In a recent Acceptance, Waiver and Consent (“AWC”) a broker dealer was censured and fined for, among other things, the failure to conduct an adequate pre-hire investigation of a registered representative. The importance of this AWC is that it may signal FINRA’s mindset for what firms must do under Rule 3110(e).

Under Rule 3110(e), FINRA expects member firms to more of a background check than simply reviewing the new hire’s CRD, and requires firms to have written supervisory procedures specifically designed to verify the accuracy and completeness of the information on the applicant’s U-4. The AWC noted that the member firm only reviewed the new hire’s CRD, and did not conduct any more investigation of that information even though the CRD showed the following: reportable events, including criminal charges, a termination for cause and customer complaints of unauthorized trading.idea.jpg

Although the AWC pre-dates the “go-live” date for Rule 3110(e), it is instructive to member firms. The AWC echoes the fact that a firm will not be insulated if it limits its pre-hire review to the information that appears in the CRD of the potential new hire. Instead, the member firm must do more to get behind the information contained on the CRD for a more detailed understanding.

Rule 3110(e) becomes effective on July 1, 2015. Between now and then, firms should be reviewing their written supervisory procedures regarding pre-hire due diligence. Make sure you have procedures that go above and beyond the CRD, or be faced with possible consequences for the failure to do so.

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Brokers like anyone else enjoy making money the old fashioned way  . . . . by inheriting it.  Although everyone wants to inherit business, a recent Investment News article highlighted the pitfalls associated with agreements to acquire the business of a retiring broker. confusion.jpg

Indeed, intra-industry disputes, such as those involving the acquisition of a book of business from a retiring broker, represent approximately 30% of all cases before FINRA.  So what are the pitfalls? 

For one, the acquiring broker may have ongoing financial obligations to the retiring broker that could last for years.  Such provisions may, in turn, restrict the acquiring broker from moving to another firm because the agreement may not be in conformity with the Protocol for Broker Recruiting; an agreement between firms that gives a broker the ability to move client information to another firm without the threat of being sued.   

The transportability of a book of business may ultimately depend if it was truly inherited without any prior connection between those clients and the acquiring broker. If the acquiring broker had worked with the acquired clients before inheriting them, there is a greater chance that the Protocol may insulate the broker who then wants to transfer these clients to a another firm. 

There is one pretty clear takeaway from the Investment News article. If you acquire a book of business from a retiring broker, make sure you have a solid agreement; one that gives you the ability to transfer to another firm while satisfying any financial obligation you may have to the retiring broker.

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As a result of a couple high profile awards that were overturned because of issues with the arbitrators, FINRA has vetted its pool of arbitrators and has instituted new procedures to review arbitrators. Should you feel any better that this has happened?

Having defended broker-dealers and registered representatives over 16 years, I have, at times, seen the underbelly of FINRA’s arbitrators. My hope is that FINRA’s routine Internet searches of its arbitrators and using social security numbers to verify information about arbitrators will reveal bias or other issues that may warrant FINRA removing the arbitrator from its pool.

FINRA’s goal of having a well-qualified and non-biased pool of arbitrators should appeal to both claimants and respondents, assuming the ultimate goal is to obtain a fair result. This, however, should not be the end of your analysis. spying.jpg

Arbitration practitioners should always do their own due diligence before selecting a panel. It is amazing what a simple Internet search can reveal.

For example, Internet searches may reveal prior litigation involving the arbitrator. You may also find articles written by the arbitrator or news stories quoting the arbitrators.

FINRA has taken the first step in ensuring that the parties have good panels. That due diligence is the floor; all practitioners must do their own independent research before selection a panel, or your clients may suffer the consequences for your failure to do so.

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The SEC’s Division of Trading and Markets assured a broker-dealer that a retiring registered representative would not risk enforcement action if, after termination of  the employment, he or she received certain compensation from the firm without maintaining his or her status as a registered associated person.  See Packerland Brokerage Services, SEC No-Action Letter, avail. 3/18/13 at

The compensation to this soon to be retired registered representative would be derived from accounts held for the retiring brokers’ continuing customers.   The retiring registered representative may receive compensation in connection with money added post-retirement to such customers’ accounts, provided the firm, the retiring broker, and the receiving broker comply with the terms of a November 2008 no-action response to SIFMA.  See

This has always been an area of trouble, and this guidance may make it easier to transition clients to the next generation of registered representatives.

On September 18, the SEC approved a FINRA proposal that essentially does away with the ability to have an industry arbitrator serve on your panel.  So the question becomes, why bother arbitrating customer complaints.

Without an industry arbitrator on the panel, you have no choice but to hire an expert witness because there will be no “industry” perspective on the panel.  Even if you do so, that may not overcome a panel stacked against the firm due to the absence of an industry presence. money.jpg

If you have to incur this additional cost, you might as well get the procedural and appellate protection that a party enjoys in court.  Unlike FINRA arbitration, in court, you have the ability to challenge frivolous claims at an early stage, and a real ability to appeal an adverse result. 

Although there are additional costs in court, such as the costs of full discovery, I think that the cost is outweighed by the benefits, only a couple noted here.  In the end, there is not much of a benefit arbitrating customer disputes without an industry presence. 

To avoid being in an adverse court, you should have your customer agreements contain a clause that requires the claim to be litigated in one particular court.  Also, you should consider a jury waiver provision.  Depending upon your jurisdiction, these clauses are generally enforceable. 

The time has come to reconsider where to litigate customer complaints.  Serious thought should be given to doing away with arbitration in your customer agreements altogether, and opting to a court of your choice.

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Recently, a Texas appellate court upheld a common law prohibition against a former registered rep who had moved firms.

The court indicated that this departing broker had a common law obligation to maintain confidential information from his prior employer.  See Institutional Securities Corporation, et al. v. Vernon J. Hood, III (December 12, 2012),  In this case, the broker had downloaded information and also obtained other documents in preparation for sending information to his customers.  The court found that he was not permitted to do such a thing and could not use a broker/client data.  This was interesting because the broker had actually been fired and escorted out of the building.  The broker had previously downloaded this information.

Although the broker did not have a restrictive covenant or non-compete, the court imposed one upon him and indicated that the broker could face disciplinary action from FINRA.  This decision is problematic for those brokers moving from firm to firm.

The FINRA Board of Governors is considering implementing new rules that will require brokers to disclose their compensation when they move firms.

In many respects, this will cause issues for those who move firms periodically to obtain bonuses and other compensation increases.  These brokers will be required to disclose to their clientele what their compensation package is, and if has anything to do with the move.   See

Many suggest that such changes, if approved by FINRA, will cause some persons to move to the registered investment advisor framework.  Further, some persons have accused FINRA of entering into a sphere where it need not go.  Moreover, some conspiracy theorists have argued that FINRA is being forced to consider these measures, not for the protection of customers, but, to provide an anti-competitive benefit to FINRA members.  That is, if this information need be disclosed, it could have a chilling effect on brokers switching firms, and, thus, provides a competitive advantage to the current employer.  Essentially, this mechanism, if approved, could lead to compensation being reduced with firms profiting at the expense of their employees.  In any event, the FINRA Board of Governors voted in favor of proposing these new rules, and the comments have already begun to roll-in.

Importantly, we should note that not every broker moves for the money and bonuses.  Many brokers move firms because the new firm provides a better platform for their clientele, and ensures better execution and services for their clients.  Additionally, some firms have internal issues that cause these brokers to leave their firms– not the size of the bonus. 

We shall monitor the process and report periodically on its status.