This post first appeared on the Securities Arbitration Alert blog. The blog’s editor-in-chief is George H. Friedman, Chairman of the Board of Directors for Arbitartion Resolution Services, Inc.
We reported in SAA 2022-42 (Nov. 10) that the Public Investors Advocate Bar Association (“PIABA”) announced in an October 27 Press Release that Hugh D. Berkson of McCarthy, Lebit, Crystal & Liffman was elected President at its just-concluded annual meeting. As promised, we interviewed Mr. Berkson about his priorities for this upcoming year.
Q: What are PIABA’s top three Priorities for the coming year?
A: As I start my term, I expect to focus on three things this coming year. First: PIABA looks forward to working with both FINRA and the SEC to address the problem surrounding unpaid awards in both the broker dealer/RIA contexts. Since PIABA published its first report on FINRA unpaid awards in February 2016, the problem has only grown worse. FINRA’s most recent data shows that 37% of all awards in 2020 went unpaid: a figure that should not be countenanced by the industry or regulators. There is no centralized reporting concerning RIA arbitration results, and we look forward to the results of SEC and NASAA efforts to gather data on the subject, so that the bounds of the RIA unpaid award problem can be understood and addressed. Second: PIABA will continue its efforts, started last year under Michael Edmiston, to study and address the myriad of problems surrounding registered investment advisors’ imposition of arbitration clauses as shields to immunize themselves from facing claims. RIA arbitration clauses requiring the use of high-cost arbitration forums, far-flung venues, unfavorable choice of law provisions, and hedge clauses designed to scare clients from bringing claims, run afoul of those RIAs’ fiduciary duties to their clients. Third, PIABA will maintain its support for the Investor Justice Act, which would require the SEC to establish a grant program to fund qualified investor advocacy clinics.
Q: Several bills have been introduced in Congress to curb mandatory predispute arbitration agreement use in the consumer and employment areas – including financial services. We know that President Biden on March 3 signed the Ending Forced Arbitration of Sexual Assault and Sexual Harassment Act of 2021, which expressly amended the Federal Arbitration Act to make predispute arbitration agreements voidable at the option of the victim. Do you think any of the other bills have a chance at enactment before this Congress expires January 3?
A: Not only is passage of the referenced bill a substantively good measure in and of itself, I take some comfort seeing that, where arbitration is being flagrantly abused, Congress is willing to act in a bipartisan manner to address the problem. I hope that the spirit of cooperation continues and allows Congress to address other situations in which individuals are denied access to justice regarding matters of critical importance. PIABA will continue to shine the light on problematic issues concerning arbitration in the financial services industry – whether they relate to broker/dealers or registered investment advisors – and bring those matters to legislators’ and regulators’ attention.
Q: In your October 27 formal statement on assuming the PIABA presidency, you say: “The recent market volatility indicates that claims will likely increase, which will, in turn, highlight the problems brought about by problematic investment advisor mandatory arbitration clauses and awards that go unpaid by financial services professionals. Thus, the coming year is poised to be a crucial one for investor protection.” Care to elaborate?
A: Absolutely, and thanks for the opportunity to explain. As the United States has moved away from a retirement system principally based upon defined benefit retirement plans, and toward defined contribution ones, people are often entirely dependent on their hard-earned 401K plan balances to fund their retirement. Much of the industry’s marketing is focused on convincing people that they do not have the skills to manage those funds, and therefore require the use of a financial professional to ensure their 401K accounts will be sufficient to meet their needs. When those professionals act inappropriately, and needlessly deplete their clients’ retirement plans, those clients have no meaningful safety net save Social Security – which was never designed to fund the entirety of those clients’ retirement plans.
As the market volatility continues, and as account balances fall, financial professionals’ wrongdoing will inevitably be exposed, which will lead to more investors bringing claims related to negligence, breach of fiduciary duty, and fraud. If those claims are hindered thanks to arbitration provisions that make it impossible to actually bring claims, or a system that makes it impossible to collect on hard-fought arbitration awards, the investors who did everything right – they worked hard, saved as much as possible, and used a professional to manage their funds – will find themselves in dire straits.
In short: the down market will almost certainly reveal the unintended consequences of the current situation. Baby Boomers are starting to retire in record numbers, and American investors will soon acknowledge that the status quo is intolerable.
Q: The COVID-19 pandemic caused lots of changes in the ADR world, including at FINRA. Besides forever getting rid of the middle seat in coach, what’s the one change you’d like to see continue?
A: As someone who has long-embraced technological aids to my practice, I look forward to seeing how tech continues to be adopted in the dispute resolution process. While we’re all getting more comfortable with presenting witness testimony, or conducting entire arbitrations, via videoconferencing, I’m especially curious to see how well we can integrate video feeds with effective document presentation.
Q: Is there anything else you’d like to share with our readers?
A: PIABA has grown in a meaningful way since its inception. While originally formed to help curb abuses found in the NASD and NYSE arbitration spaces, we’ve evolved into a full-fledged investor advocate bar association. Robin Ringo, our executive director for the last 26-odd years, has been instrumental in overseeing and guiding that growth. She is retiring at the end of March 2023, and her successor, Jennifer Shaw, will take the reins. Robin’s presence will be missed terribly, and yet we very much look forward to working with Jennifer in the years to come.
(ed: *The Alert congratulates Mr. Berkson and thanks him for agreeing to answer our questions. We wish him nothing but the best as we head into what promises to be a challenging year on several fronts. **We also wish both Ms. Ringo and Ms. Shaw the best of luck in their respective new endeavors.)
