Academic

The Analyst Conflict Global Settlement, Investor Education and Law School Clinics

By Gordon Smith, Christine, Hurt, Vic Fleischer, Fred Tung, Lisa Fairfax, David Zaring

As a follow-up to my post below on the surplus of funds earmarked for investor restitution from the 2003 $1.5M Global Settlement on Analyst Conflicts, I wanted to circle back to the amounts that were earmarked for "investor education."  Three years ago, it had become clear that this huge fund was not being used particularly well by the states or at all by the federal government.  Around that time, the  SEC successfully petitioned the court to allow it to give it to the NASD (now FINRA) for use by its foundation.  However, according to Judge Pauley's rebuke this week, FINRA has done no better, using only a pitiful fraction of its $55M investor education fund ($6.5M in substantive uses, $800k for administrative uses in past 3 years). 

One of the proposed uses of the $80M surplus of investor restitution funds was to give it to FINRA to be used for investor education.  Judge Pauley's response to this proposal was very negative, noting that the average grant from FINRA was $200,000 but cost $21,000 to process:  "To put it mildly, the FINRA Foundation's performance has been disappointing."

Perhaps more interestingly, several law school clinics focusing on aid to harmed investors proposed that the surplus money be donated to law school investor aid clinics.  However, Judge Pauley explained that he could not do so because none of the parties to the consent decree would consent to that plan, however attractive.  In fact, Pauley went on to say:

The history of this case suggests that those clinics might have been better shepherds of an investor education program than the SEC or the FINRA Foundation. One of the clinics [Bluhm Legal Clinic at Northwestern University School of Law] advises the Court that its grant request was denied by the FINRA Foundation because the Foundation is apparently barred from "funding ongoing clinical activities." (citation omitted) The FINRA Foundation appears to be having difficulty identifying investor education programs deserving support. If such a restriction exists, perhaps the SEC can prevail on the FINRA Foundation to amend its guidelines to fund grants to qualified law school clinics. Moreover, this Court invites the SEC and the FINRA Foundation to collaborate on proposals with realistic time lines to administer investor education projects so that the funds in these cases will be disbursed by the 10th anniversary of the September 2, 2005 Order.

Full post as published by Conglomerate on June 11, 2009 (boomark / email).