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Securities Compliance Sentinel

Analysis of cutting-edge securities industry issues

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

My Client Has Dementia, Now What

Posted in Compliance and Supervision, Conflicts of Interest, FINRA Compliance, Investment Adviser Regulation

What do you do when your elderly client begins to make bizarre withdrawals?  Is there something wrong when your elderly client starts transferring funds to finance a Nigerian soccer teams?  What if a long lost relative comes on the scene and starts influencing the investments and cash withdrawals of an elderly client? 

Unfortunately, many financial advisors are faced with these problems because a growing number of their clients currently have or will have dementia.  The best course is preventative medicine before your client has dementia; i.e., a protocol for dementia-stricken clients.  The challenge becomes what to do when you client is suffering from dementia. 

There are a number of courses your firm can consider, all of which have an upside, downside and associated expense and risk.  Firms may consider any of the following: money.jpg

  1. Terminate the client relationship.
  2. Freeze the account until you can obtain some sort of resolution.
  3. Suggest that your client seek medical attention; the dementia may have been caused by something that can be fixed.
  4. Seek the input of a co-account holder or family members in accordance with privacy laws.

Each of these options has certain legal implications that may vary depending upon where the client and the firm reside so you should consider any of these steps carefully with someone abreast on the law.  Ideally, your firm would have developed strategies to anticipate these types of situations, and plan accordingly for clients who suffer from dementia.  Otherwise, you may be stuck in a very difficult situation to remedy, and exposed to potential liability from aggrieved clients and their families.

* photo from freedigitalphotos.net





What Does The “E” in Email Mean?

Posted in Broker-Dealer Regulation, Cyber-Security, Financial Industry Trends, FINRA Compliance, FINRA CRD, FINRA Enforcement, Securities Litigation

Recent history shows that FINRA is going after brokers who alter client’s records.  This, unfortunately, reminded me of my own bad experience as a young lawyer when defending a broker.

That broker had great “contemporaneous” notes of his communications with the client that made the case very defendable.  My opponent questioned the authenticity of these notes, which I scoffed at.  I raised the accusation with my client, who only then (late in the case) admitted that he created the notes after was sued. confusion.jpg

Needless to say, that case did not end well for the defense.  What does this have to do with email?  And, what does the “e” in email mean?

The easy answer to this question is “electronic”, but that would be wrong.  The “e” in email actually means any one of the following: Eternal, Everlasting, Error-prone and, my all-time favorite, Exhibit, as in trial exhibit.

When I teach brokers risk avoidance techniques, I often get a big, “aha” when I drop this punch line.  Most people do not appreciate the risks associated with electronic communication.

Like the evil zombie in a horror movie, it never goes away.  Delete it as many times as you want and it will still come back.

So how can you avoid being a victim of the zombie?  There is a pretty easy rule of thumb with emails and other forms of electronic communication.

After you write the email, read it, and read it again.  If, after you have read that email, you would be okay seeing that email enlarged ten thousand times at a trial where you are defending yourself, then hit send.  If the answer is not an unqualified yes, do not send, but delete . . . fast.

This may seem so obvious, but it is often overlooked in our fast paced world.  Take your time.  Think before you hit send.  It may save your career.

*photo from freedigitalphotos.net

Look Before You Tweet

Posted in Compliance and Supervision, Conflicts of Interest, FINRA Compliance, FINRA Enforcement, Registered Representatives, Social Media

FINRA recently sanction a registered representative for tweets made some time ago.  The offending tweets referenced a stock that he did not disclose that he owned and were otherwise biased and not backed up by facts. 

The registered representative was fined $15,000 and given a ten day suspension.  In the larger scheme of things, a relative slap of the wrist.  What was more interesting was the age of the tweets. idea.jpg

The first offending tweets dated back to 2009.  The most recent offending tweets were from 2011.   So what does this mean for those of you who like to use social media to get the word out? 

For one, it certainly appears as though FINRA is taking a long look at tweets to determine if any are offensive.  If you tweeted a few years ago, you may still be subject to FINRA review. 

For those of you who want to tweet, make sure you look at your firm WSPs on the use of social media.  Typically, static content (like LinkedIn) would have to be preapproved advertisement by the member firm.  Interactive media (like Twitter) generally will not require pre-approval, but the firm will be required to be maintained by the firm for review and supervision. 

Social media is great, but use your head.  Check firm policies and be smart.  Believe it or not, the “if it feels wrong it is wrong” test does work.  Don’t tout stocks on Twitter and, if you do, disclose if you own it.  FINRA is serious about social media abuse.

* photo from freedigitalphotos.net

Is the SEC that good? SEC Wins Every Administrative Case

Posted in Dodd-Frank, SEC Enforcement, Securities Litigation

In what is sure to add more “fuel to the fire,” it was recently reported that the SEC has won every case brought in its administrative courts over the last year.  The SEC has not been so successful with its federal court cases, winning 61% of those cases over that same period.

Of course, regular blog readers know that the Dodd-Frank Act expanded the SEC’s powers to permit it to bring more cases in its administrative courts.  These SEC proceedings restrict discovery, testimony and evidence while federal court proceedings permit the full panoply of discovery as well as the protections afforded when appearing before a federal judge.   One should also keep in mind that the SEC appoints the administrative law judges while federal judges are appointed by the President and confirmed by the United States Senate.

Ultimately, it is the SEC that makes the call on where the case is brought, however, these statistics are telling.  If you are the respondent in a SEC administrative action, your chances of success are minimal as opposed to being a defendant in federal court.  Accordingly, it may be worthwhile to start thinking settlement if you find yourself in a SEC administrative court.

Forget Including A Bar Of Whistleblower Tips In Settlement Agreements

Posted in Broker-Dealer Regulation, FINRA Compliance, FINRA Enforcement, Public Customer Arbitrations, Registered Representatives, Uncategorized, Whistleblowers

FINRA recently warned that firms could face disciplinary action if they enter into settlement agreements that bar customers or former employees from reporting wrongdoing at the firm.  Although FINRA recognized that confidentiality provisions were acceptable, it noted that they have to be written in such a way to authorize the individual to contact FINRA or another regulator to report improper activity. 

Similarly, FINRA announced that any confidentiality stipulation that at arbitration panel enters in a case would not apply to sending information to regulators about the firm.  The timing of this announcement coincided with the SEC approving a FINRA rule change that allows arbitrators to make a referral to enforcement before the end of a case.  This was certainly not coincidence. 

So what is the take away from these policies?  For one, it could embolden whistleblowers to reach a resolution with a member firm, only to then report the firm to FINRA or another regulatory body.   

In the end, this may result in more litigation and enforcement proceedings.  It may also result in more FINRA arbitrations being tried to award.  In other words, the firm may as well try to get exonerated by a panel if the claimant could just report the firm to FINRA regardless of a settlement. 

The other side of this coin is FINRA’s push for transparency.  By restricting these agreements and allowing arbitrators to report firms to enforcement during arbitration, FINRA is stepping up its oversight of member firms. confusion.jpg

The cynic in me says that the lawyers will be the one that will ultimately benefit from these policies because firms may be forced to litigate claims to a conclusion and fight more enforcement matters.   

One unfortunate outcropping of these policies may also be frivolous reports to FINRA to use as settlement leverage.   Compounding that issue, making a whistleblower report is at least entitled to a qualified privilege such that firms may have little recourse for a whistleblower that makes a bogus report. 

So what should firms do?  The key is leadership from the top that promotes a culture of compliance.  This may be cliché, but solid firm leadership that has a no-nonsense approach to compliance and supervision will stand in a better position than firms that deal with compliance and supervision on an ad hoc basis. 

Life for member firms and registered representatives is becoming more challenging, and FINRA is not making it any easier.  Nonetheless, you should take a hard look at yourself.  Are you doing enough to create a culture of compliance to avoid the sting of whistleblowers?

* photo from freedigitalphotos.net

Personal Email For Firm Business – Don’t Do That

Posted in Books and Records, Broker-Dealer Regulation, FINRA Compliance, FINRA Enforcement, Social Media

As firm clients demand more and more access to their registered representatives, member firms must do more to make sure that their brokers do not run afoul of the firm communication written supervisory procedures.  One firm recently failed that test, resulting in a FINRA fine and censure. 

In that matter, FINRA found that the member firm allowed representatives to use personal email for firm business, including client communication.  Making that matter worse, the firm was aware of the practice and allowed storage of email communications on personal computers, exposing those emails to alteration and deletion.

The first question you should have is where compliance was and supervision regarding the pre-approval of client communications was.  The firm did have such WSPs requiring pre-approval of client communications, but lacked access to the personal computers to perform this supervisory task.  FINRA took issue with this type of supervision; more like the lack of supervision. 

This case is the perfect of example of the question, why have WSPs if the firm is not going to enforce them.  Client communications represent a hotbed of issues for large to small firms.  Allowing representatives to use personal email for client communications is not one of the better decisions a firm can make. 

The key to supervision is to be able to supervise.  This firm, by allowing the use of personal email accounts without meaningful supervision, set itself up for failure and sanction. 

Some may say this firm was lucky because there was no client harm.  I recently tried a case where the representative used a personal email account and made some statements that could be considered admissions.  Since the representative ignored firm policy, she and the firm were exposed to liability. spying.jpg

When it comes to client communications, you need a robust email review policy.  By having such a program, you may be able to uncover the more problematic issue of unauthorized use of personal email accounts.  Either way, firms need to really focus on client communications to avoid FINRA enforcement and civil liability. *


* photo from freedigitlphotos.net

The Uniform Fiduciary Duty Standard – It Seems Like Déjà vu All Over Again

Posted in Breach of Fiduciary Duty, Broker-Dealer Regulation, Dodd-Frank, FINRA Compliance, FINRA Enforcement

Although it has been many years since Yogi Berra uttered this famous line, it seems like he must have been thinking about the debate regarding the adoption of a uniform fiduciary duty standard.  All kidding aside, one SEC commissioner recently expressed his doubts regarding the SEC proposing such a rule for those who give retail investment advice. buyholdsell.jpg

From all accounts, there appears to be a split, along party lines, of the SEC Commissioners on the adoption of such a rule.  Some argue that a rule should be adopted because investors do not understand the difference between the duties of investment advisors and broker dealers. 

In my view, the confusion has been spawned by the ongoing debate.  For broker-dealers, separate confusion can also be found with FINRA arbitration panels, some of which do not know that broker-dealers do not have a fiduciary duty to their customers.  So where does this leave us? 

In my experience defending retail broker-dealers, I have found that most customers assume that there is such a duty on their brokers, only to be shocked to hear in closing argument that it does not exist.  Nevertheless, there is a take away from this improper assumption most customers make. 

While the debate rages, broker-dealers should be taking a harder look at the suitability of their investment recommendations.  By taking a harder look, not only do you satisfy your legal obligations, but also may also satisfy the “expectations” of your customers.  Doing that may help you avoid the likelihood of customer claims and, if you have one, a better suitability defense on top of that.


* photo from freedigitalphotos.net