By Suzanne Barlyn
Nov 2 (Reuters) - Wall Street's industry-funded watchdog
does not have an official say over registered investment
advisers, but it is not shy about stepping up with a solution to
resolve their legal disputes.
The Financial Industry Regulatory Authority (FINRA) is
opening its arbitration forum to disputes between registered
investment advisers (RIAs) and investors. FINRA has long run an
arbitration system where the securities brokerages it regulates
and their customers must resolve legal disputes.
But whether there was access to that system for around
28,000 registered investment advisers, overseen by the U.S.
Securities and Exchange Commission or by the states, has been
That changed late on Thursday when FINRA posted a guidance
on its website on how investors and registered investment
advisers can use its forum to arbitrate legal disputes. FINRA is
now accepting those cases, subject to certain conditions, the
Investors who have legal disputes with their investment
advisers typically resolve them in court or other arbitration
forums. But those options can be pricey and, in the case of
court, time consuming, say lawyers.
The change comes as FINRA, Wall Street's industry-funded
watchdog, positions itself to oversee registered investment
advisers - a move those advisers vehemently oppose.
The SEC does not have the staff or financial resources to
regularly examine its registered advisers, according to a 2011
report by the agency's staff. It examines them about once every
11 years, a problem that has prompted agency officials and
lawmakers to consider alternatives, including as a
A FINRA official, however, denies the shift in its
arbitration forum is related to those efforts.
But lawyers for investors have asked FINRA to make the forum
available for clients who want to bring claims against
investment advisers, Linda Fienberg, the head of FINRA's dispute
resolution unit, told Reuters on Thursday.
While investment advisers may oppose being overseen by
FINRA, using its arbitration system might be more cost effective
than the options they have now. That has proven true in a few
unusual cases involving registered investment advisers that were
heard in FINRA's forum, lawyers say.
Three such cases are now winding their way through FINRA's
arbitration system, Fienberg said.
FINRA held off formally revealing the plan until after the
U.S. Congress wrapped up its 2012 legislative session to avoid
creating "concern that we're trying to get ahead of everything,"
Fienberg mentioned the change last week at a conference in
Austin, Texas, held by the Public Investors Arbitration Bar
Association (PIABA) - a group of lawyers who represent investors
in securities arbitration - but she did not reveal details.
The change puzzled one executive at a key industry group.
"Arbitration is not a prevalent practice among registered
investment advisers," said David Tittsworth, executive director
of the Investment Adviser Association.
One reason: RIAs are bound to a fiduciary standard of care
that obliges them to act in their clients' best interest, while
brokers need only recommend securities that are "suitable" for
clients, based on factors such as risk tolerance and age.
Few registered investment adviser account agreements require
clients to forgo court and arbitrate legal disputes against
investment advisers, Tittsworth said. So-called "mandatory
arbitration agreements" are typical in contracts that brokerage
customers sign when they open their accounts.
Proponents of arbitration say the process is less time
consuming and more cost-effective than going to court.
Those who do sign arbitration agreements with an RIA now
typically agree that their cases will be heard by the American
Arbitration Association (AAA) or JAMS Inc. But arbitrating in
those forums can cost tens of thousands of dollars more than
using FINRA, says Ryan Bakhtiari, past president of the Public
Investors Arbitration Bar Association, a Norman, Oklahoma-based
group of lawyers who represent investors in arbitration.
Arbitrators in those non-FINRA forums have leeway to set
their own rates. Some AAA arbitrators might charge $100 to $200
per hour, while others are "much more than that," according to
Sandra Partridge, vice president of AAA's commercial divisions
for New York and the northeast. FINRA arbitrators can earn $400
each for an eight hour hearing.
The process of exchanging information between parties before
the actual hearing, known as discovery, is also more predictable
in FINRA's forum, Bakhtiari said.
For example, FINRA arbitration rules do not allow
questioning witnesses before a hearing, or "deposing" someone,
he said. That saves time and money said Bakhtiari, who is also a
securities arbitration lawyer in Beverly Hills, California.
"The FINRA process has some advantages," said Peter Fruin, a
lawyer in Birmingham, Alabama, who represents investment
Fruin has already arbitrated cases through FINRA involving
investment advisers affiliated with broker-dealers.
FINRA's guidance on Thursday provides some clarity about how
the process for investment advisers would work. For example,
both parties must sign an agreement to arbitrate after their
dispute arises, and then a second agreement to have FINRA
arbitrators hear that dispute, Fienberg said.
But since FINRA does not regulate investment advisers, there
are certain measures it cannot impose, Fienberg said. For
example, FINRA cannot suspend RIAs who do not pay awards as it
can with the brokers and brokerages it oversees.
FINRA does not plan to recruit specialized arbitrators to
hear cases, but will rely on its current roster of about 6,400
arbitrators, Fienberg said.
Investment advisers who arbitrate through FINRA should also
expect the rulings to be publicly available in a database on its
website. That is not always the case in other forums. AAA, for
example, does not make its decisions public, a spokesman said.
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