In 2002, the average cost per claim could rise to $30,000 that individual financial professionals pay to defend themselves against litigation, and in some cases it could exceed $100,000, according to Walter Baumgardner, a lead member of the legal team for Financial Advisors Legal Association (F.A. Legal).
With the average cost to defend a case quickly approaching $30,000, Baumgardner attributes rising litigation costs to more formalized arbitration rules. Major differences between arbitration and the court system include a six-year statute of limitations to file for arbitration versus four years in most courts. Also in arbitration, there are few motions for summary judgment and rules of evidence do not apply. All of these factors can lengthen the arbitration process, making it very expensive.
F.A. Legal executed more new member agreements in September and October 2001 than it did in all of 2000. President Robin Kern attributes this dramatic increase to the fact that claims are up 70 percent and arbitration is up 25 percent over last year.
In 2002, Baumgardner predicts a surge in claims related to the following areas of the National Association of Security Dealers (NASD) Rules of Conduct:
NASD Rule 3010 Supervision-Members are required to have a system in place to supervise each registered representative or others associated with their firms to make sure they comply with securities laws and regulations and NASD Rules. An increase in churning complaints has prompted a renewed interest in this rule.
NASD Rule 3010 (d)- Review of Transactions and Correspondence- Supervisors will be under closer scrutiny to determine if they are actually supervising registered representatives who work under them. Among other things, under this rule supervisors are supposed to review all incoming and outgoing correspondence. With the rise in electronic correspondence in the Internet age, the scope of this rule is much broader.
NASD Rule 3030 Outside Business Activities of an Associated Person and 3040 Private Securities Transactions of an Associated Person- More and more brokers are being called on the carpet for doing business away from their firms. These rules require that brokers receive written approval from their firms before participating in any private securities transaction. The real question here is just what exactly qualifies as a security. It varies from state-to-state and a few such as telephone payphones, airplane mortgages, and loans to relatives do not appear to be securities at all, but they are in some states. As a policy, it is best to contact state securities departments or bureaus for their definition of a security.
NASD Rule 2310- Recommendation to Customers (Suitability)- When recommending securities to investors, brokers must make sure they are suitable for investors based on their financial status, tax status, investment objectives, or other information. Many retirees who suffered during the recent decline in high-tech markets and are unlikely to recoup their losses are studying this rule carefully.
Las Vegas-based F.A. Legal is a professional national association exclusive to individual financial professionals that provides litigation prevention services, pre-paid legal consultation, referral and legal defense to its members in the event a regulatory complaint or claim is filed against them. F.A. Legal has offices in San Francisco, Kansas City, Detroit, and New York City. Members include broker dealer principals, enrolled agents (EAs), and insurance agents.
Was this article valuable?
Here are more articles you may enjoy.