by FPA member Tim Sobolewski, CFP®
Last Updated: May 29, 2012
Last month we looked at several common investment abuses, such as misrepresentation, unsuitable recommendations, and excessive trading. Now we'll examine how to take action if you suspect that you have been the victim of investment abuse.
Complaints. Your first step would be to call your broker or investment adviser and discuss how you feel. If you get an unsatisfactory response, you should call the branch manager. If you are still not getting anywhere, you should write to the Chief Compliance Officer of the broker-dealer or the RIA. They must respond to a written complaint in a timely manner, and your letter will thus be taken more seriously than a verbal complaint. The firm must also report all complaints to FINRA, unless the damages claimed are under $5,000. FINRA Rule 4530(a) “requires firms to promptly report specified events to FINRA no later than 30 calendar days after the firm knows or should have known of their existence.”1
If you again don't get a satisfactory response from the firm, you can file a complaint directly with FINRA, either online or by mail: http://www.finra.org/Investors/ProtectYourself/p118628. FINRA outlines the various methods available for taking action against investment abuse:
Some investors are confused about the difference between resolving monetary disputes through arbitration or mediation and filing an investor complaint. These are independent and unrelated. If you want to make FINRA aware of any potentially fraudulent or suspicious activities by brokerage firms or brokers, you should use FINRA’s Investor Complaint Center. If you want to recover damages, like money or securities, then filing an arbitration or a mediation case offers you a way to seek damages. You can choose to file a complaint through FINRA’s Investor Complaint Center, and file a separate arbitration or mediation case through FINRA’s Dispute Resolution program. You can pursue all of these options, or none of them.2
The most common areas of complaint going to arbitration in 2011, according to FINRA, involved breach of fiduciary duty, negligence, and misrepresentation.3
The SEC also offers its own complaint form at http://www.sec.gov/complaint/question.shtml.
Mediation and Arbitration. Both methods are offered through FINRA, but there are significant differences. Mediation is an informal process with voluntary information exchange, and all parties would need to agree on a settlement. The mediator guides the process, but is not responsible for resolution. You may be able to complete a mediation for hundreds, rather than thousands in fees.
What do you do if you think you've been placed in unsuitable investments, and you can't get anywhere with the above steps? According to Joanne Schultz, Esq. of Williamsville, NY, “Act quickly, and consult with a lawyer that practices in the securities arbitration area regarding your legal remedies.” Arbitration is a formal procedure, with the result binding on all parties.
There is an extensive discovery process, sworn testimony, and from one to three arbitrators. If the amount of damages claimed is under $25,000, simplified arbitration rules would apply; and there may be no hearing unless you request one. For more detailed information, see http://www.finra.org/ArbitrationAndMediation/.
Most claims against brokers, investment advisers and their firms are adjudicated in arbitration rather than in civil court. One reason for this is that most account opening agreements include a binding arbitration clause (buried in all that fine print that you never bothered to read) so this becomes your only recourse after an unsuccessful complaint. Another reason is that even though an arbitration proceeding may cost you thousands in legal and filing fees, it is still likely to be less expensive than going to court. Remember, though, that one disadvantage of arbitration is that the final decision is binding and cannot be appealed.
Your claim for arbitration needs to be filed within six years of the event precipitating it, and then it can take over a year to get a decision. Still, if you have suffered significant damages due to investment abuse it may well be worth pursuing, and you may be able to get an attorney to handle your case on a contingent fee basis if it has sufficient merit. You should not attempt to pursue either mediation or arbitration without the help of an attorney.
Bear in mind that this is an extremely specialized field of law; the attorney who closed your home purchase or did your will may not have the necessary expertise to handle a securities arbitration. You can find an attorney who specializes in this field at the Public Investors Arbitration Bar Association: https://piaba.org/find-attorney. You may also want to discuss what happened to you with a Certified Financial Planner™ professional from FPA.
By FPA member Tim Sobolewski, CFP®, The Financial Planning Center, Amherst, NY