The Beck Law Firm, LLC Blog

Rule 2111 - The New Suitability Rule - Goes Into Effect July 9, 2012

FINRA Rule 2111, the new suitability rule, will become effective on July 9, 2012.  In advance of this, FINRA recently released additional guidance on the new rule, via Regulatory Notice 12-25 (FINRA previously has issued two other notices relating to the rule - see Notice 11-02 and 11-25).

As the new notice indicates, much of the obligations imposed on firms and representatives is not new, however, the new rule incorporates obligations that have been enforced via disciplinary cases and interpretive releases.  Specifically, the new rule requires that firms and brokers have a reasonable basis to believe that a security is suitable for some investor (reasonable basis suitability), then have a reasonable basis to believe it is suitable for that particular customer (customer specific suitability), and finally, the concept of quantitative suitability (the suitability of a series of recommended transactions) is written into the new rule.  In addition, to a discussion of these three items, the notice provides further guidance to firms and brokers regarding the new rule.

I recommend that all brokers and supervisors, including compliance folks, review this new notice.  It is safe to expect that once the new rule is implemented, regulators will review compliance with it, as well as the reasonableness of supervisory procedures and controls regarding complying with the rule, during routine and special exams at broker-dealers.   

 

The Danger of Social Media and Your Legal Matters

Social media is not new.  And I don't think it is going away any time soon.  I like social media and am an avid user (you can find both me and my law firm on facebook, follow me on twitter, connect with me on linkedin, and even view my firm channel on youtube).  But if you use social media, you must take precautions especially when you are dealing with a legal matter, because social media is becoming much more relevant in litigation or in other legal matters, and can be very useful, or detrimental evidence in your matter.  Here's a few things to think through:

First, understand that your opponent (meaning the other party in a civil suit, or the government or a regulatory organization in criminal or regulatory matters, etc.) in a legal matter may attempt to check your postings on social media, or that you may be required to produce them in discovery or pursuant to a subpoena or regulatory request.  Assume that anything you post online - regardless of the privacy settings posted under - may be viewed by your opponent or adversary.  Also, know that it is possible that someone in your social media world (a friend, a connection, a criminal informant with social media ties to you, or whatever) may provide others with access to information about your social media postings.  

With that in mind, take every precaution to avoid making postings or comments, whether in the form of a status update, a blog post, a picture, a video, or whatever, about your legal matter that could in any way be used to discredit  you.  If you wouldn't want the judge and jury to see or read it, don't post it.  And, if the matter directly relates to your legal matter, consult your attorney before you make the posting and stick something out there for the world to see (and see forever - because not everything can be deleted!).

Additionally, you should remember - and parents should teach their children about - the dangers of social media, in that what you post may very well be used against you.  Many people nowadays routinely carry cell phones with cameras and video recorders, and often use these to record an event as it unfolds before them. I've seen stories lately of crimes being solved (thefts, assaults, fights, etc.) and folks being arrested because of social media posts, including videos on youtube.  A recent international news story about the theft of Dirk the penguin in Australia recently highlighted this fact: after commenting about their activities on facebook, three young men were arrested and charged with crimes.  So be careful, and don't make admissions of wrongdoing through social media as such admissions can be used effectively against you.

I'm not advocating against the use of social media.  Used properly, it can be a great way to connect with others, among other things.  Used improperly, however, the results can be devastating, especially as it pertains to legal matters.  

 

 

 

Brokers/Registered Reps.: The Basics of Criminal Cases and The Securities Industry

Brokers and registered representatives who are dealing with past or present criminal cases need to understand a few things about how their criminal case - even those seemingly unrelated to the financial services industry - affects their ability to be associated or registered with a broker-dealer.  The reality is that an unrelated conviction can have significant consequences to a broker's ability to work in the industry.  Here's a high level overview of some of the key issues:

*  A person convicted of any felony is generally statutorily disqualified from being associated (and registered) with a broker-dealer for ten years.  

* A person who enters a plea of nolo or guilty to any felony and to certain misdemeanors, and who is sentenced under a court program (such as deferred adjudication, some first offender programs, etc.) that will later result in no conviction and having the case dismissed, may be disqualified from being associated with a broker-dealer for a period of time (commonly during the period of probation before the case is dismissed).  

* A person convicted of certain misdemeanor offenses may be disqualified for ten years. 

* Criminal charges and convictions not properly reported on the Form U4 might result in disciplinary action against the broker as well (See the U4 category of the blog for more info. on that area).

By way of example, a felony conviction for possession of cocaine generally results in a disqualification.  A misdemeanor theft conviction might also result in disqualification.  Neither of these cases seem to have anything to do with the financial services industry, but they nevertheless might prevent a person from entering the field, or continuing their work in the industry, at least for a period of time.

If you have a disqualifying criminal event in your history, it may prevent you from being eligible to work in the industry, at least for some time, absent obtaining special approval through an Eligibility Proceeding (also known as an MC400 proceeding) with FINRA and the SEC.  If dealing with a current case that has not yet resolved, it is important to understand what result is disqualifying and what is not, so that you can seek to negotiate or obtain the best possible outcome that would still allow you to be eligible to continue working in the industry.  

 

FINRA's NAC Affirms OHO Panel Decision Against Firm, Upholding Finding of Willfulness. Result is Statutory Disqualification of a Firm.

On May 2, 2012, FINRA's National Adjudicatory Council issued an appeal decision in a disciplinary case.  The NAC affirmed findings that a broker-dealer violated industry rules because it sold four categories of securities not permitted by its membership agreement, maintained inadequate supervisory procedures with respect to the sale of certain securities, willfully failed to preserve emails, and failed to maintain and keep P&S blotters for certain business.  At the original hearing in this case, a FINRA Office of Hearing Officers panel decision from December 2010 made findings that the firm committed violations as alleged by FINRA's complaint, and fined the frm $18,500.  The NAC affirmed these findings and sanctions, as well as of the imposition of costs.  

Normally, that would be the end of the story, as a fine of only $18,500, with no other sanctions, is not terribly newsworthy.  Certainly it's a real sanction, and to many firms coughing up $18,500 to the regulators would be difficult.  But the willfulness findings in this case make the $18,500 sanction rather meaningless.

The OHO panel, and the NAC, found that the firm's violations of Section 17(a) of the Securities Exchange Act were "willful."  According to the decision, as a result, pursuant to Sections 3(a)(39)(F) and 15(b)(4)(D) of the Act, "a firm is deemed statutorily disqualified if itis found in a proceeding by a self-regulatory organization to have willfully violated the federal securities laws."  This means that while the firm was not suspended in this case, or did not otherwise have its business activities limited or curtailed, that the firm is essentially not eligible to continue doing business as a broker-dealer because it is now statutorily disqualified.  Sure, the firm may be able to continue this case through an appeal to the SEC, and it may be able to seek relief from the disqualification from FINRA and the SEC, but getting the desired result will be costly and difficult.  

I've blogged many times about the concept of willfulness as it relates to U4 issues, but as this case demonstrates, firms need to be aware of the willfulness concept and its application relating to Exchange Act violations.  

 

An "S Corporation"? That's a Tax Status, Not an Entity

Often, I'll get calls or inquiries from folks looking to form a business who tell me that they want to form a S corporation.  I often know what they mean, even though there really is no such thing incorporating a S corporation here in Georgia.  Let me explain.

Some of the most common business types are sole proprietorship, partnerships, corporations, and limited liability companies (LLC).  There are several other entity types allowed here, but they are not as prevalent as these 4 types.  So, when most people (but not all) start a business, they choose one of these.  And, because of the limited liability protection offered by corporations and LLCs, one of these two entity types are often the right choice for folks.  But  the choice of which entity a person should form is based on the answers to many questions, including the type of business to be conducted, manner in which it will be conducted, number of owners and the involvement level of the owners, and plans for the future of the business.

What many people don't know is that they can effectively have a "S corporation" whether they form a corporation or an LLC.  That's because a "S corporation" is not a type of entity; rather, it is a election (a choice) of how the business will be taxed.  So, a client can form either a Georgia corporation or a Georgia LLC and have it treated the same way for tax purposes by filing an S corp. election.  But, because it is a tax matter, you should consult your CPA for additional guidance before making this decision.  Your legal counsel, together with your CPA can provide you with guidance to make the best decisions and help to position your new business for success.

Forming a corporation or LLC with the state is not difficult and people can do it themselves very easily. But knowing what to do after that is vitally important as well.  In addition to selling their goods or services, business owners need to be careful to ensure that they sign their contracts the proper way to avoid making themselves liable for the business's activities where appropriate, that they keep and maintain the appropriate business records, make the required annual filings, make tax elections and file appropriate tax returns and forms, obtain business licenses, and more. In future posts, I'll discuss more of these items.

The System Worked. (Or, My Time as a Juror This Week).

I had jury duty this week.  After checking the system over the weekend, I found I had to report on Monday. And, although my county is a "one day or one trial" jury system, I was put on a panel late in the day on Monday, and then had to return on Tuesday after voir dire was completed.  I was confident I would not be selected to be on the jury in this criminal trial.  After all, I have worked as a police officer, and now in private practice I work in defense of government investigations and prosecutions among other areas of the law.  Certainly the state or the defense would be striking me, I thought.

I was wrong.

I was placed on this jury of twelve, plus an alternate (as an aside, another lawyer was also picked for this jury, to our mutual surprise).  The trial began Tuesday after lunch, and the State finished their case in chief that afternoon.  The defense presented their case this morning (Wednesday), we got our jury charge, took a quick lunch break, and had about two hours of spirited deliberations.  And I mean spirited.  There was some good, honest debate and discussion in that room and there were some very different opinions on the evidence and the case initially.  In the end, we all agreed on a verdict: not guilty on all counts.  There were three counts.  It was essentially a theft/fraud case, but I'll spare you the details here, as I don't think you'd find the case to be exciting or newsworthy.

I would have wanted to do some other things these last three days.  Being on a jury was not something I was looking forward to  It certainly was an inconvenience for all of us.  But it was a good experience for me, to see first hand a jury's deliberations in a criminal case (my prior jury service has all been civil), and to be refreshed by a group of 12 folks coming together to try to do what is required, and to try to get it right.

I was impressed at the approach taken in that room today.  Folks really wanted to hold the State to its burden of proof, and ensure that, before convicting someone of a crime, that they were really satisfied that the State proved the charges beyond a reasonable doubt.  I think we all agreed that it was certainly possible that the defendant in this case could have committed the offenses charged, and I think many jurors had a very strong suspicion that the defendant had indeed done so.  Nevertheless, as charged by the judge, we held to the standard of reasonable doubt - the same standard that we would want held up for us if we had been a defendant.  Based on that measuring stick, the State's case fell short - or at least it did in our view - and it was our view that mattered.

I don't know if a man "got away" with something this week, or if he really didn't do what was alleged.  I do know that the system worked today, and I think that's what's really most important here. For that, I'm thankful.