Securities attorneys routinely are asked by people in the securities industry a form of this question: “how do I get rid of the marks on my license.”  Typically, registered representatives are talking about the fact of life in the securities industry where every time some customer makes a claim, regardless of how baseless it may be, it will end up on the person’s CRD record.  Once there, it is nearly impossible to expunge.

Nonetheless, FINRA has developed over the years a process whereby a registered representative may bring an arbitration proceeding to request expungement of these items.  Such an expungement is, unfortunately, very difficult to obtain for many reasons, among others, the cost, high standards of review, and the fact there may be objections from a number of sources.  However, some registered representatives have not been dissuaded.

In particular, a recent FINRA arbitration panel ruled in favor of a registered representative, and expunged his record.  See https://www.finra.org/sites/default/files/aao_documents/17-01429.pdf.  In the Molinari matter, the registered representative was seeking expungement for some very old claims.  The customers and settlement agreements were not available given the age of the claims, and he no longer was working at the broker-dealer where the complaints were first registered.  To ensure the registered representative had at least an opportunity to be heard, the FINRA arbitration panel permitted the proceeding to move forward with the named respondent being that of the registered representative’s current firm.  The panel then reviewed the claims, and the registered representative’s involvement in said claims.  After hearing the evidence, the panel found that the claims should be expunged from the registered representative’s CRD records.

In short, with the arbitration panel’s willingness to look at the actual substance of the matter and not some formulaic process, it accomplished the ultimate goal of ensuring an accurate CRD system.  We hope other arbitration panels follow suit.

Ernie Badway and I have prepared a series of podcasts that highlights client-issues and risk avoidance techniques for broker-dealers and investment advisors.  We hope you’ll take a listen.

 

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.

When you are faced with a customer complaint, the single most important thing in my expense is the content of the file. If it is not there, it will not exist in the mind of the factfinder. If it is there, the so-called “film” generally does not lie.

Over the years that I have defended brokers and investment advisors, I frequently hear things along the line of, “I really talked with the client once a week”. Yet, in many instances there is nothing in the file, such as contemporaneous notes or a follow-up email or letter, to substantiate this claim.

Factfinders sometimes are of the mind that the calls never happened if the “film” is not there. So what should you do to avoid this unfortunate prejudice at the time of a trial?

For one, slow down. In this age of multitasking and instant messaging throughout the day, don’t forget a little CYA may go a long way.idea.jpg

After any communication you have with a client, make a brief note of the call electronically or, dare I say, hard copy form. Send an email to the client confirming the substance of the call, or send a letter.

Taking these simple steps serves two purposes. First, it gives you some (better than none) protection if you are ever questioned about advice you may have given to a client. Second, it protects the client from themselves. If you confirm what the client agreed to, for example, that same client will be hard-pressed to legitimately complain and, at the same time, has a reference for what you are doing with the client’s account.

Take your time, Take notes, or confirm discussions in writing. Taking this simple step may mean all the difference to successful defense.*

* photo from freedigitalphotos.net

If the recent National Senior Investor Initiative of the SEC and FINRA taught us anything, it was the tremendous importance to know your customers. This takes on more significance when you are working with seniors.money.jpg

You may ask why does “knowing your customer” take on any more significance for these clients. For one, an investor’s goals, objectives and tolerance for risk may change over time. What may have been suitable when your client was in her thirties may not when the same client is in her 60s.

By the same token, as our society grays, there may be more issues with cognitive impairment. Getting in front of your clients as they age will then take on an even bigger significance, especially if you detect cognitive issues.

Best practices would suggest that you have a face-to-face meeting with your clients at least once a year. At those meetings, you should undertake that know your customer analysis as if the client was new to the firm. Although this may seem like needless work, there is a benefit.

First, any time you are in front of your client you have the opportunity to generate new business. Second, it shows your clients, particularly as they age, that you have a vested interest in them as people, than just AUM. Third, it provides you with a possible risk avoidance tool. The more you know, the less likely you will be faced with a suitability claim in the future.

Take the time every year to make sure you still know your customer. Otherwise, place yourself at risk of being a target in the future. The choice is yours.

* 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.

The SEC recently approved a FINRA proposal that will further restrict who can serve as “public” arbitrators. Under this new formulation, individuals who have worked in the securities industry and lawyers, including those who represent claimants, could not be considered “public” arbitrators for a period of time.

The big change under this new rule, is that any lawyer who has devoted 20% or more of his/her time over the last five years representing claimants would be considered nonpublic instead of public arbitrators. These lawyers can reenter the public arbitrator sphere after a five year cooling off period.

The new rule will also exclude certain professionals from being a public arbitrator. Any attorneys, accountants and other professionals who have worked for financial firms for more than 20 years cannot be a public arbitrator. If they have worked in the industry for less time, they can become a public arbitrator after a five year cooling off period after the cessation of their employment.buyholdsell.jpg

This new rule when coupled with the prior rule that allowed a claimant to select an all public panel is seen as another way to level the playing field. I am still firmly of the view, however, that these rule changes will make the use of experts a necessity.

When you had an industry person on the panel, both sides could Use that person as a conduit to explain the nuances of the securities business to the other panelists, many times you could do this without an expert. In other words, an effective presentation could result in the industry person actually acting like an expert for either or both sides.

I believe that this new rule will make arbitration more not less expensive because an expert will be a necessity. The secondary risk is that all public panels with no industry representation will do nothing to level the playing field in arbitration. Instead, inexperienced panels will likely result in bizarre awards and more efforts to challenge those awards. Time will tell . . . .

* photo from freedigitalphotos.net