2. Scott C. Ilgenfritz
Incoming president of the Public Investors Arbitration Bar Association (PIABA)
Scott C. Ilgenfritz has several issues on his radar screen as the incoming president of the Public Investors Arbitration Bar Association (PIABA). The Tampa-based partner at Johnson, Pope, Bokor, Ruppel & Burns, LLP, is casting an especially critical eye on expungements, the legal term for when brokers are allowed to clean their records after arbitration cases.
He suspects both requests for expungement and expungements have increased significantly since May 2009, when the rules on reporting investor complaints were changed. They were changed to require brokerage firms to file reports of alleged broker misconduct, even if their broker was not named as a party in an investor’s arbitration claim. (Investors’ attorneys often name only the firm, even if they are complaining about misconduct by the rep.)
An increased in expungements can erode investor protection. “That’s a real issue as far as the public investor is concerned,” Ilgenfritz says, “because it affects the integrity of the public record as far as individual brokers.”
Ilgenfritz plans to ask PIABA's arbitration committee to undertake a study of awards before and after the rule change to see if expungements have increased. "The panel might enter an award of $50,000, $150,000, and nevertheless grant an expungement request by the broker, which doesn't make a lot of sense to me," Ilgenfritz says. "If the panel is rendering an award in favor of the claimant, it's logical to conclude the broker did something wrong."
Often brokers' attorneys will negotiate for expungement in settling claims with investors. For instance, before reimbursing the investor for lost money, the attorney could require that the investor agree to an expungement. "This is problematic on a lot of levels," he says.
In some circumstances, expungement might be appropriate, but there are strict requirements. "I plan to discuss with FINRA those requirements and see that arbitration panels are following the FINRA rule," he says.
Ilgenfritz also plans to focus on recruiting more arbitrators to increase the diversity of the pool of adjudicators. He will also push for investor education. "I seriously doubt that most mom and pop investors know of their ability to sue their stock brokers or his firm for negligence in recommending unsuitable investments," he says.
3. Richard Ketchum
Head of FINRA
Richard Ketchum, the chairman and chief executive of the Financial Industry Regulatory Authority (FINRA), has a long-time goal: to take over regulation of all financial advisors. Because of the opacity surrounding the leadership of the Securities and Exchange Commission and Congress's long to-do list, it's become a popular parlor game to speculate whether his dream may become reality this year.
FINRA, the industry-funded regulator of broker dealers, has been pushing to assume oversight of the 11,000 registered independent advisors (RIAs) from an underfunded and overburdened SEC. But RIAs, who are lightly regulated now, do not welcome a change. After laying low for much of last year, FINRA officials stepped up the sales pitch at an industry conference in November. One point in the group's favor: because the SEC is spread so thin, RIAs get examined once every 13 years, and almost 40% of RIAs have never been examined. Everyone agrees the regulatory playing field must be leveled. Still, that does not automatically mean that FINRA will be the self-regulated agency (SRO) to take over.
Many RIAs have objected to being regulated by the same organization that oversees brokers. They argue FINRA can't fully appreciate the way RIAs work because they are held to a higher fiduciary standard than brokers, that of acting in their clients' best interests. Meanwhile, brokers need only meet a suitability requirement, selecting investment products based on clients' age and risk tolerance.
However, the Financial Services Institute, the trade group for RIAs, reluctantly threw its support behind FINRA in May. "There is no escaping the fact that this is a classic "the devil you know versus the devil you don't" situation," Joseph Russo, chair of the FSI Board of Directors, wrote in a letter to his members.
In the short term, it's not apparent how FINRA would take over, however.
A bill to remove regulatory duties of RIAs from the SEC and give it to a self-regulatory organization (SRO) has been languishing in Congress since it was introduced in April. Another bill that proposed funding the SEC's examinations by collecting "user fees" from the advisors has suffered a similar fate. Neither got a lot of attention amidst election season and the wrangling over the fiscal cliff. Media reports suggested that the long-standing issue would continue to linger this year, as Congress deals with the thorny issue of reining in the deficit. Plus, new SEC Commissioner Elisse Walter must finish two jobs mandated by Congress—drafting new rules mandated by Dodd-Frank and the JOBS Act—before turning her attention to anything else.