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Securities Compliance Sentinel

Analysis of cutting-edge securities industry issues

My Client Is Ignoring Me, Now What

Posted in Arbitration, Breach of Fiduciary Duty, Compliance and Supervision, FINRA Compliance

Anyone who is in a service industry frequently faces this question.  It is what you do in response that makes the difference between being a target for a lawsuit and moving on to greener pastures.bankinchains.jpg

The most important thing is not to ignore the fact that your client has ignored your advice.  A client ignoring your advice could have a material impact on the investment advice you gave.

For example, if you have prepared a financial plan with certain assumptions such as cash flow, a customer who alters the cash flow could impact the overall plan.  So what do you do?

The critical thing to do is to document the fact that the customer has ignored your advice and detail the ramifications for doing so.  Using the example above, you should write a letter or email to the client explaining the advice you gave (including whatever assumptions it was built upon) and detail the impact to the overall financial plan.

This is no guarantee that the client will not complain at some later date, but you have a paper trail.  You documented the advice that you gave the disregard of that advice, and the impact for doing so.  The only other question is whether to fire the client.

* Photo from freedigitalphotos.net

Reverse-Flash: SEC and FINRA Looking to Slow High-Speed Traders?

Posted in Broker-Dealer Regulation, Compliance and Supervision, Financial Industry Trends, FINRA Compliance, FINRA Enforcement, SEC Compliance, SEC Enforcement, Uncategorized

High-frequency trading is the latest craze hitting the market.  Popularized by Michael Lewis’s Flash Boys, high-frequency or high-speed trading involves the use of sophisticated technological tools and computer algorithms to rapidly trade securities.  According to Bloomberg BusinessWeek, high-frequency trading has been “blamed for making stock exchanges less transparent and markets more volatile [and] has disrupted the process of trading stocks that determines the value of public companies.”  Yet, I was recently told by counsel for the Securities and Exchange Commission and FINRA (at a 2014 Securities Litigation & Regulatory Update CLE in Philadelphia) that there is “nothing inherently bad” about high-frequency trading.  That said, these agencies are still looking for ways to safeguard investors.

FINRA recently approved various proposed rule changes regarding high-frequency trading, aimed at increasing transparency.  Additionally, the government has prosecuted traders for using high-frequency trading technology to manipulate the market.  For example, in October, the SEC fined an investment company for manipulating the closing prices of securities with a flurry of last second trades before the market closed.  That same month, the U.S. Attorney’s office in Chicago indicted a trader for placing and then rapidly cancelling orders to manipulate perceived demand, a tactic that has become known as “spoofing”.

The takeaway here is that, while high-frequency trading is still permitted—so long as it complies with FINRA’s new guidance and is not intended to manipulate markets and exploit other investors—the regulatory and enforcement landscape is starting to change.  Thus, companies and in-house counsel should continue to monitor developments in how the government plans to handle high-frequency trading.

Who Wants To Speak With Me, Oh No

Posted in Breach of Fiduciary Duty, Compliance and Supervision, Conflicts of Interest, Registered Representatives

Anyone in a service industry has had that dreaded feeling.  You see your email or caller identification and realize it is “that” client trying to reach you.  The client I reference is that extremely difficult client that we all have.

The natural inclination for many of us is to not take the call or respond to the email.  From a risk avoidance perspective, this is the last thing that you want to do. money.jpg

Unfortunately, we are all going to have difficult clients from time to time.  It is how you deal with that client that will make the difference between having a difficult and demanding client or a customer complaint to defend.

My late father had a saying that I think applies here; kill them with kindness.  Yes, difficult clients will take your attention away from other clients, but you still must make sure you address even the concerns of these difficult clients.

One key when working with these clients is to document everything that you do.  You speak with the client, follow-up with a confirming email.  The client ignores your advice; follow-up with an email restating your advice and note the consequences for the client not following it.

There is no easy way to deal with difficult clients, but the key is never ignoring them.  That will only create an issue where there may be none.  Don’t be afraid to hold a hand from now and again.  It may make the difference from just having a difficult client or a customer complaint.

* photo from freedigitalphotos.net

I Just Got A Client, Now What

Posted in Public Customer Arbitrations, Registered Representatives, Securities Litigation

After the obvious, make and execute on investment recommendations, some are at a loss for what to do next.  From my perspective, it is the next step that may mean the difference from having a career without customer complaints to one with them. 

The key to survival in this competitive industry is to have a constant line of communication open with your customers.  For one, you should have at least one face to face meeting with each of your clients every year. 

The next thing you should do is to have some contact with your clients on at least a quarterly basis.  With all of the technology available, there is just no excuse not to be in contact with your customers.  Email, text or, for heaven’s sake, call your clients.  Any time you have contact, that may be an opportunity to get more assets under management. idea.jpg

Most importantly, when a client reaches out to you, get back to that client no later than 24 hours after the client contacts you.  It is easy to blow off those high maintenance clients, but those are also the ones most likely to make complaints. 

By simply returning calls or emails expeditiously, you can avoid small issues bubbling into a major issue, written complaint, or worse, a lawsuit. 

If you take away one thing form this post, remember you are in the customer service business.  Give service.  Get customers.  Don’t give service.  Get sued.  Choice is yours.

* Photo from freedigitalphotos.net

NFA Prohibits Funding of Retail Forex Accounts With Credit Cards

Posted in CFTC Compliance, NFA Enforcement

This week, the CFTC approved a NFA Interpretative Notice that prohibits a Member from accepting credit card payments from customers to fund retail forex accounts.  The NFA recently reviewed how customers fund their retail forex accounts and found that customers overwhelmingly funded their trading accounts using a credit card.  The NFA noted that credit cards permit easy access to borrowed funds and the highly volatile nature of the forex and futures markets create a significant risk of substantial loss in a short period of time.  The NFA cautioned that it is not prohibiting other forms of electronic funding so long as the funds come directly from a customer’s bank account.  Members will be permitted to accept debit card transactions assuming that Members are able to distinguish between a debit card and a credit card transaction.  Member firms must comply with the interpretative notice by January 31, 2015.

For some Members, the new guidance will cause a substantial change in the way they accept customer funds and will add to the long list of regulatory compliance requirements.  Members that want to allow customers to fund their accounts using debit cards will likely have to retain a third party vendor to help in differentiating between debit card and credit card transactions.  Also, Members will have to ensure that they do not accept funds from electronic payment facilitators (i.e. Paypal) that commonly draw funds from a customer’s credit cards.  Certain customers may also ask why the NFA is no longer allowing them to get frequent flyer miles before they start forex and futures trading.

No Admit, No Deny – No Longer?

Posted in Compliance and Supervision, SEC Compliance, SEC Enforcement

Admissions by companies in enforcement actions brought by the Securities and Exchange Commission (SEC) can open the floodgates to follow-on private civil litigation.  Fortunately, the SEC has traditionally settled with companies on a “no admit, no deny” basis.  That has begun to change.

As you may recall, in 2011, U.S. District Judge Rakoff of the Southern District of New York refused to approve a “no admit, no deny” settlement between the SEC and Citigroup Global Markets, Inc.  See SEC. v. Citigroup Global Markets Inc., 827 F. Supp. 2d 328 (S.D.N.Y. 2011).  While that decision was recently overturned by the Second Circuit, see SEC v. Citigroup Global Mkts., Inc., 752 F.3d 285 (2d Cir. 2014), its effect lingers on.  According to the Second Circuit, district courts should still assess whether a SEC settlement is “fair and reasonable” and that the “public interest would not be disserved.”  Id.

In response, the SEC has begun pursuing admissions from companies under certain “limited” circumstances.  Recently, at a 2014 Securities Litigation & Regulatory Update CLE, SEC counsel offered insight into its new settlement admissions policy, suggesting that it would it would seek an admission, rather than the traditional ”no-admit no-deny” settlement, where the alleged securities violations were particularly egregious.  Counsel for the SEC then offered four “limited” circumstances that would warrant it requiring an admission at settlement:

1.  Where the violation placed investors at significant risk;

2.  Where the company’s actions hindered the SEC’s investigation;

3.  Where the SEC views there to be a deterrent effect to requiring an admission and wants to “send a message to the market”; and

4.  Where the SEC perceives a possible future threat.

Companies and in-house counsel should be mindful of these circumstances when dealing with an SEC enforcement action.  An admission of wrongdoing can lead to years of headaches from continuous private litigation, not to mention the significant financial costs of defending these civil cases.  Should you be faced with an SEC enforcement action, you should consider how your legal strategy can demonstrate that each of these circumstances does not apply to you, so that you can preserve the possibility of a “no admit, no deny” settlement.

You Don’t Really Want That Client, Do You

Posted in Books and Records, FINRA Compliance, Uncategorized

As we all look to our planning for the coming year, we are all looking for ways to increase our client base.  Although that is the goal, a mistake in client selection can significantly harm your business. 

In my experience defending brokers and member firms, it seems as though mistakes made during client selection and intake ultimately lead to claims.  How does this happen? 

In my view, we are more concerned about getting clients, and less concerned abot of they are the right clients.  There are a few red flags about potential clients that should steer you away from them. 

These potential problem clients are what I call:

  1. The free agent; these are clients that jump from one firm to another looking for better results.
  2. The client with unrealistic expectations.
  3. The client whose goals and objectives are inconsistent with your investing philosophy.buyholdsell.jpg

So how do you avoid these potential problems?  Detailed screening and know your customer analysis before commencement of the relationship is the best practice. 

Know that you will never satisfy the free agent, or the client who thinks that they are going to have a 25% ROI every year no matter what happened in the markets.  Likewise, do not try to pigeon hole a client into your approach because that approach may not be proper for that potential client.  In other words, if you are a long-term growth investor, having a customer with fixed income and liquidity needs, is a recipe for a lawsuit.

Dust off your investor questionnaires and client intake due diligence materials and use them when considering the retention of a new client.  Forgot to use them and only have yourself to blame when you get sued. *

Photo from freedigitalphotos.net

Who Has Had A Problem With One Of Your Arbitrators

Posted in Arbitration, Intra-Industry Arbitrations

Anyone who has handled FINRA arbitrations, from the compliance officer to in-house counsel, you have probably had to deal with a problem arbitrator.  How many of you have had arbitrators sleep through the proceedings?  How many have had arbitrators who simply turn out to know absolutely nothing? 

I suspect that the answers to these questions are an unfortunate yes.  What would you do if one of your arbitrators was suspended for the unauthorized practice of law?  This is the issue current winding its way through the federal courts in Philadelphia. spying.jpg

In this case that is on appeal, one of the arbitrators had this issue and the parties consents to have the remaining two panel members decide the case.  The losing party is now claiming on appeal that it was denied its right to a panel of three arbitrators.  

From my perspective the result of the case is less important than the lessons to be learned.  For one, FINRA over the past year has taken a more proactive approach to assessing its arbitrator pool.  Practitioners also have tools at our disposal.

When ranking your arbitrator selections, you should perform independent research separate and apart from the packet FINRA provides.  When your panel is selected, you should do the same sort of research because you still have the opportunity to object to the appointment of one or more of the panelists. 

For example, a simple Google search can reveal a wealth of information.  Also, you should search the state and federal courts in the jurisdiction in which the arbitrator resides. 

These are just a couple of resources that you can use, but nothing is perfect.  The key is to do something so that you can hopefully avoid the problem of having an arbitrator removed mid-hearing.  That is certainly not something anyone bargained for when you proceed to arbitration.

* photo from freedigitalphotos.net

So Who Really Thinks They Know Their Customers

Posted in Broker-Dealer Regulation, Compliance and Supervision, Financial Industry Trends, FINRA Compliance, Registered Representatives, Uncategorized

As the year winds down to an end, financial advisors should be mindful of next year and the years to come.  Now is as good a time as any to make sure that you know your customer. 

The year-end gives you a unique opportunity to get in front of your clients and revisit the year coming to an end and their future with you.  Here are some questions that immediately come to mind: 

  1. Have their goals changed?
  2. Have they changed jobs or expect to in the coming year?pointing.jpg
  3. Is there an immediate or short term need for cash?
  4. Has their tolerance for risk changed?
  5. What are their investment goals on a short term and long term horizon?

Any financial advisor that does not know the answers to these questions is looking to get sued in the future.  The key to any risk prevention and, for that matter, client satisfaction, is to make sure you know your customer.  I have prepared this guide book that may help with this analysis. 

Either schedule year-end meetings or send your client a year-end questionnaire .  By taking either step, you have put the onus on the client to provide information to you.  In turn, this may protect you in the future if your client should claim that you made improper investments because you did not know your customer. 

So before you have the second glass of egg nog, ask yourself, do I really know my customers as we head into the New Year?  If the answer is anything other than an unqualified yes, you have work to do.

* photo from freedigitalphotos.net

So What Can Be Done To Avoid The Quandary Of Clients With Dementia

Posted in Broker-Dealer Regulation, Compliance and Supervision, Financial Industry Trends, FINRA Compliance, Investment Adviser Regulation

As our population ages, more and more financial advisors will have to deal with clients who have dementia or get dementia.  If a client gets dementia, your options may be limited; it may be too late. 

The question all firms should consider is are there things a firm can do before its clients show the signs of dementia.  Fortunately, the answer is yes.  Firms should consider things such as: 

  1. Require account holders of a certain age have authorized third party fiduciaries to act on their behalf;
  2. Establish an elder abuse unit to monitor accounts held by elderly clients;
  3. Place all accounts of clients over a certain age under heightened supervision;bankinchains.jpg
  4. Provide enhanced training to financial advisors to address elder issues as they arise;
  5. Require elderly clients undergo screening from a medical professional to ensure they can handle their finances;
  6. Require client trade confirmations in writing from the client; and
  7. Consult with you clients about what to do in the event of dementia and document that discussion.

None of these options are perfect and there are many more to consider.  But the point is that it is better to plan for the worst to avoid those situations where the firm is forced to go to court over what should be done with the client account.

A little planning now will hopefully go a long way to avoiding the time and expense associated with a client who gets dementia where the firm has no tools to address that situation.

* photo from freedigitalphotos.net