FINRA arbitration under the fiduciary rule may tilt in clients’ favor more often, grow even more difficult for advisors and cut into firms’ longtime high success rate, according to one expert who has served as an arbitrator since 1999.
Arbitration, however, has not been in the spotlight as prominently as a class action provision in the rule's best interest contract exemption. Industry
Yet while the future of the
Firms pay no damages in about 60% of client claims that reach a decision, according to FINRA statistics. Clients may
The Department of Labor rule “will assist claimants' lawyers in holding the brokers to higher standards,” says Temkin, a New York-based partner at Mound Cotton Wollan & Greengrass who has served nearly 20 years on FINRA’s Board of Arbitrators. He often represents firms in arbitration.
“That doesn’t mean that customers won’t have to prove their cases. There will still be defenses available to me and my clients. But it will shift the burden a little bit and increase the scrutiny of financial advisors.”
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The self-regulator is modifying its much-maligned process, addressing transparency and arbitrator qualifications, among other concerns.
February 10 -
C.L. King & Associates argued it did not break any FINRA rules.
May 22 -
"I lose years of my life. They can settle, write a check and move on," says an adviser whose book of business dropped by $40 million after he alleges he was wrongfully terminated.
December 19
Wirehouses, broker-dealers and banks unveiled client-friendly policies while asking the agency for further delays.
Another attorney who represents firms, Thomas Lewis of Lawrenceville, New Jersey-based Stevens & Lee, says he agrees that advisors’ recommendations will face heightened review. However, President Trump’s administration may yet move to try to change the rule’s impact on arbitration, he points out.
Advisors should be “vigilant and careful” until the regulatory landscape becomes more clear, says Lewis. “Claimants’ counsels are going to look at this closely and push a couple of test cases.”
ADVISORS IN THE CROSSHAIRS
Temkin predicts that the rule’s higher standards will also result in more arbitration cases overall. Advisors may also see a “spillover effect” in which arbitrators hold non-retirement accounts to fiduciary standards in cases involving both qualified and non-qualified accounts, he says.
The Labor Department has made clear that IRA rollovers from ERISA accounts will receive closer examination, even if the IRA has level fees, he notes. The agency also warned of so-called reverse churning cases, in which clients could seek damages from advisors for even small management fees in accounts with passive strategies.
“The DoL is putting advisors in sort of in a difficult position. What if you have a buy-and-hold investment objective for a customer?” Temkin says.
“You may see some pushback on these claims because I think it would be unfair to advisors to put them between a rock and a hard place. The advisor is going to have to explain why the compensation is in the best interest of the customer.”
SOME THINGS REMAIN THE SAME
Upfront recruiting bonuses provided to advisors based on their production may also come under fire from clients, Temkin says. He doesn’t expect the rule to pose much of an impact on promissory note claims by firms against advisors, though.
The rule will also not affect cases in states that may have more stringent standards under local law than under FINRA rules, otherwise known as “blue-sky states.” SEC-registered investment advisors, who already must act as fiduciaries, will also not see much of a difference in arbitration, according to Temkin.
“It’s the highest standard known to law,” he says. “It’s the standard, of course, that investment advisors have had since 1940.”
