Financial Advisor IQ (October 30, 2019) - Lawyers are warning against a particular style of venue-shopping more open to hybrid RIAs than any other type of advisory.
The vast majority of advisors who are broker-dealer representatives resolve customer disputes at Finra arbitration hearings. When investors file complaints with Finra against Finra-registered advisors, those advisors are bound to participate in the industry self-regulator's dispute resolution process.
But their counterparts at hybrid RIA firms, dually registered with Finra and the SEC, often argue successfully that their customer disputes don't belong in Finra arbitration hearings. The individual FAs and the RIA side of their hybrid often succeed in getting claims against them removed to another forum because that part of the business is typically only registered with the SEC and therefore not bound by Finra rules.
But plaintiff lawyers representing investors with beefs against advisors say hybrid FAs should stop trying to circumvent Finra hearings because that often leads to disputes being heard in multiple arbitration venues. And multiple forums mean greater costs for FAs, their hybrid firms, and the complaining investors, the lawyers say.
“Certainly, splitting claims between two different forums and requiring that a case be heard twice is not efficient for anyone on either side, especially when it’s the same human advisor involved in both forums,” says Darlene Pasieczny of Portland, Ore.-based law firm Samuels Yoelin Kantor, who spoke about the topic at a Public Investors Arbitration Bar Association convention this week in Austin, Texas.
Neither Finra nor the SEC requires firms or customers to arbitrate in a particular forum. But many firms typically stipulate in customer agreements that disputes will be settled in the forum selected by the firm. Finra has an independent arbitration and mediation forum where many broker-dealer firms tend to bring disputes.
Yet the system can also work for hybrids. When customers lodge complaints against hybrid firms with Finra, the firm or advisor can argue they don’t belong in that forum because the advisor is registered with the SEC. And they often do just that, although Finra doesn’t keep those statistics, a Finra representative says.
Should hybrid firm advisors attempt to explain all this to prospective clients?
That usually muddles matters more, Pasieczny says.
“It’s just confusing. Sometimes trying to explain it makes it even more confusing,” she says.
Should those advisors spell out in a client engagement agreement which forum different types of disputes, should they arise, would be resolved in?
“I’d be cautious about wholly relying on forum selection clauses to address these issues. Regulations are changing with respect to pre-dispute arbitration clauses. What you write might be outdated,” Pasieczny says, referring to changes to the Federal Arbitration Act and new bans on arbitration clauses including pre-dispute waivers.
Even the SEC’s Regulation Best Interest will fail to clarify these issues when it becomes fully effective on June 30, 2020, she notes.
“There is no easy fix,” Pasieczny says.