Institutional Investors Claims
Institutional investors are organizations which pool large sums of money and invest those sums in various investment vehicles. They include pension funds, insurance companies, banks, retirement funds, hedge funds and mutual funds. Institutional investors often hold large positions in various securities products. Accordingly, institutional investors often have substantial exposure to events in the securities markets. The claims brought on behalf of institutional investors seek to recover losses sustained as a result of unsuitable investment advice, breach of fiduciary duty, misrepresentations, omissions, negligence, breach of contract, failure to supervise, violation of industry rules, or securities fraud by their brokerage firm or financial institution.
Institutional investors that have sustained significant losses within their investment portfolio should consider securities arbitration as an alternative means to recover their losses, as opposed to participating in a class action lawsuit. Since the passage of the Private Securities Litigation Reform Act in 1995, institutions have become increasingly active in serving as lead plaintiff in securities class actions, as opposed to securities arbitration. However, institutional investors, both public and private, should be aware of the benefits of filing an individual arbitration claim, as opposed to participating in a class action lawsuit.
By participating in a class action lawsuit, an institution will most likely recover only pennies on the dollar. However, if an institution has experienced significant investment losses, it may be more beneficial for it to file an individual securities arbitration claim. In 2003, Klayman & Toskes conducted a detailed study of securities arbitration versus class action. The study concluded that investors who file a securities arbitration claim traditionally obtain an overall higher rate of recovery as opposed to participating in a class action lawsuit. To view the full results of the comparison, click here.
When Klayman & Toskes’ institutional clients are class members of a securities class action that has been filed against a brokerage firm where they conducted business, and which involves a particular security they purchased, Klayman & Toskes “opts-out” these clients from the class action and files individual securities arbitration claims on their behalf.
Suitability Rules for Institutional Investors
Brokerage firms have suitability obligations to their institutional customers. In order to fulfill these obligations, brokerage firms are required to 1) ensure that the institutional investor is capable of evaluating risks independently, and 2) determine if the institutional investor is making independent investment decisions.
According to NASD Rule IM-2310-3, titled Suitability Obligations to Institutional Customers:
“A determination of capability to evaluate investment risk independently will depend on an examination of the customer’s capability to make its own investment decisions, including the resources available to the customer to make informed decisions. Relevant considerations could include:
- The use of one or more consultants, investment advisers or bank trust departments;
- The general level of experience of the institutional customer in financial markets and specific experience with the type of instruments under consideration;
- The customer’s ability to understand the economic features of the security involved;
- The customer’s ability to independently evaluate how market developments would affect the security; and
- The complexity of the security or securities involved.
A determination that a customer is making independent investment decisions will depend on the nature of the relationship that exists between the member and the customer. Relevant considerations could include:
- Any written or oral understanding that exists between the member and the customer regarding the nature of the relationship between the member and the customer and the services to be rendered by the member;
- The presence or absence of a pattern of acceptance of the member’s recommendations;
- The use by the customer of ideas, suggestions, market views and information obtained from other members or market professionals, particularly those relating to the same type of securities; and
- The extent to which the member has received from the customer current comprehensive portfolio information in connection with discussing recommended transactions or has not been provided important information regarding its portfolio or investment objectives.”