Category: Stockbroker issues

FINRA looking at broker incentives, again.

For as long as I’ve been involved in the brokerage business, brokers have had financial incentives. There are commissions, management fees, bonuses, trips to islands, one time there was even a contest that gave out nearly 100 leases on Porsche sports cars. FINRA knows this goes on.

Suzanne Barlyn reports that FINRA is looking at incentives again. Give me a break.

This really is the equivalent of the piano player at a bordello saying “you mean there’s women upstairs?” or words to that effect. FINRA knows this is going on. I remember going to an SIA (the predecessor to SIFMA) conference where the chair of the SEC said that recruiting bonuses were bad because they weren’t disclosed to customers. This was like 15 years ago!

FINRA is just getting around to looking at recruiting bonuses? I would say that 30-40% of all arbitration awards are for promissory note cases. And FINRA is just now noticing? Spare me.

I will be stunned if FINRA does anything because they won’t be able to figure out how to draw the line. Will it be when a broker gets a higher payout than grid? A forgivable loan? Expense account money? FINRA won’t be able to figure it out and the firms certainly aren’t going to help. But I doubt very seriously that FINRA is going to require a broker to disclose the terms of their employment with their new employer. I just don’t see it.

That’s the bemused view of one lawyer from Jupiter, Palm Beach County, Florida. I’m Marc Dobin

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The Market Crashed 25 Years Ago Today. Where Were You?

Onwallstreet Magazine has created a slideshow addressing the numbers of the 1987 crash. It’s pretty interesting. I know a broker who actually signed his FA Training Agreement on that day.

I was working at a mid-size firm in Princeton, New Jersey, when the wheels came off the market. It’s now part of the Pepper Hamilton organization. We wandered around wondering what the world was going to be like post-crash. I left that office a long time ago, but I still have friends there. (Yes, I have friends.)

I later learned that my friends in New York were working around the clock putting their finger in the dike while the flood started. I returned to Prudential Securities in 1988, just under a year after the crash. We were working out a huge backlog of unpaid debts. There was also a huge influx of customer complaints.

The volume that day – over 600 million shares – was unheard of at the time. Now that notion seems quaint. In 1987, a lot of the blame was placed on “program trading.” People were wringing their hands about computers manipulating the market. We still have computers calling the shots, causing market breaks, and people wringing their hands about computers manipulating the market.

The big issue for brokerage firms and their customers became a customer’s ability to understand the risk and desire to have market-based risk. The same issues came up in 1989, which was primarily due to the failure of the United Airlines LBO. The issue then came back in 2000, with the “tech wreck.” and again in the fall of 2008 with the failure of Lehman Brothers and the recession. Every once in a while, the market feels the need to remind us that we are not in control, we can only plan for the worst and hope for the best.

It is often said that a failure to study history will result in repeating the mistakes. In my 25+ years in this business, I have found that there are very few historians.

That’s a 25 year view of one lawyer from Jupiter, Palm Beach County, Florida. I’m Marc Dobin.

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FINRA sanctions brokerage firm for taking too much customer information.

There is now apparently a difference between taking customer information and taking too much customer information. Since I joined the securities business in 1983, brokers have moved from one firm to another with varying levels of difficulty and information. In the stone age (when we only had copiers), brokers would copy their holding pages (paper forms for those of you unfamiliar with the term) which had a whole host of customer information including social security numbers, birthdays, mother’s maiden name and other minute details of the customer’s life.

Brokerage firms litigated the heck out of the copied information and argued about what was proper and what was improper. Sometimes the firms used Regulation S-P as their weapon. This Regulation governs privacy of customer information. In broker recruiting, Regulation S-P appeared to be honored in its breach.

Along came the Protocol for Broker Recruiting. This changed things. Suddenly, the founders and the adopters of the Protocol agreed that certain limited categories of information were fair game to be moved from one firm to the other. The SEC and FINRA are aware of the Protocol. To describe their enforcement efforts in this area as “rare” would be an understatement.

About 4 years ago, Next Financial was found to have violated Regulation S-P by the SEC. As they say, bad facts make bad law and the facts in that case were pretty outrageous as they were described in the Initial Decision. This case was decided in June 2008 but was underway starting a year earlier. NEXT employees, according to the decision, took a broad range of information from the “losing” firm and also used the other firm’s employees’ usernames and password to access computer systems. Oops.

Fast forward to 2012. FINRA has joined the Regulation S-P game. In a recent decision, FINRA fined a member firm $65,000 for taking customer information and using it to start the account opening process on its own books before the customers had agreed and before the brokers had left their prior firm. FINRA alleges that the firm obtained “nonpublic confidential information included the customers’ social security numbers, account numbers, driver’s license numbers, dates of birth and financial information.” Apparently, names, addresses and phone numbers are fair game, as this is what is allowed by the Protocol, but those numbers, Social Security and Driver’s License, are off-limits.

The ironic part of this is that the questioned activity took place in December 2008, according to FINRA. Apparently this broker-dealer didn’t get the memo.

So what is the takeaway from this? Stick to protocol data. Aside from the fact that it should keep a broker out of hot water, it is also a good time to update all the vitals. Working from 10 year-old suitability information? Update it. Customer remarried and has a new job? Change your data. Maybe you’re a lucky one and your customer won the lottery. Change the financials. Moving is a good chance to do two things: Update customer data and weed out your book. It is not the time to see exactly how much data one can download from the current firm’s system.

That’s the view of one lawyer from Jupiter, Palm Beach County, Florida. I’m Marc Dobin.

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Broker loses appeal of FINRA fine and suspension for U-4 non-disclosure

Unfortunately, many brokers treat the form U-4 as a necessary evil. Many view it as a form that stands between them and registration. Of course, the regulators view the form as an opportunity to examine a broker’s background.

And the U-4 is a fluid document. It must be updated with each reportable event. A customer complaint is the standard triggering event, whether it is a complaint letter or an arbitration. In other cases, a broker may be responsible for disclosing a bankruptcy, tax lien or even a credit card judgment. I am sometimes approached by what I call “the grandfather with a half-ounce in college.” You figure it out.

Brokers may not be 100% familiar with the reporting requirements, but they should keep in mind that any felony arrest is reportable. Any misdemeanor which demonstrates a lack of trustworthiness is reportable. Virtually anything out-of-the-ordinary dealing with the broker’s financial life, such as a lien or judgment, is reportable. These disclosures don’t necessarily mean that the broker won’t get registered or will lose their license, but it must be reported.

The problem is that brokers don’t know the rules of reporting that well. And sometimes they get bad advice. The 2nd Circuit Court of Appeals recently upheld a FINRA sanction against a broker for failing to disclose tax liens. The bigger problem is that the Court supported the regulator’s argument that the non-disclosure was “willful” which will cause a statutory disqualification, making it more difficult for the broker to be registered.

The lesson here is that disclosure, no matter how annoying or embarrassing, must be made. Failure to do so could result in repercussions that far outweigh any penalties, if any, that were received at the time of the infraction.

That’s the view of one lawyer from Jupiter, Palm Beach County, Florida. I’m Marc Dobin.

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Merrill Lynch fined for trying to avoid arbitration.

I thought this smelled when I first heard about it. When Merill Lynch merged with Bank Of America, the retention awards were made by an entity called Merrill Lynch International Finance, or some such nonsense. And I heard that there was a specific waiver of counterclaim rights in the agreement. Of course, brokers signed these agreements. What are the chances that they read them? About as high a rate as one might expect of those people who read the iTunes license agreement. (Google “south park” and “Why won’t it read?”)

It was quite obvious to me that Merrill Lynch had overplayed its sizable power. It was also clear that Merrill was trying desperately to avoid going to the very forum that it has used for years, arbitration. Merrill is likely sick and tired of arbitrators actually applying the “real world” to its employment situations instead of the world according to Merrill’s employment lawyers at their high-priced law firms. (I have friends at those firms, but it doesn’t mean I agree with them.)

FINRA got wind of what Merrill/Bank of America was up to. And it has cost Merrill $1,000,000 in fines to atone for its sin of trying to avoid arbitration. Reuters reports that Merrill gave out $2.8 billion in retention bonuses and used this ruse to avoid arbitration. One wonders what other things Merrill Lynch did and is still doing to brokers who went through the retention process. Those may come to light as well.

In the meantime, FINRA did its job and stopped Merrill from continuing to pull this stunt. Like I said at the beginning, it didn’t smell right. It seems that FINRA picked up the same odor and traced it to its source.

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Auction Rate Securities Expungements Discussed in Registered Representative

It’s interesting how the securities business goes in cycles. Over 20 years ago, my former employer Prudential Securities (now Wells Fargo Advisors) had problems with limited partnerships. At the time, the Prudential Securities name became synonymous with limited partnership sales, even though other firms sold LPs in greater volumes.

Other products have come and gone. More recently, Auction Rate Securities (ARS) are in the news. While the credit market lock-up is old news, the effects of these products is just being felt by registered representatives. As this article in Registered Representative magazine describes, stockbrokers are facing a lifetime tattooed with customer complaints which were none of their doing. Wachovia/Wells Fargo, along with other brokerage firms, settled with securities regulators and agreed to buy back ARS from their retail customers. However, because of a strict reading of U-4 reporting requirements, financial advisors at many firms have seen otherwise unblemished records tarnished through no fault of their own. The real question I have is why didn’t the firms negotiate the non-reportability of these settlements.

But there are steps to fix this. They require time and money. An expungement arbitration can be started to get relief from the reported settlements. While there is no guarantee that an arbitrator or arbitrators will grant the expungement request, the language placed by most firms forced to settle ARS complaints will go a long way towards convincing an arbitrator that an expungement is proper.

The next step is court confirmation, if the expungement award is entered. Generally, this is handled in the same manner as confirming an arbitration award. If and when the court confirms the award, then the order is sent to the CRD processing center and the negative information is removed. The happy day is when the broker looks at his or her CRD and does not see the complaints that previously tainted the report.

That’s the view of one Lawyer from Jupiter, Florida. I’m Marc Dobin.

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Florida’s rule disqualifies stockbrokers with old offenses.

In May of last year, the State of Florida amended its registration rules regarding the criminal histories of stockbroker applicants. The amendment assigns year values for specified crimes. Those year values then disqualify an applicant according to its terms.

For instance, if an applicant has committed a specified felony, the disqualification period is for 15 years from the date of the plea or finding. If other crimes are committed at different times, then additional 5 year periods can be tacked on. It appears that the entire disqualification period can only be reduced by a maximum of 3 years.

So what this means is that the felony drug possession as a senior in college could delay a new broker’s application for 15 years and could possibly be used to deny registration anyway. Further, it appears that a new U-4 filing will give the State of Florida a new shot at currently registered representatives. So brokers changing firms with otherwise ancient and forgotten criminal histories could end up with big problems.

The interesting thing is that a broker who is already registered and has a specified crime in his/her past would not lose his/her license. It is only on the submission of a new U-4 that this new part of the registration rule would apply. This could make for some very uncomfortable situations.

So the most important thing for currently registered brokers to keep in mind is that, if there is a felony in their past, they need to keep this rule in mind if they are thinking about changing firms. And if there is a question about any potential disqualification, they need to get help in interpreting the rule very carefully.

That’s the view of one lawyer from Jupiter, Palm Beach County, Florida. I’m Marc Dobin.

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Latest FINRA Securities Arbitration Statistics Released

Statistics and percentages can be fun. (Cue groans here) Sometimes it can be interesting to dig deeper into the statistics and see what else they might mean. Each month, FINRA releases arbitration statistics for the month ending one month prior. So this month’s statistics analyze arbitrations through the end of July.

The report has the usual stuff — number of new arbitration cases filed, number of cases closed, etc. But dig a little deeper and there are some interesting figures. For instance, New arbitration case filings through July are down 12% over 2010. But they’re down 35% over 2009. This is likely a function of the reaction to the 2008 meltdown and the wave of cases that followed.

Here’s something else. If you total the new cases through July for 2009, 2010 and 2011, that equals 10,724. The number of cases closed during that same time period is 9,795, leaving an overhang of about 1,000 cases.

Another interesting statistic is the “How Arbitration Cases Close” analysis. An average of less than 20% of cases have gone to final hearing in the last 5 years. An average of 50% of the cases settle through direct communication between the parties (but the report does not specify how much the cases settled for). And, at most, 10% of cases settle through mediation. It is not clear if the “Direct Settlement” category includes cases settled through non-FINRA mediation but I suspect that the mediation category includes FINRA and non-FINRA mediation.

So what can we take away from this? First, if the numbers hold, a litigant is just more likely to settle a case than have it go to hearing, by a large margin. There is a less than one in five chance of going to hearing. And more than three-fourths of all cases never see a hearing.

What would be interesting is to pair these figures up with the “win” figures that are also tracked. The only problem with that, of course, is that the claimed damages may not be based in any sort of supportable logic.

That’s the view of one Lawyer from Jupiter, Palm Beach County, Florida. I’m Marc Dobin.

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Chase Investment Services loses another non-solicitation arbitration

Loyal readers (who may be wondering if I had lost interest in the blog) will recall that Chase Investment Services lost an arbitration to Morgan Keegan and Todd Rozzo in March of this year. Chase tried to enforce a contract against a former WaMu broker, Rozzo, and his new employer, Morgan Keegan. My firm represented Morgan Keegan.

It turns out that there was a very similar case in Seattle, Washington. Chase, again, went for an injunction. Chase, again, acted as if the world was going to end if the brokers were allowed to talk to their clients. Chase, again, initiated an arbitration against the former brokers. And Chase, again, lost the arbitration.

Maybe Chase will get the message that I have detected. Absent some horrific set of circumstances, such as bad acts by the departing brokers or raiding, arbitration panels do not get excited about the run-of-the-mill changing of jobs. For Chase to behave like a child complaining about not getting his/her way is just bad business. Brokers change firms. Chase needs to get over it.

This does not mean that, in the right set of circumstances, an arbitration panel won’t award damages. It simply means that it has to be something more egregious than simply changing jobs. Having the manager and several brokers leave at the same time could be sufficient. Deleting data on a computer system could be sufficient. There are any number of bad acts that could lead to liability. But if a broker leaves “clean”, the likelihood of a firm prevailing in an arbitration is pretty slim.

That’s the view of one lawyer from Jupiter, Palm Beach County, Florida. I’m Marc Dobin.

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