At the tail-end of June SAC brought together for a wide-ranging discussion the current and future Presidents of PIABA -- Christine Lazaro and Samuel B. Edwards. This squib summarizes the interview; a feature article appears in the current SAC newsletter.
Rick Ryder, SAC's Editor-in-Chief, and George Friedman, the new Editor-in-Chief of our weekly service, the Securities Arbitration Alert, co-moderated the conversation. Reg BI had just been approved by the SEC, so fiduciary duty ranked high on the agenda, but we managed to cover a lot more. Prof. Lazaro, Professor of Clinical Legal Education and Director of the Securities Arbitration Clinic at St. John's University's School of Law, became PIABA's President Fall 2018. Mr. Edwards, a Partner with Houston's Shepherd Smith Edwards & Kantas, LLP, will assume that post this coming October. These are two busy people, so we'll send you to the St. John's and SSEK Websites for a full picture of their credentials and activities.
Key Issues this Year: Fiduciary Duty, Unpaid Awards, Non-Attorney Representatives
Moderator Ryder set the table by posing questions to Prof. Lazaro and Mr. Edwards first as PIABA leaders and then based on their own personal experiences as private attorneys. The first query asked Prof. Lazaro what items have been on her PIABA agenda this year and what projects remain for the rest of her term. She replied: “One of our main focus items has been fiduciary duty. We know the SEC just released Regulation BI, but leading up to the release, we had several meetings with the SEC to discuss our concerns, and we filed comment letters. We expect the DOL is going to be issuing its revised rule proposal later this year, so we will continue to be involved in terms of commenting throughout that process…. We will continue to push for a standard that meets investor expectations and recognizes the ongoing nature of the interactions between brokers and investment advisors and investors, and adequately protects investors in those interactions. We are also continuing to focus on unpaid awards…. We'll continue to focus on ensuring that investors who have been harmed actually realize the recovery they've been told they deserve and receive a meaningful outcome to the FINRA arbitration process. Finally, we've been working on non-attorney representation in arbitration. Specifically, FINRA had sought public comment about whether non-attorney representatives should be removed from the forum. We will continue to work with FINRA on pushing forward on that rule proposal, while at the same time making sure that smaller investors, in particular, know that there is the availability of competent representation.
Key Issues Going Forward: a Broader PIABA Role as Investor Advocate, FINRA Board Representation, Improving BrokerCheck
Mr. Ryder asked Mr. Edwards to focus on key issues and objectives for the year ahead: “In addition to the issues Christine discussed, I am very interested in continuing to expand PIABA's influence as an investor advocate…. Now, more than ever, we need to make sure that the voices of investors are being heard…. The second goal is FINRA Board representation: “While there are certainly many very good FINRA Board members -- and good public members, who are academics and former regulators -- at the end of the day, there is no one right now who sits on the FINRA Board that I think you could call a true investor advocate.” The third objective is improving FINRA’s BrokerCheck: “[A]s it's set up right now, BrokerCheck is still missing much of the information on the individual broker that should be included. Much of that excluded information is important for investors to make a good and educated decision about whether this is the type of person they want handling their money. And there's really a total lack of information about the firms, too. If you're going to be making a decision about who's going to be taking care of your life savings, there needs to be more information about these people and the firms they represent in the BrokerCheck system.”
State Fiduciary Standard Regs
Mr. Friedman observed that a few states have gone ahead with their own rules defining fiduciary standards for brokers, and asked Prof. Lazaro to describe PIABA’s policy view on whether that's a good idea and her personal legal view on the likelihood of federal preemption: “First, my own thoughts…. I think it's important that the states have the ability to regulate conduct within their borders and protect their citizens. I look at the new Reg BI federal standard as a floor, not as a ceiling, so I think it's appropriate for states to take action when they see a need. I think we're all going to watch this play out in court. I'm sure, regardless of what the wording is in the statutes or in the regulations, that the preemption argument will be tested.”
Mr. Edwards added: “There’s definitely going to be litigation coming out of this, but I personally find it pretty silly. We’ve had a split out there among the various states as to whether brokers are fiduciaries for decades. Some states have held, through common law, that brokers are considered fiduciaries in their states. States are entitled to do that. So, the fact that they’re putting it into a regulatory regime, as opposed to just a state common law, really shouldn’t change the basic premise. If the state believes it wants a higher standard for those who do business there, they should be absolutely entitled to do that.” Mr. Friedman asked whether Dodd-Frank gave the states room to maneuver in this area, to which Mr. Edwards replied: “You have to keep in mind Dodd-Frank's national standard was supposed to be, ‘Should we apply one standard across the board to everybody? Should everybody have a fiduciary standard?’ It was not: ‘Do we want to go and somehow reduce the standard?’ I think that's what has been done, and not just through Reg. BI.”
Proposed Federal Legislation to Curb Mandatory Arbitration
Mr. Friedman and Mr. Ryder asked the PIABA leaders to address the several anti-arbitration bills currently pending in Congress. Prof. Lazaro responded: “We've been supportive of the arbitration bills that actually deal with securities, so to the extent they've covered securities accounts, or investment services, we have been supportive of them. Mr. Friedman opined: “Listening to the Senate Judiciary Committee hearings on the FAIR Act, I'd say there will be some Republican support for at least some changes to better protect consumers and employees. I went into the hearing webcast thinking there's no way this thing will pass the Senate, but I'm not so sure now.”
Customer Choice and Rule 12200
Mr. Ryder asked that the PIABA leaders describe PIABA's position on predispute arbitration agreements (“PDAA”). Prof. Lazaro said: “Our position has been that customers should have a choice to bring a securities dispute in either court or arbitration…. FINRA Rule 12200 would remain in effect and investors would have the ability to pursue arbitration if that is the appropriate forum for the dispute. So, we're not looking to eliminate the arbitration forum entirely, but we also recognize that there has to be meaningful choice in terms of accepting it as a forum and understanding that, when it is being accepted as a forum, what rights the investor actually is giving up. That's what we've been supporting for a number of years – as set forth in the Investor Choice Act.” Mr. Edwards added: “As somebody who practices in all forums … I can tell you that I would still file the vast majority of my cases in FINRA, assuming all things staying the same -- given what the rules are in FINRA. I do see lots of advantages for being in arbitration.”
Registered Investment Advisers
Mr. Ryder noted that there has been a major increase in the number of RIAs in recent years and asked whether Prof. Lazaro and Mr. Edwards agreed with his view that this is due in large part to a flow of brokers from FINRA firms to the RIA space. Mr. Edwards responded: “Absolutely. There's no question right now that you are seeing both individual brokers and -- a lot more these days -- seeing groups of brokers, who are leaving their firms. They're joining existing RIAs or a lot of times starting a new RIA. It's a way for them to both increase their income -- because you don't have to split your fees with a big brokerage firm -- and if you've already established your clientele, you get additional income. And you also reduce your regulatory burden and cost. If you're under $100 million in AUM, and you qualify as state-registered, the regulatory burden is pretty low. That's been happening and it's a little scary.”
Prof. Lazaro added: “In the Clinic, we're actually seeing a lot more investors that are dealing with the dually registered individual, who is opening both brokerage and advisory accounts for their clients. I think just about every case we have in the Clinic right now involves clients with both advisory and brokerage accounts…. Our members are now representing investors in, basically, AAA, FINRA and court. It may have been that we were pretty much focused on NASD and New York Stock Exchange 20 years ago. Today, our members are going into more forums. That's why we decided to start looking at RIA issues in particular, because so many more investors now have advisory accounts, and we need to really figure out where are the investor protection issues there.”
Law School Clinics Update
Mr. Ryder asked Prof. Lazaro to offer some of the highlights of the St. John's Law School Clinic’s activities: “The Clinic itself represents small investors in the FINRA forum. Unfortunately, only a couple of the securities clinics actually represent investors with RIA claims in court or AAA. But beyond representing clients, we're also really involved in investor education efforts. Each semester my students go out to libraries and senior centers and conduct investor education seminars. The FINRA Foundation has put together some really great educational materials, which they provide to us, and we provide them to investors. In addition, this past spring, my Clinic, along with nine others, sent students down to the SEC for an investor clinic summit.”
PIABA and Small Investor Representation
Mr. Ryder asked Mr. Edwards to address briefly what PIABA is doing for small investors with cases involving less than $50,000, aside from the inter-relationship with the Clinics: “We've reached out to our membership and received a very positive response from many of our members. They are firmly committed to helping investors with small claims. About half of our members who responded said they would take cases under $25,000, and roughly 80% said they would take cases between $25,000 and $50,000.” As to how investors can find these attorneys, Mr. Edwards said: “We're upgrading our online portal for investors who are looking for attorneys on PIABA’s Website. It will then help to match an investor looking for legal help with an attorney who will handle that size of a claim the investor has, as well as other facts, such as the investor’s state. That is something we're in the process of doing right now and making it easier for investors to use our website to match their needs up with one of our attorneys.”
New Special Procedures for Smaller Claims
Mr. Ryder asked Prof. Lazaro to discuss the relatively new FINRA special procedures for small claims cases that seek a middle ground between full-blown live hearings and the current default of a decision “on the papers.” She responded: I know several of the clinics have already filed cases under those rules. I know we're certainly considering it as an option now when we're looking at cases. I think it's a really positive step in the small claims process, because one of the most frustrating things for an investor going through a paper case is, they know we've listened to them, but they don't necessarily feel heard. This gives them a way to feel heard, and know that their story has been heard by the person ultimately making the decision.”
Mr. Ryder noted that the All-Public Panels seem very popular with customer-Claimants. Some 77% of the Awards, and about 70% of the panels actually formed, have no Non-Public Arbitrator on the Panel. Mr. Friedman added: “The fairness perception is also important. If the consumer loses with the industry arbitrator, then that becomes the focus. Where the investor has a choice, I think it's just perceived that, win, lose or draw, the process has been fairer for the investor.” Mr. Edwards agreed: “[C]ertainly our clients, generally, feel better with it. I can remember back when we always had an industry arbitrator on our panels and things didn't go well, certainly clients very often blamed the existence of the industry arbitrator as the reason behind the poor result…. The investors feel much more comfortable without being forced to have an industry person on the panel.”
Looking to the Future
Mr. Ryder asked the PIABA leaders to address what they see as current problem spots in the industry and possible future FINRA arbitration cases. Prof. Lazaro replied: “Most of our cases in the Clinic are focused on complex investments that were clearly chosen for their yield potential. We have a number of cases with non-traded REITs, annuities, and master limited partnerships…. I think the real issue is the perception that investors somehow made informed choices to get into these sorts of complex products that I don't even think the salesperson understood.” Mr. Edwards said: “I agree. I see the same thing for sure. I think various private placements are going to blow up at some point in time, leaving lots of victims…. [Y]ou have a huge group of people retiring right now. It's estimated 10,000 Americans a day are retiring, and they're retiring in a world where we have extremely low interest rates -- and it seems there's going to be several moves down in interest rates going forward…. That makes an easy sell for some operators out there…. I think that we will see a plethora of those cases going forward. Sadly, that will mean the bigger mark in those cases is going to be the independent brokers. They are more typically the ones who sell those kinds of products.”
(ed: *A full write-up of the interview is featured in the current issue of the Securities Arbitration Commentator (vol. 2019, no. 4; August 2019). **At the time of the session, PIABA stood for the Public Investors Arbitration Bar Association. However, at the July Board meeting, the organization revised its name and mission statement to reflect its broader focus. PIABA now stands for the Public Investors Advocate Bar Association.) (SAC Ref. No. 2019-34-01)
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