Articles Posted in Securities

The Wall Street Journal published an article by Jason Zweig and Andrea Fuller on August 31, 2020 explaining their analysis of how financial advisers fell short in meeting their obligations to disclose important information to individual investors like you.[1] The Wall Street Journal analyzed the filings made by investment advisers on the SEC Form CRS.  The article and analysis revealed what seems to be disturbing lack of candor by investment advisers.

It is fundamental to full and fair disclosure that if an individual investor wants to know whether their financial adviser, or a financial adviser they want to hire, has any legal or regulatory problems, that this information is easy for an investor to obtain.  To that end, the Securities and Exchange Commission (“SEC”) sought to simplify the process by which an individual investor can access this information.  The result of the SEC’s efforts was the “Form CRS.”  “CRS” stands for customer (or client) relationship summary.

This information has been available.  However, for the average “Main Street” individual investor, the information was not easy to find.  And when the customer complaint and regulatory history was found, the disclosures were difficult to understand.  The Form CRS[2] was intended to address this complexity and difficulty through simplification.  Thus, the SEC created what SEC Chairman Jay Clayton said in November 2018 would be a “clear and concise” document.  I think they succeeded.  Wall Street, however, failed.

In Interactive Brokers, LLC v. Saroop, the United States Federal Court of Appeals for the Fourth Circuit made it clear that a broker’s contract that incorporates FINRA rules supports a breach of contract claim when the broker violates FINRA.  Further, this case reinforces the public policy of using arbitration to lower costs and create an efficient resolution forum for disputes.

Interactive Brokers that Saroop and two others (collectively, the “Investors”) opened accounts with Interactive Brokers where they were required to sign the contracts that provided that all transactions were subject to “rules and policies of relevant market and clearinghouses, and applicable laws and regulations.”  Interactive Brokers hired a third-party to trade the Investors’ accounts (the “Manager”).  Using the Investors’ margin accounts, the Manager invested in short-term futures, with a symbol of VXX.  The Manager sold naked call options for VXX, meaning that the Investors had the right to buy VVX at a set price until the option expired.  This works great if the market price increases but is a serious problem if the value decreases.  To make matters worse, the Manager traded using the Investors’ margin accounts.  A margin account is when you borrow money to purchase stock. This means that you can lose more money than you invested.

The high risk associated with margin trading prompted FINRA to prohibit purchases of VXX using margin.

Contact Information