Congress, the Department of Labor and the SEC are all fiercely debating if a stockbroker should act in the best interest of a retirement saver. Based on current contract agreements an individual retirement investor signs when he opens up an IRA, any claims for losses in their IRA are subject to mandatory arbitration. Therefore the fiduciary debate is rendered meaningless. Why?
FINRA designs the rules, enforces the rules and is also “judge and jury” through their FINRA mandatory arbitration panels. Further, if the individual retirement investor is subjected to a breach of fiduciary duty in their IRA by an SEC registered investment advisor, who is also registered with FINRA, (a “dual registrant” as the vast majority of financial advisors are today) FINRA will state in the arbitration, “Congress has not yet given us the authority to enforce fiduciary breaches under the Investment Advisors Act of 1940.” The claim will be thrown out, giving the IRA investor absolutely no legal recourse.
The retail retirement investor then goes to the SEC for recourse, but the individual retirement investor has no “private right of action” and the SEC will not seek damages on behalf of the little IRA investor who has lost money in their retirement account due to a breach of fiduciary duty.
In 2010, the Dodd Frank Act instructed the SEC to look at ending mandatory arbitration. Have they? Absolutely not. What has happened since Dodd Frank was enacted?
As SEC Commissioner Aguilar reported last week in a speech to The Regulatory Compliance Association on April 18, 2013:
Number of enforcement actions brought by state regulators involving investment adviser firms nearly doubled from the prior year — to 399 in 2011
“Despite the increased complexity, or perhaps because of it, more and more Americans are entrusting their savings and retirement assets to the investment advisory industry. There’s good news and bad news to this growth. The good news is that investors generally trust investment advisers. In fact, a 2012 survey found that investors trust their financial advisor more than their primary doctor or accountant. The bad news is that the growth in size and complexity has resulted in more opportunities for mischief. The evidence of that bad news can be found in some grim statistics — for example, in fiscal year 2012, the SEC brought 147 investment adviser-related cases. This is roughly 20% of all enforcement cases, and accounted for the largest category of enforcement cases during that fiscal year. In addition, the number of enforcement actions brought by state regulators involving investment adviser firms nearly doubled from the prior year — to 399 in 2011 — and accounted for 15% of all enforcement actions brought by state regulators.”
Commission Aguilar politely calls this “mischief”. Retirement savers might call this fraud, breach of fiduciary and a significant loss of their life savings. What Commissioner Aguilar is not telling you is how many thousands of cases are escaping detection due to FINRA mandatory arbitration panels and their “secret hearings” where no results may be released.
However, Commissioner Aguilar also took the critical step of coming out in favor of ending Mandatory Arbitration on April 16, 2013, described in this Reuters article.
Commissioner Aguilar stated:
“He is concerned that more investment advisory firms are requiring customers to sign similar agreements as well – a maneuver that forces investors to sign away their right to sue before they even know about the nature of a dispute.”
Further, the right to continue mandatory arbitration and ban class action law suits, is championed by Charles Schwab. They had a lot to lose if the truth about their Private Client Service and breach of fiduciary duty during the 2008-2009 financial crisis ever hit the courts, where they breached their fiduciary duty causing loses to millions of Americans about to retire. The arbitration was struck down by a conflicted panel, headed by a former stockbroker, and could not be moved to the Federal Courts. An Executive of Schwab sat on the Board of FINRA at the time of the 2010 arbitration claim. The SEC refused to look at it since they will never re-examine the decision of FINRA arbitrators.
In essence, the subject of a 2010 FINRA arbitration for breach of fiduciary duty against Charles Schwab Private Client was thrown out by a three- member FINRA arbitration panel since Schwab’s broker acted as both broker and RIA (registered investment adviser). The FINRA arbitrators stated there was no private right of action and FINRA arbitrators had no authority to enforce a breach of fiduciary duty under the Investment Advisers Act of 1940 for a dual registrant.
Charles Schwab Private Client continues these practices today that are in direct conflict with the Investment Advisers Act of 1940.
With the appointment of Mary Jo White as the new SEC Chairman and her strong legal background, time is long overdue to offer some basic protection for individual retirement savers and the ability to exercise their constitutional right to a legal due process, when laws have been broken.
Reuters reported on February 26, 2013 on Schwab’s moves to limit class action lawsuits, where the Massachusetts Commonwealth Secretary Galvin:
“Called on Schwab to repudiate the class-action ban. It is likely to be adopted industrywide, he said in statement, giving “every rogue broker-dealer the green light to steal from their customers in small-dollar amounts.”
If mandatory arbitration is not ended, if class action lawsuits to expose breach of fiduciary duty against retirement accounts are not allowed, as the role of dual registrants increases and retirement savings grow, the fleecing of American’s life savings will continue. The breaches will be forever hidden in the oh so very secret mandatory arbitration panels, staffed with arbitrators who serve on behalf of the financial services industry, not the small retirement saver.