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Saturday, January 9, 2016

Broker Dealers tighten their grip on advisers and those advisers' clients.

As reported in the Wall Street Journal today, Broker Dealer looks for ways to tie down brokers, brokers need to very careful to actually read updated polices, contracts, deferred compensation plans and employment contracts.


Wednesday, June 10, 2015

Partnership Agreements are like Pre-Nups



The partnership agreement can limit which clients the departing team members can solicit and what confidential information the they may take if the whole team doesn’t move.  An article in today's Wall Street Journal touches on this issue.  As the article states, if there is no partnership agreement, the Protocol for Broker’s default provisions take over.  However, if there is a partnership agreement, it trumps the Protocol if the entire team does not move.    The exception is that a partnership agreement cannot prevent someone from taking certain client information for those clients whom he or she introduced to the team or for soliciting those clients.

So why did the one Merrill Lynch partner stay?  One reason could be—and this is just speculation—that Merrill Lynch offered the one hold-out partner a sweet deal to stay to try to solicit the clients from the departing brokers.  Remember, if one team member stays the partnership agreement will trump the Protocol.  Depending how the partnership agreement is drafted, this could prevent members of a team from soliciting clients they have serviced for many years.  Be careful when drafting a partnership agreement regarding what rights you are giving away or retaining.  Think of it like a pre-nup.  And, be wary of the firm insisting it has a say in what happens if someone wants to leave the partnership.  Talk to you lawyer early and often.

Wednesday, June 11, 2014

BrokerCheck disclosures expanded to "Permanently" include any investment-related settlement with a state or foreign financial regulatory authority.


FINRA will soon permanently make publicly available in BrokerCheck, information about former associated persons of a FINRA member firm who were registered on or after August 16, 1999, and who have been the subject of an investment-related civil action brought by a state or foreign financial regulatory authority that was dismissed pursuant to a settlement agreement.  See FINRA Regulatory Notice 14-08.  The amendments are effective June 23, 2014.

Should Broker's exam scores and failures be added to BrokerCheck?

As we approach the end of the academic year, students are turning their attention to final exams.  They know that these exams will test their mastery of the material they were supposed to have learned.  They also know that their exam scores will soon be reflected on report cards and, in most cases will be sent home to students' parents.  But what if those exam scores never went away?  What if they could be reviewed by prospective employers or anyone else?

There has been a fair amount of controversy over how much information BrokerCheck should include. The debate appears to be heating up again. In a recent InvestmentNews article, Professor Ben Edwards of Michigan State University College of Law argues that BrokerCheck should include information about brokers' exam scores and failures. Prof. Edwards runs a law clinic focused on protecting the interests of small investors.

In March, the Public Investors Arbitration Bar Association released a study arguing that FINRA's BrokerCheck should disclose all material public information about a broker that it possesses. More on PIABA's study can be found here. The PIABA study was co-authored by Prof. Edwards, Jason Doss, PIABA's president, and St. John's Law School Professor, Christine Lazaro, who is also the Chairwoman of PIABA's Legislation Committee.

The PIABA Study highlighted categories of information, such as broker exam scores and failure rates that are contained in FINRA's Central Registration Depository database (CRD), but are not disclosed through BrokerCheck. Edwards argues in InvestmentNews that exam scores and test failures are indisputably material information for investors citing a recent Wall Street Journal study which found that brokers "who failed the test at least three times . . . were about two-thirds more likely than brokers who passed the first time to have three or more red flags on their record."

However, the Securities Industry and Financial Markets Association (SIFMA) opposes the exam disclosures. According to an earlier InvestmentNews article, SIFMA's Managing Director and Associate General Counsel, Kevin Carroll does not feel such information is relevant or helpful to investors and could in fact be prejudicial to brokers and their firms. Carroll gave a hypothetical example of a broker who failed an exam 15 years ago, but has been successfully performing ever since. "What's the point? Are you saying he's not competent now?"
In his InvestmentNews piece, Edwards seems to be responding to this argument when he writes that including exam scores should not cause brokers to "panic" because a "reasonable investor would expect someone to get better over time." Putting a different angle on the issue, Edwards notes that "in cases where an industry veteran keeps flunking exams by wide margins, investors might want to exercise a bit more caution."

Edwards opposes what he views as the paternalistic decision to draw a modest curtain over exam scores and failures. He argues that this information is useful "input for investors--presumably competent adults who should be able to make their own decisions." He believes that "a higher score points to something--perhaps greater mastery" and that "many investors probably would deem the information material."

It remains to be seen whether FINRA will agree with Edwards and "make it easier for investors to get the gritty truth" or if FINRA will agree with SIFMA's Mr. Carroll that "there's more potential for that information to be misused and abused than to help investors make informed decisions."

(This post is a mostly a reprint of a post I made on the Securities Litigation & Arbitration Blog of the New York State Bar Association) 

Thursday, February 27, 2014

Current and former employees of financial institutions can anonymously file Whistleblower claims and may be entitled to rewards.

The Wall Street Journal reported today about a record breaking $14 Million Whistleblower award.  The SEC paid the tipster the $14 Million reward for providing information that eventually uncovered a Chicago-based scheme to defraud foreign investors seeking U.S. residency.  According to the Wall Street Journal:


The case that led to the $14 million-plus payment centers on allegations last year that about 250 investors, mostly Chinese, were "duped" by 30-year-old Anshoo R. Sethi and his two Chicago, Ill.-based companies into paying a total of more than $155 million for a supposed plan to build a hotel and conference center, said the people familiar with the matter. The SEC said the investors were led to believe they were boosting their chances of green cards, because the scheme was designed to qualify for an immigration program that offers U.S. residency for job-creating investments.

In fact, the agency alleged, Mr. Sethi and his companies lacked the necessary building permits, their claims to have the support of major hotel chains were false and the documentation they gave to the immigration authorities was "phony."
Tipsters who provide information that leads to a successful SEC sanction of more than $1 Million, can receive as much as 30% of the money collected. The $14 Million reward was the largest ever paid by the SEC.

However, the SEC's program is just one of the many government whistleblower programs designed to reward those tho provide information that leads to convictions/enforcement actions. The IRS paid $104 Million in 2012 to a former UBS AG banker for providing prosecutors with evidence about the firm's efforts to promote tax evasion. This is believed to be the largest reward ever paid under these programs.

What is important to remember for those still working in the financial services industry is that tipsters can be current or former employees of the financial institutions. The program also provides strong tools to protect the tipster's anonymity, prevents retaliation from employers and can reward the tipster with a significant monetary award. However, some recent court decisions do call into question the extent of the protection if proper procedures are not followed.

This program is a great way to help regulators ferret out fraud and protect the public. Of course, tipsters can be investors as well.

If you know of fraud at your current or former firm and want to discuss filing a #Whistleblower tip, please do not hesitate to contact me to discuss.

Thursday, February 13, 2014

FINRA approves new expungement rule.

Now the proposed rule will be submitted to the Securities and Exchange Commission for review, public comment, and approval.  See FINRA's press release here.