BD Law Blog - by Georgia Securities Lawyer Joel Beck

FINRA Annual Conference is Next Week

The 2009 FINRA Annual Conference is next week in Boston, May 6-8.  Conference attendees will hear from FINRA staff regarding perspectives on regulatory reform, research analyst issues, and supervision rules in the consolidated rulebook.  There are also many break-out sessions covering various topics, and Friday's keynote speaker will by Rep. Barney Frank of the House Financial Services Committee.  I'll be attending and look forward to seeing a lot of folks there.  If you'd like to get together and chat, let me know.  And for those not attending, look for some posts here on the blog following the conference.

A Primer for Brokers Considering Changing Firms

Registered Rep. magazine reported last week that some lower-producing brokers at UBS will be let go as part of the company's plans to cut costs.  The magazine also reported that a number of Smith Barney  brokers have left the firm, according to its recent quarterly report. 

More brokers are now considering their options, wondering whether to change firms, or to go independent, or even whether to become a registered investment adviser.  In addition to looking for products and services, and a platform to serve customers, brokers must consider a host of other important issues before making a change as well.  Contract issues, promissory note matters, non-solicitation agreements and other matters must be considered. 

Before making a move, consider these items:

*  Do you have a forgivable loan with your current firm?  What's the balance on that, and how will you pay it back?
*  Does that loan agreement forbid you from soliciting clients to a new firm until paid?
*  What about covenants not to compete and no solicitation clauses?  Do you know what's in the registered rep. agreement or contract you signed?
*  What's changed that may require you to update my Form U-4?  (Always a question to ask whether moving firms or not.  Remember, under the rules,  you have an obligation to keep this current)

*  If you go to an independent firm, what are the costs that you'll be charged?  Don't focus just on the higher payout percentage.
*  What support will you receive?  How easy is it to work with the firm's departments - operations, compliance, etc.?
*  Do you need to form my own company for business purposes?  What type?  How to do it?  What are the advantages and disadvantages of each type?  How do you maintain the company to protect your assets as much as possible?

* What's involved in registering as an investment adviser?  Do you need state or federal registration?  What about registration in the various states and a de minimus exemption for a small number of clients?

These are just some of the issues involved in making a career move to another firm.  If you're considering making a change, including going out on your own, consider consulting with a lawyer experienced in this area, as well as a CPA to help you make a plan, then successfully execute it.

FINRA Dispute Resolution Announces Increase in Case Filings

According to FINRA Dispute Resolution, January and February 2009 saw a total of 1,065 arbitration claims filed in their arbitration forum.  This increase from a total of 561 cases filed this same period in 2008 represents a 90% increase in year to date filings.  Overall, in 2008, 4,982 cases were filed with FINRA Dispute Resolution, a 53% increase over 2007, when there were 3,238 cases filed.

Review of Recent FINRA Disciplinary Actions

Two recent FINRA enforcement cases stand out, and are worthy of our discussion.

First, according to a FINRA press release, a Hearing Panel fined Mutual Service Corp. more than $1.5 Million for supervisory violations and falsifying documents relating to exchanges of variable annuities.   The regulators also announced that six current or former employees of the firm were disciplined.  Three of those folks were barred from the securities industry in the action for falsification of records that showed that certain annuity transactions had been reviewed by the compliance department when they had not.  Moreover, one compliance employee allegedly created fake letters and put them in the firm's files to make it appear that the firm had utilized an exception report to review certain transactions.  According to the press release, "The hearing panel found that [the firm and the three individuals] intentionally falsified [the firm's] records to deceive FINRA's staff and termed those violations "egregious.""  Go read this press release for yourself. Unfortunately the panel's decision is not yet on FINRA's website, and my request to FINRA for a copy has not been honored.  Note that some of the individuals have appealed the decision to FINRA's National Adjudicatory Council, and the NAC has also called another one for review, so the case is not yet final.  I think you can pick up some of the lessons to be learned here, but if not, remember this:  don't stop supervising transactions, don't falsify documents. 

Second, FINRA announced that is fined a supervisor $10,000 and suspended him in all capacities for 10 business days and in principal/supervisory capacities for 90 days based on findings that he failed to follow up on "red flags" indicating possible misconduct by a broker.  Specifically, the supervisor allegedly failed to investigate why many of a broker's accounts had sell-outs in them, and why some new accounts failed to pay for securities that had increased in value.  FINRA also found that the supervisor failed to enforce and follow a heightened supervision agreement for this broker as well.  See FINRA's report of disciplinary actions for March 2009 (case No. 2005001502703).  I also think that the lessons to be learned here are obvious, but if not, remember this: if someone is on heightened supervision, there's probably a reason for that, so follow the plan.