In Disputes With Wall Street, Investors Face 'Rough Justice'

Fed up with what he called the brokerage industry's tendency to put its interests ahead of investors -- without ever being held accountable in a court of law as a fiduciary -- industry member Knut Rostad last year formed the Committee for the Fiduciary Standard in Washington, D.C. The steering committee has been meeting with regulators hoping to raise the level of industry accountability.

"Most investors don't realize that brokers, who nowadays usually go by impressive sounding titles such as financial consultant, are not legal fiduciaries," explained Rostad, a compliance officer at Rembert Pendleton Jackson, a Falls Church, Va.-based investment adviser

"Up until eight months ago, every part of Wall Street unanimously opposed the fiduciary standard for brokers," he added. "Now there has been a shift to where some in the industry are open to the idea."

Harold Evansky, president of Miami-based financial planning firm Evanksky & Katz and who years ago served as an NASD arbitrator, insisted that the system he observed was always "very fair."

But Evanksy, also a member of the Committee for the Fiduciary Standard, added that the rules governing broker conduct allow for behaviors that while technically not actionable violations, are, nevertheless, not in the client's best interests.

"I can tell you that I have been involved in cases which I felt concluded fairly, but not equitably," he said. "The standards of expected conduct in a broker arbitration case are lower than the fiduciary standards used in regular court."

FINRA President: Agreements Are Clear

Mary Schapiro, the former head of FINRA and who now heads the SEC, said earlier this month in testimony before the Financial Crisis Inquiry Commission that she supports bringing the fiduciary standard to all aspects of financial services, including brokers.

Brokers who find themselves fighting a claim in an arbitration case have no burden to prove that they acted in the client's best interest, only that rules were followed; the client has to prove that the broker did something wrong. In cases involving a breach of fiduciary responsibility, the burden is on the investment adviser to show that he or she followed a prudent process, according to Rostad.

Included in the many components to major, sweeping financial reforms being proposed in the House and Senate, and by the Obama administration, are measures that would prohibit or restrict the longstanding brokerage industry practice of mandatory, pre-dispute arbitration, giving clients who want it the right to pursue claims in a regular court of law.

FINRA rules do not require investors to arbitrate disputes with their brokerage firm. Similarly, the rules do not require firms to include a pre-dispute arbitration section in customer agreement, although this is a standard industry practice.

In Congressional testimony last year, FINRA president Richard Ketchum explained that "this is a matter of contract between firms and their customers. To protect investors, however, we do require firms to clearly and conspicuously state the nature and implications of the pre-dispute arbitration agreement."

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