BD Law Blog - by Georgia Securities Lawyer Joel Beck

Merrill's New Strategy on Retention Loans

Oftentimes large firm brokers receive forgivable loans to join a firm, or retention bonuses for staying, that require the broker to stay at the firm a number of years, or be forced to return the funds if he or she leaves.  Typically, when a broker leaves a firm and owes money pursuant to one of these notes, the firm must file an arbitration claim against the broker before FINRA Dispute Resolution.  The arbitration process takes time, although FINRA recently changed its procedures for note cases to expedite them.  And, of course, if a broker has a dispute with his firm about his employment, those cases must go to arbitration as well.

Last week, Investment News reported on Merrill Lynch's new strategy for collecting on their loans from brokers who leave the company.  They're going to court.  It seems that the loans given to brokers for staying with the firm following the acquisition by Bank of America were written not by the broker-dealer, but by Merrill Lynch International Finance, Inc., which is not a broker-dealer.  MLIF seeks to collect on the loans, and is filing the cases in court in New York.  I agree with the lawyers quoted in the article that Merrill's strategy is clever.  It seems they've found a way to have their cake and eat it too.  This underscores the need for brokers to understand the deals they're getting into - the good, the bad, and the ugly. 

SEC Charges Blustein In Edward May Ponzi Scheme

Thanks to my friend and fellow securities lawyer Mark Astarita in New York for highlighting a recent SEC against against a former broker and investment advisor.  And, if you're not following Mark's blog, you should.  He's a pioneer in this area, and authored the first blog I recall seeing on regulatory matters. 

The SEC announced earlier this week that it filed civil charges against former broker and investment adviser Frank Bluestein in connection with the Edward May ponzi scheme.  According to the SEC's press release, Bluestein was the largest seller of the ponzi scheme, raising about $74 Million from over 800 investors.  The SEC alleges that Bluestein targeted elderly and/or retired folks to purchase the "investment" and recommended that some of them refinance their homes to gain access to funds to make an investment.  The Complaint alleges that Bluestein pitched these investments as safe and guaranteed, when they were not. The SEC's Complaint can be found here.

In its action, the SEC also asserts that Bluestein misrepresented the due diligence he completed on this product and that he failed to do any meaningful due diligence, even when faced with red flags about the investment. 

I agree with Mark that it appears that the regulators are upping the ante on the due diligence issues and that this area is becoming a focus area in investigations and examinations, as well as in arbitration cases.  Firms and brokers should review their due diligence obligations under the various rules and regulations governing the industry, and make sure that their due diligence is being performed adequately and completely, or be prepared to face the consequences.  

New NASAA President Outlines Agenda for Coming Year

Denise Voight Crawford, the Commissioner of the Texas State Securities Board, was installed as the new president of NASAA (The North American Securities Administrators Association) recently.  In her presidential speech given September 15th at NASAA's annual conference, Ms. Crawford outlined an ambitious plan and priorities for the organization.  The full text of her speech can be found here.

Highlights from NASAA' agenda for the coming year include:
* Adoption of a fiduciary standard to all financial advisors - both investment advisors and registered reps. from broker-dealers. 
*Expansion of state regulation of investment advisers - NASAA supports increasing the threshold for SEC regulation to $100 Million from $25 Million.
* Reinstatement of state oversight of all Rule 506 offerings.
* Ending mandatory industry-run arbitration for investor disputes.
* Streamlining the broker-dealer registration process.