Investor Justice Clinic

FINRA Announces New and Improved BrokerCheck


On November 12, 2013, the Financial Industry Regulatory Authority (FINRA) announced a new method of BrokerCheck that will allow potential investors to review information on the background of investment professionals before investing their money.

According to Derek Linden, FINRA executive vice president of registration and disclosure, “Investors using BrokerCheck will encounter a more user-friendly interface that allows them to quickly find information that can help them decide if an investment professional is right for them.”

Investors can utilize both BrokerCheck and the Investment Adviser Public Disclosure (IAPD) to search the background of any investment professional or firm from the FINRA homepage. This will enable investors to more thoroughly evaluate whom they should trust to make their investments. These new tools will also help prevent brokers from taking advantage of potential future investors because any negative information will be more readily available to these future investors.


New Telephonic Mediation is Affordable Option for Resolving Disputes


In January 2013, FINRA launched a new telephonic mediation pilot program offering parties in simplified cases pro bono or reduced-fee telephone mediation. The program is voluntary and open to cases involving claims of $50,000 or less.

Mediation is an informal, voluntary process in which a mediator facilitates negotiations between disputing parties, and telephonic mediation is the most affordable dispute resolution forum offered by FINRA. For claims involving less than $25,000, mediators serve on a pro bono basis. For claims between $25,000 and $50,000, mediators are available for $50 per hour. FINRA charges no administrative fees for these cases. The mediator’s role is to help the parties find a mutually acceptable solution to the dispute, and mediation can be faster and less expensive than arbitration or litigation. If the parties agree to mediate, they will not give up any right to arbitrate or litigate if they cannot reach a satisfactory settlement. 


Crowdfunding Theoretical Aspect


“True crowdfunding” is the third piece of the JOBS Act, which has approved lighter reporting requirement for start-ups and lifted the longstanding ban on general solicitation for fundraising by start-ups and investment funds. This means entrepreneurs and start up companies looking for investors will be able to solicit over the internet from the general public. This marks a major shift in how small U.S. companies can raise money in the private securities market, as small businesses now may raise up to $1 million a year through unaccredited investors.

There are some noteworthy restrictions. Most importantly crowdfunding caps an amount an issuer can raise to $1 million in a 12-month period. Crowdfunding also caps the amount a person can invest in 12-month period at 10% annual income or net worth (incomes of $100,000 or more) OR the greater of $2,000 or 5% annual income or net worth (incomes less than $100,000). Crowdfunding, also, must be done through a registered broker-dealer or funding portal, requires a disclosure document to be filed with the SEC, and requires scaled financial disclosure, including audited financial statements for raises over $500,000. Crowdfunding does not allow advertising except solely to direct investors to the appropriate broker/funding portal. Lastly, annual reports must be filed with the SEC by a company that completes a crowdfunding round.


FINRA Expands Expungement Guidance Following PIABA Study


The Financial Industry Regulatory Authority (FINRA) recently issued a notice to arbitrators and parties that expanded their guidance on expungement hearings and the standards used to determine whether to grant an expungement. When investors file customer complaints against their securities brokers with FINRA, these complaints typically appear on a database called the Central Registration Depository (CRD). The CRD database contains information on licensing, employment, disciplinary, and customer complaint information on brokers and brokerage firms. However, brokers who have had complaints filed against them by investors can request an arbitration panel to expunge the complaint from the CRD so that when investors search for the broker’s name using FINRA’s BrokerCheck, the complaint will not appear in the database.


SEC Warns Investors of Fraudulent Private Oil and Gas Offerings


The SEC’s Office of Investor Education and Advocacy recently issued an alert warning investors of potentially fraudulent activity involving private offerings of securities for oil and gas ventures.[1]

The number of fraud cases regarding these commodities has risen in recent years and the SEC and the states have brought charges in several cases involving "great opportunities" that turned out to be scams.

Before investing in a private oil and gas offering, the SEC encourages individuals to consider who is asking you to invest and whether the investment is right for you.  It is also important to make sure that the person offering to sell you the securities is a registered broker and a member of FINRA.  A registered broker, not connected with the offering, can help you objectively analyze the investment and will provide you with certain legal protections.

The SEC's alert also cautions investors about indicators of potential scams. According to the SEC, one common thread among fraudulent schemes, including those related to oil and gas, are claims that they are about to strike it rich, or that returns are guaranteed. Investors should always be skeptical of high return low risk sales pitches.

Investors should also be aware that privately offered securities have limited liquidity and can be difficult or impossible to resell.  Before committing to a privately offered oil and gas venture, the SEC urges investors to ask certain questions and not to invest unless they are satisfied with the answers.  Consider inquiring as to the company’s track record in the industry and how the proceeds of the investment will be used. Do your own research and, if necessary, consult an independent specialist in oil and gas.

If you believe you have invested in a fraudulent oil and gas private offering, please contact USF’s Investor Justice Clinic at or (415) 422-5326 for a free case evaluation.


Mediation Of Customer Complaints In Smaller Claims


FINRA has launched a pilot program for parties in small claims arbitration cases for free or low-cost telephone mediation.  The program launched on January 15, 2013 and is available to cases involving claims of $50,000 or less.

The pilot program offers mediation at no cost for arbitration claims of $25,000 or less and $50 per hour for cases with claims of $25,000 to $50,000.  Mediation is an informal, voluntary process in which a mediator facilitates negotiations between disputing parties.  The mediator's role is to help the parties find a mutually acceptable solution to the dispute.  FINRA's mediation process has achieved an 80% success rate!

Additional information can be seen at

The USF Investor Justice Clinic will be able to take advantage of this pilot program as we assist many clients with small claims arbitration cases each year.  The pilot program should allow us to decrease costs  in cases where mediation is appropriate, and will allow us to assist additional clients each year.

The USF Investor Justice helps investors who believe their brokers or investment advisors have not been acting in their best interest.  If you believe you fall into this category, please contact the Clinic at for your FREE case evaluation.


The Dangers of Investing With Margin Loans


Margin loans involve the use of borrowing money, often to buy securities. Typically, investors are allowed to borrow up to 50% of the value of  securities they own.  This means that for every dollar an investor has used to purchase a stock or other security, they are able to borrow an additional dollar from the brokerage.

Margin loans increase both potential gains and losses for investory.. An important risk associated with margin loans, is the fact that these loans are subject to “calls” by the brokerage firm if the securities used as collateral for the loan fall below a certain value. These “margin calls” allow a brokerage to sell off an investor’s securities at potentially huge losses, unless the investor is able to provide additional cash to secure the margin loan.

For example, suppose an investor spent $50,000 to purchase a stock worth $100,000 and borrowed the remaining $50,000 from a brokerage with a margin loan.  Disregarding the amount of interest charged on the loan which can be high if the stock’s value dropped  to $75,000, the brokerage  could ask the investor to come up with the $25,000 in lost value of the stock.  If the investor was not able to come up with the money in a short period of time, the brokerage could sell off the inventory’s stock to satisfy the $50,000 loan. This would leave the investor with a $25,000 loss. Had the investor simply invested the $50,000 he actually had in the same stock, the investor would have lost only $12,500.

In an absolute worst case scenario, an investor could end up with nothing and still owe money to a brokerage firm to repay the margin loan. For example, after the dot-com crash earlier this decade, some investors were stuck owing money on their loans even after their brokerage firms liquidated their entire portfolios.

While margin loans may look appealing to the optimistic, they carry a high level of risk that can devastate an inexperienced investor.

If you have lost money by taking out a margin loan without being informed by your broker of the risks , please contact USF’s Investor Justice Clinic at or (415) 422-5326 for a free case evaluation.


Schwab Class Action Ban: FINRA to Appeal


A recent decision from a financial industry regulator panel allowed Charles Schwab to implement its new customer agreement which forces customers to waive their right to participate in class action suits against Charles Schwab.  The new customer agreement, revised by Schwab in 2011, includes a waiver requiring arbitration for all customer claims against the firm.  This means that customers will not be allowed to file claims in court, leaving no pathway for them to file class action suits which only operate within the court framework and not within arbitration proceedings.

The Financial Industry Regulatory Authority (FINRA) complaint filed against Schwab last year was dismissed even though the firm’s new customer agreement is in violation of FINRA rules due to conflict with federal arbitration laws under the Federal Arbitration Act.  FINRA is appealing the decision on the grounds that Schwab’s customer agreement is in violation of FINRA’S rules, which prohibit brokerage firms from requiring clients to sign class action waivers.

The implementation of a mandatory waiver of the right to class action lawsuits by brokerage firms brings into question whether investors are getting the full protection of the law under the new agreement.  Investors are limited by the new customer agreements to pursuing arbitration through FINRA.  Under the FINRA framework they are unable to pursue claims as a class action suits, which may be more beneficial to their interests.

With the decision to allow Schwab’s new customer agreement’s limitations on class action suits , it is likely other securities firms will follow its example by requiring class action waiver provisions in their own customer agreements.  Securities firms view arbitration as quicker and cheaper than litigation making mandatory arbitration provisions appealing.

FINRA did prevail against Schwab in contesting the provision of its new agreement that prevented arbitrators from consolidating clients in hearings as being in violation of FINRA regulations.  FINRA rules do not allow arbitration restrictions such as this new provision and federal law does not regulate how arbitration is conducted making the FINRA rule enforceable.  Schwab was fined $500,000 for implementing this restriction on arbitrator consolidation of hearings in violation of FINRA rules and ordered to remove this provision from the new agreement.



Who Should Regulate Investment Advisors?


Over the past few years there has been growing speculation that the Financial Industry Regulatory Authority (FINRA) will take over the regulation of Investment Advisors, which is currently a Securities and Exchange Commission function.  FINRA currently regulates the brokerage business. (Roughly, an Investment Advisor manages a client’s money for a fee; brokers---also called financial advisors and registered representatives---do not charge for advice, but usually receive commissions for the purchase and sale of securities.)

Although there is not unanimous agreement about the wisdom of FINRA stepping in, all parties seem to agree at a minimum that the SEC needs additional resources in order “to take a more robust stance in the investment advisory regulatory structure.”

A 2011 legislative bill from House Financial Services Committee Chairman Spencer Bachus, R-Ala, looks to enhance “oversight and transparency,” as well as “boost regulation” for investment advisors by transferring regulatory duties from the SEC to FINRA.

While many embrace the new role for FINRA, opponents prefer “fees for examinations rather than a self-regulatory organization.” Another critic stated he believes FINRA “lacks the accountability and transparency necessary to oversee the investment advice business adequately.”

It is clear is that change is necessary to prevent future investment advisor schemes from defrauding investors.  Congress will continue to hold hearings on the matter and hopefully will resolve the question as soon as possible.

If you have invested with an investment advisor or broker and believe that you have been taken advantage of or deceived, please contact USF’s Investor Justice Clinic at or (415) 422-5326 for a free case evaluation.


Startup Investment Opportunities Coming to your Facebook Page?


The recently signed Jumpstart Our Business Startups (JOBS) Act allows a simplified process for small startup firms to obtain early stage funding.  Under the JOBS Act, investors can pool their assets to fund a startup by buying a small equity stake in the company.  The JOBS Act places much fewer restrictions on these types of investments including the types of investors that can participate.

Prior to the JOBS Act only certain “accredited investors” could make these types of high-risk investments.  “Accredited investors,” because of their higher than average net worth (excess of $1mm excluding the primary residence) OR higher than average annual income ($200,000 individual or $300,000 for a couple) are assumed  to be able to better understand the inherent risks in unregulated startup investing.

It is expected that small investors will flock to these investment opportunities with resulting benefits to investors and the start up companies.

Under the JOBS Act, in order to gather new investors, companies must use the services of an approved intermediary.  The SEC recently released proposed rules regulating the ability of these intermediaries to use “mass marketing” of crowdfunding opportunities.  Generally speaking, an intermediary can use mass marketing so long as it has reason to believe the person being asked to investis an accredited investor.   The proposed rule lays out a number of factors an intermediary can use to justify its reasonable belief that who they are dealing with is an accredited investor.  However, the realities of the selling of investments is,that if left unchecked, the JOBS Act leaves open a great possibility for unscrupulous brokers to solicit unsuitable investments to unsophisticated investors.

If you have been contacted regarding crowdfunding opportunities or have lost money by crowdfunding, please e-mail the USF Investor Justice Clinic at for your FREE case evaluation.