Part 3/4: The Benefits of a Secondary Market for Certain Stakeholders

May 23, 2017

How the secondary market is successfully serving PIABA lawyers and their clients.



In a FINRA arbitration, damages are one of the main points of contention. If the security sold by a broker-dealer turns out to be inappropriate for the investors, the investor’s lawyer, usually a member of PIABA, will ask that the Broker-Dealer firm and its registered representative make the investor whole again.  Without a secondary market, the broker-dealer will have to pay what the investor paid, and will now own the asset.  A better solution that limits the cash exposure is for the BD to pay the difference between the original cost of the investment and its current value. That difference is easy to determine for publicly traded securities, but can be a challenge when the security in question is non-traded.


It is here that the liquidity provided by the secondary marketplace benefits the arbitration parties by identifying a private or non-traded security’s best price – the one representing the highest ask and the lowest bid sufficient to transact a trade. BDs can solve for damages by selling the securities on the market, and paying the investor the difference. In all cases, the BD firm does not want to own the securities, so liquidity is the best option to rid itself of unwanted securities at the fair market value and reduce their cash liability. A platform/marketplace that supports the trading of otherwise illiquid securities thus facilitates the arbitration process.

Another, closely related issue arises when damages are being sought involving a security, such as privately placed REIT shares, which is assigned a net asset value by the issuer. Historically, issuers of these types of securities maintain the original issue price, commonly $10 per share, as the NAV/share price, even if this price bears only a fleeting relationship to reality. By having access to prices from a platform and marketplace that reveal market value compared to NAV, PIABA lawyers can reduce the time they have to spend with valuation experts by simply accessing a more accurate  and neutral value of the asset.

PIABA and its members are also staunch advocates of the new Department of Labor Fiduciary Rule, and defends it through public commentary against attack from the Trump Administration. Security, liquidity and fiduciary responsibilities often converge when PIABA lawyers pursue cases in which broker-dealers sell inappropriate securities to their customers, commonly retirement account customers who can’t necessarily do the required due diligence on every product they are sold.

Some issuers of non-traded securities have attempted to inject better pricing by re-evaluating NAV on an annual, quarterly or monthly basis. However, without the backing of actual market-based transactions, arguments can and do arise as to the adequacy of the issuer’s statement of NAV.

In summary, PIABA lawyers and their clients benefit from a secondary marketplace because it provides unbiased information about the current pricing of private/non-traded/illiquid securities. This removes one obstacle to the successful conclusion of an arbitration process. It also gives broker-dealers an avenue toward ridding themselves of securities which don’t pass muster under the DOL Fiduciary Rule as currently constituted.


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