In searching for a better way of policing Wall Street, SEC commissioner Luis Aguilar is onto something: Let investors sue their advisers the way they could sue their doctors for malpractice.
Speaking before state securities regulators (NASAA) in Washington on April 16, Aguilar was not only critical of the industry's sacrosanct rules that prevent investor lawsuits, but new SEC guidelines that could be much tougher in preventing fraud:
"In light of the SEC’s actions to shut out investors’ voices, and in unduly delaying the adoption of investor-friendly rulemaking, it is now more important than ever that defrauded investors have the ability to seek redress against those who participate in defrauding them.
Unfortunately, a series of Supreme Court cases has restricted aiding and abetting liability in private actions."
"Seek redress" is lawyerese for the ability to sue someone, instead of the weak-kneed arbitration clauses in place now. Aguilar continues:
"I agree with NASAA’s request that Congress amend the Securities Exchange Act of 1934 (“Exchange Act”) to allow for a private civil action against a person that provides substantial assistance in violation of the Exchange Act.In 2009, former Senator Arlen Specter introduced legislation that would have amended the Exchange Act so that any person who 'knowingly or recklessly provides substantial assistance to another person would be subject to liability in a private action to the same extent as the person to whom such assistance is provided.' I join with NASAA in calling on Congress to reintroduce this legislation."
But mandatory arbitration handcuffs investors into signing away their rights to sue. It isn't fair and denies them due process. The arbitration clause should be declared unconstitutional.
Out of 134 broker-dealer enforcement cases examined last year by the SEC, roughly 95 cases, or 71%, involved allegations of fraud under the Exchange Act. Most, if not all, of those victims can't have their day in court.
Moreover, even though it was mandated by the Dodd-Frank financial reform act, the SEC has yet to establish an investor advocate office, despite the fact, as Aguilar notes, some 84% of Americans surveyed want government to get involved in better investor protection.
The SEC is also still dithering over rules for the JOBS Act, which would allow crowdfunding for stock offerings and fiduciary rules for brokers. Of the latter issue, the Institute for the Fiduciary Standard is rightfully concerned that the SEC will water down this important rule to afford brokers more protection than investors.
Investors have so few safeguards as it is, that any government agency looking out for them is a beacon in a storm.
When Aguilar says that "a client’s right to go to court to recover monetary damages is an important right that should be preserved and kept in the client’s toolkit," he's not talking about employing more lawyers. He's talking about giving investors the protection they deserve because the agency created to protect them isn't doing its job.
