October 8, 2014

FINRA Charges Southwest Securities With Improper Variable Annuity Sales

The Financial Industry Regulatory Authority (FINRA) has filed a disciplinary action against SWS Financial Services Inc. (SWS) for failing to supervise unsuitable sales of variable annuities to investors, and failing to maintain and implement appropriate supervisory policies, according to a recent InvestmentNews article. FINRA is seeking undisclosed monetary sanctions for violations that occurred during the period from September 2009 to May 2011. During this time, sales of variable annuities made up to 20% of SWS's total revenue.

With regard to the charge of failure to supervise, FINRA found that variable annuity sales were generated in SWS offices that did not have an on site supervisor to monitor compliance with FINRA rules regarding sales of variable annuities. The variable annuities in question were issued by an insurance company that is affiliated with SWS. More than 70% of these variable annuities were sold to investors without ever having been reviewed by an SWS securities principal to determine whether they were suitable for the investors.

Some of the variable annuity sales involved a practice known as switching in which an existing annuity is sold and replaced with another annuity. Improper switching is a form of churning in which a broker trades excessively for the purpose of generating commissions. Improper switching and failure to properly explain to investors the terms and risks of variable products have been long-term problems in the securities brokerage industry. In particular, brokers often fail to clearly explain the illiquidity and surrender charges, as well as the risks associated with the subaccounts that comprise the investment component of these products.

In one case, a SWS sales person recommended that 29 of his clients switch from MassMutual Life variable annuities into new ones issued by Jackson National Life Insurance Co., which had higher annual expenses, according to the article. In addition to paying higher expenses, some of the investors incurred surrender charges as a result of the switching.

Generally speaking, sales of variable annuities are very lucrative for the selling agent and firm, but are often unsuitable for investors because they are subject to surrender charges, which, as a practical matter, make them illiquid, as well as contract provisions that make them inordinately expensive to own, among other reasons. The major benefit of owning a deferred variable annuity, tax deferral, is lost if the annuity is held in an already tax-deferred account like an IRA.

The Doss Firm, LLC has over thirty years of combined experience representing investors in disputes with brokerage and advisory firms and their representatives. If you have any questions about your investments, please call us for a free consultation.

September 15, 2014

LPL Financial Representative Operating in Buford, Georgia Defrauded Investors Out of $1.7 Million in Savings

On August 26, 2014, a federal district court in Atlanta ordered Blake Richards of Buford, Georgia to pay approximately $1.7 million of money that he obtained from investors by fraudulent means, plus interest of nearly $50,000 and a civil penalty of $80,000. The money is to be paid to and held by the district court until further order. Unfortunately, Richards claims to be indigent, and the investors he defrauded are unlikely to recover any money from Richards, although they may have claims against LPL Financial. At least two of the investors defrauded by Richard were elderly and most of the misappropriated funds were from retirement savings and life insurance proceeds.

Richard was associated with LPL Financial, which is a brokerage and investment advisory firm headquartered in Boston. Richards' financial advisory firm, Lanier Wealth Management, LLC, which operated like a branch office of LPL Financial, is located in Buford, Georgia.

When the investor victims had money to invest, Richards would have them write checks to entities he controlled. The entities were named Blake Richards Investments and BMO Investments. Richards told his victims that he would cause the money to be invested, but he actually siphoned off the money and used it for his personal benefit.

One of Richards' victims was a woman he had dated. Her father became another victim. Still another victim was a woman who received over $200,000 in life insurance proceeds when her husband had died of pancreatic cancer. Richards cultivated a relationship of seeming trust, going so far as to deliver pain medication to her husband during a snowstorm in his 4-wheel-drive vehicle.

Richards provided fictitious account statements detailing non-existent investments. At least one of the statements purported to be on LPL Financial letterhead. When Richards was questioned or challenged by a victim, he always had an answer. When one victim asked Richards why she had not received statements from LPL Financial, he told her that her accounts had not been "linked" properly. When another questioned him about the status of her supposed investments, Richards showed her a phony statement generated by an internet-based software program.

In addition to losing the money entrusted to Richards, one victim's social security check was subjected to garnishment by the IRS, because of an improper IRA distribution that was caused by Richards, and which he promised to correct, but did not.

There are some lessons to be learned from this awful story. Investors should never give custody of their money to an individual or a business they do not have good reason to believe is legitimate and reputable. If you do not have the time and/or expertise to invest the money wisely yourself, you are probably better off obtaining advice from a fee-only financial planner (i.e., one who does not act as a broker or invest the money for you) and implementing the plan by investing in well-diversified stock and bond index funds, keeping an appropriate amount (a "rainy day fund") in relatively safe and liquid investment like a certificate of deposit or money market fund. Money that you may need to access sooner in the next three years should never be invested in stocks or other volatile investments. To learn more, read books on investing by John C. Bogle, the founder of Vanguard mutual funds and the person widely credited with inventing index funds.

Any time you have a question about your investments - either proposed or already made - we would be happy to share our experience. Brokers and investment advisors have certain duties to investors that, when breached, give rise to legal rights to recoup investment losses caused by the breach. For many years now, we have represented investors in securities arbitrations against brokerage firms and financial advisers, helping them to recover losses in unsuitable investments. It is certainly possible to recover such investment losses in securities arbitration. However, we would prefer to help you avoid bad investments in the first place.

September 2, 2014

Prosecutors Say Financial Fraud is On the Rise

As if ISIS terrorists, ebola, militarized police, and race riots are not enough, we now read in the Atlanta Business Chronicle that white collar crime is on the rise ("White Collar Crime Wave," by Dave Williams, August 22-28, 2014). Prosecutors report a significant increase in white collar criminal activity, according to the article. One former federal prosecutor was quoted as saying: "It's a national trend."
White collar crime includes various forms of financial fraud. Examples include Ponzi schemes (think Madoff, where cash flow from newer victims was used to pay previous investors until the house of cards collapsed) and affinity fraud. In an affinity fraud scenario, the investment promoter gains credibility and hooks victims by playing up things they have in common.
Perhaps the most common and outrageous example of affinity fraud that is the proverbial "wolf in sheep's clothing" who preys on church members. The article mentioned the sad case of Ephren Taylor II, the purported wealth builder who defrauded members of a prominent Atlanta church out of millions of dollars.
Elder financial exploitation is another tragic and infuriating example of the kind of white collar criminal activity that is on the rise.
Victims of financial fraud, through no fault of their own, undergo a kind of vertigo similar to that experienced by a pilot, who, in a crisis, must decide whether to trust his or her own strong instinct (which is typically the tragic mistake) or what the instruments are showing, which seems to be counterintuitive. Similarly, victims of financial fraud often report that they experienced conflicting signals: the signal from the fraudster, who is often a polished and convincing confidence (con) man versus an internal warning bell that something is not quite right about this opportunity or the person conveying it.
When it comes to deciding whether to invest, especially in an alternative or unconventional investment, investors are well-advised to be skeptical, and act accordingly. If the business is so great, why do they need financing from investors like me? Why haven't banks or professional venture capitalists provided financing? If the opportunity is so great, why is the promoter selling instead of buying?
The Doss Firm represents people from all walks of life who are victims of financial fraud. If you have fallen victim to financial fraud, you should consult with attorneys who have experience representing investors, because you may be able to recover some or all of your losses. You should do so promptly, because time limits, such as statutes of limitation, can bar some or all of your claims.

August 21, 2014

Unregistered Investments Are Almost Always Unsuitable, and Are Often Fraudulent

Private placements are investments that have not been registered with the United States Securities and Exchange Commission. The lack of registration is either unlawful, or lawful due to an exemption from registration under the securities laws. Private placement investments are always high-risk investments that are complex, not transparent, and illiquid (cannot be readily sold) - despite the fact that they are often presented as having little or no risk, and are sometimes fraudulent.

Issuers of private placement investments often employ unregistered brokers and financial advisers to sell them to individual (or retail) investors. The sellers of private placements typically receive outsized commissions, and thus do very well indeed. On the other hand, many investors who could ill afford it have lost a substantial portion of their life savings by investing in private placements.

The SEC recently published an Investor Alert identifying 10 red flags that an unregistered offering (private placement) may be fraudulent. The red flags include such things as promises of high returns with little or no risk; involvement of unregistered sales people; high-pressure sales tactics; amateurish, sloppy or no documentation; absence of the "usual suspects" involved in "legitimate" private placements (lawyers, accountants, etc.); the old "mail drop as corporate address" trick; cold call solicitations; and phony backgrounds of managers or promoters.

While it is true, as the SEC indicates, that some private placements may be used by legitimate businesses to raise capital, it is also true that private placements may be fraudulent investment schemes. Even if a private placement is legitimate, it is always improper for an investment adviser or broker to recommend that an individual investor invest a substantial percentage of his or her liquid net worth in such investments due to the risk of losing everything you invest.

The laws requiring registration of securities offerings are designed to protect investors, though that protection may be illusory. Generally, unregistered securities can only be sold to so-called "accredited investors." For an individual to be considered an accredited investor, he or she must either have annual income of over $200,000 for the prior two years (or $300,000 jointly with a spouse), or have a total net worth of over $1 million above the value of the primary residence and any loans secured by it.

Now, it is still true that $1 million is a lot of money, but it is not nearly as much as it used to be back when these "accredited investor" rules were written. The "accredited investor" requirement is supposed to protect investors but, arguably, the income/net worth cut-off is too low. It is based on a false premise that anyone with $200,000 or $300,000 annual income or a net worth of $1 million is wealthy and, therefore, able to bear the loss of his or her entire investment, even if that investment is all or a substantial portion of that person's net worth.

The bottom line is that private placements (even if they are not outright frauds) are almost always unsuitably risky and illiquid for individual investors. They should not be recommended to most individual investors by brokers or investment advisers, and would not be recommended were it not for the high sales commissions. If such an investment is presented to you, the best response is to "just say no." If the opportunity was so great, venture capitalist investors would invest and the issuer would not need to be raising money from people like you and me. More appropriate, liquid, and less risky investment alternatives that do not pay the seller high fees or commissions are usually available.

If you are stuck in one of these investments, you may be able to get your money back by undoing the sale (a legal remedy called rescission). We would be glad to discuss your options with you, so feel free to give us a call.

January 13, 2014

STIFEL NICOLAUS AND CENTURY SECURITIES CONSENT TO FINES OVER IMPROPER SALES OF LEVERAGED AND INVERSE ETFS

According to a recent news release, the Financial Industry Regulatory Authority (FINRA) has fined Stifel, Nicolaus & Company, Incorporated and an affiliate $550,000 ordered them to pay approximately $475,000 in restitution to 65 customers for making unsuitable recommendations of leveraged and inverse exchange-traded funds (ETFs). The affiliate is Century Securities Associates, Inc., which is owned by Stifel.

Leveraged and inverse ETFs are complex alternative investments that are usually poorly understood by both the selling brokers and investors. They are designed to be short-term trading vehicles that "reset" daily. Consequently, over time, they fail to track the underlying index or benchmark. The use of leverage magnifies such discrepancies. Thus investors may experience large losses even though the long-term performance of the index may gain.

Securities firms and their representatives and their representatives are required to understand investment products before recommending them to their customers. Firms must conduct reasonable due diligence on complex products, train their sales force to adhere to appropriate sales practices, and supervise them to see that such practices are implemented. As in this case, however, selling firms often fall short of their duties.

Stifel and Century representatives did not have a good understanding of leveraged and inverse ETFs, but the firms allowed them to recommend the products to risk averse customers, who suffered significant losses, according to FINRA. FINRA further found that Stifel and Century failed to put reasonable supervisory systems in place. The time period involved was January 2009 though June 2013.

Stifel and Century consented to FINRA's findings and agreed to pay the fines and restitution.

January 9, 2014

J. P. Morgan Chase Avoids Criminal Prosecution for Hosting Madoff Fraud

Banking giant J. P. Morgan Chase has reached a deal with federal prosecutors to avoid criminal prosecution for its role in the Bernard Madoff Ponzi scheme. According to the prosecutors, J. P. Morgan, which had custody of Madoff accounts, witnessed suspicious money transfers, too-good-to-be-true investment returns, unverifiable trading activity, and the use of a one-man accounting firm. But while the bank connected the dots, filed a suspicious activity report with British officials, and was concerned enough to withdraw its own money from Madoff feeder funds, it failed to protect investors in that it "never closed or even seriously questioned Madoff's Ponzi-enabling 703 account," according to U. S. Attorney Preet Bharara.

The nation's largest bank faced two felony charges of violating the Bank Secrecy Act because it did not file a Suspicious Activity Report after witnessing red flags about Madoff and did not have appropriate anti-money laundering compliance procedures in place. The charges come on top of other legal woes at J. P. Morgan, including a $13 billion settlement with the U. S. government in connection with its mortgage practices that led up to the financial crisis.

Madoff reportedly perpetrated his Ponzi scheme through accounts at J. P. Morgan from 1986 up until his arrest in 2008. Almost all of his clients' funds were deposited at J. P. Morgan, and money flowed into and out of those accounts. In October 2008, one of J. P. Morgan's analysts wrote a memo indicating that the bank could not verify Madoff's trading activities or custody of assets. It also questioned Madoff's "odd choice" of using a small, unknown accounting firm. Also in October 2008, J. P. Morgan filed a report with British regulators that stated in part that Madoff's purported investment returns were "too good to be true."

J. P. Morgan will pay approximately $2.24 billion to settle criminal charges plus another $350 million in civil penalties. In return, the U. S. will defer prosecution of the bank for two years as long as the bank complies with certain provisions, including reforming its anti-money laundering policies and cooperating with ongoing investigations. No individual executives at J. P. Morgan Chase were charged with a crime.

In addition to the criminal case settlement, the trustee for the liquidation of Bernard L. Madoff Investment Securities, LLC ("BLMIS") appointed by the Securities Investor Protection Act (SIPA), Irving H. Picard, announced recovery agreements with J. P. Morgan totaling approximately $543 million for the benefit of BLMIS customers, for which bankruptcy court approval is being sought. The SIPA trustee has recovered approximately $9.783 billion for the BLMIS Customer Fund, or about 56% of the $17.5 billion that was lost in the Madoff ponzi scheme, according to a press release from the office of Mr. Picard.

While $1.7 billion is reported to be the largest bank forfeiture in history, investor advocates have been critical of the criminal case settlement. In particular, they criticize the failure to charge individual bank executives, who may have turned a blind eye to Madoff's fraud, with a crime. They also criticize the leniency of the settlement terms as amounting to an ineffective deterrent.

January 9, 2014

FINRA IDENTIFIES AREAS OF CONCERN FOR INVESTORS

Each year, the Financial Industry Regulatory Authority (FINRA) publishes a letter to the financial services industry identifying its regulatory and examination priorities. FINRA is the industry's "self-regulatory organization," which is charged with policing sales practice violations by its member broker-dealer firms, among other things. According to FINRA, its letter highlights important risks and problem areas in the industry that "could adversely affect investors." While there may be some differences from year to year, the major risks and problems that impact the most investors seem to persist.

The two major categories of violations that concern FINRA are unsuitable recommendations and misrepresentation of the material facts about recommended investments. In general, the suitability rule requires selling firms to have (and be able to demonstrate) a reasonable basis for believing that a recommended investment is both (1) suitable for at least some investors based upon the nature of the investment and its potential risks and rewards, and (2) that the investment is suitable for the particular customer to whom it is being recommended based on that customer's investment profile (e.g., age, investment experience, time horizon, liquidity needs, and risk tolerance).

FINRA has long been, and remains, concerned about sales practices related to a group of investments that share the characteristics of being illiquid, not transparent and hard to understand, and that are extraordinarily costly in that they pay outsized commissions to the agents that sell them to investors. In this regard, FINRA's list includes the following categories of investments: Complex Structured Products, Private Real Estate Investment Trusts (also known as non-traded REITs), Frontier Funds and a group of interest rate-sensitive securities like Mortgage-Backed Securities, Long Duration Bond Funds, Long Duration Bond ETFs, and so on.

These products are typically sold to income-oriented investors, who are often retired people trying to live on a fixed income that consists of social security payments and investment income. Such investors typically have high liquidity needs and low risk tolerance. The low interest rate environment has sharply reduced their income. While these income-oriented investments promise more income, they are largely illiquid, higher-risk investments. For example, a number of non-traded REITs reduced or eliminated distributions in the wake of the real estate market crash, but they cannot be sold like a stock - i.e., they are illiquid, and investors were left holding a non-producing asset that was worth far less than what they paid for it.

FINRA is concerned that the selling brokers neither fully understand nor explain the risks and problems associated with these investments.

According to its letter, FINRA is also concerned about the disproportionate effect that chronic bad brokers, which it calls "recidivist brokers," have on investors. However, if FINRA truly wanted to protect investors from recidivist brokers, it would take action to prevent brokers from expunging or whitewashing their customer complaint histories from the records it makes available to investors (and urges them to check out before investing) known as BrokerCheck. PIABA (the Public Investors Arbitration Bar Association), under the leadership of its President, Jason Doss, has launched a campaign aimed at improving disclosures of brokers' histories to potential investors by placing more appropriate restrictions on brokers' ability to expunge their records posted on FINRA's BrokerCheck. We will keep you posted on those efforts. FINRA's priorities letter can be viewed here.

November 18, 2013

Anonymous SEC Whistleblower Awarded $150,000

On October 30, 2013, the Securities and Exchange Commission announced that is has awarded $150,000 to an anonymous whistleblower. It is the sixth award since the SEC Whistleblower program began two years ago. So far, the largest award is $14 million.

Under the SEC's program, persons who voluntarily provide original information about a possible securities law violation that leads to the collection of monetary sanctions by the SEC of more than $1 million are entitled to an award of between 10% and 30% of the amount collected.

The most common violations reported by whistleblowers have involved corporate disclosures and financials, offering fraud and manipulation, according to the SEC's Annual Report on the Whistleblower Program for 2012. Other categories of violations have included insider trading, trading and pricing, unregistered offerings, municipal securities and public pensions.

The most recent award recipient wished to keep his identity confidential. By law, the SEC takes steps to protect the confidentiality of whistleblowers. In order to submit a tip anonymously, the whistleblower must be represented by an attorney.

Employers are prohibited by law from retaliating against whistleblowers. It is unlawful to discharge, demote, suspend, harass, or discriminate against an employee who provides information under the SEC's whistleblower program. Victims of wrongful retaliation may be entitled to reinstatement, double back pay, expenses and attorney's fees.

Whistleblowers provide a valuable service to financial markets and society in general. If you believe you have information relating to a possible securities law violation by your employer, and would like to submit a tip to the SEC anonymously, The Doss Firm, LLC may be able to help.

April 23, 2013

Co-Directors of SEC's Enforcement Division Named

On April 22, 2013, George Canellos and Andrew Ceresney were named as SEC's Division of Enforcement co-directors. Both have ties to SEC's new chairman Mary Jo White.

Canellos worked as an assistant attorney to Ms. White while she was the U.S. Attorney for the Southern District of New York in the 1990s to early 2000s. Then he worked for six years as a litigation partner at Milbank, Tweed, Hadley & McCloy LLP. In 2009 he headed the SEC's New York Regional Office from 2009 to 2012. Canellos has been serving as the SEC's acting director of enforcement since January 2013.

Ceresney is joining the SEC after his tenure at Debevoise & Plimpton LLP. Ceresney was a partner when White headed the litigation department at Debevoise & Plimpton LLP.

The appointment of the enforcement co-directors is among the White's first moves as head of the SEC.

April 22, 2013

FINRA Approves Proposed Rule Changes to Arbitration for Submission to SEC

On April 19, 2013, the FINRA Board of Governors approved several proposed rule changes that now will be submitted to the SEC for review and approval. Two that center on the FINRA arbitration process are detailed below:

First, the Board authorized FINRA to file with the SEC proposed amendments to FINRA Rule 12403 which would simplify arbitration panel selection rules. The proposed rule would allow all parties to see lists of 10 chair-qualified public arbitrators, 10 public arbitrators, and 10 non-public arbitrators. Furthermore, the proposed rule would permit four strikes on each of arbitrator list. Also, a party could select an all-public arbitration panel by striking all of the arbitrators on the non-public list or instead, if the parties leave on the non-public list one or more of the same non-public arbitrators, the parties could have a majority public panel.

Secondly, the Board authorized FINRA to file with the SEC proposed amendments to the Discovery Guide. The proposed amendments would provide general guidance on e-discovery issues and product cases, and clarify existing provisions relating to affirmations. The proposed amendments would cause the Discovery Guide to:
"1. Include guidelines for arbitrators to consider when deciding disputes relating to the form of e-discovery;
2. Add guidance on product cases to explain, among other matters, that these cases are different from other customer cases and that the Document Production Lists may not provide all of the documents parties usually request in a product case; and
3. Clarify that a party may request an affirmation when an opposing party makes a partial production."

April 22, 2013

Rep. Waters Introduces Bill that Allows SEC to Charge User Fees to Investment Advisors

On April 19, 2013, Rep. Maxine Waters introduced legislation that would allow the SEC to charge user fees to investment advisors to fund their oversight. Ms. Waters said that the SEC needs a source of revenue dedicated to regulating advisors and the bill would authorize fees to fund investment advisor examinations.

Under the bill, the user fees would be set by the SEC based on the cost and frequency of inspections, an advisor's size, advisor's AUM, types of clients, and risk characteristics.

Ms. Waters said, "This legislation answers a funding gap which has been largely responsible for the infrequency of investment advisor exams, and represents the simplest and most direct method for achieving the desired result: improved quality and quantity of these exams and another step toward restoration of public confidence in the markets."

The bill faces an uphill climb in Congress though. It will be difficult for Ms. Waters, who introduced the bill with Rep. John Delaney, D-Md., to generate Republican support in the House.

April 19, 2013

Professional Athlete Wealth Management Group Allegedly Involved in Discount Firm's Fraudulent Sales Case

On April 12, 2013, we posted a blog entitled FINRA Charges Discount Firm with Fraudulent Sales, which detailed FINRA's complaint against Success Trade Securities Inc, an online discount firm, and its CEO, Fuad Ahmed alleging fraudulent sales of promissory notes. New details are emerging in this case.

Yahoo! Sports reports that many of Success Trade Securities Inc.'s clients were prominent NFL and NBA players and those investors were led by Jade Private Wealth Management to invest with Success Trade Securities. This will undoubtedly make Jade Private Wealth Management a prime target for investors seeking to recover their losses.

We recommend that all investors who were directed by Jade Private Wealth Management to invest with Success Trade Securities should document all conversations that you had with Jade and preserve all written communications.

In the complaint, FINRA alleged that players were typically introduced to Success Trade by representatives of Jade Management, including prominent Jade adviser Jinesh "Hodge" Brahmbhatt. In turn, Success Trade is alleged to have made at least $1.25 million in payments to Jade Management since March 2009. Furthermore, Success Trade funded Jade Management's business from approximately March 2009 through March 2010.

Brahmbhatt is currently registered in the financial advisors program established by the NFL Player's Association. Brahmbhatt spoke to Yahoo! Sports Wednesday night and said he still does not know whether Success Trade was operating a Ponzi scheme with investor money.

According to multiple sources that spoke to Yahoo! Sports, several professional athletes have either been contacted or been urged to contact investigators from the U.S. Department of Justice, the FBI and the SEC.

The Doss Firm, LLC represents investors nationwide who have lost money as a result of investment fraud or due to faulty investment advice. If you believe that you may be a victim of investment fraud and would like to speak with us, please call our firm for a free consultation.

April 19, 2013

CFPB Concerned Older Americans are Confused by the Vast Amount of Financial Advisor Designations

On April 18, 2013, the Consumer Financial Protection Bureau (CFPB) released a report that detailed its view that regulators need to do more to stop older Americans from being confused by "the scores of senior designations that financial advisors use." The CFPB believes the SEC should consider setting up a centralized tool for investors to verify an advisor's designations and a place for seniors to submit related complaints.

The report details that there are more than 50 senior designations used to claim specialized knowledge in helping older Americans with retirement planning and its impossible for seniors to determine which ones are legitimate.

Furthermore, the CFPB believes, with all the above designations being overseen by different state and federal regulators, it is difficult for a senior seeking to file a complaint to know whom to file it with.

Hubert "Skip" Humphrey, assistant director of the Office for Older Americans, said in a CFPB blog post that, "when it comes to these specialty titles, they are anything but transparent...in fact, we found that many consumers don't understand basic differences between brokers, investment advisors, insurance agents, and financial planners, let alone the 50-plus senior designations that many of those financial advisors add to their titles."

April 18, 2013

SEC Commissioner and NASAA Advocate Ending Mandatory Arbitration Clauses

On April 17, 2013, NASAA members visited Washington D.C. to raise support among lawmakers to help their effort to restrict, or end, the use of mandatory arbitration clauses in client contracts with brokers. SEC Commissioner Luis Aguilar agrees with them.

In a speech at the NASAA conference on April 16, 2013, Aguilar called for an end to mandatory arbitration clauses. In addition, he said "I believe the [SEC] needs to be proactive in this important area...we need to support investor choice." Furthermore, he stated in support that, "allowing investors to take their legal claims to court would enhance investor protection and add more teeth to our federal securities laws."

Also at the conference, about 17 NASAA members conducted meetings with more than 40 lawmakers, delivering the same message echoed by Mr. Aguilar and other state securities regulators.

According to state regulators, almost all brokerage contracts include mandatory pre-dispute arbitration clauses, and they're also now appearing in agreements between clients and investment advisors.

Arbitration backers say that the process is more efficient and less costly than a court proceeding. Opponents argue that in many cases, courts provide a better venue than arbitration for resolving disputes.

Mr. Aguilar believes that "investors should not have their option of choosing between arbitration and the traditional judicial process taken away from them at the very beginning of their relationship with their brokers and advisors...a client's right to go to court to recover monetary damages is an important right that should be preserved and kept in the client's toolkit."

April 18, 2013

SEC Walter Says SEC Proposed Budget Increase Still Not Enough

On April 12, 2013, we posted a blog entitled In Proposal, SEC's Budget to Oversee Investment Advisors Increased, which detailed the recent federal budget proposal that would increase the SEC's funding by $256 million to allow the SEC to hire hundreds of examiners to increase investment advisor oversight. On April 16, 2013, however, SEC member Elisse Walter commented to state regulators that the proposed budget increase would still not be enough.

Ms. Walter believes that, even with the proposed budget increase, the SEC still would lack the resources to boost investment adviser oversight substantially. Ms. Walter said that "there are simply not enough examiners to go around." She furthermore stated that "the transfer of about 2,240 midsize advisors (with AUM of less than $100 million) from SEC to the states has not given the SEC more capacity to oversee advisors who have remained with the agency."

The SEC has taken on about 1,400 newly registered private fund advisors, who now make up about 37% of SEC-registered advisors. The complexity of their funds has boosted the AUM of registered advisors to $49.6 trillion.