Friday, February 4, 2011

A New Arbitration Option for Investors

The Securities and Exchange Commission approved a Financial Industry Regulatory Authority, Inc. proposal giving investors the option to have an all-public arbitration panel. Traditionally, FINRA arbitration panels contain three arbitrators: two public arbitrators and one industry arbitrator—with a “nexus to the securities industry.” The public arbitrators are those who do not have any recent ties to the securities industry.

Over the last 27 months FINRA has been testing a voluntary pilot program that presented investors with the option to eliminate the industry arbitrator and replace that arbitrator with a public panelist. Results from the FINRA pilot program showed that the all-public option was chosen about 60 percent of the time. Further, the findings revealed that having the ability to choose the type of arbitration panel improved investor-claimant’s perception of the process.

The SEC cites in its approval that this new all-public option “will enhance the public’s perception that the FINRA securities arbitration process and rules are fair.” Some State regulators and other investor and consumer groups have long-advocated for all-public arbitration panels. The president of the North American Securities Administration Association, David Massey, further supports this move, but suggests that it should go one step further and allow investors to choose between arbitration and litigation.

Although there has been a big push for all-public arbitration panels, the shift has been controversial for some in the industry. Some industry arbitrators argue that because they know how things are supposed to run in the industry, they are in a unique position to be tougher on bad actors, and that they enhance the ability of the panel to reach the correct conclusion.

The option for an all-public arbitration panel is only applicable to future arbitrations and those currently pending before FINRA where the investor has not yet received a list of potential arbitrators. It is important to note that this change does not apply to investor arbitration proceedings in other arbitration forums, such as JAMS or the AAA. The rule change also does not affect disputes between brokerage firms or brokers.

Additional information about the new arbitration rules is available here.

Thursday, February 3, 2011

Another Belated Trend in the Investment World?: Litigation Over Secondary-Market Life Insurance Policy Sales Practices

A few years ago, I represented a law professor in his quest for relief after purchasing life insurance policies on the terminally immortal. The defendant/respondent life insurance/investment-advisory Representative encouraged the good professor to liquidate hundreds of thousands of dollars in mutual funds and to invest those funds in to “viaticals,” in addition to an ever-rotating team of variable annuities. And like a school kid in February, the Representative moved from one RIA to another, spreading an influenza-like strain of failure-to-supervise liability.

It wasn't too long ago that I followed with fascination the story of the untimely death of the mother-in-law of the former CEO of life insurance company Conseco, Inc. The beneficiary of a $15 million life insurance policy on the elderly woman--whose body was found in a bath tub in 2008--was a company owned by a young male companion whose company she shared on the night of her death. The woman's family has brought a federal lawsuit against the policy issuer – American International Group. The Wall Street Journal covered the story with a page-one article in April of last year as well as a follow up article in October of 2010.

In the viatical case I handled, the purchaser of the policy in the secondary market suffered from ongoing premium payments years beyond those estimated in fraudulent life-expectancy documentation provided at the time of purchase. The fraudulent medicals went hand-in-hand with negligent, if not deceptive investment advice. Securities regulators prone to ADD symptomology fixated their fickle eyes upon “viaticals” back in the late 1990's and the first few years of this decade. At the time, viaticals structured upon policies insuring the lives of those suffering from – and unexpectedly still living with – AIDS was the focus on the passing scrutiny. But, in recent months it has been the issuers of the policies that that have brought legal actions, claiming that their underwriters were defrauded with applications failing to disclose a secondary-market purpose.

In the most recent iteration of the litigation fall-out, the insureds themselves are bringing legal actions. Yesterday's Wall Street Journal provided us with an example. Bruce Porter claims that his insurance agent defrauded him with false promises regarding the marketability of a policy on Mr. Porter's life, the premiums for which were being financed by a trust funded by a bank loan Mr. Porter allegedly guaranteed without his knowledge.

I just recently settled a case in which my client was assured that the 20 years of $118,000 annual premiums on a variable whole life policy would be satisfied in their entirety with the cash value of the policy. Not so much.

Most observers attribute the recent uptick of litigation in this area to the market woes of the last three years. I , for one, am unsure that there was actually any abatement in the litigation or finger pointing in this murky area of the already murky “insurance-as-investment” market.