FINANCIAL SERVICES ABUSES IN THE RETAIL STOCK BROKERAGE ENVIRONMENT

Financial services abuses in the retail Stock Brokerage Environment

Financial Services Abuses in the Retail Stock Brokerage Environment

Brokerage firms are trying to “browbeat” aggrieved customers who have filed arbitration assertions against them into resolving their assertions by inundating them with overbroad and burdensome demands for documents and information, according an Investment News item by Bruce Kelly. Firms engage in such intimidation with the articulate acceptance of the financial commerce Regulatory Authority (FINRA), whose directions rule a scheme of mandatory arbitration of clientele assertions against brokerage firms and permit such practices. The industry knows it, and so do state regulators (Hazen, 1990).

“The accusation we get from investors is that they are being overburdened with breakthrough requests from the firms,” Tanya Solov, controller of securities at the Illinois Securities Department, was quoted as saying at the annual gathering of the North American Securities Administrators Association Inc. (“NASAA”) in Baltimore (NASAA, 1989). The North American Securities managers Association, Inc. is the association of the 50 state securities regulators. Discovery is the process by which opposing parties obtain documents and information that are related to the dispute and in the possession or control of the other party. Brokerage firms regularly try to stonewall investors' requests for documents and data, while at the same time demanding output of a huge array of individual documents that are unrelated or only marginally associated to the dispute. Says Ms. Solov: “But now what's occurrence, too, is that the firms have begun inquiring the investors for breakthrough information such as tax comes back for a number of years, all the checking anecdotes you've had, and all the investments you've ever had. It's becoming more common.”

Brokerage companies' discovery practices are abusive and harassing and make FINRA arbitration more costly and burdensome for investors than it should be. It drives the investors to often settle a case where they otherwise may want to litigate, Schlegel states “Brokerage firms routinely employ this kind of overly intrusive and burdensome discovery practice aimed at intimidating public customers is just one more reason why Congress needs to make FINRA arbitration voluntary rather than mandatory as it is today,” (Schlegel, 1994, 88).

The Federal Reserve, for the first time since the great Depression of 1929, opened up the discount window to Wall Street firms. The discount window is a facility created by the Federal Reserve to lend money to member banks for their overnight funding needs. Now, Wall Street firms are permitted to use this facility to fund their "overnight" funding needs.

Banks are highly regulated by the government. Brokerage firms are regulated by pseudo-governmental agencies, the Securities & Exchange Commission, National Association of Securities Dealers, and the Commodity Futures Trading Commission. The pseudo-agencies regulate industry activities related to trading and regulatory situations, not financial soundness of member firms.

Now that the Federal Reserve has opened up its lending facilities to brokerage firms that are in need of overnight funding, the Fed has opened up a can of ...