The Derivative Project

Betterment Brexit Trading Halt Shines Light on Abusive Broker Dealer Practices in ERISA Brokerage Accounts

Betterment Brexit Trading Halt Shines Light on Abusive Broker Dealer Practices in ERISA Brokerage Accounts

Betterment Brexit Trading Halt Shines Light on Abusive Broker Dealer Practices in ERISA Brokerage Accounts

“These Customers Were Put at a Great Disadvantage” regulator says…

The markets were abuzz when Betterment, a “robo advisor” blocked access to their customer accounts with no warning, as the Wall Street Journal reported on July 2, “Robo Adviser Betterment Stokes Concern Over Brexit Trading Halt,” following the UK’s decision to leave the EU or “Brexit” referendum vote.

To make matters worse, Betterment provided advance notice to the customers’  “advisors”,  the “institutional” side,   but not their retail customers.

Massachusetts Regulator Expressed Grave Concerns with Betterment’s Trading Halt

“These customers were put at a great disadvantage,” said Massachusetts Secretary of the Commonwealth William Galvin, a regulator who has been critical of some robo advisers’ ability to serve as fiduciaries, a standard that requires them to act in clients’ best interests. “The precedent this sets is a real bad situation where people are desperate to get liquidity and they can’t.”

However, Regulator Galvin apparently hasn’t reviewed the fine print of Massachusetts’ broker dealer retirement brokerage accounts and is not aware of the rampant blocking of access to retirement accounts –from viewing, withdrawing, and trading.  The broker dealers’ attitude to Mr. Galvin and to retirement investors is simple, “Read the fine print of your brokerage agreement”.

Betterment’s response to the Wall Street Journal is right in line with the brokerage industry’s attitude to every retirement investor:

“The eight-year-old firm also notes that its rights to suspend trading are spelled out in its client agreement.”

There is currently carte blanche for broker dealers to block access to retirement brokerage accounts, spelled out in fine print agreements or interpreted by poorly trained FINRA arbitrators, that typically rule for their industry or to ensure their next appointment to a FINRA panel.  The SEC does not care, nor does FINRA, when ERISA black out rules are violated in retirement brokerage accounts.

However, the abuse of this right, as Betterment demonstrated, is rampant by broker dealers, to the detriment of retirement investors’ access to their life savings for trading, viewing and withdrawing, with NO notice, some times for over 10 consecutive days.

Imagine the uproar if a retirement investor went to their bank and could not withdraw their funds, move their funds or see their current account balances. The OCC and commercial banks have well established the ground rules on access to funds in a commercial bank.

The Department of Labor Black Out Rule Covers Retirement Accounts held by Broker Dealers

When a retirement investor was blocked access to trading, viewing and withdrawing to his SEP account held by a broker dealer, the Department of Labor was asked:  “Who enforces breaches of the Black Out rule in a SEP account held at a broker dealer?”  The Department of Labor responded, “Oh, we do not know.”

Blocking access to retirement brokerage accounts (viewing, trading and withdrawing) is rampant in the brokerage industry, despite securities laws and ERISA Black Out rules that prohibit such, without advance notice to retirement investors.  Since almost 99% percent of every IRA/SEP IRA is in a brokerage account, with wording that permits such abuse of client access to trading, withdrawing and viewing of their funds, the retirement investor has no recourse or protection from the SEC or FINRA.

All brokerage accounts (a retirement SEP account or 401k brokerage window account, for example) is subject to mandatory arbitration, overseen by the brokerage industry’s FINRA, that has not yet trained its arbitrators on ERISA black out rules.  The SEC has avoided the lack of regulatory oversight of retirement brokerage accounts’ right to ERISA protection and does not mandate that FINRA enforce the rules.

The SEC Office of the Whistleblower has no concern about such unconscionable violation of the securities industry long-standing rule of “fair dealing and honesty and integrity”.  These words in a broker dealer client agreement ring hollow and the SEC pays no attention to the day to day breaches of securities laws harming the  small retirement investor.  The SEC Office of the Investor Advocate, mandated by Dodd Frank, will not take on SEC/FINRA’s lack of enforcement of existing ERISA protections in small retirement (SEP) brokerage accounts.  “Regulatory capture.”  Look who is in the Office of General Counsel at major broker dealers and their law firms.

Congress’ securities laws, passed in the ’40′s, after the Great Depression, never anticipated this revolving door.  Nor did Congress anticipate the growth of retirement assets in brokerage accounts, now subject to out-dated securities laws and lack of a private right of action for a retirement investor, who also is subject to mandatory arbitration in every retirement brokerage account.

A retirement investor generally opens a SEP in a brokerage account and must agree to a mandatory arbitration; thus the retirement investor has no recourse when ERISA Black Out rules are broken.

The Department of Labor ERISA rules mandate that the employer/broker dealer inform the plan participants the beginning and end date of a black out, with a minimum of 30 days notice prior to the Black Out period.  The brokerage industry ignores this ERISA regulation, since they know a FINRA panel will not enforce it, nor will the SEC.

The problem is never aired publicly since FINRA arbitrations are not subject to the Freedom of Information Act and the major broker dealers would never agree to  “published” arbitrator findings.

Perhaps Mr. Galvin or Senator Warren will take notice, at the State level, with no enforcement at the Federal level of existing securities laws (and ERISA laws) by FINRA arbitration panels or the SEC.

The problems aren’t just high fees for retirement investors. It is also a rampant disregard for ERISA and securities laws passed in the ’40′s to protect investors’ rights to fair dealing and access to their retirement assets.

Trillions of dollars of American’s life savings now rest in the hands of broker dealers, who write the rules, interpret the rules and “enforce” the rules, all behind a cloak of secrecy.