robber.jpgMy partner, Ernest Badway, recently blogged about the dangers of a lawyer referring a client to a rogue stockbroker.  The question for the broker-dealer/investment advisors is how do you uncover rogue brokers or prevent them from infecting your firm.

In all of the years that I have defended broker-dealers and investment advisors in cases involving rogue brokers, I have found that the answer to this question is much like the search for Bigfoot; everyone thinks it exists but cannot see to find it.  So what is a firm to do?

The most fundamental thing a firm can do to prevent/uncover rogue brokers is to foster a culture of compliance.  Firms with such a culture will go a long way to establishing itself as an entity to which rogue brokers need not apply. 

Rogue brokers tend to thrive in those environments where compliance and supervision are not up to snuff.  A firm that promotes a culture of compliance will also encourage other brokers to report up the supervisory chain when they see conduct that one can characterize as “rogue”. 

Another useful tool for firms to employ is a regular review of your brokers, coupled with occasional surprise reviews.  Regular reviews are good because they emphasize that the firm is watching its brokers.

Surprise reviews are, in some ways, even better because the truly rogue broker may be able to cover their tracks before a regularly scheduled review.  The surprise inspection takes away this potential luxury.  Also, the firm should let its brokers know that they are subject to no notice surprise inspections.

Unfortunately, some rogue brokers are so good that they may fly under the radar even at firms that promote the culture of compliance; I have seen it happen.  But put the odds in your favor.  Keep tabs on your brokers through regular and surprise inspections, and maybe you will find Bigfoot.

Ever since Dodd-Frank, there has been much concern in the RIA world regarding who would be its regulator.  At this point, RIAs can dispense with any concern that FINRA will be its regulator because FINRA pulled its hat out of the oversight ring, at least for now.


Even thought FINRA spent nearly $2 million lobbying Congress to become the SRO for RIAs, FINRA has decided that there is not enough support in Washington for it to be the regulator for RIAs.  So where does this leave RIAs?

At the moment, it seems unlikely that there will be a new SRO for RIAs any time soon.  Instead, the most likely scenario would be greater funding for the SEC to conduct more examinations than historically performed.

Although RIAs may not have their own SRO, they will still likely have to contend with a better funded SEC.  You should anticipate and be prepared for more frequent examinations.  All bets may be off, however, if FINRA pushes once again to be the SRO for RIAs.

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Much like the character in the famous Nathaniel Hawthorne story, FINRA is looking force broker-dealers to wear a mark on all of their social media.  FINRA wants to amend Rule 2267, forcing member firms to have a link to BrokerCheck on the websites and all other forms of social media.

The stated purpose of doing so is to create better consumer awareness for BrokerCheck.  As it currently stands, member firms must annually provide their customers written notice regarding the existence of BrokerCheck and how to access it.  Is this move really necessary?


Unfortunately, studies mandated by Dodd-Frank reflect that consumers are generally unaware of the resource that BrokerCheck has become for consumers to review information about member firms and registered representatives.  In light of these findings, it seems like a safe bet that this rule change will come to pass.

What should member firms do in anticipation for this change? 

Make sure you push the culture of compliance at your firm.  Any reportable events will be more easily found by existing and potential customers.  Do what you can to avoid these events, and wearing the scarlet letter of BrokerCheck will be just another link in social media.

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The late great comedian, George Carlin, was made famous by his routine, “The Seven Dirty Words You Can Never Say On Televisions”.  Likewise, fraudsters do not want compliance personnel to ever mention the 13 common dirty traits that may uncover a fraud.

Although not as funny as George Carlin, focusing on these traits may be the key to a firm’s survival.  In no order of significance, you should look for people who do the following:

1.         Never takes a vacation;

2.         Live beyond their means;

3.         Too much debt relative to income (creditors calling the place of employment);

4.         Possess an attitude that they are above the system;

5.         Suspicious of having others check their work;

6.         Extreme behavior changes to either extreme (depression and euphoria);

7.         Set unrealistic personal goals;

8.         Unexplained spike in production;

9.         Spouse loses a job;

10.       Divorce (i.e., a property distribution);

11.       Drug or alcohol abuse;

12.       High number of elderly clients (or any other affinity group concentration); and

13.       Consistently offering new product lines for investing.

So what does the list of 13 suspect behaviors mean for member firms and investment advisers?  You must do all you can to know your personnel as well as you need to know your customers before making an investment recommendation.fraud.jpg

The better you know your team, the better prepared you will be to notice any of these ugly traits.  You will notice erratic behavior or behavior that is simply out of the norm.

Certainly everyone going through a divorce or an alcohol problem are not fraudsters, but traits in combination may be the sign of trouble.  Do more due diligence over your personnel when any of these traits arise.

Protect yourself and the firm.  There are fraudsters under every rock.  You just need to identify those rocks needing to be turned over. 


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With the east coast in the midst of Hurrican Sandy, I am sure we are all thinking about a nicer place right now.  Apparently, the Seventh Annual National Institute on Securities Fraud is November 15-16, 2012 in New Orleans. For more information and to register, call 800-285-2221 or log on to:

 A simple review of FINRA’s enforcement proceedings demonstrates a new norm; compliance officers are being held accountable as supervisors for rules violations.  How can a compliance officer avoid being held accountable as a supervisor?

The best way for compliance to insulate yourself is to make sure that there are clear divisions between compliance and supervisory duties.  For one, compliance officers should not be managing the day to day operations of the firm, such as hiring and firing personnel.  Instead, compliance should only make “recommendations” to supervisors when it comes to compliance issues.

Another effective tool is to have separate written supervisory procedure manuals for supervisors and compliance officers.  The firm may call the manuals two different things as well.  For example, you may want to call the compliance manual the “ethics” manual and the other the “supervisors’ manual”. 

Similarly, in those manuals, you should define the roles of those in a supervisory versus compliance capacity.  Depending upon the size of the firm, you may want to consider naming in your manuals the individuals who serve in those capacities.  The manuals should be revised every year to reflect personnel changes.

One last method to consider is for the chief compliance officer to ask the supervisors on a monthly basis whether they are aware of anything requiring a Rule 4530 disclosure. 

This guidance is no guaranty that a regulator will not try to couch compliance as supervision, but doing nothing is not an option.  Define roles, act separately, and protect yourself from being miscast as a supervisor.

Although the SEC’s Dodd-Frank mandated report that there should be a uniform fiduciary duty standard for broker-dealers and investments advisers is nearly two years old, we are no closer to seeing that become a reality.  The question is why. 

Some see the lack of a majority of SEC Commissioners in support a draft request for public input as the cause for delay.  The stall may continue as long as the Commission remain currently constituted.  Others think that the Department of Labor’s forthcoming rule on the definition of a fiduciary under ERISA as a possible development that may break the logjam. 

The real question that must be asked is whether a uniform fiduciary duty standard is even worth the effort.  

In the many cases that I have defended broker-dealers, it is hard to recall any where the claimant did not assert a claim for breach of fiduciary duty.  Moreover, many arbitrators that I have observed make the general assumption that a broker-dealer serves as a fiduciary for its clients.  In addition, some courts have already concluded that broker-dealers are fiduciaries to their customers. 

In my view, the push, to the extent that one even remains, is one of optics.  In other words, there is a perception that the public wants to see there be such a standard so some will continue to push for it.  If anyone analyzed the issue hard enough, they would probably see that broker-dealers are already often held to such a standard, such that the effort to legislate it is one that is not needed.

One of the more anticipated and debated outgrowths of the Dodd-Frank Act was the designation of a self-regulatory organization responsible for investment advisers.  Yet, it has recently been reported that this issue is dead for the current Congressional session, although likely to come back again.

The only consensus thus far is that the SEC is ill-equipped to be the SRO.  The primary disagreement has focused on who should be the SRO for investment advisers: a new entity, FINRA or an enhanced SEC funded by user fees.

Regardless of the outcome of the Presidential election, this issue is likely to percolate once again in the next Congressional session.  The SEC is clearly not currently constituted to serve in the capacity as the SRO and, at the same time, there is a push for investment advisers to be subject to better oversight.

In the short-run, this means that investment advisers will still be subject to SEC examinations, which historically have resulted in very few examinations on a yearly basis relative to the number of investment advisers.  In the long-run, the debate will continue and it is likely that, at some point, there will be an SRO for investment advisers.  The most like SRO would, in my view, be an enhanced SEC as it already serves in an oversight role over investment advisers.  The question becomes whether any of us will be alive to see this happen.

The Department of Labor’s head of the Employee Benefits Security Administration recently announced that the DOL is going to coordinate with the SEC on fiduciary policy, but that the DOL and SEC will maintain and pursue their own regulations.  This statement has garnered confusion and concern by many in the industry, as it should.

The primary concern with such a statement is that the SEC and DOL operate under different fiduciary duty standards.  The securities laws focus on disclosure, while the retirement law fiduciary duty that the DOL enforces prohibits conflicts of interest.  As such, how can the DOL and SEC coordinate their respective fiduciary policies when they operated under different standards.  In response to such concern, the DOL stated that there would not be one standard, but that the two will be compatible.

The DOL like the SEC has been struggling with its own fiduciary duty standard, resulting in it withdrawing a proposed fiduciary duty rule in September 2011.  Dodd-Frank vested the SEC with the authority to develop a uniform fiduciary duty standard over anyone who provides retail investment advice.  The SEC has yet to develop such a standard and has tabled doing so through the balance of 2012.

The overall uncertainty created by the respective inability of the SEC and DOL to develop a fiduciary duty standard leaves many in the retirement planning arena in the dark, leading some opponents to question whether this is even necessary.  The bad apples ultimately float to the top and can be removed from the barrel through enforcement mechanisms.  While the debate rages, confusion reigns.  Either clear rules should be adopted or the process abandoned.  The state of unrest does not help anyone.

Last week, the CFTC issued a final rule on the data recordkeeping and reporting requirements for historical swaps.  Historical swaps are swaps executed prior to the passage of the Dodd-Frank Act and swaps entered into between the enactment of the act and applicable compliance date for recordkeeping. 

For swaps in existence on or after April 25, 2011, the date of publication of the proposed rule concerning historical swaps, counterparties must keep records of specified, minimum primary economic terms for a swap of the asset class in question.  The counterparty must also keep a confirmation, master agreement or credit support agreement concerning the historical swap that was in its possession on or after April 25, 2011.  For any swaps that expired before April 25, 2011, counterparties must keep the records they have.  The required records must be kept for five years after the swap’s termination or expiration.

With respect to data reporting requirements, for each historical swap in existence after April 25, 2011, counterparties are required to submit an initial electronic data report to a swap data repository on the applicable compliance date.  The initial data report must include all of the minimum primary economic terms specified for a historical swap of the asset class in question that are in possession of the reporting counterparty after April 25, 2011.  For any swaps that expired before April 25, 2011, the reporting party need only report information that was in the counterparty’s possession as of April 25, 2011.

To comply with data reporting requirement, counterparties may contract with third party service providers to facilitate reporting.  Swap dealers and major swap participants must full comply with the final rule by the following dates:

  • credit and interest rate swaps by Compliance Date 1, which is the later of July 16, 2012, or 60 calendar days after publication in the Federal Register of the later of the CFTC’s final rule defining swap, swap dealer or major swap participant; and
  • equity, foreign exchange and other commodity swaps by Compliance Date 2, which is 90 calendar days after Compliance Date 1.

Non-swap dealers and non-major swap participants must fully comply by Compliance Date 3, which is 90 calendar days after Compliance Date 2.