The leading professors at pro bono law clinics, which help retail investors pursue small-money claims, hope a summit sponsored by the U.S. Securities and Exchange Commission will inspire other universities to set up pro bono law clinics. theirs.
The SEC is holding its annual Investor Advocacy Clinic Summit this morning, in which students and professors from those clinics will join SEC staff to talk about providing free legal services to investors whose claims typically don't attract paid lawyers because of the relatively low dollar amounts involved. .
The summit will feature SEC Chairman Gary Gensler, other commissioners, the SEC's Investor Advocate and FINRA's Director of Dispute Resolution Services, Richard Berry. Students and faculty from law clinics, including Fordham University School of Law and the University of Miami School of Law, will participate.
The commission invited law schools without investor advocacy clinics for the first time.
Getting the message to these schools about the value of these clinics is critical, given that the number of clinics has not increased. since the year WealthManagement.com reported on this matter in 2022. At that time, the number of law school clinics was 10, five of which were located in New York State.
“I suppose it's good news that the number hasn't gone down,” said Nicole Iannarone, a Drexel Kline University School of Law professor and keynote speaker for the summit. “It's not good news for investors outside of New York City.”
The pro bono clinics at these schools work with a rotating cadre of students who help investors with claims under $100,000 who often have some money to invest but not enough to comfortably lose. Without this assistance, investors may not be able to obtain any representation because the money recovered would be too low for private attorneys to financially justify.
The market is huge; Ben Edwards, director of the Public Policy Clinic at the University of Nevada, William S. Boyd School of Law in Las Vegas, estimated that the total amount of unpursued claims could drop into the millions or “potentially billions” of dollars. However, it was hard to know for sure.
In new research for an upcoming law journal article, Iannarone found that when it came to large claims (over $100,000) at stake in arbitration, 87% of claimants had an attorney. But when the claim fell below $100,000, the percentage of claimants represented by an attorney dropped to about 50%.
Claimants seeking more than $100,000 win about 44% of the time, but for smaller claims under $50,000, the success rate drops to 31%, she found.
Pro se litigants (those representing themselves) primarily drive the discrepancy; unrepresented clients with claims under $50,000 win only 24% of the time, according to Iannarone's research. The lawyer can also be critical of those investors who do not pursue their claims.
“Advocates do an important job of filtering and an important job of making sure people understand what happened to them,” she said. “It allows them to come to some form of closure, whether or not they have a viable claim.”
The problem has worsened over the years; the total number of clinics has shrunk significantly since 2012, when 18 operated, including ones in Michigan, Georgia and California, fueled largely by FINRA seed funding.
But that funding dried up and the new money didn't materialize, forcing some clinics to close. Now, five of the remaining 10 clinics are in New York state, with others in Pennsylvania, New Jersey, Washington, DC, Illinois and Florida.
That leaves no clinic west of Chicago, and the University of Miami Law School's Investor Rights Clinic is the only one operating in the entire Southeast. Scott Eichhorn, a professor and acting director of the Miami clinic, says they reject 90% of the cases they receive.
The situation is worse for clients outside those states, as attorneys (and students working pro bono) are often limited to practicing in the states where the clinic is located. Therefore, clients with a case in states such as California, Arizona, or Texas (among others) may not be able to obtain pro bono counsel.
Scott Eichhorn, acting director of the Investor Rights Clinic at the University of Miami School of Law
The professors who ran the clinics said WealthManagement.com they had witnessed an increase in claims filed by self-directed investors, including complaints about digital engagement practices, investors not understanding trading practices, the use of margin and options, and cyber security concerns.
Christine Lazaro, director of the Securities Arbitration Clinic at St. Louis University School of Law. John in New York, said that these types of issues often affect new investors. The problems the clinics now faced were a far cry from the typical scenario she dealt with 15 years ago, in which Queens and Long Island investors clashed with the neighborhood broker.
“With the proliferation and accessibility of apps, lower minimums for opening accounts and lower no-cost investments, many more investors are entering the markets,” she said. “These issues tend to be much smaller, so they can be a few hundred or a couple of thousand, which can be the investor's entire investment.”
But the help of these investors remained a “work in progress,” according to Elissa Germaine, associate director of the St. Uncertainty about regulations remained an issue; for example, does it apply to the Best Interest Regulation with self-directed accounts?
For clinics like St. John's, Germaine and her students are left to define what a recommendation means in this context.
“We're trying to figure out where self-directed accounts fit in … or how can we make the case better, or if there's another way to look at it?” she said. “That makes it more difficult and we're trying to find other ways to help investors.”
Eichhorn said that since Reg BI focused on recommendations, clinics and attorneys seeking compensation could be stymied when mobile platforms claim they are not making recommendations.
As lawyers increasingly pursue self-directed platforms like Robinhood in court, it remains challenging to prevail in these cases, Eichhorn said.
“We feel terrible for these investors and we feel like they've been wronged, but we don't want to put them through this whole arbitration process because we know the outcome is not there at the end with the current state of the regulations,” he said.
Clinic directors have taken notes on the Investor Choice Act, which Sen. Catherine Cortez Mastro (D-Nev.) and Rep. Mike Quigley (D-Ill.) reintroduced it in 2022. The bill would require the SEC to provide funding to the clinics through grants issued for three years prior to renewal.
But the bill has yet to go anywhere in Congress, Eichhorn acknowledged. He said advocates for the bill sought Republican support during congressional meetings last summer, to no avail.
“The point is that Congress is so divided, and the sticking point in opposition is that the industry sees these securities clinics as 'we're going to fund people to sue us,'” he said. “And there are some lawmakers (who) are more sensitive to industry interests than Main Street investors.”
Without Congressional approval, the SEC cannot distribute the money. Eichhorn estimated that the entire grant project for the new clinics could be accomplished with $5 million.
Meanwhile, Iannarone and others hope that pitting the clinic's students and professors against other law schools can inspire them to launch pro bono programs, even without the safety net of federal funding.
“There are resources between 10 of us who can share our experiences,” she said. “It's a very close network of people who are supportive in a small community. Anyone in it would be willing to reach out and help a law school that wants to start one of these.”
The 2024 Investor Advocacy Clinic Summit is being held today at SEC headquarters and is being broadcast live on sec.gov from 11 am to 4 pm Eastern Time.