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FINRA Arbitration – What Is A Product Case?

The Financial Industry Regulatory Authority (“FINRA”) provides an arbitration process for investors to resolve disputes with their securities advisors. Among other things, the FINRA arbitration process helps parties avoid the expenses and waiting periods associated with filing a case in state or federal court. FINRA also writes special rules and regulations specially tailored to these investment-related disputes. As commissions on trading stocks has gone to zero, Wall Street has replaced recommending stocks with a large number of high commission alternative investments or “products” which can be complex for the average investor but lucrative for Wall Street. Over the last decade, we have seen a substantial rise in product cases for the sale of investments which were sold without disclosure of the fees or risks or alternative investments which failed to perform the way the investment was designed. Frequently, risks and costs are buried deep in the paperwork and products are falsely sold as alternatives to the stock market with reduced risk. FINRA Provides Special Guidance For Arbitrations Concerning Bad “Products” Unfortunately, many investors suffer losses due to broker-dealer firms failing to conduct sufficient due diligence on investment products before recommending them to customers. These “products” include private placements, real estate investment trusts (“REITs”), and busines development companies (“BDCs”). It is often the case that the company managing the product pays the broker a high commission to recommend the investment, incentivizing broker-dealer firms to sell the product in high volumes to a multitude of customers, all without properly investigating the investment. When things fall apart and the value of the investment plummets, the investors are left alone to pick up the pieces, often suffering substantial losses and prolonged illiquidity.The Financial Industry Regulatory Authority (“FINRA”) provides an arbitration process for investors to resolve disputes with their securities advisors. Among other things, the FINRA arbitration process helps parties avoid the expenses and waiting periods associated with filing a case in state or federal court. FINRA also writes special rules and regulations specially tailored to these investment-related disputes.

As commissions on trading stocks has gone to zero, Wall Street has replaced recommending stocks with a large number of high commission alternative investments or “products” which can be complex for the average investor but lucrative for Wall Street. Over the last decade, we have seen a substantial rise in product cases for the sale of investments which were sold without disclosure of the fees or risks or alternative investments which failed to perform the way the investment was designed. Frequently, risks and costs are buried deep in the paperwork and products are falsely sold as alternatives to the stock market with reduced risk.

FINRA Provides Special Guidance For Arbitrations Concerning Bad “Products”

Unfortunately, many investors suffer losses due to broker-dealer firms failing to conduct sufficient due diligence on investment products before recommending them to customers. These “products” include private placements, real estate investment trusts (“REITs”), and busines development companies (“BDCs”). It is often the case that the company managing the product pays the broker a high commission to recommend the investment, incentivizing broker-dealer firms to sell the product in high volumes to a multitude of customers, all without properly investigating the investment. When things fall apart and the value of the investment plummets, the investors are left alone to pick up the pieces, often suffering substantial losses and prolonged illiquidity.

FINRA has taken steps to help guide parties and arbitrators through these “product cases.” In 2013, FINRA amended its Discovery Guide to include additional documents a broker-dealer firm may be required to produce in disputes concerning the recommendation of these products.

FINRA defines “product cases” as “cases in which one or more of the asserted claims centers around allegations regarding the widespread mismarketing or defective development if a specific security or group of securities.” In these product cases, FINRA notes the following special circumstances when it comes to discovery:

  • The volume of documents tends to be much greater
  • Multiple investor claimants may seek the same documents
  • The documents are not client specific
  • The product at issue is more likely to be the subject of a regulatory investigation
  • The cases are more likely to involve a class action with documents subject to a mandatory hold
  • The same documents may have been produced to multiple parties in other cases involving the same security or to regulators
  • Documents are more likely to relate to due diligence analyses performed by persons who did not handle the claimant’s account

These product cases involve complex investment products. Broker-dealers owe customers certain duties and responsibilities to conduct due diligence and understand the investments they recommend, as well as to make certain disclosures about the qualities and risks of these products before selling them. In order to determine whether a broker has upheld these responsibilities, a careful review of these due diligence and marketing documents is necessary.

Silver Law Group May Be Able to Help You Recover Losses in Bad Investment Products

Silver Law Group represents investors nationwide who suffered losses in a variety of bad “products,” including GPB, Hospitality Investors Trust (ARC Hospitality Trust), American Finance Trust (AFIN), and many more. If you were sold a private placement, REIT, or BDC and have suffered losses, you may be entitled to recovery of your losses through FINRA arbitration.

Silver Law Group is experienced in representing investors in securities and investment fraud cases nationwide. Our product case lawyers can help you recover investment losses due to stockbroker misconduct and most cases are handled on a contingency fee basis, meaning you won’t owe us any money until we recover your money for you. Scott Silver, managing partner of Silver Law Group, is the chairman of the Securities and Financial Fraud Group of the American Association of Justice and has extensive experience representing investors in securities and investment fraud cases. Please contact us for a confidential consultation at ssilver@silverlaw.com or toll free at (800) 975-4345.

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