Idaho FINRA Arbitration Attorneys

Officially, Idaho is the Gem State, but many associate it only with potatoes. Idahoans surely know their potatoes and further understand that a balanced meal includes more than just spuds, but a diversity of foods. Similarly, Idaho investors and retirees typically understand that a balanced portfolio must also be diversified. Proven blue chip equities or conservative fixed income investments should typically represent the largest portion of a retirement portfolio. However, it has sadly not been uncommon for some Idaho retirees to have realized that their nest eggs have been decimated due to taking the advice of financial advisers who, instead, recommended an over-concentration of these portfolios with what should be, at best, mainly “side-helpings” of alternative investments, which are typically speculative and turn out to be illiquid when it comes time to sell them. Unfortunately, many investors only learn this lesson too late. For those taking legal steps to recover investment losses, investors quickly learn that their disputes are ineligible for the courts, but that their cases must instead be heard in arbitration before the Financial Industry Regulatory Authority (FINRA). This forum has both plusses and drawbacks. An experienced FINRA arbitration law firm like Malecki Law in New York is skilled in this litigation forum — whether in Idaho or nationally — and has recovered tens of millions of dollars for retirees and other senior investors.

Malecki Law’s FINRA arbitration lawyers in New York have seen many product cases over the years and have noticed that the alternative investment market is more robust than ever, with private placement products coming in many forms, from non-traded Real Estate Investment Trusts (REITs) to Business Development Companies (BDC). Idaho’s Securities Bureau is the state agency that enforces consumer financial protection laws for the state, including the regulation of the sale of investment securities, as well as providing oversight of the persons and entities that offer such investments to the public. The Bureau operates under Idaho’s Department of Finance, which recognizes that alternative investments are being improperly recommended and marketed to retail investors, including many seniors and retirees.

For instance, in July 2020, the Idaho regulator issued legal guidance regarding an investment adviser’s duty to fully disclose the features and fees “concerning illiquid securities [which] are investments that have no ready public aftermarket and may or. may not have limited liquidity provisions through the sponsoring organization or a stand-alone securities issuer.” The guidance provides states examples of such products to include, but not be limited to, “private placement securities, and other non-traded securities such as REITs, BDCs, direct participation products, life settlements and similar securities.”

In its guidance, the Idaho regulator further cited several important considerations stemming from an “increasing concern among regulators that [advisers] placing significant client assets into illiquid securities are not only putting clients at greater risk, but that they are charging an ongoing fee for an asset that they truly are not able to ‘manage’ due to the illiquid nature of the product.” For certain cases, the regulator echoed the views of the Securities and Exchange Commission (SEC) that some investors would be better served, and should be guided as such, in accounts that instead charge commissions or fees for each transaction.

Whether regulated by the SEC or FINRA, financial advisers have a duty to act in the best interest of their clients, which includes disclosing all conflicts of interest relating to fees and products risks before recommending such products. The securities laws are, in fact, designed to ensure that investors must have an opportunity to provide informed consent around these risks and disclosures — legally, it is typically not a sufficient disclosure for a financial adviser to simply ask an investor to sign a form that agrees to these fees and risks amongst the fine print of a subscription agreement. What happens in many instances is that subscription forms make fulsome disclosures in written form, but the financial adviser is simultaneously providing verbal assurances and only talking about the potential yield or gains of an investment. As required almost uniformly under the various federal and state securities laws, investment advice must always be presented in a fair and balanced manner such that it is not misleading. In attempting to recover investment losses from these alternative products, misled Idaho investors and retirees should consider skilled FINRA arbitration attorneys at Malecki Law, who are fully familiar with the relevant securities laws.

In its guidance, the Idaho regulator cites further considerations on these illiquid products, including:

1. Suitability/Concentration issues, in which “high concentrations of any type of product (e.g., illiquid securities) raises the possibility that such concentrations may be inappropriate when considering the liquidity risks and the product specific risks….over exposure to any one asset class (e.g., financial stocks in 2007) presents risks that must be assessed and managed,” and that “investor funds in illiquid assets or in any one asset class presents significantly higher potential risks and returns.” Importantly, the regulator acknowledges: “While we recognize that certain products are not publicly traded, we have some concern where there are similar products available that have a public market.” In those situations, the regulator indicates it would question the motivation and rationale for recommending an illiquid product when a similar publicly traded one is available.
2. Unreasonable Fees: Another stated concern by the Idaho regulator is that “it appears that some advisers may not be meeting their fiduciary obligation in recommending securities that require long-term ongoing advisory fees, long holding periods, or are considered illiquid.”
3. Other Fee Considerations: Also relating to fees are issues that can be confusing to retail investors, which includes the notion that “market-based valuations for illiquid products can be difficult, but necessary where ongoing fees will be charged.” In such situations, investors need to be wary that fee calculations may be flawed and improper. Further, the regulator makes clear that simply carrying on periodic meetings with a client after the fact is unlikely to support a legal claim that the adviser is “actively managing” the illiquid securities.

Idaho investors and seniors who have been misled by financial advisers into alternative investments need to be represented by professionals who understand the complexities of the securities laws. Malecki Law’s attorneys handle a wide variety of securities matters to recover lost investment funds. Our firm has been particularly successful at recovering lost investment funds involving illiquid securities, which typically allows for other legal remedies to apply, such as rescission, which is the legal term for canceling an investment contract and requiring a seller of a security to take back the (now worthless or mostly worthless) security and fully refund the amount to the investor. You need to contact a FINRA arbitration law firm, such as Malecki Law in New York. To schedule a free initial consultation with Malecki Law, please call (212) 943-1233, or email jenice@maleckilaw.com.