The lead professors at pro bono law clinics who help retail investors pursue small-money claims hope a U.S. Securities and Exchange Commission-sponsored summit will inspire other universities to start their own clinics.
The SEC holds its annual Investor Advocacy Clinic Summit this morning, in which students and professors from those clinics will join SEC staff to speak about providing free legal services to investors whose claims typically don’t entice paid attorneys because of the relatively low dollar amounts involved.
The summit will feature SEC Chair Gary Gensler, other commissioners, the SEC’s Investor Advocate and FINRA Director of Dispute Resolution Services Richard Berry. Students and teachers from law clinics, including Fordham University School and the law school at the University of Miami, will be participating.
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, considering the number of clinics hasn’t increased since WealthManagement.com reported on the issue 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 has not declined,” said Nicole Iannarone, a Drexel University Kline 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 assisting investors with claims below $100,000, who often have some money to invest but not enough to lose comfortably. Without this assistance, investors might not be able to get any representation because the money recovered would be too low for private attorneys to justify financially.
The market is enormous; Ben Edwards, the director of the Public Policy Clinic at the University of Nevada, Las Vegas William S. Boyd School of Law, estimated that the total amount of unpursued claims could fall into the millions or “potentially billions” of dollars. However, it was difficult to know for sure.
In new research for an upcoming law journal article, Iannarone found that when it came to big claims (over $100,000) at stake in arbitration, 87% of claimants had an attorney. But when the claim dropped below $100,000, the percentage of claimants represented by an attorney dropped to around 50%.
Claimants seeking more than $100,000 win in about 44% of cases, but for smaller claims under $50,000, the success rate drops to 31%, she found.
Pro se litigants (those who represent themselves) mainly drive the discrepancy; clients without representation with claims below $50,000 win in only 24% of cases, according to Iannarone’s research. Counsel could be critical even for those investors who don’t pursue their claims.
“Lawyers do an important filtering job and an important job making sure folks understand what happened to them,” she said. “It allows them to come to some form of closure, whether or not they have an actionable claim.”
The problem has worsened over the years; the total number of clinics has shrunk significantly since 2012, when 18 clinics were in operation, including ones in Michigan, Georgia and California, mainly fueled by FINRA seed funding.
But that funding dried up, and new money didn’t materialize, forcing several clinics to close. Now, five of the 10 remaining clinics are in New York State, with the others in Pennsylvania, New Jersey, Washington, D.C., Illinois and Florida.
This leaves no clinics west of Chicago, and the University of Miami’s School of Law 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 turn down 90% of cases they receive.
The situation is worse for clients outside of those states, as attorneys (and students working pro bono) are often limited to practice in the states where the clinic is located. Therefore, clients with a case in states like California, Arizona, or Texas (among others) may be unable to attain pro bono advice.
Scott Eichhorn, acting director of the University of Miami’s School of Law Investor Rights Clinic
Professors guiding the clinics told WealthManagement.com they’d witnessed a jump in claims brought by self-directed investors, including complaints about digital engagement practices, investors not understanding the trading practices, the use of margins and options and cybersecurity concerns.
Christine Lazaro, the director of the Securities Arbitration Clinic at the St. John’s University School of Law in New York, said these kinds of cases often roped in younger investors. The issues clinics faced now 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 prevalence and app access, lower minimums to open accounts, and the lower no-cost investing, far more investors are accessing the markets,” she said. “These issues tend to be much smaller, so they can be a couple of hundred or couple of thousand, which could be the investor’s entire investment.”
But helping these investors remained a “work in progress,” according to Elissa Germaine, the St. John’s clinic associate director. Uncertainty surrounding regulations remained an issue; for instance, does Regulation Best Interest pertain to self-directed accounts?
For clinics like St. John’s, Germaine and her students are left to determine what a recommendation means in this context.
“We’re trying to figure out where self-directed accounts fit in … or how we can best make this case, or whether there’s a different way to look at it?” she said. “It makes it more difficult, and we’re trying to figure out other ways to help investors.”
Eichhorn said that since Reg BI focused on recommendations, clinics and attorneys seeking damages could be hindered when mobile platforms claim they’re not making recommendations.
While attorneys increasingly pursue self-directed platforms like Robinhood in court, it remains challenging to prevail in these cases, Eichhorn said.
“We feel awful for these investors and feel like they have been wronged, but we don’t want to put them through this entire arbitration process because we know the result isn’t there at the end with the current state of regulations,” he said.
Clinic directors have kept tabs on the Investor Choice Act, which Sen. Catherine Cortez Mastro (D-Nev.) and Rep. Mike Quigley (D-Ill.) reintroduced in 2022. The bill would require the SEC to provide funding for clinics via grants issued for three years before renewal.
But the bill has yet to go anywhere in Congress, Eichhorn admitted. He said advocates for the bill pushed for Republican support during Congressional meetings last summer, to no avail.
“The issue is, Congress is so divided, and the sticking point in opposition is the industry views 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 the industry’s interest than Main Street investors.”
Without congressional approval, the SEC can’t allocate the money. Eichhorn estimated the entire grant project for new clinics could be done with $5 million.
In the meantime, Iannarone and others hope that getting the clinics’ students and professors in front of other law schools may inspire them to launch pro bono programs, even without the safety net of federal funds.
“There are resources among the 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 wanting to start one of these.”
The 2024 Investor Advocacy Clinic Summit is being held today at SEC headquarters and live-streamed at sec.gov from 11 a.m. to 4 p.m. Eastern time.