Category: Marc’s Blog

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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Tips on forming stockbroker partnerships

My friend, Joel Beck, writes his own blog. I read it and commend the three people who read mine to read his as well. 😉

Joel’s most recent posting dealt with run-of-the-mill business organizations. Since a large part of our business deals with stockbrokers, I thought I would add to what he said, but bring it specifically to the broker-dealer world.

Here are some points:

1. What is the purpose of the “partnership”? Is it a coverage partnership, referral partnership or joint business? Is one partner nearing retirement? Or is it some hybrid?

2. What do you expect to get from the partnership? An easier life? More referrals? Increased access to more desirable clients?

3. How will the revenues be split? Each partnership model, with its unique motivations, will result in a different revenue split. In a “retirement” model, the split generally increases for the non-retiring partner. But there needs to be equity towards both partners regardless of the motivation for the partnership.

4. How will a partnership breakup be handled. A few companies have succeeded by forming on the back of a napkin. Compaq perhaps is the most notable (where are they now?). But wise partners have a formal agreement. Many firms have what they call either a partnership or team agreement. Many firms also have policies in place that determine how a team is to break up in the absence of a formal agreement. That agreement may suffice. Or it may be a good starting point. Areas that need to be addressed are the division of clients, communications with clients, compensation to each partner in the event that a perfect split cannot be achieved and, my favorite, dispute resolution.

A word on dispute resolution. I am a big fan of arbitration. It is private and can be much less costly. In the brokerage world, registered representatives would be required to arbitrate their differences. But it would still make sense to have an arbitration clause in the partnership agreement.

5. Liability. Here’s where it gets interesting. I handled a case 20 years ago where there was a fee split between a younger broker and an older one. The younger one was, shall we say, an aggressive investor. His elderly client, who was originally a client of the older broker, was not aggressive and filed an arbitration against the two of them and their employer. One of the theories of liability against the older broker was one of partnership.

So, be careful when forming split numbers, partnerships or teams. Get the agreement in writing and figure out who is responsible for what. It won’t make things perfect, but at least it will give you a framework.

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

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New Morgan Stanley hires ignore Recruiting Protocol

You have to be living under a rock to not know about the Protocol for Broker Recruiting. This was an agreement entered into between UBS, Merrill Lynch and Citigroup/Smith Barney/Shearson Lehman Brothers (whatever they wanted to be called then) that specified what a broker could and could not do when changing firms. The Protocol (as it is now called in shorthand) allowed brokers to take a limited amount of information, which was shared with the “losing” firm and the “gaining” firm. In exchange for playing by the rules, these three firms agreed that they would not seek to obtain injunctions against departing brokers for taking the client list. Raiding and other misdeeds were specifically excluded.

The Protocol was open for membership to anyone who agreed to abide by its terms. There are over 500 signatories to the Protocol. Some of the signatories no longer exist, I’m pretty sure. But the protocol has eliminated a lot of litigation. All of the major Wall Street firms have joined in the Protocol and many regional firms. The largest non-signatory traditional broker-dealer that I know of is Robert W. Baird & Co.. As a result of Baird’s refusal to join, Baird finds itself in court and arbitration on injunction and recruiting cases where other firms do not.

Merrill Lynch, as one of the original signers of the Protocol, was formerly one of the most aggressive pursuers of former brokers. For the most part, its litigation is now limited to promissory notes and training agreements. Thomson Reuters reports that Merrill Lynch was able to regain custody of “non-Protocol” data after five brokers left for Morgan Stanley. Three of the brokers were alleged to have done some things that are definitely not allowed in the Protocol, such as taking cost basis data (which is silly, since most of this data is required to transfer when an account transfers via ACATS), and taking data related to customers of other brokers in the office, which has never been allowed.

A Morgan Stanley Smith Barney representative is quoted in the article as saying that these matters are typically resolved without resorting to litigation. But the problem is that after the lawyers swap letters and the business people check out the allegations, the damage has been done. Brokers and their new supervisors should know better. And, by the way, look out for security cameras. They always make for some interesting viewing in a recruiting case.

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FINRA proposes new expungement rules for U-4 and U-5 filings

FINRA has proposed rule amendments to the customer and industry arbitration codes. These amendments would codify procedures to allow registered representatives who are not named in arbitrations to receive an expungement order from the panel. The current procedure is a hodgepodge of common sense and invented procedures to allow for an expungement request.

Most recently, I filed a Notice of Appearance on behalf of a client who was not named in an arbitration for the sole purpose of obtaining an expungement of the customer claim. FINRA procedures are silent on what to do and it took a little bit of work to get the request processed. These new rules would have allowed my appearance, but only if there was compliance with the procedures.

And that’s where the potholes can be found. The procedures require that the broker who is not named, called the “unnamed person” in the proposed rules, to receive notice when the U-4 or U-5 is amended. The broker then has 180 days from receipt of that notice to file a Notice of Intent to seek expungement. The broker can do this on his or her own or a lawyer can do it. The rule seems to contemplate that a failure to file the Notice of Intent within 180 days will result in a lifetime waiver of the right to obtain the expungement.

Then, after the case is closed, either through hearing or settlement, the broker has 60 days to notify FINRA that she or he will be seeking an expungement. If there is an expungement request, then the chairperson will normally handle the hearing. It is unclear whether a new matter is opened for the expungement, but FINRA makes reference to “IN RE:” proceedings, so it appears that this will be the case. There is also a waivable $750 filing fee for the expungement proceeding and a hearing with the chairperson.

If the broker does not request the expungement hearing under these procedures, it appears that there is no opportunity to obtain an expungement in the future. But the rule is not clear on this point. However, what is clear is that a broker who is named as a party will only be able to obtain an expungement within the pending case. This would be obtained as part of the relief in the case, as it usually is accomplished now, but will not be available after the case is over.

As always, brokers need to be vigilant about what is contained on their CRD and Brokercheck records. Any opportunity to obtain an expungement is one more opportunity to reduce the number of, or eliminate, complaints on a registered representative’s record. The regulatory safeguards are in place to ensure that expungements are properly granted.

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

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Do not Text and Drive. It Is That Simple.

What could a comment on text messaging and driving possibly do with a blog that primarily discusses securities and commercial matters? A lot, actually.

Here’s the deal. Too many people are injured or killed because of texting. It’s bad enough that we have a whole host of distractions (some minor, some major) that keep us occupied/entertained/awake in our cars. We eat in our cars. We put TVs and refrigerators in our cars. Some cars now are rolling WiFi hotspots.

Do we need to text? I will admit that, until the other day, I would text from my car on occasion. It’s particularly tempting when I am on those long, boring, stretches of the turnpike north of Yeehaw Junction. (For those of you not in Florida, that is a real place. Look here) Not any more.

Nothing is as important as a life, other than someone else’s. You want to kill yourself because you want to write “ROFLMAO” (which is tough to actually accomplish in a car), that’s your own stupid right. But to take out someone else’s parent, sibling, grandparent, spouse or friend? That’s just plain wrong and selfish.

Here’s why this rant applies to securities. We live in a connected world. A broker doesn’t just sit in an office. They’re on the road, too. And most of them work for commissions, so a lack of communication could result in a loss of income. So could a deadly car accident. Further, if there is an accident and the broker hurts someone, then it may be the firm’s responsibility. Then what happens to the broker’s career?

There are technological advances that will help deal with the temptation. They’re not perfect, because they’re still a distraction, but in my opinion, they are better than texting. Siri, on the Apple 4S, reads texts and allows you to respond by voice. Windows phone will read texts as well. And it does this really cool thing with a Bluetooth connection where it will read the text and allow you to respond by voice.

Android phones allow text by dictation natively. I don’t recall if it will read them. Finally, Blackberry, my weapon of choice, has apps such as Vlingo and drivesafe.ly that will read and allow dictation. Because my device is a touchscreen, Dragon Dictate for Blackberry is not available. I used it on my Curve and it worked well.

My car will read my texts and emails to me. But I can’t respond.

None of these “solutions” is a cure for distraction. I can’t even tell you if they reduce distraction or if they just make me feel better. But, for the most part, I am not taking my eyes off the road trying to tell if I typed an “f” or a “d”.

I am not advocating banning the use of mobile devices in the car. They have saved me time and heartache countless times. But when I think of the times I texted when I should have just pulled over, I cringe. Not any more. And you shouldn’t either.

That’s enough ranting for 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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US Supreme Court rules on Palm Beach County arbitration motion.

Palm Beach County is famous for many things.  Burt Reynolds, Tiger Woods, Michael Jordan, Spring Training for the World Series-winning St. Louis Cardinals are among them.  Sometimes Palm Beach County gets in the news because the United States Supreme Court finds something worthy emanating from our court system.

In this case, the Supreme Court took issue with a ruling from the Fourth District Court of Appeals, which agreed with a ruling by Hon. David French, denying a motion to compel arbitration by KPMG, a national accounting firm.  This dispute is more fallout from Bernard Madoff and his admitted fraud.

It appears that the plaintiffs lost money investing through one or more of the feeder funds, Termont Partners and others.  They claim, according to the court, that they relied on audits performed by KPMG.  They further claimed that the audits were not done properly.  And, of course, they claim that they lost money.

When they sued, KPMG moved to compel arbitration because there was an arbitration clause in the audit engagement agreement.  According to the court, there were professional malpractice claims along with some Florida state law claims.  The court differentiated the claims, under a Delaware choice-of-law provision, as direct or derivative.  The trial court and the Fourth DCA both held that arbitration was unavailable because the direct claims did not have to be arbitrated.

The US Supreme Court disagreed.  The Court held that, even though it may appear judicially inefficient, the arbitrable claims, referred to as “derivative”, must be arbitrated.  The Court also held that the “direct” claims need to be examined to see if they are arbitrable as well.  This could very well leave the litigation split between two arenas, likely increasing costs and complexity.

Not sure how I feel about this decision.  The US Supreme Court continues its support of arbitration “above all.”   But in a situation where the cases will be split, it seems that the costs of litigation will increase dramatically and no real benefit will be served by forcing the parties to arbitration.

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