Consistent with the ongoing guidance/requirements from the SEC and FINRA, all firms must have and enforce data security policies and procedures.  Even the best policies and procedures may, however, not protect the firm in every instance.  So what do you do if there is a breach?19196909_s

One of the most important things to determine is what law governs.  In other words, if you have clients in all 50 states, it is possible that there are 50 different data breach laws that may be implicated.  Fox Rothschild LLP has a free app, Data Breach 411, which provides an overview of state data breach laws.

Knowing what you need to know is imperative when assessing a data breach.



In the hectic world of financial services, registered representatives and investment adviser representatives are always looking to increase their assets under management. At what cost? Are there situations where you would be better off just saying no to accepting that one additional client?

In my many years of defending representatives and advisers from customer complaints, the unqualified answer is yes; there are situations when you are better off just saying no. Any good risk avoidance program will provide for the proper screening/selection of prospective clients. I have addressed this very issue in a risk avoidance handbook.whistle

The key to this screening process is being able to sniff out the types of clients that you do not want to accept. For example, are you the fourth adviser that this client has come to in the last four years? Does the client profile not fit your personal/company investment philosophy? Does the client have unrealistic expectations on what she is expecting you to deliver?

If the answer to any of these questions is in the affirmative, there should be a huge stoplight in front of you flashing red. Any client who fits any of these descriptions is also the client most likely to bring a claim against an adviser.

So before you take on any client with a little money, be cautious. Are there red flags coming into the relationship? If so, just say no.

On Monday, September 12, 2016, the SEC’s Office of Compliance Inspections and Examinations (“OCIE”) announced that a “Supervision Initiative” will take place across the country.

OCIE staff will conduct focused RIA examinations of firms employing or contracting with supervised persons, who have a disciplinary history.  OCIE plans to evaluate the effectiveness of RIA compliance programs, supervisory oversight practices, and disclosures to clients and prospective clients, concentrating on the potential risk disclosures arising from financial arrangements initiated by supervised persons with a disciplinary history.  OCIE’s justification for this targeted examination is its belief that firms, who hire those with disciplinary histories, are more likely to have future disciplinary issues arising from these individuals’ conduct.

Frankly, this announcement should come as no surprise to anyone.  The SEC has made it abundantly clear over the years it does not like people who have disciplinary histories working for regulated entities.  However, the SEC always seems to fail to consider that, for a significant part of the securities industry, disciplinary histories have become the norm given the ease where people may make complaints against registered persons, and how expensive and difficult the regulators have made fighting unfounded allegations.  Numerous registered persons have had to make the difficult choice of agreeing to resolve disciplinary charges simply because the price of fighting them would be too great.

Conveniently, the SEC ignores this fact and instead will seek to further stigmatize many hard working and honest members of the securities community.

Although the Broker Protocol has alleviated some concerns, many firms still find themselves wrestling with the vagaries of restrictive covenants when dealing with their employees.  Fox Rothschild has produced this revised and updated 50-state survey as a quick reference for in-house counsel and human resource professionals to access details on the variations by state in the laws of restrictive covenants in the employment context.

As always, we are available to discuss individual circumstances.

That is the question that the SEC has essentially posed for registered investment advisers in a National Exam Program Risk Alert. In doing so, the SEC has stated that it will be “examining compliance oversight and controls of registered investment advisers that have employed or employ individuals with a history of disciplinary events . . . .”

The SEC will essentially be examining the investment advisers business and compliance practices, particularly focused on higher risk individuals. Does this mean that you should not hire or retain someone who may have a disciplinary past?Core Values

Of course, not. Instead, this alert should be telling you that such people, if you do decide to hire (or retain) them, should come under some form of heightened supervision for a period of time, if not forever. But be forewarned that the SEC is going to check up on you by reviewing certain information, including the following:

  1. Your compliance program , including the practices surrounding the hiring and ongoing reporting obligations of investment adviser representatives.
  2. The firm’s disclosures (i.e., Form ADV) that it makes to its customers to ensure that they are accurate.
  3. The conflict of interest that the firm discloses.
  4. The firm’s marketing.

By reviewing these areas, the SEC believes that it can better understand how firms are handling and representing advisers with a past to their customers. If you decide to hire or retain such advisers, you should focus on what you are saying to the public about them through your words and actions before you are in the SEC doghouse following an examination.

Given the start of the NFL season and the post-Labor Day last leg of the presidential campaign season, it reminded me of a blog entry that I posted in August 2012, regarding picking a winner for the then presidential race based upon the conference of the team that won the Super Bowl in the year of the election.  I have re-published the blog below for your amusement.

I blogged on this topic because it involved 3 things everyone in the securities industry seems to argue about:  politics, football, and statistics.  In any event, my blog proved to be prophetic.  The New York Giants defeated the New England Patriots because of a lucky catch with some assistance from the referees who happened to leave their seeing eye dogs at home during the 4th quarter– yes, I am still slightly bitter at the result.  Based upon my statistical analysis, such a result foretold President Obama’s re-election, and he did win pretty handily.

Now, this year’s Super Bowl was won by the Denver Broncos, yet again with the assistance of Roger Goodell’s band of incompetent zebra looking and optically challenged referees, who permitted Aqib Talib to put on Rob Gronkowski’s jersey while he was still wearing it in the end zone during the final drive of the AFC Championship Game thereby depriving the better team from prevailing.  Poor “I am not a Lawyer” Roger promised a thorough investigation, but, since it would not benefit any team other than the Patriots, he quickly backtracked and forgot about it.

However, I digress so let’s get back to my model.  If the statistics are to be believed, the NFL’s machinations– ensuring Peyton Manning winning his final Super Bowl– dictate that the Republican nominee, Donald Trump, will win the presidential election.  Of course, if you do not like this prediction, you should take comfort with another NFL axiom, “anything can happen on any given Sunday,” and get out and vote to prove it wrong (or, if you do like the model, get out and vote to prove it right) since that is the only true measure of any election, not some fancy statistical metric.

Yes, this blog is quite different than what you are used to reading, but it is a Friday in August so please take it in that vein.  Here goes.

Undoubtedly, many know the securities industry loves to use statistics.  Statistics are used for everything, including, among other things, to make predictions.  However, the securities industry is not alone in using statistics to predict the world to come.  For example, given this time of year with both NFL training camps and the presidential campaign in full swing, statistics and the resulting predictions are being dispensed like Pez candy.  Really, how many more NFL pre-season or swing state predictions can they come out with???!!!

Although statistics may be the norm in the political field, some political wonks are using an odd, novel method, most notably, cockroaches to predict the outcome of the presidential race.  Although I have heard a number of politicians in my life called cockroaches, until today, I have not heard of them being used for polling purposes.  However, I digress.

In any event, I started to think if there was some statistical correlation between the NFL and presidential politics.  Eerily (of course, when you use statistics in this manner, it is always eerie), there is!!  Apparently, the connection is with the winner of the Super Bowl in the year of the presidential election.

Now, since 1980, there have been 8 presidential elections.  Over that time, the Democrat has won 3 times while the Republican has won 5 times—more on that below when we discuss 2000—yes, you always have to discuss 2000!!  Of the 8 Super Bowl winners, 3 were from the AFC (Steelers, Raiders and the Patriots), and 5 were from the NFC (Redskins-2x, Dallas, Rams, and the Giants).  You are probably thinking, okay, whenever the AFC wins the Democrat wins, and, when the NFC wins, the Republican is the victor.  Not so fast, as your mother probably told you, do not jump to quick conclusions!!

In fact, it is the exact opposite.  In 1992, 1996, and 2008, an NFC team won the Super Bowl along with the Democrat candidate, while, in 1980, 1984, and 2004, the AFC team won along with the Republican.  Two elections remain: 1988 and 2000.

You are probably thinking, okay, the NFC team won both years along with the Republican so any predictive benefit falls apart.  However, the eeriness continues.  Let’s go back to 1988, that year the Redskins defeated the Broncos in Super Bowl XXII.  Some may recall that the Redskins’ quarterback was Doug Williams.  Williams would lead the Redskins over the Broncos, and win the Super Bowl MVP.  As many may also recall, Williams was the first African-American quarterback to play in the Super Bowl.  Is this an omen for President Obama, who happens to be the nation’s first African-American president?  Who knows?  One other point on the 1988 Election, George H.W. Bush, the Republican, defeated Democrat Michael Dukakis—a Massachusetts governor!!!!  Hmm, should former Massachusetts Governor Romney be worried???

Similarly, in 2000, the spooky coincidences continue.  The 2000 Super Bowl was won by the Rams, a NFC team, okay, based upon what we are talking about a Democrat should win.  Well, did he?  This is not the place to go through the tortured history of that excruciating presidential election, but Democrat Al Gore did win the popular vote while Republican George W. Bush, won the Electoral College and the presidency.  Of course, this game was famous for coining the phrase “One Yard Short,”, the final play of the game where the Titans were driving, but Titans receiver Kevin Dyson was tackled one yard short of making a game tying touchdown.  Some people are still suggesting George W. Bush really came up one yard short as well, but, unlike him, the Titans could not appeal to the United States Supreme Court.

Okay, what does this all mean for the 2012 election?  The New York Giants won the Super Bowl.  That means, if re-elected, President Obama will have none other than Tom Brady of the New England Patriots to thank for missing his favorite receiver, Wes Welker, thereby, ensuring the NFC’s victory and the President’s victory in November.  However, a word of advice for the President (like he really needs my advice!!), if he wants to send Tom a present, I do not think he likes cockroaches!!!



The SEC has repeatedly included issues around social media in its annual exam priorities for investment advisers. With the SEC’s recent release of a final rule on the subject, the SEC has taken that “exam priority” to the next level.

Under this new rule, investment advisers will have to complete an additional component to their annual Form ADV filed with the SEC. In doing so, investment advisers will have to disclose their addresses for Twitter, Facebook and LinkedIn. So what’s the point?

By requiring this disclosure, the SEC can better focus on each examined firm’s use of social media. Undoubtedly, the SEC will use this information when framing its examination of individual firms.

The SEC can also use this information on an ongoing basis to assess what firms are putting out there on social media. The industry has to assume that the SEC will be doing more with this information than just tucking it away for examination purposes.Core Values

This new rule should incentivize you to review your social media policy, assuming that you have one. If you do not have one, you need to have one prepared.

You should also monitor the information that your firm is putting out there on social media. Does it confirm with SEC rules? Rest assured. If you are not minding the store, the SEC will.

Every time that I start a FINRA arbitration, I find myself having the same internal debate; did we pick the right person to serve as the arbitration chair. Unfortunately, you will not know the answer to that question until after your arbitration begins, or, more likely, after the award is issued. FINRA has proposed a rule change to open up the filed for chair arbitrators.Conference Room

Under the proposed rule, attorneys can serve as public arbitrator chair with less experience than they were required to have in the past. Pursuant to this proposal, attorneys would only need to have served on at least one arbitration that went to an award and the complete chair training.

FINRA’s stated purpose for the rule is to “protect investors and the public interest” by increasing the pool of eligible chairpersons. This way, chairs would ideally no longer have to travel to serve as a chair.

In theory, this all makes sense. If there are more available chairs, then investors and the industry will be better served. But will this work?

In my view, much still falls on the parties to critically review the CVs of potential chairs and do your due diligence. Call other lawyers who have had arbitrations with that person. Do some research of the professional backgrounds of the potential chair. After all, just because a lawyer passes FINRA’s vetting processing does not mean that you would want that person as your chair.

Over the years that I have defended broker-dealers and investment advisors on customer-initiated claims, I have seen many things that would make any compliance officer cringe. One spine tingling (not in the good way) type of conduct is when an advisor engages his/her client when the client makes an informal complaint, instead of routing the complaint to compliance/supervision.whistle

So why is engagement against the rules of engagement? The most important reason is that engagement (aka arguing) may only make a simple customer service issues into a formal complaint. Rather than engage, my experience suggests that it is better to get the complaint (assuming it is in writing) to the proper person in compliance/supervision.

Dealing with an oral complaint is a little trickier because you are put on the spot. Nevertheless, the best course, as hard as it may be, is to try to defuse the situation by expressing that you understand the issue that is being raised, you will look into the issue and, finally, will respond further as soon as possible.

By defusing instead of engaging, you give all sides the opportunity to let cooler heads prevail. Many times a customer service issue can be easily addressed by taking a little time to consider the issues and formulate a response/course of action instead of blurting out the first thing that comes to mind; that is invariably the worst thing to say.

If you get a complaint; don’t jump to respond. Use your resources and formulate a well-reasoned response. Sometimes the client is wrong, but arguing with the client gets you nowhere except guaranteeing litigation.

When faced with a customer complaining through a letter or email, it is human nature to try to appease the customer with a conciliatory response or no response at all. I have seen this “human nature” all too often when defending brokers and advisor from customer complaints.

In almost all instances, the complaining customer now claims that the conciliatory comment or non-response is the functional equivalent of an admission by the broker/advisor that he/she did something wrong. In turn, the broker denies that he/she made any admissions by being conciliatory or silent. While I generally agree with the advisors, it is always an issue that must be overcome.whistleblower

So what should an advisor do when confronted with a nasty/accusatory email/letter? Most important, forward the communication to the person/persons who are designated in your company to handle customer complaints regardless if you “think” this person is just blowing smoke.

Someone should always respond to such a communications. The responding communication does not have to be the functional equivalent of beating up baby seals with a bat. Instead, it should be nice, but be firm at the same time.

If a client claims that you misrepresented an investment that you recommended, the response should remind the client in detail what was discussed, and why the investment falls within the client’s overall investment objectives, goals and tolerance for risk. Ideally, prior written communications on the subject will be sent back to the customer as part of this “reminder.”

Although nothing will ultimately keep a client from suing you if he/she is really inclined to do so, avoid potentially making it worse by not responding or being too conciliatory to a complaining email/letter. The last thing you want to have do is explain away the poor response (or absence of any response) to an arbitrator or jury who may not really understand you were just trying to be nice.