Archive for the ‘Hamburger Law Firm’ Category

Muddy disclosures continue to attract the wrong kind of attention

Tuesday, September 19th, 2017

Disclosure of conflicts of interest has long been an area of enforcement emphasis by the SEC.  Last year, Julie Riewe, Co-Chief of the Asset Management Unit within the Division of Enforcement stated:

In nearly every ongoing matter in the Asset Management Unit, we are examining, at least in part, whether the adviser in question has discharged its fiduciary obligation to identify its conflicts of interest and either (1) eliminate them, or (2) mitigate them and disclose their existence to boards or investors. Over and over again we see advisers failing properly to identify and then address their conflicts.[1]

Aggressive enforcement actions against investment advisers and their compliance officers for failing to fully disclose existing conflicts continues.  On May 26, 2017, a Connecticut Federal Court sided with the SEC where the regulator had alleged a firm and its CEO had failed to disclose to clients that moving assets into newly-created mutual funds created and managed by the defendants would “increase the clients’ total advisory fees paid to the adviser without changing the clients’ investment strategy.”  Significantly, the SEC brought this action even though the firm’s Form ADV disclosed that clients may pay mutual fund fees in addition to the usual management fee paid to the investment adviser for the new funds and that the adviser might receive additional compensation if the clients invested in the new funds.  See SEC v. Momentum Investment Partners LLC (D/B/A Avatar Investment Management) and Ronald J. Fernandes, (No. 16-cv-00832–VLB).

Cases involved degrees of disclosure are among the most challenging to fight – the Court in Momentum made clear, an adviser should identify and disclose in its Form ADV all sources of compensation to ensure that any potential or actual conflicts of interest are fully disclosed to clients clearly and unambiguously in order to minimize litigation risk.  In other words, disclose the compensation issue, don’t assume that a vague or non-committal reference will be adequate.  Couching the disclosure in language that implies compensation “may” or “might” be paid will not be sufficient, and may expose the adviser and its management to significant penalties and fines.

The Hamburger Law Firm continues to represent advisers undergoing regulatory investigations for this and other types of potential compliance-related infractions, working to bring them to as efficient a conclusion as possible.

[1] https://www.sec.gov/news/speech/conflicts-everywhere-full-360-view.html

 

Muddy disclosures continue to attract the wrong kind of attention

Tuesday, September 19th, 2017

Disclosure of conflicts of interest has long been an area of enforcement emphasis by the SEC.  Last year, Julie Riewe, Co-Chief of the Asset Management Unit within the Division of Enforcement stated:

In nearly every ongoing matter in the Asset Management Unit, we are examining, at least in part, whether the adviser in question has discharged its fiduciary obligation to identify its conflicts of interest and either (1) eliminate them, or (2) mitigate them and disclose their existence to boards or investors. Over and over again we see advisers failing properly to identify and then address their conflicts.[1]

Aggressive enforcement actions against investment advisers and their compliance officers for failing to fully disclose existing conflicts continues.  On May 26, 2017, a Connecticut Federal Court sided with the SEC where the regulator had alleged a firm and its CEO had failed to disclose to clients that moving assets into newly-created mutual funds created and managed by the defendants would “increase the clients’ total advisory fees paid to the adviser without changing the clients’ investment strategy.”  Significantly, the SEC brought this action even though the firm’s Form ADV disclosed that clients may pay mutual fund fees in addition to the usual management fee paid to the investment adviser for the new funds and that the adviser might receive additional compensation if the clients invested in the new funds.  See SEC v. Momentum Investment Partners LLC (D/B/A Avatar Investment Management) and Ronald J. Fernandes, (No. 16-cv-00832–VLB).

Cases involved degrees of disclosure are among the most challenging to fight – the Court in Momentum made clear, an adviser should identify and disclose in its Form ADV all sources of compensation to ensure that any potential or actual conflicts of interest are fully disclosed to clients clearly and unambiguously in order to minimize litigation risk.  In other words, disclose the compensation issue, don’t assume that a vague or non-committal reference will be adequate.  Couching the disclosure in language that implies compensation “may” or “might” be paid will not be sufficient, and may expose the adviser and its management to significant penalties and fines.

The Hamburger Law Firm continues to represent advisers undergoing regulatory investigations for this and other types of potential compliance-related infractions, working to bring them to as efficient a conclusion as possible.

[1] https://www.sec.gov/news/speech/conflicts-everywhere-full-360-view.html

 

Muddy disclosures continue to attract the wrong kind of attention

Tuesday, September 19th, 2017

Disclosure of conflicts of interest has long been an area of enforcement emphasis by the SEC.  Last year, Julie Riewe, Co-Chief of the Asset Management Unit within the Division of Enforcement stated:

In nearly every ongoing matter in the Asset Management Unit, we are examining, at least in part, whether the adviser in question has discharged its fiduciary obligation to identify its conflicts of interest and either (1) eliminate them, or (2) mitigate them and disclose their existence to boards or investors. Over and over again we see advisers failing properly to identify and then address their conflicts.[1]

Aggressive enforcement actions against investment advisers and their compliance officers for failing to fully disclose existing conflicts continues.  On May 26, 2017, a Connecticut Federal Court sided with the SEC where the regulator had alleged a firm and its CEO had failed to disclose to clients that moving assets into newly-created mutual funds created and managed by the defendants would “increase the clients’ total advisory fees paid to the adviser without changing the clients’ investment strategy.”  Significantly, the SEC brought this action even though the firm’s Form ADV disclosed that clients may pay mutual fund fees in addition to the usual management fee paid to the investment adviser for the new funds and that the adviser might receive additional compensation if the clients invested in the new funds.  See SEC v. Momentum Investment Partners LLC (D/B/A Avatar Investment Management) and Ronald J. Fernandes, (No. 16-cv-00832–VLB).

Cases involved degrees of disclosure are among the most challenging to fight – the Court in Momentum made clear, an adviser should identify and disclose in its Form ADV all sources of compensation to ensure that any potential or actual conflicts of interest are fully disclosed to clients clearly and unambiguously in order to minimize litigation risk.  In other words, disclose the compensation issue, don’t assume that a vague or non-committal reference will be adequate.  Couching the disclosure in language that implies compensation “may” or “might” be paid will not be sufficient, and may expose the adviser and its management to significant penalties and fines.

The Hamburger Law Firm continues to represent advisers undergoing regulatory investigations for this and other types of potential compliance-related infractions, working to bring them to as efficient a conclusion as possible.

[1] https://www.sec.gov/news/speech/conflicts-everywhere-full-360-view.html

 

Muddy disclosures continue to attract the wrong kind of attention

Tuesday, September 19th, 2017

Disclosure of conflicts of interest has long been an area of enforcement emphasis by the SEC.  Last year, Julie Riewe, Co-Chief of the Asset Management Unit within the Division of Enforcement stated:

In nearly every ongoing matter in the Asset Management Unit, we are examining, at least in part, whether the adviser in question has discharged its fiduciary obligation to identify its conflicts of interest and either (1) eliminate them, or (2) mitigate them and disclose their existence to boards or investors. Over and over again we see advisers failing properly to identify and then address their conflicts.[1]

Aggressive enforcement actions against investment advisers and their compliance officers for failing to fully disclose existing conflicts continues.  On May 26, 2017, a Connecticut Federal Court sided with the SEC where the regulator had alleged a firm and its CEO had failed to disclose to clients that moving assets into newly-created mutual funds created and managed by the defendants would “increase the clients’ total advisory fees paid to the adviser without changing the clients’ investment strategy.”  Significantly, the SEC brought this action even though the firm’s Form ADV disclosed that clients may pay mutual fund fees in addition to the usual management fee paid to the investment adviser for the new funds and that the adviser might receive additional compensation if the clients invested in the new funds.  See SEC v. Momentum Investment Partners LLC (D/B/A Avatar Investment Management) and Ronald J. Fernandes, (No. 16-cv-00832–VLB).

Cases involved degrees of disclosure are among the most challenging to fight – the Court in Momentum made clear, an adviser should identify and disclose in its Form ADV all sources of compensation to ensure that any potential or actual conflicts of interest are fully disclosed to clients clearly and unambiguously in order to minimize litigation risk.  In other words, disclose the compensation issue, don’t assume that a vague or non-committal reference will be adequate.  Couching the disclosure in language that implies compensation “may” or “might” be paid will not be sufficient, and may expose the adviser and its management to significant penalties and fines.

The Hamburger Law Firm continues to represent advisers undergoing regulatory investigations for this and other types of potential compliance-related infractions, working to bring them to as efficient a conclusion as possible.

[1] https://www.sec.gov/news/speech/conflicts-everywhere-full-360-view.html

 

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.

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Thursday, April 20th, 2017

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Wednesday, April 19th, 2017

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Thursday, March 2nd, 2017

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FINRA Arbitration Proposed Changes

Wednesday, February 24th, 2016

Rounding out 2015, FINRA’s Arbitration Task Force issued its Final Report regarding improvements to the SRO’s arbitration of customer cases. Despite its focus on such cases, many of the changes recommended by the Task Force easily impact industry related disputes as well. Agreeing on 51 recommendations, the most significant relate to improving confidence in arbitrator qualification and perceived confidence in the forum.

Intended to improve the arbitrator pool, the Task Force cited FINRA’s below-market-rate compensation as its major challenge. Conceding FINRA could not bring its arbitrator compensation in line with non-SRO forums such as the AAA (widely respected to offer generally high quality arbitrators), it sought to couple its recommended modest increase, with a robust recruitment effort based on gender and race based qualifications. Notably, none of the recommendations focused on improved screening of arbitrators to identify augmented skill sets advantageous to actually improve their qualifications.

Taking another indirect path toward improving the quality of decision making, and increased consistency among awards, the Task Force recommended increased use of explained decisions. Currently, explained decisions must be requested by all parties to a case, and are used in less than one percent of eligible cases. However, the report concedes that before implementing such a change, arbitrator’s competency to write such decisions could be a challenge. (One would think they would look to actually improve the arbitrator pool to overcome the issue.)

To streamline discovery in customer initiated cases, the report urges that all insurance policies that may provide coverage of a claimant’s claim be presumptively discoverable. This was seemingly conceived in a vacuum, and places the disclosure of policy limits ahead of any finding of liability, substantially impairing the ability to effectively negotiate settlements, particularly where multiple claims are made against the same policy.

As FINRA gains momentum increasing public awareness of BrokerCheck, more brokers use FINRA’s arbitration forum to expunge (or clean up) their records. The Task Force report disclosed that FINRA and NASAA are in the process of exploring whether to convert the expungement process into a regulatory procedure. While that likely won’t make it any easier to clean up damaged records, for now, the Task Force recommended a specially trained pool of arbitrators handle expungement cases. A bright spot of the report, at least they were recommending training.