Investors’ FINRA Arbitration for Violations of FINRA's Best Interest Rule

For an investor, there’s no worse feeling than realizing that one or more of the investments your advisor recommended weren’t something you wanted for your portfolio. Sometimes that realization comes too late.

Your first thought might be to sell the investment outright—but would that work? Can you even sell it for anything? FINRA statistics reflect that many securities arbitration claims involve the sale of alternative investments or Reg D offerings which were sold as being safe investments not directly tied to the stock market. Many small and regional brokerage firms sell these investments because of the high commissions the company pay the brokerage for helping them raise capital. However, when things go bad, investors discover that they cannot get out of these investments and are left with no option but watch the investment decline further in value.

For example. In the case of GWG Holdings’ L Bonds, the answer is no. Not only was there no secondary exchange or marketplace for holders to sell, their only other option was to sell them back to the company at a 6% relinquishment fee.

There is an option to recover your money. FINRA, the Financial Industry Regulatory Authority, operates the largest securities forum for dispute resolution in the US. You may be able to recover some or all your investment through a FINRA arbitration if the brokerage firm violated FINRA rules including Reg BI or otherwise made an unsuitable recommendation.

Regulation Best Interest, also called “Reg BI,” is the requirement that an investment advisor use the client’s best interest as the criteria for selecting, vetting, and recommending investments for them. Those who do not consider the client’s best interest may have committed a form of professional negligence. Reg BI was implemented in 2020 to offer investors additional protection.

Investment advisors are subject to the fiduciary standard under the Investment Advisers Act of 1940. The standard was created from significant fiduciary principles that includes the obligation to consider a retail investor’s best interests. The advisor is not to place their own self-interests ahead of that of the investor, which creates a conflict of interest.

All investment advisors have conflicts of interest with their investors to a certain degree. These usually involve a specific economic interest in promoting products or services that can generate additional revenue or other advantages for themselves or their firms. These may or may not be in line with the best interests of a retail investor.

What causes trouble is when the advisor makes recommendations based on what’s best for them or their firm, not what’s best for the investor. An investment that brings bonuses or higher commissions can be problematic for the investor. Whether consciously or unconsciously, an investment advisor may offer recommendations or advice that is even slightly biased towards them.

Under the Advisors Act, firms are required to identify any conflicts of interest in their written compliance instructions and require advisors to review them yearly. Part of this includes eliminating conflicts of interest that may occur, such as bonuses, sales contests and quotas, or non-cash incentives that could lead to advisors to make recommendations not in a customer’s best interest.

Brokers can also be a registered investment advisor (RIA.) When offering recommendations as an investment advisor, they are required to let you know that they are acting in that capacity.

You may want to sue your investment advisor, broker, or broker dealer for violating Reg BI. But you may not realize that a lawsuit:

• Can take years before you receive any award or settlement
• Is public, and everything is public record
• Can be considerably expensive, including legal fees, court costs, and other related expenditures
• May cost more to litigate than your claim is worth
• Offers no choice in the judge, who is simply assigned
• Is an uncertain outcome; the decision could be in favor of the other party even with strong legal counsel

This is not to say you should never consider filing a lawsuit. In some cases, a lawsuit may be the only appropriate course of action. But FINRA arbitration is a viable alternative for many investors to seek damages after an investment advisor’s recommendations led to losses.

In some cases, arbitration may be a requirement in the contract you signed with your investment advisor or their firm. In case of a dispute, you’re required to submit to arbitration instead of a lawsuit.

Securities arbitration is a simplified process of dispute resolution that allows parties to settle their dispute without the long wait and uncertainty of a full-blown trial. Both parties meet with an arbitrator that they both agree on, then meet with and present their side of the story. The arbitrator works with both parties to come to an agreement.

FINRA operates the largest securities arbitration service in the US for investors. The service can be requested by investors who suffer losses and discover that their advisor had not acted in their best interests in mind when making recommendations.

Arbitration is better because:

• It takes less time than a trial
• It’s less expensive than a trial
• Discovery is the same as it is for trial
• Both parties choose the arbitrator
• Disputes are solved amicably
• In some cases, both parties can continue to have a business relationship following arbitration
• The proceeding is private and not conducted in a courtroom, although may not be entirely confidential
• The decision is legally binding and can be enforced by the court

FINRA arbitration is a faster, easier, and more efficient method of financial recovery. By keeping a dispute out of a back-logged court system, you’ll be able to get a resolution sooner than filing a lawsuit. Work with an experienced securities attorney to learn if your individual case is eligible for FINRA arbitration, and your next steps.

Silver Law Group represents investors in securities and investment fraud cases. Our lawyers are admitted to practice in New York and Florida and represent investors nationwide to help recover investment losses due to stockbroker misconduct. If you have any questions about how your account has been handled, call to speak with an experienced securities attorney. Most cases are handled on a contingent fee basis, meaning that you won’t owe us until we recover your money for you. Contact us today at (800) 975-4345 and let us know how we can help.