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Could Stock Broker Arbitration Be Nearing an End?

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Tempe, AZFor many years now, stock broker arbitration has been the only means of settling a dispute with a stock broker or a brokerage firm. Regardless of whether the allegation was stock broker fraud, mismanagement of funds or other unethical dealings, investors had to turn to stock broker arbitration to settle their dispute. However, a recent request from President Barack Obama might just change all that.

StockbrokerAccording to Forbes, in June 2009, President Obama asked the Securities and Exchange Commission (SEC) to consider whether mandatory arbitration should continue in the manner it has for the past few decades. The Wall Street Journal reports that President Obama's regulatory plan, "Financial Regulatory Reform: A New Foundation," would create a new agency called the Consumer Financial Protection Agency, which would have the authority to either ban or restrict the use of mandatory arbitration clauses in consumer agreements.

There are other critics of Financial Industry Regulatory Authority (FINRA) arbitration. Sen. Russ Feingold has introduced the "Arbitration Fairness Act," which would make consumer arbitration agreements unenforceable. Furthermore, a group known as the Public Investors Arbitration Bar Association has said that the industry arbitrator who sits on every FINRA arbitration panel should be eliminated from the process. Some people argue that having an arbitrator with such close ties to the industry makes it more likely that claimants will not have an impartial hearing.

Of course, FINRA has been criticized, along with the SEC, for not catching on to Bernard Madoff's Ponzi scheme, despite having investigated him. Madoff's scheme, which he has admitted to conducting, involved billions of dollars given to him by clients. Those clients included individuals, charities and institutions. Some of his clients say they lost everything when Madoff's scheme came out into the open.

Madoff could be sentenced to up to 150 years in prison for his Ponzi scheme, in which he used money from new investors to pay returns to other clients. According to Madoff's confession, he never actually invested the money his clients gave him but it took years before he was caught—and he was only caught after he confessed his actions to his sons.

Although it must be said that not all brokers are unethical—in fact, the vast majority are ethical, hard working people—it is also possible to run into a financial advisor who is not necessarily on the up and up. For example, The Charlotte Observer notes that in September 2008, FINRA suspended a local financial advisor based on allegations he falsified customers' signatures on retirement account documents. Only a month later, a different advisor, also local, was accused by FINRA of copying customers' signatures onto forms explaining financial transactions. More recently, but still locally, an advisor pleaded guilty to charges of fraud after he was accused of stealing almost $3 million from an elderly client.

Where there are large numbers of people who have been wronged by 1 stockbroker or brokerage firm, some clients have joined together to file a class action lawsuit. However, for the time being, the vast majority of investors have only FINRA arbitration to turn to when they have a grievance with their stockbroker or brokerage firm. Common complaints against financial advisors include negligence, unsuitable advice and misrepresentation.

It is important to keep in mind that as losses rise, so do complaints against stockbrokers and financial advisors. That means that during these tough economic times, there are likely a higher number of FINRA arbitrations being filed, which in turn means that the waiting period to have your claim heard is probably getting longer. It might be a good idea to act sooner rather than later if you feel your financial advisor has acted unethically.


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