Friday, September 25, 2009

Trouble Brewing for Small Broker-Dealers?

Trouble Brewing for Small Firms?

Having spent the last 25 years representing small and mid-sized brokerage firms, I completely understand the issues facing these firms. It always seems that FINRA and the SEC fail to pay attention to the ramifications of their rules and regulations on the smaller firms when new regulations are considered.

Those concerns are coming to the forefront again, as the latest economic crisis generates calls for additional rules and regulatory overhaul. SIFMA has taken notice, and is speaking out.

E. John Moloney, the chairman of SIFMA’s small firms committee provided written testimony to the House Committee on Small Business this week, and spoke to On Wall Street magazine afterwards. Moloney, who is the president and chief executive officer of Moloney Securities Co., said that Congress and regulators need to be mindful of unintended consequences in their zeal for regulatory reform.

There are any number of proposals that could negatively impact the small broker-dealer, and Moloney hit a few. He addressed the issue of pre-dispute arbitration agreements, which the NASAA has suddenly decided is a terrible way to resolve disputes. (See my post on their latest position on the topic here). Moloney’s point is that before the use of such agreements are prohibited; the entire process must be examined. As I noted in my discussion, arbitration is often the best way to protect the consumer, as it is not only faster than a traditional court proceeding, it is less expensive.

Today aggrieved investors with smaller claims are able to retain attorneys to represent them, precisely because of the lower cost of arbitration. If pre-dispute arbitration agreements are banned, not only will consumers be able to opt-out of arbitration, brokers and firms will be able to do so as well. The end result: consumers who cannot afford to prosecute their claims in court will have no recourse at all, and “would likely result in a complete denial of justice for individuals with smaller claims” in Moloney’s words.

On Wall Street’s story contains more detail regarding the issue and SIFMA’s concerns, and is available here.
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