Archive for May, 2013

Large Adviser Edelman Financial Services Pulls Out of Protocol

Friday, May 31st, 2013

As reported today by Investment News, Edelman Financial Services LLC is pulling out of the Protocol for Broker Recruiting as of June 1.  The “Broker Protocol” permits representatives to take basic customer contact information when they change firms and, if followed, the representatives can solicit their clients regardless of having signed a non-solicit agreement with their firm.

Edelman Financial Services, the fast-growing firm, based in Fairfax, Va., joins several other large advisory firms that have pulled out of the pact in recent years, including Savant Capital Management Inc., Convergent Wealth Advisors and Buckingham Asset Management LLC. According to the firm’s chief executive Ric Edelman, “None of our business units are engaged in the recruiting of brokers who have books [of business], so there’s no value to us in being a member” of the recruiting pact.  Withdrawing from the protocol also ensures the firm’s non-solicitation agreements can be enforced, Mr. Edelman added.

Of  other withdrawing firms, Edelman commented, “They may have reached the same conclusion we did, that the only value from the protocol is for firms that actively recruit brokers with books,” Mr. Edelman said. “If you’re not doing that, there’s no value.”  Still, many firms still find value in the Broker Protocol, which was created by several wirehouse firms in 2004. In total, 969 financial firms have joined, while only 31 have withdrawn.

It is our opinion that even if a firm is not actively bringing on representatives from other Broker Protocol firms (but can foresee it happening), the only reason not to stay on as a member of the group is if the firm wants to enforce non-solicit agreements on its representatives.

SEC Budget Request Rebuffed

Thursday, May 30th, 2013

An article by AdvisorOne discussed new SEC Chairwoman Mary Jo White’s first appearance before the House Subcommittee on Appropriations.  Ms. White was defending the SEC’s $1.67 billion budget request for 2014.  She tried to explain that the requested amount was necessary to expand the SEC’s ability to examine investment advisers.  Ms. White said the increased budget would allow the SEC to add 250 examiners for investment advisers as well as 60 positions to improve oversight of broker-dealers, SROs and municipal advisors and 676 new staff positions overall.

The $1.67 billion requested is a 27% increase over the $1.32 billion provided by the continuing resolution the SEC was operating under this year.  The SEC’s budget was cut by $108 million for 2013 under the sequester.  Ms. White admitted that she has been “struck by how vast, difficult and complex” the agencies responsibilities are.

The article specifically covered the lack of confidence in the SEC expressed by Rep. Ander Crenshaw, R-FL, who pointed out that the SEC has failed to catch the likes of Bernie Madoff and Allen Stanford, despite a 300% budged increase since 2001.  Rep. Crenshaw stated that “most agencies don’t get this kind of increase each year.”  Rep. Jose Serrano, D-NY, was more sympathetic to the SEC’s needs, but he told Ms. White that further cuts were likely.

So the dance continues.  The SEC is given a significant budget increase compared to other agencies, but they immediately say that it isn’t enough to do their job.  This way when a major fraud is missed, they can claim it was a lack of funding that hampered them.  We can only hope that the SEC gets enough of an appropriation to make it worth their while not to support an SRO for advisers.  After all, if the main reason that they want so much money is to examine more advisers, they’ll surely give back hundreds of millions of dollars if they no longer have to do so.  Right?

Unlikely to See an SEC Fiduciary Rule in 2013

Tuesday, May 28th, 2013

As reported by WealthManagement.com, FINRA hosted its annual conference on Monday (5/20), and in an interview with Elisse Walter, the former chairperson of the SEC confirmed that it is unlikely that we will see the SEC implement a rule harmonizing the fiduciary duties of brokers and investment advisers anytime this year. The industry response received following the agency’s 70 page information request issued last March has lacked the sufficient data required, and a more thoughtful analysis of any new rule will need to be conducted prior to action.

Those advisers that are disappointed with this news should be aware that the SEC is also considering numerous other “harmonizing” changes that would make investment adviser regulations more similar to stringent broker-dealer regulations.  MarketCounsel continues to believe that harmonizing two disparate industries because regulators have allowed broker-dealers to confuse investors is a cop out.

@PrivateAssetMgt Reports Dodd and Frank to Speak at MarketCounsel Summit

Wednesday, May 22nd, 2013

Former Senate Banking Committee Chairman Christopher Dodd and former House Financial Services Committee Chairmen Barnett “Barney” Frank will lead discussions at the 6th annual MarketCounsel Summit on December 10th, making it the first joint appearance ever arranged for the two at a conference.

“We’ve been really good at bringing in compelling speakers in the past to spark interest and intrigue attendees,” Brian Hamburger, founder and managing director of MarketCounsel told PAM. “Our strategy is to ‘wow’ our attendees and give them much more than what they thought they were coming for.”

Delivering the key note speech and taking questions from the attendees, Dodd and Frank will discuss their co-authored 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act and its intended and actual impact on the business and the economy. Additionally, they will address the effect on investment advisors, diving into the topic of proposals to improve investment advisor examinations that may result in requiring them to join a self-regulatory organization or be subject to user fees, as well as the “harmonization” of broker-dealer and investment advisor regulations.

Hosted at the Four Seasons Hotel in Las Vegas, Hamburger noted that Dodd and Frank will attend the welcome reception dinner and mingle with the guests, present their speech the following morning and interact off stage as well. “We want this to be a place where everyone can be a part of the conversation with meaningful dialogue and debate.”

The summit brings together thought leaders, prominent independent investment advisors and service providers in a manner that provides context and solutions for recognizing the entrepreneurial opportunity in a changing and highly-regulated environment. It also includes general sessions, breakout sessions, interactive workshops and extracurricular events for networking.

Hamburger explained that they strive to advance the interests of independent investment advisors as a whole, pointing out that because of their independence it can be difficult for them to get together in a completely neutral territory, sit down and discuss what is happening and what to do about it. “People come for the agenda and the speakers, but they later let us know how much they value the discussions outside the conference sessions; the interaction feeds them and keeps them coming back for more.”

@PrivateAssetMgt Reports Dodd and Frank to Speak at MarketCounsel Summit

Wednesday, May 22nd, 2013

Former Senate Banking Committee Chairman Christopher Dodd and former House Financial Services Committee Chairmen Barnett “Barney” Frank will lead discussions at the 6th annual MarketCounsel Summit on December 10th, making it the first joint appearance ever arranged for the two at a conference.

“We’ve been really good at bringing in compelling speakers in the past to spark interest and intrigue attendees,” Brian Hamburger, founder and managing director of MarketCounsel told PAM. “Our strategy is to ‘wow’ our attendees and give them much more than what they thought they were coming for.”

Delivering the key note speech and taking questions from the attendees, Dodd and Frank will discuss their co-authored 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act and its intended and actual impact on the business and the economy. Additionally, they will address the effect on investment advisors, diving into the topic of proposals to improve investment advisor examinations that may result in requiring them to join a self-regulatory organization or be subject to user fees, as well as the “harmonization” of broker-dealer and investment advisor regulations.

Hosted at the Four Seasons Hotel in Las Vegas, Hamburger noted that Dodd and Frank will attend the welcome reception dinner and mingle with the guests, present their speech the following morning and interact off stage as well. “We want this to be a place where everyone can be a part of the conversation with meaningful dialogue and debate.”

The summit brings together thought leaders, prominent independent investment advisors and service providers in a manner that provides context and solutions for recognizing the entrepreneurial opportunity in a changing and highly-regulated environment. It also includes general sessions, breakout sessions, interactive workshops and extracurricular events for networking.

Hamburger explained that they strive to advance the interests of independent investment advisors as a whole, pointing out that because of their independence it can be difficult for them to get together in a completely neutral territory, sit down and discuss what is happening and what to do about it. “People come for the agenda and the speakers, but they later let us know how much they value the discussions outside the conference sessions; the interaction feeds them and keeps them coming back for more.”

Brian Hamburger in this weekend’s @WSJ on “Buying a Piece of Your Advisor” http://on.wsj.com/13tWigJ

Monday, May 20th, 2013

Millions of investors already invest with financial advisers. Now some are investing in them.  With stocks and bonds near record highs, gold tumbling and cash earning zilch, a few investors have taken the bold step of either buying an ownership stake in their adviser’s firm or lending money to it.  “There’s no doubt that it’s been coming up more and more frequently,” says Brian Hamburger, managing director of MarketCounsel.  As growing numbers of stockbrokers leave big firms to hang out their own shingle as independent financial advisers, they need funding to get started. Loyal clients often want to help kick-start their adviser’s new venture by providing a loan or an equity investment, says Mr. Hamburger.   http://on.wsj.com/13tWigJ

Fewer Advisers Than Expected Switch to State Oversight

Monday, May 20th, 2013

An article in InvestmentNews points to the fact that significantly less SEC registered investment advisers switched to state registration after the Dodd-Frank increased thresholds became effective.  Before the “Switch” took place NASAA members testified that they expected 4,000 advisers to switch.  In the end, only 2,100 switched.  The article credits the lower number to firms going out of business, merging or growing to reach the $100 million asset level.

MarketCounsel expects this “small” number of switches to be used by the SEC in its constant claim that it has too many advisers to examine and not enough money to do examinations.

SEC Seeks to Increase Frequency of Exams

Monday, May 20th, 2013

As reported by InvestmentNews late last week, the SEC plans to make increasing examinations a top priority.  Newly appointed Chairman Mary Jo White expressed concern that in 2012 only 8% of registered investment advisers were examined by the SEC and noted that “significant additional coverage is essential” in order to protect investors.  While the SEC has not decided the best way to accomplish this goal, the Commission is seeking a $1.6 billion budget appropriation which would be a 27% increase.  Ms. White has not yet resolved exactly how more examinations are to be administered, stating: “The SEC’s not taken a position on whether that should be through an SRO or additional funding for the SEC. I don’t have a conclusion on that today.”

Don’t Alert Clients Before Defecting

Wednesday, May 8th, 2013

When a financial adviser is plotting to jump ship, the temptation to tell clients is often strong. Stifle it, and stay mum.

As reported by the Wall Street Journal on April 30th, tipping a client is one of the most common ways for an adviser to derail an otherwise carefully planned defection from a brokerage. When and if the company gets wind–and it often does–the broker can be fired, leaving him with a black mark on his record. He can also wind up trapped in litigation.

It is hard for clients to grasp the peculiarities of working in the securities industry, and they can trip up an adviser without meaning to, says Brian Hamburger, founder of the Hamburger Law Firm and MarketCounsel.   He recalled the case of one broker who let a wealthy client know he was getting ready to launch his own firm. The client, an artsy type, sent the broker an email saying how excited she was about it–but that she thought the new firm’s logo was all wrong. She thoughtfully sketched her own new design, and told him to expect some additional ideas by fax.  Her messages went to his work address, and he wound up being called in by his branch manager. The Hamburger Law Firm and MarketCounsel were able to help him put off a meeting with the firm’s legal department, allowing him to voluntarily resign first.

Brokers’ relationships with clients often span decades and frequently cross the line between business and friendship. It is only natural to want to divulge the details of an exciting new move, and of course, gauge a client’s willingness to follow.  But any such communication could be viewed as pre-solicitation, which violates a broker’s legal obligation to act in his employer’s best interests. It also could be prohibited by the terms of an employment contract. Further, it also violates the Protocol for Broker Recruiting.  Still, brokers sometimes ignore the best legal advice and tip clients to their moving plans.

We always stress that a solid transition strategy can often mean the difference between facing a dispute or not as the result of an employment transition. This goes for breakaway brokers forming their own firm or those that are joining an existing firm.

SEC Chief Counsel Expresses Concern Over Broker/Dealer Exemptions Claimed by Private Funds

Wednesday, May 8th, 2013

In an April 5, 2013 speech, David Blass, Chief Counsel of the SEC’s Division of Trading and Markets, raised concerns about the practices of private funds and the commonly claimed sources of relief from broker/dealer registration.  He stated that the analysis for determining whether broker/dealer registration has been triggered is very fact-sensitive, but did go on to reference some specific activities relevant to the determination, including: i) marketing securities transactions; ii) soliciting securities transactions; and iii) handling customer funds and securities.  Mr. Blass also went on to explain that transaction-based compensation is largely considered the hallmark of broker/dealer activity and that the existence of a dedicated marketing department may also indicate an adviser is in the business of effecting transactions in securities.

Encouraging advisers to revisit their regulatory obligations, Mr. Blass pointed to several factors that a firm should evaluate when determining whether it should register as or associate with a broker/dealer:

  • Whether a fund employs a dedicated sales or marketing department (for purposes of soliciting investments in the fund);
  • Whether employees who solicit investors also have other responsibilities or if their primary job function is to solicit investors;
  • Whether employees who solicit investors receive compensation tied to successful commitments by investors; and
  • Whether a fund charges a transaction fee in connection with the sale of a security.