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Articles Posted in Fiduciary Duty

Wall Street’s fastest growing trend is investing in Special Purpose Acquisitions Companies (“SPACs”).  SPACs are a way for private companies to go public without having to go through the traditional IPO process.  SPACs have been around for decades but have recently gained popularity in companies seeking to go public in this period of high market volatility.  Historically, SPACs were viewed as extremely risky investments.  The recent rise in SPACs does not change the high risks associated with them.  Some brokers and financial advisors ignore these risks and recommend customers invest in SPACs regardless of the customer’s investment profile and appetite for risk.  RIK’s investment fraud lawyers have extensive experience handling these types of cases and recovering losses for customers.

SPACs, also known as blank check companies, are companies created and publicly traded for the sole purpose of buying or merging with a private company in the future, known as the target company.  SPACs disclose criteria about the what kind of target company or companies it seeks.  Despite these disclosures, which are usually very limited and loosely defined, investors of the SPAC have no idea what the eventual acquisition company will be.  In other words, investors are going in blind.

In using SPACs to go public, private companies forego the process of registering an IPO with the SEC, meaning there is less oversight from the SEC.  The SPAC process also permits private companies to go public in a substantially shorter time period than a conventional IPO.  As one might suspect, the due diligence of the SPAC process is not as rigorous as a traditional IPO and no one is looking out for the best interests of investors.  Even worse, SPAC managers are not incentivized to obtain the best possible deal for investors – their job is to get a merger deal, not get the best deal.  Not surprisingly, this can lead to substantial harm to investors.  For example, the SPAC company may be overpaying for the target company – meaning investors are losing on the deal.

In what has become a hot issue this Spring, the Labor Department yesterday proposed a new set of standards for brokers who offer advice in connection with 401(k)’s and other retirement accounts. Currently, brokers are required only to recommend products that are “suitable” for investors, which permits the sale of products that earn the broker high fees. Reuters reports that the new standards will require brokers to put their clients’ best interests first ahead of any personal financial gain. The Labor Department proposal will require “best interest” contracts between brokers and investors.

Rich Intelisano and Katz LLP represents investors in FINRA arbitrations and other litigations against broker-dealers and other financial firms.

I noted in my March 20 post that the Chair of the SEC had just come out in favor of a rule requiring brokers to act in their clients best interests. While investors wait for the SEC to move forward on the issue, the New York City Comptroller, Scott Stringer, is proposing that New York State require brokers to disclose the present state of their relationship to clients – “I am not a fiduciary” and “I am not required to act in your best interests, and am allowed to recommend investments that may earn higher fees for me or my firm, even if those investments may not have the best combination of fees, risks and expected returns for you.” The Wall Street Journal posited that New York’s adoption of such a requirement could spur other states to impose similar regulations.

A recent report by the Public Investors Arbitration Bar Association (“PIABA”) shows why Stringer’s proposal is critical. U.S. News describes the PIABA report which contrasted brokers’ advertising campaigns with the legal positions taken by those brokers in litigation against their clients. For example:

• Ad: “It’s time for a financial strategy that puts your needs and priorities front and center.”

Reuters reported that Mary Jo White, Chair of the U.S. Securities and Exchange Commission, came out in favor of creating of new rules to harmonize standards of care between investment advisers and brokers. Currently, investment advisers must act in a client’s best interest, while brokers may continue to sell products that primarily benefit their or their firm’s financial interests – so long as such products are “suitable” for the clients.

Wall Street has opposed efforts by the Department of Labor to craft rules governing such broker conduct and requiring them to put client’s interest first. White’s comments this week suggest that the SEC may be preparing to weigh in on the issue.

Rich Intelisano and Katz LLP represents investors in FINRA arbitrations and other proceedings against both investment advisers and brokers.

A leaked White House memo supports imposing fiduciary duties on brokers in their dealings with IRA investors, as reported by the New York Times.

Current rules provide a weaker standard for brokers. The memo estimates that the absence of adequate investor safeguards penalizes IRA holders by as much as $17 billion per year. Hopefully, this development indicates that a rule imposing a fiduciary standard will be promulgated by the U.S. Labor Department soon. The securities industry has been vigorously fighting this requirement for years, some threatening to stop offering IRAs that would be subject to the rule. Of primary concern to investors are built in conflicts of interest that brokers often have in recommending IRA investments that may be lucrative to the broker but not right for the investor. The government should err on the side of investor protection in this dispute because the securities industry has the knowledge and resources to protect future retirees, whereas many investors lack the knowledge to protect themselves in the arena of complicated investment products.

http://www.nytimes.com/2015/02/14/your-money/fiduciary-duty-rule-would-protect-consumers-and-target-investment-brokers.html?_r=0

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