors in 2020 went unpaid. Investors never received nearly one in four dollars, compared to one in five dollars in 2019. Likewise, the percentage of prices that went unpaid last year rose to almost 30% from about 27% in 2019.
FINRA has yet to release award data for 2020, so PIABA has calculated the numbers for itself, using data scattered across the watchdog’s website.
14 cents per year
Grim as they are, PIABA said its findings likely downplayed the larger problem of cheated investors getting at least some of their money back. This is because many investors “don’t bring cases where they know there is no chance of getting paid,” Michael Edmiston, PIABA chairman-elect and securities attorney at Studio said on Wednesday. City, Calif., At a Zoom conference. The problem will worsen if markets slide and investors’ retirement plans are affected, he said.
FINRA, funded by the industry and overseen by the SEC, tracks the pecuniary indemnities it demands of its members after a compulsory arbitration process it organizes. While a brokerage or broker is at risk of being suspended by FINRA if a reward is not paid within 30 days, what PIABA has called “disapproved (and often destitute) brokers” and their businesses can avoid paying their fines by filing for bankruptcy – leaving investors cheated with nothing. Most brokerage firms require their clients to sign agreements stating that they will handle all disputes through FINRA, but even if they do not, aggrieved brokerage clients can file a complaint with FINRA.
FINRA argues that by the time it grants rewards, an offending firm or broker has often already been suspended, expelled, or otherwise severely disciplined – or transferred to another firm where they continue to deceive clients, a practice known as the name “cockroach”. As such, the watchdog says it “is limited in its ability to help enforce the recovery of unpaid indemnity against an inactive business or individual.”
PIABA countered that FINRA must establish a “clawback pool” of $ 24 million – for now – in money for cheated investors, which it could do if Congress or the SEC so ordered. under the Dodd-Frank Act, the law that revised financial regulation. after the 2007-08 financial crisis. One way to fund this pool, PIABA said: to charge member companies about $ 6,300 per year; or ask individual advisors to shell out about $ 107 per year; or charge investors 14 cents per year. PIABA calculated the amounts on the basis of attribution data and the number of companies and investors from previous years.
A FINRA spokesperson said in a statement that the self-regulation “is committed to reducing the number of unpaid arbitration awards to clients, which usually result from respondents declaring bankruptcy or going out of business.” FINRA, the statement said, recently took steps “to reduce investor risks for brokers and companies who may be less likely to pay rewards.”
PIABA also called on the SEC to “conduct a scan of consulting firms and RNs registered with the Commission and then report statistical summaries regarding where AI arbitrations are heard.”
The SEC did not immediately respond to a request for comment.
“No way to quantify”
Aggrieved investors usually resolve disputes with their advisors. alternative dispute resolution services or legal proceedings; unlike FINRA, the SEC does not have its own internal arbitration process to resolve disputes.
The problem is, while FINRA has a database of rewards that brokers are required to pay, there is no central data repository for rewards through private settlements with bad advisers. Meaning that there is “no way to quantify unpaid AI (investment advisor) premiums in a statistically significant way,” according to the PIABA report.
This hides the problem of bad advisers resolving client complaints through private dispute resolution forums, such as the American Arbitration Association or JAMS.
PIABA quoted North American Securities Administrators Association data showing that state securities regulators sanctioned or banned 200 brokerage firms and 391 individual brokers in 2020. Meanwhile, those same regulators have brought enforcement actions against 193 investment advisory firms and 434 advisers . It is almost as many consulting firms as brokerage houses, and more advisers than brokers.
PIABA’s findings come against a backdrop of massive changes in the wealth management industry.
Brokers have abandoned their communications agencies and independent brokerage houses to create or join independent consulting firms. At the same time, brokerage houses have expanded into wealth management services by recruiting financial advisers. Over 13,800 RIAs large enough to register with the SEC held nearly $110 trillion customer assets at the end of 2020, according to the Investment Advisor Association, a trade group and lobby. When a âhybridâ brokerage firm also offers independent advisory services, the boundaries of fiduciary liability can become blurred for investors.
But even pure fiduciary advisers can be problematic, especially when they are selling private securities and “promissory notes“, A tactic against which the SEC warns investors.
David Meyer, president of PIABA and a lawyer in Columbus, Ohio, who represents defrauded investors, cited the case of a retired widow. Meyer said his client lost his savings to a fraudulent advisor from Fisher Wealth Management, a small RIA in Dublin, Ohio, with 70 clients and $ 12 million in assets under management.
Meyer and the company’s adv detailed how adviser Bradley Fisher sold the woman, Barbara Gelderloos, private speculative securities that have lost all of their value. Last May, a private arbitration forum ordered Fisher to pay Gelderloos $ 621,500, but the award has yet to be upheld in a civil court. Meanwhile, Meyer said, he’s not optimistic that his client will actually see money because the company, also known as Rockpointe Financial, is small.
Ten years ago, Meyer told Zoom, 90% of his law firm’s business involved dishonest brokers. Today, about half of them involve investment advisers and their firms, half of which are smaller state-regulated entities.
Whether from brokers or advisers, the report says unpaid rewards are “a heinous breach of responsibility on the part of a securities industry that massively benefits from its ‘trust your advisor’ encouragement.”
PIABA also criticized FINRA and the SEC for not requiring brokers or advisers to maintain liability insurance that could compensate stolen customers.