Battling Your Broker Just Got Easier

The last thing investors need when they suspect their broker wrongfully lost their money is to spend more of it trying to right the situation. But investors often have to do just that when they take a broker to arbitration. Now, relief may be on the way: A rule change being adopted this month by the Financial Industry Regulatory Authority (FINRA) could ease the financial burden for investors squaring off against their brokerage firm.

The rule change limits the number of “motions to dismiss” brokerages can file against pending cases, a tactic often used to slow down the process and burden consumers with tens of millions of dollars of added legal fees. That should be welcome news for investors grappling with huge losses in the aftermath of the market crash. While many consumers simply made bad investment decisions the last few years, others claim it was some form of broker misconduct that led to their shrunken account balances. Indeed, the number of arbitration claims filed with FINRA jumped 76% to 1,511 in the fourth quarter of 2008 compared with the previous year. To counter that surge brokerage firms have stepped up the number of motions they have filed, says FINRA spokesman Brendan Intindola.

The new rule would try to level the playing field by preventing brokerages from filing motions before investors even begin to make their case and it would also limit the reasons they can use to justify the filing. Securities lawyers contend the motions often have little merit. Brokerages use them as “a tool of harassment” to stall cases brought against them, says William Jacobson, head of Cornell University’s Securities Law Clinic. The Securities Industry and Financial Markets Association (SIFMA), the brokerage industry’s trade association, acknowledges some motions are “spurious.” But they can be useful in other cases, the organization said in a letter to the Securities and Exchange Commission, such as when investors name the wrong broker in a claim.

When the rule is finally on the books it could save consumers money -- and may even make it easier for them to find a lawyer willing to take their case. Securities lawyers are forced to deal with every motion, leading to hundreds of extra billable hours that are passed on to investors. In addition, FINRA arbitrators charge investors and brokerages hundreds of dollars a day to oversee cases, join in on conference calls or sit in on meetings surrounding the extra motions. SIFMA didn't return calls for comment, but said in its letter to the SEC last year that it supports “lending efficiency to the process.”

Securities lawyer Jonathan Evans says in the past he's turned down clients with less than $100,000 in losses because the motions to dismiss soak up time and money. (More than 30% of arbitration cases filed total less than $100,000 in losses, according to FINRA.) “You have to drop everything when the motions come in, and for smaller cases, we just can’t handle that,” says Evans. Now, though, he is considering taking on smaller claimants

The rule change "makes my life easier," says Evans, "which makes things easier on the client."