Econintersect: ThinkAdvisor has conducted a number of interviews of brokers and advisors in the early to mid second quarter. They report having uncovered a pattern that “many say” is “deeply flawed, even horribly broken” with regard to the disposition of the manditory arbitration between brokers and investment advisors and the Wall Street firms that constitute the membership of FINRA (Financial Industry Regulatory Authority), a self-regulatory organization for the financial industry.
In an article in late May, ThinkAdvisor‘s Jane Wollman Rusoff wrote:
The Financial Industry Regulatory Authority’s arbitration forum that’s meant to resolve advisor-firm disputes is a farce, a kangaroo court – an appalling, broken, despicable system that is rigged against advisors.
The Rusoff article summarizes the bulk of the cases having one or both of two characteristics. The first involve promissory notes signed by brokers when they move from one firm to another. These notes are either to be repaid in part or in full through a cash payment (usually if the broker moves on before a specified time period has passed) or through working at the firm for the specified period of time.
The second characteristic involves complaints by a broker against a firm for failure to comply with concessions offered and commitments made in their recruitment process.
The article quotes sources who say the first category (complaints by firms against brokers are almost always fully heard and found (93% of the time) in favor of the firms. The second category of complaint is usually ignored. ThinkAdvisor says that often there is limited documentation to support the broker/advisor complaint and the firms ignore requests for documents that could support.
The article provides numerous quotes from FINRA officials defending the legitimacy of their arbitration process.
Rusoff mentions the case of Mark Mensack whose story of a mismanaged FINRA arbitration hearing had such defects as disappearance of more than 30 minutes of the most critical testimony that was then not considered in rendering a decision. GEI Opinion published an article by Mark Mensack in January detailing the travesty he endured.
The problems detailed by Rusoff have been described previously in a book by Larry Doyle, In Bed With Wall Street: The Conspiracy Crippling Our Global Economy. The book was reviewed by Econintersect in January.
Doyle has recently called out Linda Fienberg, the president of FINRA’s dispute resolution and chief hearing officer for a statement she gave to Rusoff for her article. Feinberg said, when asked about the Mensack case:
“On rare occasions, it has happened that an arbitrator has forgotten to turn on the recording device. But we have a built-in procedure now to almost ensure that cannot happen again.”
Here is the challenge from Doyle to that statement:
Clearly, Fienberg would like to have us believe that the individual operating the recording device in Mensack’s case simply forgot to turn the machine on. If we were to believe that, we would have to accept that the operator “forgot” at 14 separate times . . . for an average duration each and every time of 34 minutes and 18 seconds . . . AND . . . that these operational memory lapses just so happened to occur in the midst of when the representatives for Morgan Stanley were testifying.
What are the odds of all those crooked curves in the court aligning? I do not think so, Ms. Fienberg.
The ThinkAdvisor review focused on the experiences of brokers and advisors in disputes with financial firms. In his book Doyle documents that investors have a similar “almost never win” experience with their complaints as well.
Is it fair to ask the question: Is FINRA a Wall Street protection racket?
- FINRA’s ‘Total Warfare’ Against Brokers in Arbitration (Jane Wollman Rusoff, ThinkAdvisor, 20 May 2014)
- FINRA Arbitration: Kangaroo Court or Model of Fairness? (Mark Mensack, GEI Opinion, 31 January 2014)
- Book Review: “In Bed With Wall Street” (John Lounsbury, GEI Opinion, 04 January 2014)
- Wall Street’s Kangaroo Court: Calling Out FINRA’s Linda Fienberg (Larry Doyle, Sense on Cents, 22 May 2014)