Archive for August, 2017

Don’t let the numbers fool you, @WSJ, @jeaneaglesham, and davidamichaels.

Tuesday, August 29th, 2017

A recent study conducted by the Wall Street Journal has found a significant reduction in the amount of penalties assessed by financial regulators for the first six months of 2017 as compared to the first six months of 2016 (Regulators’ Penalties Against Wall Street Are Down Sharply in 2017).  Citing a combination of change of regulatory emphasis, changes in personnel at the regulatory agencies, and the completion of large cases initiated during the financial crisis prior to the start of 2017, the study found that fines imposed collectively by the Securities and Exchange Commission, the Commodity Futures Trading Commission, and FINRA, for the first half of 2017 totaled $489 million, compared with the $1.4 billion imposed during the first half of 2016.  But no one should believe this means the regulatory environment is easing up.

The number of enforcement actions commenced has remained relatively constant, including during the first half of 2017.  Meanwhile, the amount of the fines being imposed in individual cases continues to be significantly higher than fines imposed for the same conduct just two to three years ago.  Perhaps resources freed up by the resolution of financial crisis cases have been re-purposed, as we continue to experience earlier involvement by enforcement staff – sometimes even working side-by-side regulatory examination staff.  This leaves firms battling two departments of the same regulator, simultaneously responding to exam deficiency letters and enforcement subpoenas.

Finally, at least part of the apparent decrease in the total fines can be traced to more aggressive termination of advisors by large firms – some still stinging from those historically large fines driving the statistics.   Missteps that resulted in a disciplinary letter tucked away in a personnel file five years ago now gets the employee fired.   Firms continue to exhibit their decreased tolerance, dedicating resources to sniff out compliance issues, terminate potentially problematic personnel as early as possible, arguably demonstrating a more proactive compliance oriented culture before the regulators knock on their doors.  While the pure numbers may be down, our experience demonstrates that regulatory enforcement is not easing.

Hamburger Law Firm continues to work with financial advisors facing investigation, administrative leave, potential termination, and the regulatory inquiries that typically continue to follow, in spite of the cited statistics.

New Trend Toward Transparency in Expungement Awards

Tuesday, August 29th, 2017

CRD records are like credit reports – you want them to be as clean as possible, and at least where there is derogatory information reported, it needs to be accurate to avoid doing unnecessary harm.   As FINRA continues to push for widespread use of its BrokerCheck database and pressure for increased disclosures continues to build, the drive to ensure one’s CRD record is accurate has never been stronger.  To have inaccurate or misleading entries removed from their records, representatives must file an action against the firm that reported the information, or the customer whose complaint was reported.

Facing criticism that obtaining a clean CRD record required little more than money and patience, in October of 2013 FINRA issued its “Notice to Arbitrators and Parties on Expanded Expungement Guidance” increasing the demands of arbitrators considering these types of applications.  By 2015 FINRA amended its Notice, specifically requiring that arbitrators identify in the award the reason(s) for and any specific documentary or other evidence relied on in recommending expungement.  Still, this has seldom resulted in detailed reasoned awards that provide meaningful guidance for future expungement actions, leaving brokers pondering, “what are my chances that I’ll be able to prove this is just wrong?”

But the opaque nature of FINRA expungement awards may be changing.  A recent study by the Securities Arbitration Commentator requested by InvestmentNews found a slight but noticeable increase in the number of reasoned expungement awards in settled cases, from 15% through the first quarter of 2016 to 22% through the first quarter of 2017, as well as the issuance of reasoned awards in some recent high-profile cases.  While this certainly is in step with FINRA’s Rules requiring more detail, representatives now may potentially find similar or analogous fact patterns, and identify the facts and legal arguments that the panels found dispositive.  While a later panel deciding a similar case is not bound by an earlier decision, successfully tailoring an expungement application, focusing on elements proven successful in prior proceedings, may increase the likelihood of a favorable outcome.  Conversely, some brokers may be deterred from even taking a crack at expungment based on this same detailed precedent.

It remains to be seen whether the net impact of this emerging trend may lead to fewer expungement cases being filed, but of those filed, a higher percentage being granted because they have already been carefully vetted by counsel.

Our firm regularly represents brokers seeking to clean their records – many of whom seek removal of information not even visible to their clients on BrokerCheck.  But a derogatory mark – perhaps one filed as they fled to independence — may be their employer’s final strike to hurt them on the way out the door.  From where we sit, so long as a mere allegation (no matter how baseless) is publicly reported, expungement provides a critical protection for representatives.

The Value of Greater Transparency in FINRA Expungement Awards @newsfromIN @MarkSchoeff

Tuesday, August 22nd, 2017

CRD records are like credit reports for financial advisors – you want them to be as clean as possible, and at least where there is derogatory information reported, it needs to be accurate to avoid doing unnecessary harm.   As FINRA continues to push for widespread use of its BrokerCheck tool to background check brokers, and expansion of increased disclosures, the drive to ensure one’s BrokerCheck report is accurate has never been stronger.  To have inaccurate or misleading entries removed from their records, representatives must file an action against the firm that reported the information, or the customer whose complaint was reported.

Under pressure to protect the integrity of BrokerCheck and CRD record reporting,    FINRA’s Rules  require the panel provide a written explanation of the reason(s) for granting expungement.  Even then, it reserves for itself the right to challenge a panel’s decision to grant expungement of any customer complaint.  Even still, this has seldom resulted in detailed reasoned awards that provide meaningful guidance for future expungement actions, leaving brokers asking, “what are my chances that I’ll be able to prove this is just wrong?” The opaque nature of FINRA expungement awards may be changing.  Recent data from the Securities Arbitration Commentator requested by InvestmentNews found a slight but noticeable increase in the number of reasoned expungement awards in settled cases, from 15% through the first quarter of 2016 to 22% through the first quarter of 2017, as well as the issuance of reasoned awards in some recent high-profile cases.  See  Wood vs. Merrill Lynch, Arbitration No. 16-00246, award issued on March 31, 2017; Caputo, et al vs. Kathleen Tarr, Arbitration No. 14-03557, award issued on March 28, 2017.

This increase seems to be attributable to two primary factors.  First, in October of 2013 FINRA issued the “Notice to Arbitrators and Parties on Expanded Expungement Guidance, which was then amended in 2015.  The Amended Notice instructed panels to “ensure that the explanation is complete and is not solely a recitation of one of the Rule 2080 grounds or language provided in the expungement request. Specifically, arbitrators should identify in the award the reason(s) for and any specific documentary or other evidence relied on in recommending expungement.”
Panels now appear to be applying this guidance with greater emphasis and consistency.  Second, FINRA seems to be responding to call for greater transparency in its expungement process by the Public Investors Arbitration Bar Association, particularly after it released its own report in 2013, by explaining the rationale underlying their expungement awards.

The result of this greater emphasis on reasoned awards is that representatives now have the opportunity to review expungement awards, find similar or analogous fact patterns, and identify the facts and legal arguments that the panels found dispositive.  While not precedential in a legal sense, the ability to tailor an expungement application by focusing on elements that proved successful in prior proceedings should increase the likelihood of a successful expungement.

While the addition of some measure of insight into the arbitration panels’ decision making may be a useful tool for evaluating the viability of a potential expungement application, there is no substitute for the guidance provided by experienced FINRA counsel, and the attorneys at the Hamburger Law Firm are available to answer your questions about the FINRA expungement process.

@BarronsOnline features @danbernstein on “Firms Hitting the Brakes on Fiduciary Work”

Monday, August 21st, 2017

Barron’s writes:

With a lengthy delay likely for the DOL fiduciary rule’s next set of requirements, brokerages are set to delay some of the compliance adjustments they’d planned, writes InvestmentNews.  Specifically, steps around broker compensation and product lineups are likely to be delayed, industry experts tell the publication.  “They now get to push [compliance] off into the horizon, and the horizon is kind of beyond vision,” says Daniel Bernstein, chief regulatory counsel at MarketCounsel.  MarketCounsel is an Englewood, N.J.-based firm specializing in business and regulatory consulting services for investment advisers.

Read more.

UBS Fails to Block RIA’s Client Solicitation

Thursday, August 17th, 2017

The Protocol for Broker Recruiting is a well-worn path to independence, permitting advisors to leave one Protocol member firm to join another.  So long as they follow the rules of the Protocol and act in good faith, the payoff is big – advisors can leave their firms with limited client information tucked under their arms, and use it to solicit their clients.  But UBS v. Fiore, et al. (DCT) illustrates one of many recent wirehouse tactics to aggressively police use of the Protocol – a trend that shows no signs of stopping.  It highlights the value of an authentic planning process and experienced transition counsel.

UBS’ bid for a court order to bar Fiore, his team and their new RIA from soliciting certain of their UBS clients was largely a test of the Protocol’s amorphous good faith standard.  Fiore, fired by UBS six months before launching his new RIA, did not claim the Protocol applied to him.  But, when his team resigned to join him upon launch of the new firm, they used the Protocol, provoking UBS’ aggressive effort to stop them in their tracks.  Relying on text messages and personal email account exchanges, UBS claimed the team knew Fiore was soliciting clients during his six-month hiatus, yet failed to inform UBS management of Fiore’s activities, in breach of their duties to UBS.  As is common, immediately upon launch of the new RIA, Fiore and the team sent their clients a blast email with the news.  Importantly, the email was also sent to clients not on the team’s Protocol list, in direct violation of the Protocol’s rules.

Rather than simply attack this conduct as an express breach of the Protocol, UBS argued their conduct proved they acted in bad faith in using the Protocol.  “Some courts have found that a showing of bad faith in serious violation of the spirit, if not the text, of the Protocol by a departing financial advisor will prevent the Protocol and its protections from applying, allowing non-solicitation provisions to apply and leading the courts to find possible trade secrets-related violations.”  Recognizing breaches of the Protocol had likely occurred, the court was unwilling to extend those breaches and find they were committed in bad faith.  Instead, it found the Protocol’s main policy goal of clients’ interests of privacy and freedom of choice had not been violated because the team did not do anything that actually prevented UBS from “immediately contacting” clients upon their resignation, nor had they acted with “contempt for [their] clients’ right to freely choose” between the new RIA or UBS.

While the court denied UBS’ request for an injunction, the dispute now continues before a FINRA arbitration panel, where it will proceed to trial in 12-18 months, unless the parties reach a settlement.

Through our Transition Intelligence program, we provide strategic guidance to our clients so they may choose to accept or avoid risks related to their proposed employment transition, and gain a clear understanding of how their conduct may impact those risks.

@newsfromIN features @danbernstein: Broker-Dealers and RIAs change course in anticipation of DOL fiduciary rule delay

Thursday, August 17th, 2017

Broker-dealers and registered investment advisers are pivoting in the wake of news that the Department of Labor is likely to get a lengthy delay in the implementation date of its fiduciary rule.  “They now get to push [compliance] off into the horizon, and the horizon is kind of beyond vision,” said Daniel Bernstein, chief regulatory counsel at MarketCounsel. Mr. Bernstein added, “RIAs are able to side-step some of the more difficult elements of BICE compliance if they receive a ‘level fee’ as defined by the regulation. Assuming the delay occurs, advisers wouldn’t have to complete an analysis to determine if they’d qualify as level-fee fiduciaries, and can continue doing business as usual regarding rollovers.” MarketCounsel is an Englewood, N.J.-based firm specializing in business and regulatory consulting services for investment advisers.

Read more.

@HDelux to @RIABiz: “Our Passion Defines Us”

Wednesday, August 16th, 2017

Recently, Brian spoke with RIABiz and had an opportunity to discuss attorney qualifications:

“If an attorney can’t roll up their sleeves, remove the walls and share their passion about the success of our clients and their endeavors, we just don’t have a place for them here,” says Brian Hamburger, president and CEO of the Hamburger Law Firm. “That’s not to say that a qualified and experienced attorney cannot fulfill their client’s expectations. But passion is an essential element for us; it defines us.” The Hamburger Law Firm based in Englewood, NJ specializes in offering legal counsel to startup investment advisers and managing the employment transition for the industry’s most accomplished advisers.

Read more.

Third-Party Exams: SEC Apparently Drops the Initiative

Thursday, August 10th, 2017

It appears that the SEC will not pursue a third-party compliance examination requirement for investment advisers in the foreseeable future.  In 2016, the SEC staff had recommended that the Commission consider requiring third party examinations of investment advisers as a way to increase the number of advisers examined each year.  Many industry groups had opposed the third party exams for their likely impact on small advisers and uncertainty about quality and cost.  Some also believed a third-party examination rule would give FINRA an opening to push itself as a self-regulatory organization for investment advisers.  Third-party examinations were omitted from the SEC’s most recent regulatory agenda which precludes any realistic chance of a third-party audit rule in the foreseeable future.

As always, members of MarketCounsel’s compliance management programs can find more information on examinations on RIAglass.

DOL Requests to Further Delay Fiduciary Rule

Wednesday, August 9th, 2017

The US Department of Labor (the “DOL”) is seeking to extend the remaining implementation of the Fiduciary Rule that was scheduled to go into effect January 1, 2018 (“Phase 2”) by 18 months.  Phase 2 would include full implementation of the Best Interest Contract Exemption (the “BIC” Exemption).  In addition, certain fiduciaries could avoid the full BIC requirements if they only charge a “level fee.”  Many investment advisers could avail themselves of the level fee exemption, but others would find the requirements challenging (such as those advisers that charge different fees for managing different asset classes).

There is currently limited information on the delay requested by the DOL.  Details are expected shortly, but regardless, it looks as if the full BIC requirements are being pushed back, as we expected.  MarketCounsel believes that the 18 months places Phase 2 in jeopardy, either for SEC intervention or for political fodder.

As always, members of MarketCounsel’s compliance management programs can find more information on the DOL Rule and its implementation on RIAglass by searching for other articles on the topic.

SEC Sends Reminder Regarding Revisions to Form ADV Part 1

Wednesday, August 2nd, 2017

On August 2, 2017, the SEC sent out a reminder email to advisers that beginning on October 1, 2017, all investment advisers filing Form ADV must use the revised version of Part 1A.  Advisers that amend their ADV (Part 1 or 2) after September 30, 2017 will need to answer the new / revised questions.  Keep in mind that all investment advisers must update their Form ADV within 90 days after their fiscal year end.

The changes are substantial and include disclosures about the types of investments made by advisers and the percentages of assets under management invested in each.  Additional disclosures are required of advisers that invest client assets in derivatives (including options).

Members of MarketCounsel’s compliance management programs can find more information on the revisions on RIAglass.