Weapons of Reason

By Sean Banks J.D. – Dir. of Risk Management

“Never let the future disturb you. You will meet it, if you have to, [br]with the same weapons of reason which today arm you against the present.” [br]Marcus Aurelius

A Registered Investment Advisor (RIA), axiomatically, embarks upon a career in which risk is a uniquely intensive reality, both for the client and the RIA.  As is required by the profession, the prudent RIA takes measures to mitigate those risks, part of which includes employing predictive analyses. The Financial Industry Regulatory Authority (FINRA) operates the largest dispute resolution forum in the securities industry and publishes statistics related to the process it oversees.  When looking at the first graph (“Yearly Volume Comparison”)[1]below, which contains the cases filed through FINRA from 1998 through May 2013, the peak years of 2003 and 2009 are striking.  Contrasted with the market, it becomes noticeable that as Wall Street “Bears” the cases filed against RIA’s “Bull.”


While the above graph is most significant in forecasting the trend in claims by volume the chart below (“Arbitration Cases Served by Controversy”)[2]provides the types of claims brought forth. Each year the greatest controversy by volume arbitrated by FINRA concerns Breach of Fiduciary Duty.  However, other highly disputed controversies include, Negligence, Misrepresentation, Failing to Supervise, Breach of Contract, Omission of Facts, and Unsuitability.

arb_case_controv_inv And while FINRA claims appear linked to trends in the market, SEC enforcement statistics[4](see below), with some fluctuation, suggest a general trend in the increase of enforcement actions.  As illustrated in the chart below, SEC enforcement actions rose from 679 in 2003 to 734 in 2012. More interestingly, Mutual Fund/RIA claims rose from 72 to 147 over the same period!


As evident by the charts above and below[5]in light of the current trend in market performance, enforcement action and associated costs, including penalties is likely to rise, particularly for the RIA.  The RIA’s defensive weapons of reason, those that eliminate risk. As always, we remain available to the RIA community to assist in protecting each firm’s practice properly.


[1]http://www.finra.org/ArbitrationAndMediation/FINRADisputeResolution/AdditionalResources/Statistics/ [br][2]Id. [br][3]Each case can be coded to contain multiple controversy types. Therefore the columns in this table cannot be totaled to determine the number of cases served in a year. [br][4]http://www.sec.gov/news/newsroom/images/enfstats.pdf [br][5]http://online.wsj.com/article/SB10001424127887323893504578555990184592624.html#project% 3DWhitechrtPRINT%26articleTabs%3Dinteractive

Golsan Scruggs is an insurance brokerage firm operating throughout the United States specializing in investment advisor E&O errors & omissions insurance (aka professional liability insurance) for RIA registered investment advisors.. As one of the largest insurers of RIA firms in the U.S., we have a dedicated staff that understands the risks of the financial services industry and delivers superior results.  We make the underwriting process painless.