A new bill in Congress would target an issue that experts say is costing small retail investors and wealth managers in FINRA arbitration cases.
The Investor Justice Act — introduced July 28 by Democratic Senator Catherine Cortez Masto of Nevada in the Senate alongside the House version sponsored in May by Rep. Mike Quigley, an Illinois Democrat, would create the SEC’s first recurring grants to fund free legal clinics, run by law schools that serve small investors. Currently, there are only 10 clinics, including five in New York State, according to Christine Lazaro, director of the Securities Arbitration Clinic at St. John’s University’s School of Law. There had been up to 25 at a time.
Cortez Masto’s bill would allocate $5 million of SEC money to the program, which a 2018 estimate is sufficient to support 25 to 33 of the clinics at a cost of $150,000 to $200,000 per year for each. That year, the SEC’s Investor Advisory Committee advised for the Wall Street regulator to step in to fill the need after FINRA Investor Education Foundation seed funding ran out for several clinics. In lack of direct funding from law schools themselves to state-level programs like the one in New York, clinics have closed in such numbers that there isn’t a single one west of Chicago.
“It lets people get away with an enormous amount of driving, as long as they spread it out,” said Benjamin Edwards, director of the Public Policy Clinic at the University of Nevada, Las Vegas William S. Boyd. School of Law. “If you scam one person out of $1.5 million, you’re going to face justice. If you scam hundreds of people out of just thousands of dollars, you’re probably going to get away with it, unless people don’t. ‘accept for free or unless someone walks into a free legal clinic.”
The UNLV clinic helps nonprofits with regulatory policy issues, but Edwards often hears from investors who have potential cases but who to turn to. He and other legal experts say there is a representation gap among clients seeking damages of less than $100,000 after suffering losses at the hands of financial advisors and wealth managers. Less than half of those claims have attorneys representing the injured client, compared to 75% to 80% among larger cases, according to Drexel University assistant law professor Nicole Iannarone, who is currently studying the cases. FINRA arbitrations filed by these so-called retail investors. .
The fact that “we have so many smaller, unrepresented claims” raises “concerns that I think the Investor Justice Act can help address,” Iannarone said. “If there are free resources for students supervised by experienced attorneys, it helps both investors and, frankly, the industry by reducing their costs of defending against baseless claims.”
However, it remains to be seen whether the industry will align behind a bill designed to, according to Cortez Masto. wordshelp “investors who lose savings due to bad financial advice”.
Representatives of the independent wealth manager advocacy group, the Financial Services Institute, declined to discuss the legislation, while brokerages, banks and asset managers represented by the Securities Industry and Financial Markets Association n did not respond to an email asking for the group’s position. So far, no Republican is co-sponsoring either bill.
Advisors and companies wary of litigation stand to gain from the legislation, as legal assistance “can also be very helpful or good for brokerage firms,” Edwards said.
“If they can get good advice from an independent person, they may not file a case. They will accept from an investor clinic that represents investors that they have no complaints,” said he declared. “When they work their way through the system, they can be much more difficult to deal with as a counterparty in arbitration or litigation than to have proper counsel on the other side.”
For investors, many of them have technically lost too little to be able to find a lawyer to argue the case while having too much income to qualify for other programs, Lazaro said.
“Most of the other clinical programs, as long as they provide representation to those in need, there are sources of grants available,” she said. “Most of our clients would not qualify for legal aid representation.”
Arthur Levitt, then SEC chairman, started a pilot program in 1997 to start clinics at two schools, and the FINRA Foundation awarded grants of $250,000 each to eight clinics between 2009 and 2012. A 2014 academic study more late describe their “unlikely birth and conceivable death”, which largely came to fruition outside of New York and a few other select locations.
“There’s a lot of need outside of New York,” Iannarone said. “It’s a good solution to solving this problem, and I really hope Congress sees this from both sides of the aisle.”