The Beck Law Firm, LLC Blog

An Open Response to the Headhunter: Why Every Adviser Needs a "Go Bag."

Earlier this week, Danny Sarch wrote an article for the "From the Headhunter" column over at InvestmentNews.com, entitled "Why Every Adviser Needs a "go Bag."  The gist of his column is that financial advisors need to be ready to shift gears and go to a new firm in case something happens at their present firm.  This means, according to Mr. Sarch, that they understand that their retention bonus agreement is not a fixed-term employment contract, that they maintain an updated production list, that they have a "protocol spreadsheet" with client contact lists up to date at all times, and that they have personal cell-phones/communication devices separate from their broker-dealer.  The author likens these steps to a spy having a "go bag" ready with extra passports, cash, and weapons, ready at a moment's notice in case it is needed.  

For several years in college, I was a volunteer firefighter/emergency medic, and I'm quite familiar with having your gear ready to go on a moment's notice.  I get the analogy.  I also think that Mr. Sarch is on to something here, and makes some good points.  But I disagree somewhat with his recommendations, and also think that his list is not complete.

FINRA Adopts Rule 5123 Relating to Private Placements

FINRA has adopted Rule 5123 concerning private placements, and has announced an effective date of December 3, 2012.

Under this new rule, each FINRA member broker-dealer that is selling in a private placement will file a copy of the PPM, term sheet or other offering document within 15 days of the date of the sale, or advse FINRA that no such materials were used. 

There are several exemptions under 5123(b), and business leaders and compliance folks should become familiar with the reporting requirements and the applicable exemptions.  Further, in advance of the effective date, firms need to consider whether their written supervisory procedures need to be amended to help achieve compliance with the rule.

FINRA's Regulatory Notice 12-40 announcing the SEC approval and effective date of the rule can be found here.

Disclosure Obligations Beyond The U4 and ADV.

Most stockbrokers and financial advisers know that they have certain disclosure obligations and must answer questions to disclose certain events on their registration forms such as the Form U4 for registered representatives and the Form ADV for registered investment advisors.  Often these forms get reviewed once a year at renewal times, or when there is a triggering event such as a disciplinary action.  It is important to keep these forms current so as to avoid enforcement action for failing to disclose material information.

Some brokers and advisers might not remember or be aware of disclosure obligations beyond the U4 and ADV.  If you are an insurance agent, you might have disclosure obligations.  And if you have a professional designation, you might have more disclosure obligations as well.  For example, in Georgia, an insurance agent has to notify the Commissioner of any change to the information included in his or her application, and must do so within 30 days.  Also, CFP (R) certificants must report to the Board of any professional suspension or bar within 10 calendar days upon receipt of notification of such action.  There are also requirements to report certain criminal convictions as well.

The point is this:  Don't just think about the U4 and ADV when considering your disclosure obligations. Review your other licenses, including insurance, as well as the requirements for any professional designations that you hold. Failing to do so could result in unintended consequences.

Attorney Joel Beck helps stockbrokers and financial advisers protect their #1 investment, their careers.  If you're a broker or adviser who needs help, contact Joel at 678-344-5342 or visit him online at www.thebeckfirm.com.  

FINRA Seeks to Expand BrokerCheck Use

According to an email sent by FINRA's Chairman and CEO to the execuive representative's of broker-dealer's on September 14th, it look as if FINRA's Board of Governors is seeking to increase and expand the use of the BrokerCheck system.  BrokerCheck provides information to investors and other folks about a registered representative's background, including disciplinary history, complaints, arbitrations, lawsuits, and other things.  Ketchum reported that the Board of Governors authorized staff to file proposed amendments to FINRA Rule 2267 that would require firms to include a reference to BrokerCheck on their websites, as well as on "certain websites maintained by, or on behalf of, any person associated with a member firm."  Another proposal for a rule amendment would also make permanently disclosable certain actions brought by other regulatory agencies that were dismissed pursuant to a settlement agreement.  

It does not appear that the rule filing has yet been made and it is not on the regulator's website.  When it is, we will be able to read the proposed amendment and the rationale for making the changes.  Certainly this change, if adopted, would impact many registered reps. who maintain their own websites (generally those who work for an independent-model firm), and it would certainly impact those brokers with disciplinary and other disclosures that they'd prefer not be more widely distributed.

With an ever-increasing mindset of disclosure, disclosure, disclosure by the regulators, brokers must be aware of the potential consequences of disclosure-related issues when dealing with regulatory investigations, customer complaints, arbitration claims and lawsuits etc., and should seek the advice of competent counsel to help them with these issues while considering the potential impact of future disclosure.  

Joel Beck Releases 2nd Edition of A Stockbroker's Guide to Regulatory Investigations

Securities attorney Joel Beck announced that he has released the second edition of his e-book, A Stockbroker's Guide to Regulatory Investigations.  The e-book provides a wealth of information to brokers who are facing a regulatory investigation, explaining in the detail both the investigation/examination phase as well as the disciplinary/enforcement process.  A former regulatory attorney, and now in private practice, Mr. Beck has significant experience in both the prosecution and defense of enforcement cases against stockbrokers and associated persons.

The e-book is available through an online download for free, and can be obtained at www.brokerdefender.com.  

"If you are dealing with a regulatory examination, understanding the process can help you make better decisions," said Mr. Beck.  Of course, the e-book is for general information only, and is not a substitute for legal advice, he said, adding that "[He] still counsels brokers that the best thing they can do when dealing with a regulatory investigation is to engage a lawyer experienced in securities regulatory matters."   

 

 

PCAOB Releases Interim Inspection Report on Audits of Broker-Dealer

It looks like some annual audits of broker-dealers may become a little more difficult, if auditing firms review a report released today by PCAOB and work to ensure that their audits are problem free.  The Public Company Accounting Oversight Board today released a press release and their  interim inspection report announcing its findings from examinations of audits of broker-dealers.  

This inspection program focused on a small number of auditing firms and broker-dealers and is admittedly a very small sample size.  PCAOB identified deficiencies relating to audit procedures related to computation of net capital requirements as well as customer reserve calculations, audits of financial statements, as well as issues with auditor independence.  Much more detailed information is contained within the report.  If you're involved in financial operations - including having some responsibility for your firm's annual audit - you want to take a look at this.  

 

 

A Free Compliance Tool For Broker-Dealers and RIAs?

It seems I often tell folks that they get what they pay for.  And I think that is especially true when it comes to legal services.  But sometimes, you can get something good for cheap or free.  

Google Alerts is a free service from Google that allows you to set up a series of search terms or names and receive emailed alerts when Google finds those search terms on the web.  It is very easy to set up and monitor, and the alerts that it sends are very timely, in my experience.  Folks and companies of all types can use Google Alerts to monitor press coverage and other internet activity in an individual's name or a company's name, for example.  

But Google Alerts has a lot of value to compliance and legal folks in the financial services industry, I think. Broker-Dealers and RIAs may want to set up a series of alerts for compliance purposes.  For example, alerts could help identify undisclosed outside business activities, potential selling away situations, advertising and communications with the public violations, and more, when such activity involves internet postings or web pages.  This can give compliance officers another tool in their toolbox, to help augment their supervision program and oversight of brokers and agents; of course this does not replace other supervision steps that firms must take.  

Sometimes you can get something for nothing.  

Socia Media Used To Investigate Crimes and Violations

A report by InformationWeek Government last week shows that a majority of law enforcement agencies turn to social media sites such as Facebook and Youtube as part of their investigative efforts.  The survey had more than 1,200 law enforcement professionals respond and found that 83% reported using social media in the context of their investigations.  And, according to the report, for those that aren't doing it, nearly 75% reported an intention to start doing so.  

We already know that social media use is highly monitored and scrutinized in certain segments, such as the broker-dealer industry.  There, regulators are very wary, it seems, about social media use and the ability to properly monitor its use and maintain compliance with standards relating to communications with the public.  Further, we've also seen regulatory actions based on tweeting inappropriate information, along other things.  And finally, we know that social media can be a gold mine in certain civil litigation, including family law and divorce matters, among other types of cases.  Given these factors, folks should be aware of the high-level of scrutiny that social media postings and activity could receive, whether from criminal justice agencies in connection with criminal investigations, or by regulators reviewing compliance with civil rules and standards that apply to particular industries.  

For all these reasons, folks should understand, and consider applying, some common sense tips when it comes to social media use:

* First, don't implicate yourself in criminal conduct via social media.  This means don't brag about your latest crime, and don't post videos of it, on facebook, youtube, twitter, or other sites. (Of course an even better step to avoid problem is don't commit crimes in the first place).

*Second, remember the old newspaper front page test.  I think that can still be a good one.  If you wouldn't want your post, tweet, or whatever, appearing on the front page of the paper (yep, some folks still read an actual paper version of the newspaper), think long and hard about whether you want to post it, tweet it ot whatever.

* Finally, understand that in this day and age, things that you think are private, aren't really all that private.  So tread carefully.

 

Broker-Dealer News Flash

FINRA recently released an update from Chairman/CEO Rick Ketchum summarizing recent rulemaking items considered by the FINRA Board at their July 2012 meeting.  A few things here are noteworthy.  Initially what caught my eye is the forthcoming filing with the SEC to expand the MRV plan (minor rule violation) to increase the rules for which a MRV letter is eligible.  The MRV is a disciplinary action that falls somewhere between informal action (such as a cautionary action letter or compliance conference) and a formal action (an AWC or formal complaint).  MRVs impose fines of up to $2500 on a firm or individual for rule violations, but are not considered formal disciplinary actions, and therefore don't have as much disclosure ramifications as formal actions.  In my view, the MRV is a good tool for FINRA to have in its toolbox, but is one that is under-utilized.  According to the update, FINRA will file with the SEC proposed amendments to expand the list of rule violations appropriate for MRV resolution, noting that "The proposed additional rules generally involve non-willful technical violations that do not involve direct customer harm."  I'm curious to see the list once the filing is made.

Another announcement that caught my eye has to do with another proposal to be filed with the SEC, which will seek to amend Rule 8313 to expand the ability of FINRA to release disciplinary information to be more "transparent"  Over the recent several years, there has been a push for more disclosure of disciplinary information on cases and charges made against brokers and firms.  I believe that we can expect to see this type of push continue.

 

 

The Red Flag Series: Broker-Dealer Supervision

This is the fourth post in the Red Flag series.  As I mentioned yesterday when discussing red flag issues in connection with broker compliance, the "red flag" language is used often when we speak of broker-dealer compliance issues.  The regulators particularly like this metaphor, and often speak about the importance of recognizing and responding to red flags in a firm's supervision of brokers and associated persons.  Doing so can certainly help keep a firm out of trouble, or can work to minimize problems when possible.  As I've mentioned in the other posts in this series, this list of red flags is not an exhaustive or complete list, but it is a good starting point.  

When I think of supervisory concerns, written supervisory procedures are at the foundation of the supervision process.  And, from the regulators' perspective, they are critically important.  So the first red flag that comes to mind is not having a good set of written supervisory procedures.  The WSP should be customized and tailored to the business that the firm does and to the manner in which it supervises.  And importantly, the WSP should not read as if it was written for (or stolen from) another firm because that other firm's name is sprinkled throughout the pages (Yep, I've seen that. More than once.)  

A second red flag is failing to have the WSPs ingrained in the culture of the firm, letting folks know who is responsible for what, and how and when they are to carry out their assigned roles.  Here, consistency is important.  A lawyer I used to work with would often proclaim that "Consistency is the hobgoblin of little minds."  I think that quote, or something similar, is attributable to Ralph Waldo Emerson.  I get it. Consistently doing things for the sake of consistency doesn't add up to much.  But in a broker-dealer, regarding supervision, consistency can be very important, especially for firms with multiple locations and managers. Ideally, a firm would likely want to ensure that its supervisory policies are consistently and uniformly carried out throughout the enterprise.  When they are not, supervision can breakdown.

In addition to the flags that are easy to see such as numerous complaints, arbitrations and regulatory inquiries, other red flags in supervision that arise from time to time are:

* Failing to investigate and respond to outside business activity disclosures. 

* Failing to maintain track of outside securities accounts of brokers.

* Patterns of renegs or Reg-T extensions for a particular broker or branch office.

* Patterns of excessive or atypical short-term trading in clients' accounts.

* Evidence of atypical financial trouble experienced by brokers, that might point to issues relating to a variety of problems, including something very serious as involvement in fraud, down to things like selling away or undisclosed OBAs, etc.