Some readers thought last week's
examination of the brokerage business was unfair. Others thought it was right on.
The topic: the punishment of wayward brokers -- or the lack thereof.
The regulatory arm of
National Association of Securities Dealers
bars or suspends few brokers each year when compared with the hundreds of thousands doing business. Last year, only 0.07% of the 620,387 registered brokers were barred from the industry, while 0.05% were suspended.
will tell you that the numbers are low because the industry is a clean one. Less optimistic observers might say it's because people just don't get caught.
writes in with another reason.
"Another issue which keeps the number of NASDR sanctions down is that the first recourse for a client is the arbitration process. If the panel (as you noted) so chooses, it can recommend disciplinary action from the NASDR," writes Lowe. "However, so very few complaints ever make it to arbitration, the brokerage firms avoid this possibility in the vast majority of cases. Nearly all the arbitrations never actually become arbitrations, but settle during the process as evidence is uncovered and the brokerage firms weigh their potential for larger claims awarded by a panel," he continues.
"I've been placed, as an arbitrator, on numerous panels in the past three years or so, but have only heard one case. The rest have settled at the eleventh hour!"
The majority of arbitration cases that are filed every year are settled before they're even heard before a panel.
Rick Ryder, editor of the newsletter
Securities Arbitration Commentator
, says that about 35% to 40% of the roughly 6,500 cases filed each year go to arbitrators. That means 60% to 65% of cases settle before they reach a hearing.
"The big firms have dispute-resolution programs. Sometimes that's done internally," says Ryder. If the investor and the broker's firm cannot come to an agreement, the case will probably be filed as an arbitration, where the complaint can be heard before one arbitrator or a panel of three if it's not settled before reaching that point.
Mediation, a formalized negotiation, is an alternative to arbitration that NASD Regulation has been promoting with great zeal.
Currently, about 20% of the arbitration docket at NASDR, which runs the largest forum for securities arbitration, uses the mediation process. The biggest advantage to mediation is that the proceeding is over in 60 to 90 days and it's less expensive, says Ryder.
However, "the results are confidential and don't have to be published anywhere," Ryder adds.
Stop the Abuse
Some of the readers who wrote in are brokers who are tired of the accusations.
"It would be nice if you got to the point without putting more negative stuff out there about brokers. There has been too much of this," writes
. "Our life is difficult enough and most of us do a very good job in a very difficult market. We are getting squeezed in the middle on commissions and fooled by all the game playing going on by other market players. In addition, I think it is safe to say in retrospect, that we performed an important buffer between do-it-yourselfers who have ruined themselves and don't understand the investing process."
Another reader, who wished to remain anonymous, takes that argument a step further. "I've been in this business for 15 years and have seen countless fabricated 'situations' created by unscrupulous investors. In this litigious society, it is common for clients that make a bad (unsolicited) gamble to suddenly cry, 'I'm unsophisticated and gee I shouldn't have been allowed to
blow myself up
,' " the reader writes.
Brokers do have to adhere to so-called suitability requirements, meaning the broker isn't allowed to make transactions that are inappropriate based on a client's age, sophistication and risk tolerance. Perhaps, a client could use that obligation against a broker.
But are the "fabricated" complaints the anonymous reader laments common? That's debatable. But as the cliche goes, there are always two sides to the story. You'll find deceitful people among the brokers and the investors.
Unfortunately, nobody really knows who those people are until it's too late.