Yesterday, NASAA released a Model Fee Disclosure Template for broker-dealers, urging firms voluntarily to adopt the model as a means of clearly disclosing to customers and prospective customers the types and amounts of various miscellaneous fees that BDs ordinarily charge their customers. Working with FINRA, SIFMA, the FSI, LPL Financial LLC, Morgan Stanley Smith Barney LLC, Prospera Financial Services, and Signator Investors, Inc., NASAA developed the disclosure template “to help investors better understand and compare various broker-dealer service and maintenance-related fees and guidelines to make fee disclosure accessible and transparent.”
This sounds great, actually. No customers should be unsure about the services they pay for, how much they pay, and how frequently the fees are assessed. This schedule takes all the mystery out of those questions, so, theoretically, no customer provided one of these schedules ought to be able to claim confusion. Indeed, that is the express goal of the schedule, to make the fees express, thereby eliminating any questions about what was disclosed, or that customers understood what was disclosed to them. Reality, however, suggests that this goal may be illusory.
As a litigator, I look at the world through the prism of evidence. Good evidence, bad evidence, no evidence, documentary evidence, testimonial evidence, etc. I have often told people that in my ideal world, when a registered rep has a conversation with a customer, it would be under oath and videotaped, since that would clearly be the best evidence of what transpired. Armed with that tape, I could likely persuade any reasonable factfinder about what was actually said in that conversation. But, in the real world, there are no such tapes. Often, disputes over what was said in a particular conversation boil down to a swearing match between the participants, as a result of which the credibility of the respective witnesses becomes the single factor which dictates the resolution of the dispute.
To avoid this, broker-dealers commonly use documents to memorialize information that they pass along to their customers. A prospectus, for example, is nothing other than a compilation of material disclosures of which any prospective investor should be made aware before investing. No one provided a prospectus can reasonably argue that he or she did not know about the 15 pages of “risk factors” carefully described by the issuer, including the risk that the investment is speculative, and that no investor should proceed if unable to bear the risk of possibly losing the entire investment.
Yet, every day in arbitration, customers who receive such disclosures – indeed, customers who sign multiple documents expressly acknowledging not only receipt of such disclosures but, as well, that they have read and understand them – are able to convince panels, for whatever reason, to disregard the disclosures. Case in point: years ago, I defended a customer arbitration in which the principal claim was that the claimant did not know the REIT he had purchased lacked liquidity. I thought the defense was easy and compelling, as the customer had signed and/or initialed at least three different disclosure documents, each describing in plain English that the product was not liquid. On cross-examination, the customer dutifully acknowledged his signatures and initials, but maintained that despite all that, he still failed to understand that the REIT lacked liquidity. In fact, a similar disclosure was in the prospectus. I recall asking the customer if he had read the prospectus, and he honestly answered, “No, it is too long.” So, I asked if he had bothered, then, to read at least the very first page, on which, in bold print, all caps, was a disclosure that the REIT was not liquid. Again, he told me “no.” I was comfortable that no panel would ever award money to a customer who so readily admitted he had not read the disclosures provided to him.
Guess what? The customer prevailed.
The point is, disclosure documents are useful, but they are hardly the silver bullet that regulators seem to believe they are. Even detailed disclosures, acknowledged in writing by a customer, are routinely ignored by arbitration panels (or, worse, second-guessed by regulators who insist the disclosures did not go far enough). NASAA’s template is a fine document, and will obviously help broker-dealers communicate clearly with their customers about fees. But, it is completely unrealistic to expect that firms which elect to employ the template will be able to use it as a shield against any potential liability. If NASAA believes otherwise, then it ought to join me the next time I have to defend an arbitration brought by a customer who admits he didn’t bother to read the very disclosures that would have revealed the baseless nature of his case, and watch how the panel responds.