Whether or not the federal Labor Department allows the much-discussed fiduciary rule to take effect, a reasonable question might be: What happens when clients believe that their financial advisers are not acting in their best interests and aren’t happy with how those advisers are investing their money?
According to agreements that investors and their advisers sign before the professional relationship begins, they must submit to binding arbitration under the aegis of the Financial Industry Regulatory Authority (FINRA) in the case of a disagreement, says Gerald “Jerry” Fingerhut.
The Wilmington resident is one of these arbitrators. He travels to Raleigh when, periodically, he is called upon to resolve a situation.
“There are typically three arbitrators per case,” he explained. “The cases are either broker-customer disputes, where the customer feels his account has been mishandled, or they involve an employee or ex-employee of a brokerage house.”
In the latter situation, the employee or ex-employee didn’t get paid and feels that compensation is owed, or the person got a loan from the brokerage house on favorable terms and there is a dispute about repayment terms or forgiveness of the loan.
A broker-dealer found not to be at fault can ask the record of the case be expunged, Fingerhut said.
While the arbitrators cannot alter an agreement between parties, they can and do determine whether the requested damages are fair. Once they determine who is at fault – and sometimes, Fingerhut said, there is fault on both sides – the arbitrators rule on the damages and then apportion their own fees accordingly between the parties.
Nobody, however, becomes an arbitrator for the money, he said. “It’s partly professional satisfaction. It’s an intellectually stimulating environment to be in, and you’re meeting interesting people,” he said.
Fingerhut, who moved to Wilmington in July 2011 after a long career as a CPA and a consultant in New York City, learned about the possibility of becoming an arbitrator about 10 years ago when talking with a broker-dealer friend. To qualify, he took a course through the National Association of Securities Dealers.
Resolving disagreements has been a recurring and important part of Fingerhut’s career. For instance, he played a central role in establishing the Securities Investor Protection Corp., better known as SIPC.
SIPC, created as a result of the Securities Investor Protection Act of 1970, “oversees the liquidation of member broker-dealers that close when the broker-dealer is bankrupt or in financial trouble, and customer assets are missing,” according to the corporation’s website. By protecting customers against certain types of loss resulting from broker-dealer failure, SIPC is designed to promote investor confidence in the U.S. securities markets.
Developing the entity required representatives of the U.S. Securities and Exchange Commission and the New York Stock Exchange to forge the framework.
Officials looked to the accounting firm for which Fingerhut worked to provide a chair for the appointed panel. He was tapped for the job.
As chair, Fingerhut guided SIPC’s development process to its resolution, after which, he said, all the rules and regulations became uniform.
“I have to admit it was fun because I knew every person on the panel,” he said of the process. “[Our firm] worked so closely with the SEC and NYSE. We were honest brokers, able to explain the purpose of rules – what worked and what didn’t.”
Soon after Fingerhut’s experience of developing SIPC, however, a major rules change altered the playing field for broker-dealers. Those firms, which until the 1970s were partnerships, were allowed to incorporate.
“The significance of their being partnerships was that, whatever they were doing, they were doing with their own money,” he said. “Any risk was with their own money. [Our firm] was asked and obligated to prepare the tax returns for all partners for transparency’s sake. It was a healthy environment to the extent that the management of risk was handled well.
“When broker-dealers were allowed to incorporate, they got a taste of what it’s like to play with other people’s money. All the subsequent disasters came from the fact they were playing with [shareholders’] money. On the scale to which we’ve seen it since – those things could not have happened when broker-dealers were partnerships.”
Soured on the new reality, Fingerhut ultimately became CFO of a communications company listed on what was then known as the American Stock Exchange. He also began lecturing for the New York Institute of Finance and the Practising Law Institute and did consulting work for co-op residential communities.
It was a co-op issue – and one affecting his own co-op – that proved Fingerhut’s greatest challenge in conflict resolution.
In 2005, Fingerhut was the president of the Castle Village co-op, the multi-building condo development on Manhattan’s upper west side where he and his wife, Wendy, lived. In May of that year, the 75-foot-high retaining wall reinforcing the hillside of Castle Village collapsed, sending a massive deluge of dirt and huge chunks of concrete onto Riverside Drive and the Henry Hudson Parkway below. The price tag ran into many millions of dollars.
While there was no question that replacing the wall would be the responsibility of Castle Village residents, Fingerhut negotiated with the city to reduce Castle Village’s assessment for roadway repair. He also wrangled settlements from 33 different insurers to at least partially cover the cost of Castle Village residents’ assessments, although the insurance companies initially refused to pay.
“He was a hero to those people,” Wendy Fingerhut said. “His was a remarkable feat of bringing together all the affected parties and getting things settled. That wall was kind of a metaphor for life.”