On Friday, Malecki Law securities attorneys Jenice Malecki and Darryl Bouganim traveled to Washington D.C to lobby on behalf of investors as part of PIABA’s annual Hill Day. PIABA is an international bar association for securities attorneys representing investors in disputes within the financial services industry. As part of Hill Day, PIABA attorneys from across the nation met with representatives and their legislative aids on Capitol Hill to lobby for stronger investor protection. Following a day of discussing the issues amongst PIABA members, our attorneys met with officials across party lines including at the offices of Brian Higgins, John Katko, Tom Reed, Danny Davis, John Hawley, Tim Scott, and Patty Murray. Alongside other PIABA members, Malecki Law securities attorneys lobbied for the FAIR Act; legislation to fund outstanding arbitration awards; and modification or clarification of the proposed Regulation Best Interest.
On Capitol Hill, Malecki Law attorneys lobbied for members of the House of Representatives and Senate to co-sponsor the Forced Arbitration and Repeal Act, known as the FAIR Act. U.S Rep. Hank Johnson (D-GA) and U.S Sen. Richard Blumental (D-CT) introduced the FAIR Act to end the use of mandatory arbitration in their effort to restore public accountability. As it stands now, investors must sign contracts with forced arbitration clauses when opening new brokerage accounts. The FAIR Act outlaws forced arbitration, thereby granting investors the freedom to choose venues besides private arbitration to adjudicate their disputes. Investors will still have the option to choose to use arbitration under FINRA rules, just as how it was before the historic Shearson/American Express v. McMahon case.
Mandatory arbitration clauses within investment account contracts undermine investors’ rights for fair process and their right to trial by jury under the 7th amendment. The industry’s self-regulatory agency, FINRA runs arbitrations as off the record legal proceedings. Instead of a judge and jury, one or three arbitrators decide on the verdict of cases. A major problem is that arbitrators are usually industry people who tend to be overwhelmingly older, white and male. Thus, the arbitration pool is not diverse enough for the diverse investors that use it to feel their case is being heard by their peers, which undermines the process. Additionally, arbitrators do not have to apply the law or include any reasoning behind their decisions. When only 40% of their cases win their cases, the process should be more transparent especially with the other forces that could foster bias. Even after winning their case in arbitration, investors sometimes cannot collect their damages from the wrongdoers found liable. This undermines self-regulation.
Unlike in a court case, FINRA has the power to regulate brokers and set standards. If awards go unpaid, it is evidence of a failure to properly screen and regulate its members. Creating a financial incentive for better regulation makes sense and benefits investors. Thus, PIABA attorneys asked Congress to support legislation that would require FINRA to establish a relief fund for unpaid arbitration awards. Senators Kennedy and Warrant outlined such an Investor Recovery Pool in a previous bill as a response to the alarming number of unpaid arbitration awards. Between 2012 and 2017, about 30% of arbitration awards remained unpaid, according to FINRA’s own statistics. Although unfortunate, the unpaid awards are not too surprising considering that thinly capitalized brokerage firms can be FINRA members. Our investor fraud attorneys find the numbers to be deeply problematic given the time and effort that goes into securing a successful verdict.
Another major issue that PIABA attorneys discussed in DC is the SEC’s proposed Regulation Best Interest, as part of the security industry’s advice standards package. Regulation Best Interest barely “muddies the water,” according to Darryl Bouganim, one of our attorneys who attended the lobby. PIABA is requesting that the SEC adopt a uniform fiduciary standard that every single financial professional offering financial investment advice must adhere to at all times. The standard for fiduciary, at a minimum, should be as stringent as that for “suitability” that carries regulatory notices and other guidance. In terms of a fiduciary standard, brokers should exercise a duty of care and a duty of loyalty. Generally, fiduciaries should be required to act in the best interests of clients by trading with their investment objectives and risk tolerance in mind.
Our investor fraud attorneys enjoyed advocating for positive changes on such pressing matters that heavily influence financial market fairness and integrity. Contact our securities fraud law team to explore your rights as an investor further.