SECLaw.com - The Securities Law Blog

Congress to Give FINRA Authority over RIAs

2009-11-02T09:55:00.000-05:00

According to InvestmentNews.com, there has been an amendment to the Investor Protection Act which gives FINRA authority over the advisory activity of any broker-dealer that it regulates.

The bill would affect anyone who is dually registered as an investment adviser and a broker, and would greatly expand FINRA's authority over the financial markets.

On one level the proposal makes sense. In recent years we have seen the distinctions between brokers and advisers blurr, and in the retail area, there often is no substantive difference between the two. At least not to the investor, who often does not know, nor does he care, whether his financial adviser is a stock broker or an investment adviser.

The most notorious example is Madoff, who, although presenting himself and his firm as a brokerage firm, was actually acting, or purporting to act, as an investment adviser. In that example, a distinction without a difference, and giving FINRA authority over the RIA side of the BDs business might have made a difference.

That is not to say that FINRA should have authority over all RIAs. There are thousands of investment advisers who are not brokers and who do not work for broker-dealers. Those adviser are now regulated by the states, or by the SEC, depending on how much money they manage.

The committee is scheduled to vote on the Investor Protection Act Nov. 4. According to InvestmentNews.com, it is likely to approve the bill. More>>>

Technorati Tags: finra

Getting Arbitration Facts Wrong

2009-11-02T08:40:00.000-05:00

Litigation 2009 - Home Court Disadvantage at American Lawyer attempted to put together an article about the large cases being won before FINRA arbitration panels, but in doing so demonstrates a marked bias in the media against arbitration. Or, perhaps just an abject failure to fact check.

The article correctly points out that there have been some significant cases won in arbitration, multimillion dollar verdicts in favor of investors, but in the course of reaching that conclusion makes a number of flagrantly wrong, and significantly misleading, statements regarding FINRA arbitration.

For example

FINRA's reputation for siding with the securities industry was long lamented and well-known to even casual investors

Long lamented? Perhaps. At least one party to every litigation proceeding is unhappy with the outcome. Sometimes even both sides. But "well-known?" Hardly. Ask any experienced securities attorney, and the key word is "experienced" and they will agree that while their might be a panel here and there over the thousands of arbitration panels that have decided cases, there is no institutional bias in favor of the industry, and certainly no reputation for siding with the industry. There are no statistics, studies or reports which demonstrate any bias in securities arbitrations for the industry. Customers settlement rates and “win” rates are well over 75%, and “win” rates are consistently higher in arbitration than in comparable court proceedings.

Attorneys for investors point out that from 2003 to 2008, customers won damages in only 27 percent of cases filed

I don't know which attorneys for investors they spoke to, but the statement is simply wrong. Incredibly wrong. According to FINRA’s statistics, over 50% of the cases that are concluded are resolved by a settlement. Of the remaining 50% that go to a hearing, customers won 44% of the time from 2003 to to 2008. That puts a customer win rate at something on the magnitude of 70%, assuming of course that a customer did not settle a case without getting some compensation.

FINRA and its predecessors have long been the financial services industry's preferred venue for claims.

FINRA requires, by regulation, that all members of the financial services industry arbitrate all claims against them at FINRA arbitration. It is not the firms preferring the venue, it is the venue forcing firms to use its forum; by force of law.

FINRA arbitrations don't provide for discovery, which could also be a challenge for investors' lawyers, due to the complexity of the products at issue

Incredibly wrong again. FINRA arbitration procedures have virtually unlimited document discovery. FINRA arbitration proceedings do not have depositions, which at a cost of a couple of thousand dollars a day, are a significant cost for an investor in a court litigation. Further, the parties have the ability to request depositions, and whatever other discovery devises they need. And, if justified, the arbitration panel can order depositions.

…nonpublic arbitrator--the slot that, according to investors' lawyers, usually favors securities firms.

In 25 years of representing parties in securities arbitration I never heard an investors' attorney make this claim. "Usually favors securities firms" is a libel of the thousands of nonpublic arbitrators, and there are no studies or reports to support such an outrageous claim. In fact, there are reports that show that there is no difference in a customer award rates between public and nonpublic arbitrators.

FINRA arbitration certainly isn't perfect, but repeating misstatements without fact checking, in a legal publication, does nothing to correct the problems that do exist, and actually hampers the efforts of those who are attempting to make the process better for all participants.

Hedge Funds On Wall Street Talent Hunt

2009-10-30T11:21:00.001-04:00

From Financial Planning.com - Less than a year after the credit crisis forced the closure of some 1,000 hedge funds, these firms are back out looking for capital and hiring professionals from Wall Street firms. In addition to poaching from investment banks, the funds are bringing in professionals from endowments, foundations, and traditional asset managers, according to a recent report More>>>

Merrill Exec to Head UBS Wealth Management

2009-10-27T10:30:00.001-04:00

After months of speculation, UBS today named Robert McCann as its new head of wealth management in the Americas.

Mr. McCann, the former head of the brokerage business at Merrill Lynch & Co., left Merrill in January after the acquisition by Bank of America. More>>>

Branch Managers Being Forced to Produce

2009-10-26T10:50:00.000-04:00

There are hundreds of producing branch managers at the wirehouses, and over recent years, the wirehouses have been pushing their BOMs to drop production and concentrate on supervision. There is some appeal to using a non-producing manager, but the firms seemed to miss an important issue - compensation.

As firms pushed managers out of production there was a disconnect on the compensation side. After all, firms were asking managers to give up a business that many of them had spent years building.

There is of course nothing wrong with having producing managers. If you staff the branch properly, a BOM can service his own clients while running a branch. It happens all over the country all the time, without incident.

But the key is staffing the branch. The BOM needs an assistant, and an ops manager, and maybe a compliance officer. You simply cannot force a BOM to supervise a branch on his own, without proper support, regardless of his personal production.

But after years of forcing managers to drop their own clients, some of the wirehouses are putting managers back into production. Why? To save costs. The firms have figured out that a non-producing manager is an expense. Shocker.

According to Registered Rep Magazine, in an effort to cut costs, some brokerage firms such as UBS and Morgan Stanley Smith Barney are restructuring their branch office organization and changing the rules about which managers must generate production.

Putting aside the turmoil that this creates for the managers ("no more production" and then "do more production") the move is a complete upheaval of the branch dynamics and creates a conflict between the BOM and the reps in his office.

Brokers like having a non-producing manager because it removes a number of conflicts. Putting non-producing managers into production creates those conflicts, and will undoubtedly increase costs in the long run, as staffing needs to be increased, and brokers feel the effects of the newly created conflicts.

Check out the full article at Registered Rep.

SEC Charges Broker for Manipulation Using Internet

2009-10-26T09:42:00.000-04:00

Once again, the SEC is moving quickly. It is a welcome change, as they have always been known for closing the barn door after the horse has bolted.

Only three weeks after an alleged fraud began, the SEC charged a securities broker with securities fraud for repeatedly creating and then distributing fake press releases to manipulate the stock prices of multiple publicly traded companies.

The SEC alleges that the broker created press releases, including one that claimed that Google was buying the target company. He then posed as an investor on Internet message boards, touting the announcements he had fabricated. In one instance, his scheme caused the stock price to increase by nearly 80 percent within a few hours of the issuance of his phony press release.

Moving a stock 80% on an Internet posting is pretty amazing, and raises another question. Just how greedy, and gullible, are some investors? Someone posts news in an Internet forum, linking to a press release, and they buy the stock?

Investing is not that easy. There is due diligence that needs to be performed, and analysis that needs to be done. That is why investors use financial advisers, and not Internet investment forums, to make investment decisions.

More>>>

Morgan Stanley Plans to Double High Net Worth Advisors

2009-10-23T10:30:00.001-04:00

Morgan Stanley Smith Barney announced the integration of Smith Barney’s Citi Family Office into its own ultra-high-net-worth division, which will now be called Morgan Stanley Private Wealth Management. Unlike the old family office, the newly combined unit will exclusively serve clients with a minimum of $20 million in assets. Morgan said it plans to add more advisors to PWM through a combination of “organic growth and selective acquisitions.” More>>>

Schwab Receives Wells Notice For Mutual Funds

2009-10-15T11:52:00.001-04:00

In an 8-K filed today, Charles Schwab Corp. disclosed that it has received a Wells Notice from the SEC. Accordign to the filing, the Company has been responding to civil litigation claims and regulatory investigations regarding two fixed income mutual funds, the Schwab YieldPlus Fund(R) and the Schwab Total Bond Market Fund(TM). The Wells Notice reflects that the SEC staff intends to recommend the filing of a civil enforcement action against Schwab Investments, Charles Schwab Investment Management, Charles Schwab & Co., Inc. and the president of the funds for possible violations of the securities laws with respect to the two funds.

A Wells Notice is a device used by the SEC to advise a prospective defendant that the Staff is going to make a recommendation to the Commission to commence proceeding. The notice is designed to provide the prospective defendant with the opportunity to inform the Commission as to why an action should not be commenced. The notice is simply that; a notice. It is not a finding of wrongful conduct.

The use of a Wells Notice is something of a unique procedure, and one that is sometimes beneficial to a prospective defendant. I have represented numerous parties in SEC and FINRA investigations over the years, and wrote a column, "The Wells Notice in SEC and NASD Investigations" for those who are interested in learning more about the process. provides additional information. The column is at SECLaw.com, at http://www.seclaw.com/docs/wellsnotice.htm.

Schwab's 8-K reflects that the company intends to respond to the Wells Notice. More>>>

SEC Continues Mark Cuban Fight

2009-10-08T09:47:00.001-04:00

The SEC is in trouble. We all know that, and they need to show that they are active, aggressive and enforcing the securities laws. So, we get surprise examinations, a flurry of press releases and other assorted activity. Good for them, they need to regroup and recover from their recent failures.

But do you gain respect and reputation by pursuing bad cases? Of course not,and someone needs to tell the decision makers at the Commission. In August the SEC announced that it would not refile a complaint against Cuban, and yesterday the SEC annouced that it will appeal the court decision which tossed out their complaint against Mark Cuban.

The decision was not much of a surprise. The Commission was on thin ice, and stretching the law in the Cuban case, which is why the Court dismissed the complaint. Our analysis is here, and all of our posts related to Mark Cuban are here. The WSJ story on the appeal, with background information is here.

FINRA Seeks Further Erosion of Broker Rights - BrokerCheck Forever

2009-10-07T11:18:00.000-04:00

FINRA has proposed rule SR-FINRA-2009-050 under which it would permanently disclose a condensed record for any broker who has been fined, suspended or barred by securities regulators on its Internet based Broker-Check system. The proposed rule was published in the Federal Register on August 17, 2009 and the SEC solicited comments for submission on or before September 8, 2009.

Broker-check has been a significant intrusion into the private and personal lives of employees of the brokerage community for years. Is there any other industry or profession where such detailed information regarding allegations (not proof; allegations) of wrongful conduct are available to the public?

Broker-check was designed to allow the investing public to review information regarding their broker and potential broker. Therefore there is no reason to keep making this information public after the broker has left the industry.

That is not to say that a broker's record should be removed forever. A broker's CRD record is always available from FINRA, and all 50 state securities regulators, it is just not available on the Internet for the entire world to view.

Customer allegations are simply that - allegations. Unproven, unsworn, untested allegations by customers against brokers should never be publicly disclosed, and help no one. Why in the world would anyone want to continue the damage caused by this continued violation of broker's privacy rights?

Supremes Will Not Hear Manifest Disregard Cases

2009-10-06T15:44:00.000-04:00

The United States Supreme Court declined to hear the appeals of three cases, all of which involve the concept of manifest disregard of the law as a grounds for vacating an arbitration award.

Manifest disregard of the law has evolved over the years as an alternative justification for vacating an arbitration award. However, the concept is not contained in the arbitration statutes of the various states, nor is it in the Federal Arbitration Act. Rather it was judicially created, to address the situation where an arbitration panel is aware of a controlling legal principle, but refuses to apply it.

While such an event is rare, it does happen from time to time, and the courts have vacated awards when it is clear that that the arbitrators were aware of the law, that the law controlled the issue before the panel, and the panel simply refused to apply the law.

However, the concept has been called into question of late, and some courts have refused to consider manifest disregard as a grounds for vacature, taking the position that the only grounds to vacate an award are those set forth in the statutes - typically fraud, bias on the part of the arbitrators, arbitrator misconduct, or where the the arbitrators exceeded their authority.

There has been a split in the Circuit Courts, which should have resulted in a granting of a review by the Supreme Court. The Court's denial of the cert petition means that the split will continue, with some jurisdictions applying manifest disregard, and others holding that it is not grounds to vacate an award. For the near future, the ability to use the concept is going to depend on the court deciding the issue.

One question that is being raised that has some merit - isn't the refusal of an arbitrator to apply a controlling law to the facts before him a form of misconduct? And if so, then the concept of manifest disregard of the law is simply a form of arbitrator misconduct, and is in fact a grounds for vacating an award.

Thanks to Philip Loree for alerting us to the denial of cert.

Pay Czar Targets Salary Cuts

2009-10-06T08:00:00.001-04:00

The Obama administration's pay czar is planning to clamp down on compensation at firms receiving large sums of government aid by cutting annual cash salaries for many of the top employees under his authority, according to people familiar with the matter.

Instead of awarding large cash salaries, Kenneth Feinberg is planning to shift a chunk of an employee's annual salary into stock that cannot be accessed for several years, these people said. Such a move, the most intrusive yet into corporate compensation, would mark the government's first effort to curb the take-home pay of everyone from auto executives to financial traders. More>>>

No More 50% Pay Cuts?

2009-10-05T15:19:00.003-04:00

Sallie Krawcheck, Bank of America Corp.’s head of wealth management, said she won’t do “stupid things” to pay policies that might spur financial advisers to leave the bank. I guess we don't be seening any more 50% pay cuts or insulting retention bonuses from BofA/Merrill that caused so many brokers so much harm. More>>>

Beware of Auction Rate Securities Settlement "Phishing" Scam

2009-10-05T15:19:00.001-04:00

FINRA has issued an Investor Alert to warn the public about a recent auction rate securities (ARS) “phishing” scam that promises compensation from ARS settlements in exchange for personal information. Follow the link to the FINRA web site. The email looks like it originated from FINRA—although it did not. It purports to inform the recipient of regulatory actions, including fines imposed by FINRA related to ARS, and states that the recipient is due $1.5 million regardless of the amount of their ARS investment or loss. The email then “phishes” for personal information including occupation, address and phone number. More>>>

No More 50% Pay Cuts?

2009-10-05T15:02:00.001-04:00

Report Cites Finra Lapses in Fraud Probes

2009-10-02T17:23:00.001-04:00

FINRAhas repeatedly denied that it had any responsibility for the Madoff Mess, claiming earlier this year that "[n]one of the fraudulent activities that have been alleged deal with the activities of the broker-dealer or come under the jurisdiction of FINRA" according to Reuters. But today a special FINRA committee has release a report that addresses teh failure of FINRA to uncover the Stanford CD program issues, and yes, the Madoff Mess. The report states "FINRA examiners did come across several facts worthy of inquiry with the Madoff scheme that, with the benefit of hindsight, should have been pursued."
More>>>

RIA Assets Fall But Their Numbers Grow

2009-10-02T16:51:00.001-04:00

A recent report has confirmed what we suspected - brokers and groups of brokers are moving to the investment advisory side of the business, leaving FINRA and its regulatory nightmare behind them. FA Magazine is reporting that while total assets under management for advisers declined by more than 20%, which is no surprise, the total number of advisers has increased. More>>>

The IAA Favors Banning Mandatory Arbitration

2009-10-01T18:03:00.001-04:00

I am constantly amazed at the positions people take on issues when they haven't thought the entire issue through. The Investment Adviser Association, a trade association of investment advisers, supports the Obama's administration's efforts to ban mandatory arbitration clauses in securities contracts.

That is an easy position to take when it doesn't affect you, and when it damages your competitors. Arbitration clauses are so widespread in customer agreements because the government forces broker-dealers and individual brokers to arbitrate their disputes with customers. In order to level the playing field, firms started including arbitration agreements in their customer agreements, so that they had the ability to force a customer to arbitration.

Of course, the government does not force investment advisers to arbitrate their disputes with their customers; yet.

If pre-dispute arbitration clauses are banned, there will be no impact on the members of the IAA - no one will be able to force them to arbitrate a claim, since there is no rule that requires them to do so; yet. However, banning pre-dispute arbitration clauses, without addressing the government-forced arbitration clause for brokers, creates a one way street - customers can force brokers to arbitrate, but brokers cannot force customers to arbitrate.

How is that fair, just, or equitable? Clearly it is not.

The IAA thinks it is a good idea to ban such agreements and to create a one way arbitration agreement for their competitors? I'll be here to remind them of this position when the government combines the regulations for advisers and brokers, and forces investment advisers to arbitrate their disputes, as they currently force brokers and broker-dealers to arbitrate.

If arbitration is unfair, then let's ban it. It if is unfair then the rule should be that no one can be forced to arbitrate a dispute before it arises. Ban pre-dispute arbitration agreements, and ban agency rules which force over 650,000 employees to arbitrate their disputes with their employers and their customers.

The Investment News article on the IAA position is here.

Advisors’ Job Attitude, Outlook Improves

2009-10-01T08:47:00.001-04:00

A new survey reveals that independent RIAs have seen their level of job satisfaction rise 10% and the number with an optimistic outlook for the U.S. economy has climbed by 25% over the past three months, according to a survey released by TD Ameritrade Institutional. Half of the 500 RIAs surveyed gave a top rating (9 or 10) to their satisfaction with their job, up from about 40% three months ago. More>>>

Registration and Regulation of Investment Advisers

2009-09-30T11:23:00.001-04:00

Increased regulation, and a push for more regulation by FINRA and the States is causing brokers and small firms to move the to investment advisory side of the business. While regulations are going to change here too, there are benefits to the adviser registration, rather than dealing with FINRA. More>>>

How BofA Used Merrill To Bully the Government

2009-09-29T12:43:00.001-04:00

Some members of Congress and others have accused federal regulators of pressuring Bank of America into going through with its merger with Merrill Lynch. But records suggest it was the bank, not regulators, doing the bullying. Law.com has an analysis of this view of the issue. More>>>

EXCERPT: 'The Madoff Chronicles'

2009-09-29T09:01:00.000-04:00

If you simply can't get enough Madoff, ABC News correspondent wrote a book which examines the personal and business life of the Madoff Family. More>>>

Due Diligence Failure Leads to SEC Enforcement Action?

2009-09-28T13:45:00.000-04:00

Did a failure of due diligence cause a broker to assist a fraud? The SEC has charged Detroit-area stock broker Frank Bluestein with fraud, alleging that he lured elderly investors into a $250 million Ponzi scheme.

The complaint reflects that the broker was a top salesman for the Ponzi scheme, raising $74 million from more than 800 investors over a 5 year period. The broker is not charged with running the Ponzi Scheme. In fact, he is charged with not knowing enough about what he was selling - the Commission alleges that he failed to conduct proper due diligence on the investments that he was selling, and thus breached his fiduciary duty to his clients.

There is a whole lot more to the allegations than a simple failure to do due diligence, but we are seeing more and more noise, and some cases, from the Commission regarding the failure of firms and brokers to conduct proper due diligence on the investments that they are presenting to their clients. The work is not being properly performed, or it is being farmed out to third party "due diligence" firms who are not doing their jobs.

The last thing a firm or broker needs to be named in a SEC proceeding alleging misrepresentations that arise from a failure to perform due diligence and therefore becoming an unwitting participant in a fraudulent scheme. The SEC's press release is here, the securities fraud complaint is here.

Due Diligence Failure Leads to SEC Enforcement Action?

2009-09-28T13:44:00.000-04:00

Trouble Brewing for Small Broker-Dealers?

2009-09-25T17:04:00.000-04:00

Trouble Brewing for Small Firms?

Having spent the last 25 years representing small and mid-sized brokerage firms, I completely understand the issues facing these firms. It always seems that FINRA and the SEC fail to pay attention to the ramifications of their rules and regulations on the smaller firms when new regulations are considered.

Those concerns are coming to the forefront again, as the latest economic crisis generates calls for additional rules and regulatory overhaul. SIFMA has taken notice, and is speaking out.

E. John Moloney, the chairman of SIFMA’s small firms committee provided written testimony to the House Committee on Small Business this week, and spoke to On Wall Street magazine afterwards. Moloney, who is the president and chief executive officer of Moloney Securities Co., said that Congress and regulators need to be mindful of unintended consequences in their zeal for regulatory reform.

There are any number of proposals that could negatively impact the small broker-dealer, and Moloney hit a few. He addressed the issue of pre-dispute arbitration agreements, which the NASAA has suddenly decided is a terrible way to resolve disputes. (See my post on their latest position on the topic here). Moloney’s point is that before the use of such agreements are prohibited; the entire process must be examined. As I noted in my discussion, arbitration is often the best way to protect the consumer, as it is not only faster than a traditional court proceeding, it is less expensive.

Today aggrieved investors with smaller claims are able to retain attorneys to represent them, precisely because of the lower cost of arbitration. If pre-dispute arbitration agreements are banned, not only will consumers be able to opt-out of arbitration, brokers and firms will be able to do so as well. The end result: consumers who cannot afford to prosecute their claims in court will have no recourse at all, and “would likely result in a complete denial of justice for individuals with smaller claims” in Moloney’s words.

On Wall Street’s story contains more detail regarding the issue and SIFMA’s concerns, and is available here.