When faced with a customer complaining through a letter or email, it is human nature to try to appease the customer with a conciliatory response or no response at all. I have seen this “human nature” all too often when defending brokers and advisor from customer complaints.

In almost all instances, the complaining customer now claims that the conciliatory comment or non-response is the functional equivalent of an admission by the broker/advisor that he/she did something wrong. In turn, the broker denies that he/she made any admissions by being conciliatory or silent. While I generally agree with the advisors, it is always an issue that must be overcome.whistleblower

So what should an advisor do when confronted with a nasty/accusatory email/letter? Most important, forward the communication to the person/persons who are designated in your company to handle customer complaints regardless if you “think” this person is just blowing smoke.

Someone should always respond to such a communications. The responding communication does not have to be the functional equivalent of beating up baby seals with a bat. Instead, it should be nice, but be firm at the same time.

If a client claims that you misrepresented an investment that you recommended, the response should remind the client in detail what was discussed, and why the investment falls within the client’s overall investment objectives, goals and tolerance for risk. Ideally, prior written communications on the subject will be sent back to the customer as part of this “reminder.”

Although nothing will ultimately keep a client from suing you if he/she is really inclined to do so, avoid potentially making it worse by not responding or being too conciliatory to a complaining email/letter. The last thing you want to have do is explain away the poor response (or absence of any response) to an arbitrator or jury who may not really understand you were just trying to be nice.

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

The SEC and FINRA have made it very clear that they are focused on senior customers and elder abuse. Granted, firms must be focused on the elder customers, but, at the same time, must also focus on the fact that many advisors are included in the graying generation.

What are firms to do about that? Before you do anything definitive, you should vet your ideas with an employment consultant or lawyer to make sure that any plan does not run afoul of labor and employment laws because older advisors may be within a protected class.confusion.jpg

Separate and apart from any legal analysis, you should consider doing certain things to make sure your advisors are acting properly and clients are being protected. Here are some suggestions that, in reality, apply across all age groups; these areas of inquiry could include:

  1. Having a supervisor meet with the advisor on a more regular basis just to see how they are doing; i.e., are they acting properly in the office or are they even in the office.
  2. Monitor trading activity; has it changed radically over a short period of time.
  3. Analyze the outflows of cash from customer accounts.
  4. Analyze the loss of customers over time (i.e., has the advisor lost a number of clients in short order).
  5. Randomly contact customers to vet their recent experiences with their advisor.

These oversight tools may help you uncover an elder advisor who is suffering from dementia, or, quite possibly, uncover a young advisor who is defrauding customers. Either way, the key is simple, properly monitor your advisors’ activity and protect your clients in the process.

* photo from freedigitalphotos.net

It is bad enough that firms and publicly traded companies have to make sure that their respective IT architecture is safe and secure, but recent developments demonstrate that you have to be weary regarding the media outlet with who you share material, non-public information.19196909_s

The SEC and the DOJ in a joint effort have brought civil and criminal proceedings against individuals part of an international scheme who hacked the systems of certain media outlets to steal and then trade on material non-public information.

Unfortunately, these events only further demonstrate that, no matter how good your security system may be, you are ultimately at risk of a cyber-attack that may be perpetrated on one of your vendors, or a media outlet. As to the latter, it would seem as though the only foolproof protection is not to provide media outlets with this information.

I doubt that any media outlet would give you any sort of assurances going forward that their systems are not exposed to such a strike. Nevertheless, if you are sharing this information before a public announcement, do your homework.

Ask about the media outlet’s data security program. Explore whether and how frequently the outlet tests its systems against unwanted intrusions. Ask whether they have ever been subject to an attack.

Only after you have reasonable comfort should you share such information. Otherwise, just save it for your public announcement or submission with the SEC.

Two years ago, the United States Supreme Court stated in an opinion that the five-year statute of limitations for the SEC to seek civil monetary sanctions began from the date of the fraudulent act, as opposed to when the SEC discovered the fraudulent act. In doing so, the Court rejected the discovery rule.

The discovery rule extends the statute of limitations because it provides that the statute does not begin to run until the party brining the claim discovers the wrongdoing. For example, if the fraud happened 10 years ago, but was discovered yesterday, the SEC would have had five years from yesterday to bring a claim against the fraudster. Applying the Supreme Court’s rule noted above, the SEC would be out of luck to bring a claim for civil penalties.money and calculator

This week, Senator Reed of Rhode Island introduced a bill that would extend the SEC’s statute of limitations from five to 10 years. Applying this new limitations period, the above-referenced scenario would fall within the time in which the SEC could act.

The logic behind extending the limitations can be seen as a way to insulate the impact of the Court’s decision and the absence of the discovery rule. In other words, it extends greater protection to investors who are the victim of a fraud.

Under the new proposed limitations period, the SEC would have twice as long to uncover a fraud to seek civil monetary penalties. The moral of the story; if you are committing securities fraud be prepared for the SEC to have more time to come after you. Better yet; don’t engage in fraud.

A recent Investment News article highlighted the pervasive problem associated with cyberattacks and offered some guidance in the event of an attack. Before visiting that guidance, understand how pervasive these attacks are.

The SEC recently conducted a sweep on cyberattacks. This sweep revealed that 88% of broker-dealers and 74% of advisors have experienced some form of cyberattack, either directly or indirectly through a vendor. These statistics suggest that it is a matter of when, not if you will sustain some form of cyberattack.

Accepting this reality, the SEC has urged firms to be proactive and develop and deploy cybersecurity plans that address what should be done in the event of a breach. The SEC has found that most broker-dealers and advisors have such plans, which include periodic system assessments, encryption and proper backup.fraud.jpg

So what do you do in the event of an attack? Some action steps include the following:

  1. Each adviser should change all of his/her passwords.
  2. Fully investigate what happened across systems and seek proper assistance (which should include determining what your state law is on cybersecurity breaches) before contacting the impacted parties. We have an app known as Data Breach 411 that can help you determine the state law where you are located.
  3. Notify those impacted, including what you are doing to ensure that it does not happen again.

We are living in a challenging world when it comes to cyber-crime. Make sure your systems are up to date and as secure as possible. Have a cybersecurity plan. If the event you are a victim, deploy your plan of action to minimize the impact.*

* photo from freedigitalphotos.net

The U.S. Court of Appeals for the Sixth Circuit affirmed a dismissal of investors’ securities claims in the wake of a bank liquidation, but left the door open to a possible “silent fraud” claim under Michigan law.  See Dailey v. Medlock, http://www.bloomberglas.com/public/document/Thomas_Dailey_et_al_v_Lisa_Medlock_et_al_2014_BL_9430_6th_Cir_Jan.

A claim for silent fraud under Michigan law requires a plaintiff to establish that the defendant intentionally suppressed material facts to create a false impression.  The case arose from a private placement, where the plaintiff signed subscription agreements to purchase the stock.  The company subsequently experienced financial and regulatory difficulties, and, in April 2011, failed resulting in a receivership.  The court said that the plaintiff may show that some type of false or misleading representation was made, and that there was a legal or equitable duty of disclosure.  A silent fraud cause of action requires more than mere silence, and a plaintiff must show that the defendant intentionally suppressed a material fact so as to create a false impression.  The court said that the case law “does not suggest that the silent fraud analysis under Michigan law mirrors that of a” Securities Exchange Act of 1934 Rule 10b-5 claim.  However, the two causes of action share common elements.

Where there is a duty to disclose, an issue may not remain silent.

A federal court held that life settlements were securities under federal and Illinois law.  As such, certain sellers violated the securities laws when they lied about having done due diligence.  The court also found that a reasonable jury could conclude that the sellers violated the Illinois Consumer Fraud Act.  See Giger v. Ashmann (ND Ill).

The defendant sold a life settlement product, that is, the purchase by a third party of the right to pay premiums on a life insurance policy, receiving in return the death benefit.  The plaintiff demanded rescission of the $2.1 million that he had invested.  He filed an action in 2009, alleging violations of the antifraud provisions of the Exchange Act, and violations of Illinois common law, the Illinois securities laws, and the Illinois Consumer Fraud and Deceptive Business Practices Act.

The court noted that other courts have found that life settlements were securities even when the promoter’s activities were primarily pre-purchase, and the fact that the settlements were bonded did not change the court’s conclusion that they were securities.

The life settlement market has consistently been under attack by private plaintiffs and regulators.

FINRA arbitrations may never be the same because FINRA recently proposed to redefine “public arbitrator” to exclude anyone from the financial industry from falling within that definition.  Couple that proposal with the existing ability of a claimant to select an all public panel and you have a totally new arbitration system. 

What does this proposal mean for the long-term future of arbitration?  For one, I believe that it will make arbitrations more expensive.  You may ask, how so? 

When there was an industry arbitrator on the panel, parties sometimes tried to “use” that person as their expert by trying to convince the industry arbitrator of their side in the hope that the industry person would convince the other panel members of their position. 

Another benefit of having an industry arbitrator is that the industry person could explain the investments at issue to the panel.  In other words, serve as the panel’s own expert. money.jpg

Now, it is likely that both sides will have to have their own experts on liability and/or damages because you will no longer have an industry voice.  Although some may see this as a good thing, it will certainly cost both sides of the aisle more money.  It appears as though the only real winners will be the experts. 

Regardless if you represent the interests of a firm or a customer, you will likely be spending more money to take the claims through conclusion.  Start lining up your experts now or be left in the dust.

* photo from freedigitalphotos.net