Despite the anger harbored by Main Street investors toward brokers who sold them auction-rate securities, some of the people trying to protect consumers say individual brokers may not be to blame.
Instead, some regulators and investors’ lawyers argue, brokerage firms are responsible. The firms had a bird’s-eye view of the now-frozen auction-rate securities market and should have foreseen the failure, they believe.
Also, some say, it is reasonable to expect brokers to rely on their firms’ descriptions of products; they aren’t obligated to research an investment if their firms had explained it to them.
Even if brokers are legally blameless, their reputations may be tarnished. As the business attempts to shift to a more-relationship-based model, many investors are disappointed that their financial advisers were caught off guard by the collapse of the auction market.
The market was estimated at $330 billion, held by individuals and institutions, when it collapsed in February. Many individual investors say they received no disclosure of risks when they purchased these products. Brokers never gave them prospectuses to read, they say, and they were never told auctions could fail.
FINRA arbitration is a dispute resolution process administered by the Financial Industry Regulatory Authority (FINRA). It provides a forum for resolving monetary disputes between investors and securities firms or brokers without going to court. The process is generally faster and less formal than traditional litigation, and decisions are made by a panel of arbitrators who are knowledgeable in securities law and industry practices. Arbitration through FINRA is binding, meaning the decision is final and enforceable in court. This process is commonly used for disputes involving investment losses, unsuitable recommendations, or misrepresentation. Investors must agree to arbitration in their brokerage agreements, often as a condition of opening an account. While arbitration can be a more efficient way to resolve disputes, it also has limitations, such as limited appeal options and potentially high costs. Despite these challenges, FINRA arbitration remains a crucial mechanism for investor protection and dispute resolution in the securities industry.