DEFENDING YOUR PROFESSIONAL INTEGRITY
Stay current on recent changes in the regulatory environment
We speak to hundreds of FAs with tales of meritless customer disputes that would make even the most ardent supporter of financial regulation suddenly sympathetic to the broker’s plight of expungement. Stories of clients mailing in handwritten complaints from the inside of a mental institution to those of clients complaining that their double-digit investment returns should have been larger. Ask yourself, “what rate of return on your investment would ever really be 'enough'?”
The fact of the matter is, the bar for filing a customer dispute is set so low these days that it is non-existent. Meager standards for disputes allow for savvy customers to game the system. As evidence, when we utilize FINRA Rule 2080 to remove these meritless complaints, one of the three criteria that our firm may use to obtain expungement is to demonstrate that the claim was “factually impossible”. Yes, you read that right. Even customer allegations that are factually impossible will, in a best-case scenario, be denied and end up on an FA’s public record until expunged. In a worst-case scenario, the meritless dispute may also be combined with the customer receiving a settlement check due to a “business decision” by the firm.
Firms settle because it costs less to pay an angry customer a percentage of their losses in the market than to pay attorneys to fight to the death. In 2015, FINRA received 3,250 customer disputes averaging over 17 months to adjudicate, and that adds up to a lot of billable hours. Not to mention, in the current DOL rule environment, allegations such as breach of fiduciary duty and negligence have become lightning rods that firms will gladly steer clear of in terms of public relations.
Attorneys who represent investors know this and tout settlement amounts averaging 50% of the requested damages. In fact, many customers themselves, especially those with significant assets and investing experience, know that they can look forward to a 66% rate of settlement by the firm through arbitration or mediation. With customer attorneys working on a contingency basis, an investor can take a swing at a settlement with absolutely no downside and a great percentage chance of receiving a payout.
Any client armed with knowledge of these weak complaints and sizeable payouts can leverage their advisor relationship to be a virtual insurance policy. The markets go up and the customer takes their profit. The markets go down and they recoup their losses through settlement with the firm. Either way, the investor bent on exploiting the system can plow money into the market without bearing the true market risk of their investments.
Customers run the numbers and make business decisions to file a dispute based upon the best interest of themselves and their investment returns. The firms run the numbers and make business decisions to settle based upon the firm’s bottom line. No matter what the outcome of the complaint is though (denied, withdrawn, no action, dismissed or settled/award) the broker is caught in the middle with a brand new disclosure promptly advertised on their BrokerCheck profile and their CRD, permanently. Absent the short response listed in the comments section, both industry insiders and the general public are now left to their own imagination as to the validity and enormity of the complaint as well as the true motivations behind any settlement payout.
Being realistic, this tug-of-war between firms and customers is unlikely to change anytime soon. And as the markets inevitably turn down, there will be near perfect correlation with an increase in customer disputes. If you want someone to finally represent your interests in this process, and ensure that your reputation and legacy are not tainted, make your own “business decision” and call us for a free consultation on the process, timeline, and costs involved.
EA, Executive Vice President
3400 Industrial Lane, Unit 10A
Broomfield, CO 80020
This blog is my ongoing effort to inform and educate FINRA licensed professionals about the evolving regulatory ecosystem in which we operate.