The Financial Industry Regulatory Authority is now making its arbitration process available to all registered investment advisers. The SRO’s arbitration forum has in the past been for member broker-dealers, but not IA’s, to resolve disagreements. (That said, IAs that are dually registered with FINRA have had to arbitrate via the SRO’s arbitration process if the disagreement pertained to the adviser’s activities as a member of FINRA or as an associated person.) Now, however, FINRA is ready to take arbitration cases against investment advisers as long as the parties involved are both amenable to this.
Some people have expressed concern that opening up FINRA’s arbitration process to these advisers could create problems. For example, seeing as broker-dealers and investment advisers are upheld to different standards under federal law, there has been the worry that FINRA arbitrators might get confused as to which standard applied to a case.
FINRA arbitration lawyer William Shepherd, however, disagrees: “It is true that financial advisors are held to a fiduciary standard by statute, but securities brokers are often held to a ‘common law’ fiduciary standard. For example, brokers are held to a fiduciary standard when they use discretion to invest their clients’ money (either with or without written permission). As well, for decades the FINRA Arbitration Code has allowed cases to be filed for ‘any dispute, claim or controversy.’ Current FINRA arbitrators are savvy enough to make any distinction in the responsibilities of different investment professionals and are likely the most capable persons in existence to decide cases concerning financial advisors.”
FINRA’s decision to open its arbitration process comes during the ongoing discussion about possible self-regulatory oversight for advisers. Bill H.R. 4624 proposes bringing advisers under the supervision of at least one SRO, with FINRA as the potential watchdog. There has, however, been strong opposition to the legislation, and House Financial Services Committee Chairman Spencer Bachus (R-Ala.), who ushered H.R. 4624, has decided not to keep pushing it forward until a committee consensus is reached.
Meantime, FINRA has put out guidance on how investment advisers who are not members of the SRO can use its mediation and arbitration forum to resolve disagreements with employees and members. Per the guidance on disputes between IAs that are firms not regulated by FINRA and investors/investment adviser employees, the SRO will accept disputes by parties seeking this forum as long as the investor and IA turn in a post-dispute agreement to arbitrate, the IA or other parties consent to pay arbitration surcharge fees, and the investor submits a written submission agreement to send the dispute to FINRA Dispute Resolution (the agreement has to be signed by all parties involved in the arbitration and the signatures need to have been written after the events that led to the dispute happened). FINRA mediation services will be offered for investment adviser disagreements on a voluntary basis.
Guidance on Disputes between Investors and Investment Advisers who are not FINRA-regulated firms, FINRA
FINRA Opening Arbitration Process To Investment Advisers, Spokeswoman Says, Bloomberg/BNA, October 29, 2012
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Court Upholds Ex-NBA Star Horace Grant $1.46M FINRA Arbitration Award from Morgan Keegan & Co. Over Mortgage-Backed Bond Losses, Stockbroker Fraud Blog, October 30, 2012
Plaintiff Must Arbitrate Faulty Investment Advice Claim With TD Ameritrade But Can Proceed With Litigation Against Oakwood Capital Management, Stockbroker Fraud Blog, October 29, 2012
Citigroup Ordered by FINRA to Pay $1.2M Over Bond Markups and Markdowns, Institutional Investor Securities Blog, March 27, 2012
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