Clinic Comments on FINRA Proposal to Change Arbitrator Chair Qualifications

As part of its mission of serving regular investors, the Investor Advocacy Clinic reviews FINRA rule proposals and submits comments after fully evaluating the proposal.  Earlier this week, the clinic commented on FINRA SR-2016-033, a proposal that would require change the qualifications necessary to become a public chair qualified arbitrator.

The clinic’s comment, drafted primarily by fall 2016 student intern Geoffrey Hafer, praised FINRA for taking steps to increase the roster of public, chair qualified arbitrators.  Hafer noted that FINRA should also revisit the definition of “public” arbitrators and consider revisions in light of the size of the current pool due to a recent change in the definition.  Moreover, the clinic recommended that alternative training be available to arbitrators who wish to serve as a chair to ensure that FINRA arbitrators continue to be of the highest quality.  Click here to read the Clinic’s comment letter in its entirety.

SEC Legal News: Form ADV

By Michael Williford, Fall 2016 Student Intern

Rules promulgated under the Investment Adviser Act of 1940 include a requirement that investment advisers deliver to each client or prospective client something called a Form ADV. The part of the form often referred to as the “Brochure Rule,” contains some basic information the law requires investment advisers to disclose before or at the time the adviser enters into an investment adviser contract with a client. The Brochure Rule compels an adviser to disclose to clients information about potential conflicts of interest, even if the adviser believes the conflicts will not affect the advice the adviser provides to clients. The rule also requires advisers to disclose information about how the adviser is compensated.

We all know the joke about the government— “there’s a form for that.” But, the form ADV is a powerful tool investors can use to assess an adviser with whom they may consider doing business. The Securities and Exchange Commission adopted some changes to the form last month that are worth pointing out. The changes to the form are designed to increase the quality of the information available to customers by increasing the degree of transparency in the information required. Continue reading

Investor Advocacy Clinic Partners with Secretary of State Office on Investor Education

Beginning this semester, Georgia State University College of Law’s Investor Advocacy Clinic is partnering with Georgia Secretary of State Brian Kemp’s office to enhance investor education in Georgia.

“Our partnership is driven by the need for improved and more highly visible investor education,” stated Secretary Kemp. “We want to provide Georgians with dynamic resources that will better enable them to manage their savings investments and avoid being victimized by investment schemes and scams.”

Under the direction of Nicole G. Iannarone, assistant clinical professor and clinic director, students are working with the Securities Division by developing informational resources for investors to make informed investment decisions and avoid investor fraud.

“Our goal is to meet investors where they are with information that is interesting, easy to understand and meaningful,” Iannarone said.

As part of the partnership, clinic students also are helping the division’s attorneys with cases, investigating compliance matters and complaints.

“In the clinic, we historically only represented clients with claims against broker dealers associated with FINRA, the Financial Industry Regulatory Authority,” Iannarone said. “Now, we can give students a 360-degree view of securities regulation and administration. Our students will explore how regulation affects investment advisers, how investment professionals are overseen and how the state securities framework operates.”

According to Noula Zaharis, director of the Securities Division, the partnership with Georgia State Law is one that could serve as a model for other states and law schools.

“By working with the clinic, we are able to expand our resources for cases and educational outreach efforts,” said Zaharis. “This is also a valuable educational experience for the students.”

Georgia State Law alumni Candice Broce (J.D. ’14) and Benjamin Martin (J.D. ’11) work at the Secretary of State’s office and plan to work with clinic students in various capacities.

“Ben and I both had terrific experiential learning opportunities while at Georgia State Law,” Broce said. “I’m excited that now we can pay it forward by working with current students.”

The Securities Division of the Secretary of State’s Office is charged with the implementation and enforcement of the Georgia Uniform Securities Act of 2008. The Securities Division registers securities offered or sold in Georgia, oversees firms and individuals selling securities or providing investment advice in Georgia, enforces the Securities Act through criminal, civil and administrative penalties, and promotes investor education.

Wednesday’s Word: The Fed

mary-annBy Mary Ann Hanke, Fall 2016 Student Intern

A July 2016 headline from the Wall Street Journal read, “Fed Officials Gain Confidence They Can Raise Rates This Year.” A few follow-up questions spring to mind:

  • Who is “The Fed?”
  • How do they have the authority to raise my interest rates?
  • Why does it seem like raising interest rates is a good thing?

This Wednesday Word post will, hopefully, answer these very important questions in turn. Continue reading

Investor Alert: Red Flags for Senior Investors

By David Hsu, Fall 2016 Student Intern

Over the summer, the SEC updated their investor alert for seniors entitled: Five Red Flags of Investment Fraud. It highlighted five important things seniors should take care to look for to identify potentially fraudulent investments. Continue reading

What do Brix and Donald Trump have to do with the Value of Your Investment Portfolio?

By Majda Muhic, Fall 2016 Student Intern

On June 24, 2016, in light of the British vote to leave the European Union, FINRA re-issued its Investor Alert Market Risks: What You Don’t Know Can Hurt You. The alert focuses on the elusive notion of market risk: the risk that overall shifts in the market may devalue your investment portfolio. While market risk factors may seem far removed from your doorstep, or your bank account, their effects are palpable and may be devastating. Just think back to the recent recession.

Unlike business, or “non-systematic” risks associated with a particular product, company or industry, market risks are systemic – and utterly beyond your control. The FINRA alert outlines the main types of market risks and provides some points on how to manage the unmanageable.

Rainbow of Risks

The specter of inflation may be the most familiar yet elusive risk of all. Inflation is the general increase in prices and accompanying decrease in the purchasing power of your money: yesterday you could buy four popsicles for a dollar and today only one. This decrease in cash worth inevitably decreases the worth of your investments. It is also entirely beyond your control.

This so-called Inflation Risk is often referred to as Purchasing Power Risk and is closely related to another type of risk: Interest Rate Risk. When money buys less, lenders increase interest rates to compensate for this loss of purchasing power. Changes in interest rates, in turn, directly affect the value of your bonds. More precisely, rising interest rates directly devalue your bonds. A bond issued at a certain interest rate is worth less if the interest rate goes up; conversely, if interest rates decline, the value of your bond increases.  You feel this abstract domino effect of purchasing power decline and interest rate increase in the diminishing value of your actual investments.

If you invest in international securities, you may also face Currency Risk: the effect of changing exchange rates on the value of your investments. Changes in exchange rates may, in fact, lead to financial loss. Even if the actual value of your foreign stock stays the same, your initial investment of $1000 may be worth far less once converted back from the local currency.  In today’s global market, the Currency Risk affects large numbers and types of investments.

How fast, or slow, you can sell or buy an investment is referred to as the investment’s liquidity. Liquidity Risk refers to the risk of not being able to do so fast enough to keep up with an investment’s actual worth. The value of your investment may plummet before you find a buyer for it.

The effect of larger social and political events on the market is referred to as Sociopolitical Risk.  While the events may be actual or merely anticipated, the responses of other investors to the events are real, as are their effects on your wallet. Earthquakes and elections or a terrorist threat – as remote as they appear from your investment portfolio – may significantly affect its value.  For more on how this election may affect your wallet, see Time’s article How the Election will Really Affect your Investments.

Similarly, you may feel the effect of apparently remote socio-political shifts in foreign countries on your foreign investments. This is referred to as Country Risk.  The market uncertainty and volatility that followed Britain’s decision to leave the EU is a case in point.  Finally, if your investment creates a legal problem, particularly in a foreign country, you may not have the means to resolve it: appropriate legal measures may not exit, or you may simply not have the money to do it. This is referred to as Legal Remedies Risk.

Managing the Unmanageable

So, how can you protect yourself from these nebulous forces over which you have zero control? While absolute protection is impossible, you can take small yet crucial steps to minimize them.

First, follow the basic investment risk management mantra: diversify. Do not put all of your eggs in one basket.

Second, do your research. Get, and stay, informed. Stay in tune with global economic trends and developments; learn more about the industry you’re considering investing in; research the social, political, economic, and legal context of your foreign investments. FINRA’s Smart Investing Series  can help you make informed investment decisions.

The price of a Popsicle, the strength of the British Pound and Donald Trump’s election campaign invariably affect your wallet. Stay informed. What You Don’t Know Can Hurt You.