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Daniel Hetzel
An Uptick in Customer Arbitration?
Litigation risks to understand during the COVID-19 crisis
WHEN there is a downturn in the markets, claims against
broker/dealers (B/Ds) and investment advisers tend to
increase. For example, 8,945 arbitrations were filed in 2003
in response to the declining markets associated with the
" tech wreck. " As markets recovered, claims lessened and
reached a low of 3,238 in 2007. In 2009, however, 7,137 arbitrations
were filed, in the aftermath of the Great Recession.
Once again, as markets recovered, claims progressively
declined, to a low of 3,757 last year.
The Dow Jones peaked at 29,569 this February 20-dropping
to a low of 18,213 on March 23 due to fears over the
novel coronavirus. Although the market has recovered
some, certain investors will have lost money, as a result
of this general market decline. Markets are also likely to
remain volatile for the foreseeable future-which creates
the potential for additional losses. This precipitous decline
in equities markets, coupled with the fact that many investors
may have suddenly lost their job or small business,
provides fertile ground for attorneys from the Public Investors
Arbitration Bar Association (PIABA) to solicit customer
claims. March saw a 14% increase in arbitration filings. But
this recent jump may be unrelated to COVID-19, as it can
take six to 12 months for a claim to actually get filed.
Understand the Risks
To understand what types of claims will likely be filed against
broker/dealer and investment adviser firms, it's instructive to
visit PIABA attorneys' websites. For example, these attorneys
are now arguing that the recent decline in equities markets
was somehow " foreseeable, " such that representatives and
advisers should have moved their clients out of the market
and into " safer " investments. With the benefit of 20/20 hindsight,
they are also identifying sectors of the economy that
have been hit hard by the COVID-19 crisis and are encouraging
customers with alleged over-concentrations in these
sectors-e.g., hospitality or senior housing-to come forward.
PIABA attorneys are also soliciting claims for losses in oil
and gas investments-in fact, portraying the recent decline
in fossil fuel prices as a separate " financial crisis, " which predated
the pandemic and has been exacerbated by it. Further,
these attorneys are targeting claims for illiquid investments,
including nontraded real estate investment trusts (REITs)
and different types of annuities. Finally, they are soliciting
claims for: 1) the use of margin in customer accounts; 2)
failure to execute claims based on firms not being able to
process securities transactions in a timely manner; 3) losses
in the accounts of elderly customers; and 4) claims for failure
to supervise reps and/or the activity in customer accounts.
Mitigating the Risks
To mitigate the risk of arbitration claims being filed, firms
and advisers need to recognize that certain customers may
have lost money, or may have at least experienced temporary
declines in their portfolio, and these customers may be
emotional. These emotions may also be driven by external
factors such as the loss of a job, loss of a small business or
an unexpected illness. Firms and advisers should be proactive
and identify which customers have lost the most money
and then contact them first. Firms and advisers should also
try to identify and contact customers with large positions
in illiquid investments, oil and gas investments or other
sectors of the economy affected by the pandemic.
Firms or advisers should call customers whose accounts
have the largest losses and talk to the customers about
these losses. Although the call may not be easy, it will be
appreciated. It's much better for a customer to find out
about losses in this way as opposed to reading the account
statements themselves and feeling like no one from the firm
cared enough to call. Registered representatives and financial
advisers then need to talk to these customers about
what has changed in their lives since the COVID-19 crisis
and what they want to do going forward.
The risk/reward landscape has changed dramatically
since early March, and customers face difficult decisions
about what to do with their investment portfolios. However,
the first, and easiest, step in this process is to talk to the
customer-be it an individual, a plan or a trust-and document
any changes to their investment objectives, risk tolerance,
financial situation and other " suitability factors. " Then
find out what the customer wants to do and what the customer
thinks, for example, will happen in financial markets and in
the broader economy in the aftermath of COVID-19. Having
these conversations at this point not only helps to prevent the
risk of client claims being filed, but may also provide valuable
evidence in defense of claims that do get filed. Firms and
advisers need to be careful in having these conversations and
not, for example, make any unwitting admissions of liability.
Daniel Hetzel is a partner
in the financial services and regulatory
practice group at Kaufman Dolowich & Voluck, a civil defense litigation
law firm that represents and advises insurers, self-insured businesses and
professionals in a wide range of matters. May-June 2020 | 37

PLANADVISER - May/June 2020

Table of Contents for the Digital Edition of PLANADVISER - May/June 2020

All That Goes Into a Practice
Compliance When It's Tough
A Case For Both
The Alternative Workplace
Damage Control in a Downturn
An Uptick in Customer Arbitration?
Client Relationship Summary
Evaluating Reg BI Compliance
PLANADVISER - May/June 2020 - Cover1
PLANADVISER - May/June 2020 - Cover2
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PLANADVISER - May/June 2020 - 2020 PLANADVISER DCIO Survey
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PLANADVISER - May/June 2020 - All That Goes Into a Practice
PLANADVISER - May/June 2020 - 21
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PLANADVISER - May/June 2020 - 23
PLANADVISER - May/June 2020 - Compliance When It's Tough
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PLANADVISER - May/June 2020 - 26
PLANADVISER - May/June 2020 - 27
PLANADVISER - May/June 2020 - A Case For Both
PLANADVISER - May/June 2020 - 29
PLANADVISER - May/June 2020 - The Alternative Workplace
PLANADVISER - May/June 2020 - 31
PLANADVISER - May/June 2020 - 32
PLANADVISER - May/June 2020 - 33
PLANADVISER - May/June 2020 - Damage Control in a Downturn
PLANADVISER - May/June 2020 - 35
PLANADVISER - May/June 2020 - 36
PLANADVISER - May/June 2020 - An Uptick in Customer Arbitration?
PLANADVISER - May/June 2020 - Client Relationship Summary
PLANADVISER - May/June 2020 - Evaluating Reg BI Compliance
PLANADVISER - May/June 2020 - 40
PLANADVISER - May/June 2020 - Cover3
PLANADVISER - May/June 2020 - Cover4