Archive for June, 2013

Dan Bernstein quoted in @finplan, “Goldfarb’s CFP Board Sanction Shows Risk to Advisors”

Friday, June 28th, 2013

MarketCounsel’s director of research + development, Dan Bernstein, comments on the CFP Board’s actions in @finplan article, Goldfarb’s CFP Board Sanction Shows Risk to Advisors.

A sanction by an ad hoc Disciplinary and Ethics Commission ultimately lead to Goldfarb losing his chairman of the CFP Board position. “This sounds like it could’ve been handled by sending something private that said, ‘Hey, we think you should fix this,’” Bernstein says. But the board “may not have wanted to go that route [with Goldfarb] because of an appearance of playing favorites,” he adds. “I think what this comes down to is the board trying aggressively push its mark to gain public confidence. Unfortunately, they sometimes seem to want to do that at the expense of designees.”

Gary Davis Jr. Gives @ByAllAccounts 12 Timely Takeaways for Preparing for the SEC’s 2013 Exam Priorities

Thursday, June 27th, 2013

MarketCounsel’s Vice President of Practice Management, Gary Davis Jr. recently sat down for an interview with @krpaxton of @ByAllAccounts to go over 12 Timely Takeaways for Preparing for the SEC’s 2013 Exam Priorities.

FINRA Targeting Broker-Dealer Use of Social Media

Wednesday, June 26th, 2013

As reported by AdvisorOne, FINRA plans to increase the review of broker-dealer written communications.  In particular, FINRA’s Advertising Regulation Department will be requesting the following:

  • An explanation of how the firm’s registered representatives and associated persons generally use social media for business purposes, including the date the firm began allowing the use of each social media platform and whether such usage continues.
  • The portion of the firm’s written supervisory procedures concerning the production, approval and distribution of social media communications in effect during the exam period.
  • An explanation of the measures that the firm has adopted to monitor compliance with the firm’s social media policies (e.g., training meetings, annual certification, technology).
  • A tabular list of the firm’s top 20 producing registered representatives (based on commissioned sales) who used social media for business purposes to interact with retail investors, identifying the type of social media used.

While not directly affecting registered investment advisers, those acting in their individual capacities as registered representatives of a broker-dealer may come under scrutiny as FINRA reviews  firms’ social media communications on Facebook, Twitter, LinkedIn and blogs.

Former SEC Compliance Chief Asks Chairwoman White to Stop Suing Compliance Officers

Wednesday, June 26th, 2013

John Walsh recently offered some welcomed advice to new SEC Chairwoman, Mary Jo White, in a June 7 blog post on Corporate Counsel.  Walsh suggested that the SEC stop suing compliance officers and cautioned that “the future of the profession may be at risk.”

As reported by AdvisorOne, Walsh provided some constructive guidance.  Walsh defended compliance officers generally, articulating that compliance professionals are “dedicated to the same mission as the SEC: a fully compliant securities business,” though compliance professionals have grown increasingly weary as enforcement actions for failure to supervise, establish adequate procedures and consider a risk during the annual compliance review are on the rise.  Walsh’s final piece of advice to the Chairwoman was to resist the pressure to set enforcement records for the sake of setting records.

Walsh was not recommending that CCO’s complicit in a fraud or responsible for a breach be spared.  CCO’s are concerned that they will be found liable for the actions of firm personnel simply because the CCO is in charge of the compliance program.  In a case against Ted Urban (a CCO and general counsel), the SEC claimed that Urban was a “supervisor” of a representative that committed fraud and, therefore, partially responsible under a failure to supervise claim.  Urban fought the enforcement and won, but the court decided that he had done enough to not be responsible.  Because the court did not conclude that Urban was not a supervisor and because the SEC pushed the issue against Urban, there has been a concern regarding CCO liability.  To date, there have been no other similar failure to supervise claims, and SEC personnel has generally agreed with Mr. Walsh’s position that going after CCO’s may be counterproductive to the SEC’s mission.

Sharron Ash writes in @FinAd_IQ about Morgan Stanley exploiting gaps in the Broker Protocol

Monday, June 24th, 2013

Hamburger Law Firm’s chief litigation counsel, Sharron Ash, writes about weaknesses in the Protocol for Broker Recruiting and how a recent case by Morgan Stanley against some transitioning advisors brings these gaps to light in a Financial Advisor IQ article

RIA Going Public

Friday, June 21st, 2013

Silvercrest Asset Management Group, LLC filed a registration with the SEC in an effort to launch an IPO.  As reported by InvestmentNews, Silvercrest hopes to raise $62 million by selling 4.8 million shares at $12 to $14 per share.  Silvercrest initially filed in September 2012, setting expectations for a $55 million IPO in October, ultimately withdrawing a month later.  The last investment advisory firm to make a similar move in 2010, Edelman Financial, reverted back to a private firm within 2 years.

Silvercrest manages $13.6 billion in assets under management, making it one of the largest registered investment advisers in the U.S.  It will be interesting to see if Silvercrest is able to make the move successfully and if other advisers then follow suit.

Corey Kupfer discusses “How to Increase the Value of Your Firm” on a webinar sponsored by @RIAMatch

Thursday, June 20th, 2013

Register for the June 13th webinar at

Dan Bernstein quoted in @AdvisorOne article, “The Curious Case of Alan Goldfarb, and Why All Advisors Should Care”

Thursday, June 20th, 2013

Dan Bernstein, director of research + development at MarketCounsel, clears the air regarding pass-through-commissions in @AdvisorOne article, The Curious Case of Alan Goldfarb, and Why All Advisors Should Care. “Legally, only securities licensed individuals can receive any portion of a commission on the sale of a security. Consequently, brokerage or insurance subs cannot pass along the commissions they receive nor any portion of them to a parent accounting firm. The only way an accounting firm can benefit from owning a brokerage subsidiary is to charge it directly for services offered or as reimbursement for direct expenses such as overhead.”

Lessons from Morgan Stanley’s Latest Action Against Its Recently Departed

Wednesday, June 12th, 2013

A recent ruling of the Idaho Federal District Court is a sobering reminder that while the protections of the Protocol for Broker Recruiting mitigate some risks for transitioning brokers, there are still dark, deep and potentially dangerous waters when it comes to soliciting fellow employees to make the leap as well.

The Protocol provides relief from traditional non-solicitation provisions of employment agreements as to clients and provides for five data points that can be taken upon resignation to facilitate the solicitation of those clients. While the Protocol has been portrayed as a panacea for all that worries breakaway brokers – a veritable “get out of jail card,” it does have real limitations. Chief among them are that it does not provide relief from other types of contractual arrangements between the broker and their former firm and it does not limit a firm’s ability to make a “raiding” claim after a broker leaves even if the Protocol was properly followed.

“Raiding” typically refers to situations where a firm has successfully recruited employees from a competitor, but has overstepped the bounds of fair and lawful competition in some way. Unfortunately, there is no bright line test for when recruitment crosses the line to raiding. As such, even when the Protocol is carefully followed, raiding claims remain a risk, particularly where brokers make up more than half the revenue of their branch, as was the case with the Idaho team. It’s this lack of a specific definition that makes raiding a worrisome concept for potential breakaway brokers trying to measure their departure risks.

The recent action by MSSB (in Morgan Stanley Smith Barney, LLC (“MSSB”) v. Armon, Scharenberg and Gerber) may signal a trend of firms making increased use of raiding claims when a big team departs. Raiding, however, was never mentioned in the MSSB lawsuit. In fact, MSSB took the path of less resistance and did not take any action against the “raider,” Stifel Nicolaus & Co., the firm the brokers were joining. Instead, MSSB turned its sights on the brokers; claiming that: a) they took too much information and solicited clients prior to resigning in violation of the Protocol’s rules; and b) the branch manager solicited the departure of employees in violation of his own employment contract with MSSB. The Idaho Federal Judge denied much of the relief requested by MSSB, but issued an order to the brokers to return information not permitted for under the Protocol and a cease and desist as to the former branch manager, the only one of the three defendants who had expressly agreed not to solicit employees of MSSB.

This case is just another where breaches of the Protocol provide fertile ground for disputes, and contractual restrictions prohibiting solicitation of fellow colleagues remain an area to be enforced against departing brokers. But there are lessons to be learned here:

1.For all of its uncertainty, raiding is still rarely used by most wirehouses. Inconsistent interpretations on what constitutes raiding leave unpredictable outcomes.

2. Client data should be limited to the information that the Protocol specifically permits. By taking extraneous documents, brokers risk losing its protections.

3. The Protocol provides relief from restrictions on soliciting former clients. But promissory notes, restrictions on soliciting former employees / colleagues, training agreements and other contractual responsibilities remain enforceable.

So, this was really a Protocol enforcement and breach of contract case and does not signal a shift towards an increased prevalence of raiding claims. Taken along with the line of cases it follows, there remains a well-travelled path for brokers using the Broker Protocol for their departure to mitigate the risk along the way.

Impending IAR Registration in Minnesota

Tuesday, June 11th, 2013

Minnesota has been one of the few states not to require the registration of investment adviser representatives.  Unfortunately, all good things must come to an end. Minnesota has revised its investment adviser statute and will require applicable IARs to file a Form U4. The effective date of the statute is August 1, 2013; however, the state has already acknowledged that this date will be pushed back as they have been advised by FINRA that IARD will not be ready for MN IAR registrations until sometime during 4Q13.

The revised statute provides for the typical examination requirements (S65 or S66 + S7). SEC firms will have to register certain personnel that have a place of business in Minnesota. Advisers registered with the state of Minnesota may have to register certain personnel regardless of having a place of business in Minnesota.

New York now remains the only state (along with Wyoming that does not provide any investment adviser oversight) that does not register investment adviser representatives.