FINRA and Brown v. Wells Fargo BankCraig Zafis
Another reason to proceed with caution when dealing with senior citizens, clients with disabilities and any client who could be perceived as “vulnerable.”
The point of this article is to highlight another procedural trap into which an unwitting adviser may step when dealing with seniors or others perceived to be “vulnerable.” In the context of the adviser – customer relationship, vulnerability can include “…advanced age, youth, lack of education, ill health and mental weakness.”1 Perceived vulnerability coupled with the fiduciary duty owed to customers by all investment advisers and by brokers in many states may result in a customer successfully avoiding FINRA arbitration (despite signing an arbitration agreement), and forcing an investment professional to litigate a customer claim in court.2
Such a result is shocking for 2 reasons. First, arbitration agreements in new account documents and other agreements signed by the customer are generally rock solid and uniformly upheld by courts. Many creative ways to avoid them have been shot down over the years. Second, an arbitration agreement can be declared void in cases of a “vulnerable” client because the investment professional did not read and explain or otherwise fully disclose, in a manner the individual understands, the material terms of a contract, including the meaning and effect of the arbitration provision.3
The Brown v. Wells Fargo Bank case involved the enforceability of an arbitration provision in a stockbroker agreement of which the Plaintiffs – an elderly couple where the husband was legally blind and thus unable to read – said they were unaware. The broker’s expert witness testified that it would be contrary to accepted industry practice to require an investment professional to read aloud a customer agreement or arbitration provision or attempt to explain the document before the customer signed. Investment professionals are usually not licensed attorneys and he opined that it would be a mistake that they should be compelled to interpret contracts for prospective customers. By doing so they could misinterpret words and phrases or leave out essential terms. 4 The Court dismissed these concerns but was careful to point out that its conclusion does not require that an investment professional read or explain their initial agreement to prospective customers.
The facts in Brown were unusual. So much so that one of the Appellate Court Justices recommended limiting this opinion to “the unusual facts of this case.”5 Notwithstanding this recommendation, one Judge in Santa Barbara County, California recently relied heavily on the holding in Brown to invalidate an arbitration provision. So, despite the lack of a requirement to read and explain the terms of an agreement with a customer, courts seem more willing to rule that the failure to do so as a fiduciary dealing with a customer who is vulnerable will invalidate the arbitration provision.
What should investment professionals take from the Browndecision? First, Judges are people, with children and, more importantly, parents who are or soon will be senior citizens who may be perceived to be vulnerable by their child. Second, despite shrinking judicial budgets and a heavier caseload (which usually results in arbitration provisions being enforced to reduce the caseload) if Judges perceive that a vulnerable customer was taken advantage of, they may compel the investment professional to defend herself in Court, rather than before a FINRA hearing panel. The likelihood of this result could be increased in areas of the country with a large population of senior citizens. While customer attorneys complain that FINRA arbitrations are more favorable to investment professionals (a view which I don’t share) the investment professional is in an unquestionably worse position having to defend her conduct before a state court jury. The sympathies that will naturally attach to the “vulnerable” customer, along with the lack of industry and product knowledge held by most lay people, are difficult hurdles to overcome.
If confronted with a customer who is or through conversation and observation could soon be considered vulnerable, consult your compliance department. If advised to read or otherwise review and explain the legal provisions in the new account documents(most notably the arbitration provision), document the efforts made in this regard. The best protection in the case of a later customer complaint or regulatory inquiry is to have the customer sign a document which sets forth the measures taken by the investment professional to disclose and explain such provisions in a manner the customer understood at the time. In the event that you are advised by your firm not to prepare such a document, an e-mail or letter to the customer confirming your efforts(approved by the firm) would also offer protection.