BD Law Blog - by Georgia Securities Lawyer Joel Beck

Is this a Double Standard? SEC Says No to Carlyle Arbitration Clause.

Carlyle Group LP has reportedly given up on a plan to require shareholders purchasing stock in an IPO to arbitrate any disputes with the company, giving up their ability to take suits to the courts.  Apparently, many organizations and advocacy groups, as well as a few Senators contacted the SEC urging it to reject Carlyle's attempted arbitration clause.  One of the main issues, it seems, is that an arbitration requirement would effectively end class-action claims on securities matters with that issuer.  

The SEC and some other securities regulators don't seem to have much of a concern about arbitration requirements when it comes to other securities industry participants.  Investors have long been forced to abandon court cases for arbitration forums when they have a case against a broker-dealer.  Arbitration has its place, and can be a useful mechanism for resolving disputes; I'm not knocking the system as a whole.  But forced arbitration is just that.  And it seems, at least a little, that there just might be a double standard here. 

SEC: OCIE National Examination Risk Alert on RIA Social Media

The SEC staff might not be clicking the "like" button on investment advisers' use of social media.  Earlier this month, the OCIE staff issued a national examination risk alert focused on use of social media by investment advisers.  This alert conveys the staff's observations (read: concerns) regarding social media use by investment advisers as identified during examinations of RIAs.  The staff cautions RIA firms to periodically evaluate their compliance procedures as to social media, and to monitor the effectiveness of such program.  Further, they warn firms to pay attention to the use of third-party content on social media platforms, as well as to be aware of the RIA's record-keeping requirements in this area.  

Social media is here to stay.  In my view, its use is a legitimate way to communicate with, and market to, the public.  But, social media must be used in accordance with applicable rules and regulations, and firms doing so should understand that regulators have significant concerns in this area.  

FINRA December 2011 Disciplinary Actions: Registration Issues, CE Problems, and Escheatment Procedures

FINRA has published their notice of disciplinary actions for December 2011.  In cases involving firms, there were a few cases relating to alleged failures to complete an annual certification of compliance and supervisory processes to senior management at firms, as well as failing to test and verify supervisory controls and procedures.  Firms should be aware of the requirements for these certifications.  It is apparent that the examiners are reviewing for compliance in this area during examinations of broker-dealers.  

One case that caught my eye involved a national broker-dealer that submitted an AWC agreeing to be fined $350,000 and censured.  This was based on findings that the firm failed to establish, maintain and enforce adequate WSPs for its escheatment group in regards to addressing abandoned accounts (accounts where the account statements were returned as undeliverable, for example).  FINRA found that the deficient procedures allowed an operations manager to convert approximately $850,000 from retail client accounts, and let the manager avoid detection by the firm (Case 2009020630701).

As always, there were a number of actions against individuals.  We see the typical selling away cases, as well as several cases involving improper borrowing of funds from customers, and some conversation cases.  There were also several cases against supervisors relating to supervision of private offerings, as well as supervision of excessive or unsuitable trades.  Supervisors are increasingly on the regulator's radar and must be aware of, and respond to, red flags in these areas.  

A few cases against individuals also caught my eye.  First, there were a couple of cases against brokers who were found to have let a manager in their firm complete their required firm element continuing education program.  These brokers were fined $5,000 and suspended for 30 days. (2009019276103 and 2009019276102),  In another case, an individual was fined $7,500 and suspended for 20 business days based on findings that the individual sold $1.3 million in private placement offerings without required registration, as the individual had not passed the Series 7 exam (or, according to FINRA, any other FINRA qualifications exam) until a later date. (2010022715604).  

Proposed FINRA Rule On Social Media Supervision Modified

FINRA has sought to have the SEC approve proposed FINRA Rule 2210 relating to communications with the public (similar to NASD Rule 2210 dealing with the same subject).  In a letter to the SEC dated December 22, 2011, FINRA responded to comment letters on the proposed rule, as well as other proposed rules.  As it relates to social media use and other online electronic communications (not email), FINRA has explained that it believes that participation in online forums occur in real-time, and that it is not practical to require pre-use approval of such postings by a principal.  Nevertheless, these communications must still be supervised by firms.  Addressing concerns as to whether they are correspondence or public appearances, FINRA has explained that participation in an interactive electronic forum would fall under the "retail communication" category of communication and would be supervised by broker-dealers in the same manner as required for supervising correspondence.  Recognizing the difficulties of supervision in these areas if pre-use filing was required, FINRA has amended proposed FINRA Rule 2210(c)(7) to add an exclusion from filing for such communications posted online in interactive forums.  FINRA makes clear, however, that the exemption from filing would not apply if any other filing requirement arises under federal law or pursuant to SEC rules.  (See pages 10-12 in the letter at the link above).  

Raising the Bar on Accounts: Is A Broker Exodus Coming?

InvestmentNews.com reports today that brokers at Merrill Lynch are being encouraged, by way of changes to the firm's compensation plan, to focus their attention on larger accounts.  According to the report, the grid change includes raising the minimum account size to $250,000 per household, up from a $100,000 threshold.  If I understand the article correctly, advisers can continue to bring in new clients below that amount, but will receive only a 20% payout, or, if the broker's book consists of 20% or more of accounts at that level, then they won't get paid for any new accounts under the new line.  Given everything that has happened over the past many years, I don't think this change will cause a mass exodus of brokers departing for other firms; indeed, the wirehouses often focus on wealthier clients.  Certainly, however, some brokers may make a move because of the effect that the new compensation grid may have on them, and some brokers may move for other reasons.  But if a broker is considering making a move, what should the broker consider?

I've written several posts over the years aimed towards brokers thinkning about making a move.  Be sure to check these out here.

A Primer for Brokers Considering Changing Firms.

Changing Firms or Going Out on Your Own?  Consult a Lawyer.

Thinking of Changing Firms?

Sometimes the grass is greener, sometimes it is not.  Before making a big move, consider it fully, and engage experienced professionals to help your transition succeed.  

FINRA Brass: The 1%?

Forbes recently published an article online reviewing the salaries and some key benefits paid to FINRA's top regulators.  According to the column, more than a dozen current and former officials at the organization received compensation in excess of $1 million for 2010.  I thought some of the BDLawBlog readers would be interested in this article.    

Momentum Gaining on RIA SRO?

Earlier this week, Investment news reported that support for a self-regulatory organization for registered investment advisers is apparently gaining momentum.  The article highlights many trade groups that have thrown their support behind FINRA as a possible SRO for advisers though some state regulators object to an SRO.  On Monday, Rick Ketchum, CEO of FINRA, testified before a House subcommittee (the Subcommittee on Capital Markets and Government Sponsored Enterprises Committee on Financial Services).  The text of his testimony can be found online here.  As you would expect, Ketchum was in favor a a SRO for RIAs, and for FINRA being an SRO in that arena.  With what appears to be some bipartisan support for an adviser SRO, it's coming, I think.  Just a matter of when.  

Dealing With The Wild Ride & The Customer Complaints

Wow.  Today's markets have had us in for a wild ride.  As I write this a few moments before the markets close today, the DOW is down a little over 600 points, give or take a few, pointing to a close down about 5.4% or so.  Certainly, investors can get anxious during periods of turbulence like this, and they'll turn to you, their trusted broker or advisor, for some guidance and help, or maybe just a reassuring word.  But some investors will instead decide that now is the time to make a complaint, and seek to be compensated for their losses.  What's a broker to do?  Here's a few ideas:

To start with, it pays to try to avoid complaints in the first place.  Want to know a secret to doing so? Answer your phone and return calls.  Clients tend to escalate their angst and file complaints when they can't get in touch with you.  In addition to this, you can be sure that, when meeting with clients, you routinely and periodically reconfirm their financial situation, investment objectives, and risk tolerances. Recommend re-balancing or changes in strategies if the information warrants, and keep notes of your recommendations.  Likewise, when a client refuses your recommendations to change to a more conservative strategy, consider the value of that client, versus the value and hassle of an expected customer complaint down the road, as well as a possible arbitration claim and regulatory examination.  It might be that you need to fire that client and move on.  

When a complaint does come in, be sure to follow your firm's policies and procedures regarding those.  You may need to report it to your manager and/or compliance folks, and it may require that your Form U4 be amended to disclose it, depending on the substance and allegations of the complaint.  Remember that brokers are also sanctioned by the regulators for settling client complaints away from the firm, so don't get caught up in a rule violation.  Rather, work with your managers to see what can be done, if necessary and appropriate to handle the situation.  And finally, don't be afraid to bring in folks to help you deal with a complaint situation, including experienced counsel.  

Operations Professionals: FINRA's New Registration Regime Set to Take Effect

FINRA has announced that it's new registration rule and requirements for Operations Professionals, Rule 1230(b)(6), becomes effective on October 17, 2011.  See Regulatory Notice 11-33 for the effective dates and other information material to this new rule.  

All persons who meet the definition of an "operations professional" by virtue of one or more of three roles, having to do with a laundry list of certain broker-dealer functions, will be required to be registered as an operations professional.  Those who have previously, and recently, been registered in certain other registration categories, can be registered with the new qualification without taking an exam.  But, those who do not meet this exam waiver requirement must take the new qualifications exam, the series 99.  

It is important to note that there is an opt-in requirement.  This means that folks who are otherwise eligible to be registered as an OpsProf without the exam, will not automatically be registered in that capacity unless they opt-in.  It is also important to note that FINRA is establishing certain dates and deadlines for firms to identify its OpsProfs, apply for the registration, and become registered in such capacity over a one-year transition period.  Also note that the new registration comes with continuing education requirements.

Both compliance folks and business leaders at firms will need to review and understand this new rule and formulate a plan to determine what folks must become registered, and put in place appropriate mechanisms to ensure compliance with the rule.  Going forward, new hires must also be evaluated to determine whether they must be registered as an OpsProf as well.  And importantly, firms must recognize that OpsProf have to also be assigned to designated supervisors as well.

We saw from the research analyst registration regime implementation that FINRA (NASD at the time) took regisstration issues seriously.  I believe that we can expect that FINRA will focus a part of future exams of broker-dealers on whether the firm has complied with the new registration requirements.  

B/D's Beware: New Rule 4530 In Effect

Earlier this month, FINRA Rule 4530 became effective, replacing former NASD Rule 3070.  We can expect that compliance with the more stringent reporting requirements of this new rule will be examined closely, beginning immediately.  

Rule 4530 requires broker-dealers to report to FINRA the existence of certain criminal charges, indictments, arbitrations and litigation, regulatory findings, certain customer complaints, etc. against individual representatives and/or the firm, as well as to report quarterly statistical and summary information on complaints.  Going farther than the old Rule 3070, the new rule also requires firms to self-report certain violations stating, "Each member shall promptly report to FINRA, but in any event not later than 30 calendar days, after the member has concluded or reasonably should have concluded that an associated person of the member or the member itself has violated any securities-, insurance-, commodities-, financial- or investment-related laws, rules, regulations or standards of conduct of any domestic or foreign regulatory body or self-regulatory organization."

To help firm's with understanding the meaning of the new rule, FINRA recently released Regulatory Notice 11-32.  This is a must read for all legal and compliance folks who work in the area of reporting, as well as in registration/reporting, and those who develop and update the firm's WSPs.  Among other things, the notice gives guidance on interpreting the reporting requirements for self-reporting violations as well as dealing with situations when a broker is also affiliated with other companies such as insurance, mortgage, or banking.  Compliance folks should recognize that FINRA is interpreting a customer complaint very broadly in the context of complaints that don't directly to the broker-dealer, but to another financial services entity.  The Notice also highlights the need for firms to review their procedures for ensuring compliance with the rule.  Beyond that, I would also recommend that firms consider conducting training on the new rule for the appropriate folks, as we know that this rule will likely soon become the focus of enforcement actions.