Public Customer Arbitrations

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.

If you thought the SEC and FINRA were serious about elder issues, welcome to the Alabama, Indiana and Vermont. Each has focused on elder abuse issues.

These states will have mandatory reporting to state officials in instances involving the disabled or those over 65 years of age. They will also allow advisors to cease disbursing funds from clients and providing advisors with immunity associated with doing so. So what does this all mean?

For one, states are starting to run on the coattails of federal regulators who have made elder issues an examination priority in recent years. In addition, such state laws should be a wake-up call for brokerage and advisory firms who service elder clients.money and calculator

The actions of these states should force you to ask yourself; what is my firm doing to prevent, detect and report elder abuse. Although a FINRA proposed rule does not require reporting, its goal is the same because it would allow advisors to designate a third-party to who they can inform of suspected problems.

In the absence of reporting requirements, firms should consider having clients aged 65 or above designate a trusted family member or friend when the advisor suspects that the client may be the subject of some abusive conduct. At that point, you may have a group approach to address suspected abuse.

Firms may also want to consider requiring these elder clients to designate a trusted family member or friend to receive copies of account statements. This way, someone who is “independent” can check an account for irregular activity as well.

Whether you are required to address elder abuse or not, firms should make sure that they are taking special care with their elder clients. Federal regulators and now states are focused on the issue. Are you doing anything to make sure your firm does not get into an elder abuse nightmare?

Anyone in a professional service business, like being a stock broker, have been faced with a client who decides to make a stupid decision. But the issue we all face is when that decision results in the client losing money; who is to be held accountable.whistleblower

Fortunately, the law does not require you to stop a client from making a stupid decision with their investments. As long as a broker-dealer’s advice was suitable and the investment advisor’s advice is in keeping with the fiduciary duty, you should not be held accountable.

But this does not mean a client who has now lost money won’t try to hold you accountable for letting them make a stupid business decision. So how do you protect yourself?

The best way to protection yourself is to send the client a letter or email at the time that the client makes the bad decision. The communication should detail why you think it is a bad decision and the potential ramifications associated with that decision.

At a minimum, you should make a note in your file, either electronic or in hard copy, that the client made the bad decision and that you (presumably) advised against it.

The law should protect you from stupid clients, but make sure you protect yourself. Contemporaneous communication to the client and notation to the file may save you millions of dollars in the future.

It was great speaking at the May 17 New York NSCP regional conference on risk issues facing firms where Ernie Badway and I discussed cyber-security, risk issues, regulatory matters, issues involving elder clients and ways compliance personnel can protect themselves.  For those of you who could not make the conference, these topics are frequently discussed in our various publications.  Feel free to access them here and use them as you see fit.  Core Values

Most people say that New Year resolutions are only as good as the paper on which they are written. Notwithstanding that ringing endorsement, I will give it a shot.

Here are some things that you should be resolved to doing in the New Year:

  1. Read the SEC and FINRA exam priority letters that each issue shortly after the New Year.
  2. Reevaluate your data security policies and procedures by testing it with internal and external threats.confusion.jpg
  3. Reevaluate your policies and procedures regarding the client relationships you maintain with anyone over the age of 65.
  4. Communicate (in either writing or telephonically) with all of your clients at least once a quarter.
  5. Only communicate with your clients through a form of communication that is approved and monitored by your firm.
  6. Have a written follow-up communications after you speak with your clients.
  7. Put in writing to your clients those instances where your clients ignore your advice.
  8. Never put anything in an email that you are unwilling to see blown up 1000 times as an exhibit in a trial or disciplinary proceeding.
  9. Hold on tight for the roller-coaster ride that we may see in the markets next year; your clients will expect you to be the voice and reason and calm.
  10. If a client makes a complaint, immediately report it up the chain, and do not try to resolve it yourself.

I am sure each of you could think of more thinks to resolve yourself to doing. So have it and best wishes for a healthy, happy and prosperous New Year.

* photo from freedigitalphotos.net

Now that I have your attention, there is a pretty tried and true method to avoiding customer complaints, especially in this volatile market. All too often, clients hide in their shelters when the market gets rough. The biggest mistake you can make is hiding in your own shelter.money and calculator

The best way to avoid a customer complaint in these trying times is to take the proactive approach and reach out to each and every one of your clients to take their temperature. Ideally, either you or one of your assistants will speak with each customer. At a minimum, you should email everyone to let them know you are on top of things and remind them to call if they want to discuss any concerns.

Many will only need a bit of hand holding. Some may want to revisit their overall investment goals and objectives. Most will just want to hear a friendly voice.

The worst thing you can do is nothing. This sends the opposite message to your clients; namely, that you really do not care about them as opposed to their money.

If you show a little proactive care, you may be surprised by the results. Some of your clients may have money on the sideline and be willing to deploy in the market adjustment. But you will never know if you do nothing. Nothing can only lead to one ending; a customer complaint. Don’t be a do nothing.

Not too long ago, I tried a case that had, among other issues, the improper use of the advisor’s personal email account. That improper use serves as a valuable lesson of what can go wrong when you deviate from using the firm approved email.

The client emailed complaints about the handling of the account to the advisor’s personal email address. In hindsight, the client appears to have done so to manipulate the situation. He was successful.

The advisor responded from his personal email without forwarding the complaint to the compliance department. Compounding that issue, the email he sent was construed to contain admissions of wrongdoing. We lost the trial.spying.jpg

The reasons are obvious why personal email should never be used for business purposes. For one, there is no oversight. Second, it can and will put you in an awkward position vis-à-vis the client and the firm.

What makes this situation even more pronounced is the reason why the advisor gave the client his personal email address in the first place. The client would not stop sending hardcore porn and racist humor to the company email address.

From my perspective, this was a client (regardless of account size) who had trouble written all over him. Rather than report the client and take some more drastic action (such as firing the client or barring the use of email), the advisor took an easy way out and paid dearly for that mistake.

Don’t give your clients your personal email address. If you do, report anything in the nature of a complaint to the firm before trying to respond. It is better to take the heat over using personal email than possibly admit to liability.  Don’t get caught with your pants down!*

* photo from freedigitalphotos.net

For years, firms have been using wrap products to charge an annual fee based upon the value of assets under management regardless of the number of trades, as opposed to fees per trade. In other words, wrap accounts were an effective tool to avoid churning claims because the customer theoretically could trade daily and only be charged an annual fee. These accounts are, however, giving way to a new type of customer complaint and regulatory oversight.

The new claim is known as reverse churning. In that situation, the client is placed into a wrap account, but trades very infrequently. As a result, the client winds up paying more in wrap fees than she would have with a straight brokerage, pay per trade account. idea.jpg

You can avoid these types of claims and potential regulatory headache by doing some simple due diligence when the account is opened and over the life of the account. As part of the “know your customer” intake process, you need to make proper inquiry to get a sense from your new client how frequently that client may want to execute trades in the account.

If your prospective client is looking for an active trading strategy, then the wrap account is probably the right way to go, and vice versa. It is equally important to review your accounts on a regular basis, at least annually, to see if the account activity justifies the fee structure. If the fees are out of whack when judged against the trading volume, then recommend a change in a formal written communication.

Unfortunately, reverse churning does not change butter into cream. To avoid what it can create, do your due diligence during your initial and subsequent know your customer analysis. Make sure your client is in the right type of account and avoid the stomach upset associated with a churn.

* photo from freedigitalphotos.net

Over the years that I have defended financial advisors and their firms, I have frequently spoken and written about ways to avoid the risk of being sued. I prepared a guidebook a couple of years ago that detailed some common sense approaches to risk avoidance. I have updated that guidebook to take into account new issues that you face.  You can access this material by clicking on guidebook.

I hope that you find this of use in avoiding the risk of being sued.