New York Securities Lawyer BlogLax & Neville LLP is investigating claims on behalf of investors regarding possible misconduct in connection with LPL Financial LLC’s (“LPL”) sale and marketing of various investments. As stated in a prior blog, LPL, one of the largest independent-contractor broker-dealers, self-reported to the Financial Industry Regulatory Authority, Inc. (“FINRA”) that it experienced problems with broker e-mail surveillance, and as a result was going to reach a settlement for its violations with FINRA during the summer of 2013. Now, FINRA has reported that LPL has agreed to settle with FINRA by paying a $7.5 million fine for 35 separate e-mail system failures. A FINRA spokesperson stated, “[t]his is the largest fine FINRA has imposed for an e-mail case.” According to FINRA, between 2007 and 2013, LPL’s e-mail review and retention system failed at least 35 times, which caused LPL to be unable to meet its obligations to capture e-mails, supervise its registered representatives and respond to regulators’ requests. Further, it has been reported that LPL’s inadequate e-mail surveillance system resulted in 80 million corrupt e-mails and the failure to review 28 million messages sent to LPL brokers working as independent contractors. FINRA made the following statement, “[a]s LPL rapidly grew its business, the firm failed to devote sufficient resources to update its e-mail system, which became increasingly complex and unwieldy for LPL to manage and monitor effectively. The Firm was well-aware of its e-mail systems’ failures and the overwhelming complexity of its systems.” LPL made the following statement to the media: “[i]n September 2011, we reported to FINRA issues relating to the surveillance and retention of e-mails. We cooperated fully with FIRNA throughout its ensuing investigation. We very much regret our lapse of oversight. We have undertaken a comprehensive redesign of our e-mail systems and associated compliance policies and procedures, and have engaged independent experts to assess and validate our approach.”
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FINRA Charges Kimberly Springsteen-Abbott, Owner of Commonwealth Capital Securities Corp., With Misuse Of Customer Funds
On May 3, 2013, the Financial Industry Regulatory Authority, Inc. (“FINRA”) filed a Complaint against Kimberly Springsteen-Abbot (“Springsteen-Abbot”), owner, chief executive and head of compliance for the broker-dealer, Commonwealth Capital Securities Corp. (“Commonwealth”), for misuse of investor funds. Commonwealth is a broker-dealer that marketed and sold 13 different equipment-leasing funds from 1993 to the present, which raised $240 million. After customers invest in the equipment-leasing funds, the customer money is purportedly invested in information technology, medical technology and telecommunications equipment that are subject to 12 to 36 month operating leases. The Complaint alleges that between December 2008 and February 2012, Springsteen-Abbot misused approximately $345,000 in customer funds for personal expenses, including, but not limited to home remodeling, trips, meals and Christmas decorations for her home. For example, according to the Complaint, Springsteen-Abbot falsified and backdated a memorandum to account for “Disney Tickets,” which were provided to FINRA staff members who conducted an examination of Commonwealth in 2011. Further, the Complaint states that Springsteen-Abbot “directed the misuse of investor funds to pay for various American Express credit card charges that were not related to legitimate business purposes of the funds.” Moreover, the Complaint attaches a 27 page exhibit referencing various purchases made with customer funds by Springsteen-Abbot, and other company executives. These purchases include, but are not limited to, a meal at a Hooters restaurant, a family vacation for Springsteen-Abbot in Orlando, Florida, and $12,414 for a 2011 board of directors meeting at the St. Regis Hotel in Kauai, Hawaii. Springsteen-Abbot has denied the allocations in the Complaint, and according to a statement released by Commonwealth “intends to vigorously defend the proceeding, [and] provide FIRNA with a clearer understanding of the expenses at issue.”
Schwab Removes Customer Class-Action Waivers From Its Account Agreements
On May 16, 2013, Charles Schwab & Company, Inc. (“Schwab”) released a statement that it will remove the Waiver of Class Action or Representative Action clause (“Waiver Clause”) from its customer agreements. Specifically, Schwab announced that it would modify its account agreements to eliminate the Waiver Clause for all disputes raised on or after May 15, 2013. In October 2011, Schwab amended its customer Account Agreement by adding language to include the Waiver Clause, which required Schwab customers to waive their right to participate in a class action lawsuit against the firm, and instead arbitrate any disputes with the broker-dealer on an individual basis before the Financial Industry Regulatory Authority, Inc. (“FINRA”). In February 2012, the FINRA Department of Enforcement (“FINRA Enforcement”) filed a Disciplinary Proceeding Complaint against Schwab alleging that the Waiver Clause in the amended Account Agreement violated various FINRA Rules. See FINRA Disciplinary Proceeding No. 2011029760201. A FINRA Hearing Panel, which was comprised of one Hearing Officer and two other neutral panelists appointed by the Chief Hearing Officer in the FINRA Office of Hearing Officers, presided over the matter and determined that even though the Waiver Clause in Schwab’s amended customer Account Agreement violates FINRA rules, “the Federal Arbitration Act bars enforcement of those rules to the extent that they require that customers be given the option to bring their claims in court in the form of judicial class actions, despite any pre-dispute agreement to resolve disputes in arbitration.” See Hearing Panel Decision, dated February 21, 2013. As such, the FINRA Hearing Panel determined that FINRA could not prevent Schwab from requiring customers to waive their rights to participate in class-action lawsuits since the recent United States Supreme Court Decision in AT&T Mobility LLC vs. Concepcion, 131 S.Ct. 1740 (2011) held that pursuant to the Federal Arbitration Act, class action arbitration waivers in consumer contracts are enforceable, even when class action participation would be preempted. That decision is presently pending on appeal before the National Adjudicatory Council (“NAC”). The inclusion of the Waiver Clause in Schwab’s customer agreements was extremely significant because if the Waiver Clause became effective, Schwab would eliminate the risk of customer class actions. It is conceivable that every other broker-dealer would follow suit, and eventually every customer of a SEC regulated broker-dealer would be precluded from bringing a class action. In its May 16th statement, Schwab made the following representations, “[w]hile the company believes that dispute resolution is the best way to handle via FINRA arbitration, we have chosen to voluntarily remove the waiver going forward until the issue is resolved by the appropriate regulatory and/or court decisions. Given that the process will likely take considerable time to resolve, and may leave clients with a degree of uncertainty about their dispute resolution options in the meantime, we have elected to remove that uncertainty until the legal and regulatory process is completed.”
FINRA Fines Three Broker-Dealers For Failure To Establish And Implement Adequate Anti-Money Laundering Programs
Recently, the Financial Institute Regulatory Authority, Inc. (“FINRA”) fined three broker-dealers, Atlas One Financial Group, LLC (“Atlas”), Firstrade Securities Inc., and World Trade Financial Corp. (“World Trade”), as well as several of their executives, for failure to establish and implement adequate anti-money laundering programs.
FINRA And The SEC Release Joint Investor Alert Regarding Pensions and Settlement Income Streams
On May 9, 2013, the Financial Industry Regulatory Authority, Inc. (“FINRA”) and the Securities and Exchange Commission (“SEC”) issued a joint Investor Alert to warn investors about the risks associated with pensions and settlement income streams. The Investor Alert can be viewed here: Pension or Settlement Income Streams – What You Need To Know Before Buying Or Selling Them. Specifically, the Investor Alert warned investors who receive pension distributions from former employers or settlements in personal injury lawsuits about salespeople from “factoring companies” who offer to buy the rights to some or all of the payments the investor would receive in the future from their former employer or settlement, in exchange for a structured settlement, which is an upfront lump sum payment. The Investor Alert highlighted that recently retired government employees and members of the military are the most targeted groups of investors. According to the Investor Alert, the upfront lump sum that the investor receives in exchange for signing over the rights to some or all of the future payments, is almost always significantly lower than the present value of the future income stream, and costly as these transactions can charge at least a 7% commission. Although investors may need immediate cash, or feel that the income stream from their pension or settlement is not sufficient enough, the Investor Alert urges investors to consider the following factors: (1) Is the transaction legal?; (2) Is the transaction worth the cost?; (3) What is the reputation of the company offering the lump sum?; (4) Will the factoring company require life insurance?; (5) What are the tax consequences?; and (6) Does the sale fit the investor’s long-term financial goals? In the FINRA press release regarding the Investor Alert, Gerri Walsh, FINRA’s Senior Vice President for Investor Education stated, “[c]onsumers should know that a series of potential pitfalls may greet anyone who is considering selling their rights to an income stream. And any investor who is tempted by the high yield offered by buying the rights to another person’s income stream should know that yield comes with high fees and considerable risks.” Further, Lori J. Schock, Director of the SEC’s Office of Investor Education and Advocacy stated, “[i]nvestors should always learn as much as possible before making an investment decision, and this is certainly true with respect to investing in pension or structured settlement income-stream products. This alert will help investors understand the costs as well as the potentially significant risks of these transactions.”
FINRA Releases Regulatory Notice To Broker-Dealers Regarding Communications With Investors Concerning Nontraded REITs and DPPs
On May 2, 2013, the Financial Industry Regulatory Authority, Inc. (“FINRA”) released Regulatory Notice 13-18 (“Regulatory Notice”) to broker-dealers concerning the shortcomings in the sales materials they disseminate to customers and investors regarding nontraded or unlisted real estate investment trusts (“REITs”) or direct participation programs (“DPPs”). FINRA Regulatory Notice 13-18. According to the Regulatory Notice, “REITs are pass-through entities that offer investors an equity interest in a pool of real estate assets, including land, buildings, shopping centers, hotels and office properties, and in some cases, mortgages secured by real estate. As defined in FINRA Rule 2310, DPPs are investment programs that provide for flow-through tax consequences regardless of the structure of the legal entity or vehicle for distribution.” FINRA released this Regulatory Notice in an effort to improve sales practices for the illiquid nontraded REITs and DPPs, which are primarily sold through independent broker-dealers such as LPL Financial LLC and Ameriprise Financial Services Inc. According to FINRA, reviews of broker-dealer’s communications with the public regarding REITs and DPPs revealed deficiencies in the communications as being unfair, not balanced and misleading. For example, the FINRA Regulatory Notice discussed how broker-dealers’ sales materials regarding dividends in the nontraded REITs and DPPs are misleading and contain several inaccuracies. Specifically, the FINRA Regulatory Notice states that the broker-dealers’ materials “have emphasized the distributions paid by a real estate program and failed to adequately explain that some of the distribution constitutes return of principal.” Further, according to FINRA, many broker-dealers’ communications with investors minimize the risks associated with REITs. The Regulatory Notice states, “some communications have not provided sufficient discussions of the risks associated with investing in the products in order to balance the presentation of benefits.” The Notice provides extensive guidance to firms to ensure that their communications with the public concerning REITs and DPPs comply with various industry and regulatory requirements.
The SEC Charges Two Mutual Fund Directors With Misleading Shareholders
The Securities and Exchange Commission (“SEC”) charged two investment firms, Northern Lights Compliance Services LLC and Gemini Fund Services, which operated the Northern Lights Fund Trust and the Northern Lights Variable Trust mutual funds, with misleading shareholders about the factors the firm considered when determining whether to hire investment advisers for the firm. Federal securities laws require that mutual fund directors evaluate and approve the mutual fund’s contracts with their investment advisers. Further, the securities laws mandate that the mutual fund directors accurately report the material factors considered during the evaluation of the investment advisers’ contracts to the mutual fund shareholders. After an investigation, the SEC determined that the directors of the Northern Lights Fund Trust and the Northern Lights Variable Trust mutual funds misrepresented the material factors they considered when reviewing their investment adviser contracts. The SEC further found that Northern Lights Compliance Services LLC, the trustee and trusts’ chief compliance officer, as well as Gemini Fund Services, the trusts’ fund administrator, violated various SEC compliance rules, as well as violated the Investment Company Act recordkeeping and reporting provisions. The firms and other trustees have agreed to settle the charges with the SEC. George S. Canellos, Co-Director of the SEC’s Division of Enforcement, made the following statement to the media, “[d]etermining terms of the investment advisory contract, especially compensation of the adviser, is one of the most critical duties of a mutual fund board. We will aggressively enforce investors’ rights to accurate and complete information about the board’s process and decision-making.”
LPL Financial LLC Set To Settle E-Mail Surveillance Matter With FINRA
LPL Financial LLC (“LPL”) has become one of the largest independent-contractor broker-dealers with over 13,000 registered representatives and 4.3 million customers. As a result of this success, LPL has been the subject of several regulatory investigations with federal and state regulators. Most recently, LPL self-reported to the Financial Industry Regulatory Authority, Inc. (“FINRA”) that it experienced problems with broker e-mail surveillance. Mark Casady, LPL’s Chief Executive stated to the media, “[t]urning to the regulatory environment, we self-reported a matter related to e-mail surveillance and production to our principle regulator in 2011. Since then, we have been working to implement enhancements to our supervisory systems and procedures related to these e-mail issues.” It is believed that LPL will settle the potential rule violations regarding their failure to properly monitor broker and investment advisers’ e-mails sometime during the summer of 2013. One of the other regulatory matters that plagued LPL during 2013 involved the Massachusetts Securities Division finding that LPL violated securities regulations when it sold nontraded real estate investment trusts (“REITS”) to customers, in violation of the state limitations and the company’s own rules and procedures. As a result of this, the Massachusetts Securities Division fined LPL $500,000 and ordered LPL to set aside $2 million for potential restitution to investors who purchased the nontraded REITs. At the end of 2012, FINRA also fined LPL for failing to maintain supervisory systems and procedures to ensure delivery of mutual fund prospectuses to investors.
FINRA Proposes A New Rule Which Would Require Brokers To Disclose Transition Compensation
The Financial Industry Regulatory Authority, Inc. (“FINRA”) proposed a new rule which would require brokers and registered representatives to disclose their transition packages when switching from one broker-dealer to another firm. Specifically, the proposed rule would require financial advisors to disclose bonuses and other compensation they received as a result of transitioning between investment firms. According to the FINRA Rule proposal, “enhanced compensation packages offered to recruit a representative to leave one firm and join another provide an additional and significant layer of compensation on top of the commission payout grid compensation that the representative receives based on bonus or a foregiveable loan.” Moreover, the FINRA Rule proposal states that many types of enhanced compensation transition packages lead to registered representatives believing they must sell securities and violate obligations to investors in order to justify the special transition packages they received. This creates increased regulatory concerns for FINRA and the Securities and Exchange Commission (“SEC”). Many industry experts believe this will thwart the number of transitions that are based solely on broker compensation packages since the rule will require that brokers articulate to clients that the transition was based on the new firm providing better financial services, rather than based on the compensation. Indeed, Jennifer McPhee, Managing Director of Merrill Lynch Wealth Management made the following statement to the media, “[Brokers] really shouldn’t come just for a check. I think this will force the people who are moving for the wrong reasons to rethink that.” Other financial services professionals believe that if the proposed FINRA rule is implemented it will have a very small impact on the number of brokers transitioning between firms. Jason Chandler, head of the Wealth Management Advisor Group and Private Wealth Management at UBS stated to the media, “I don’t think it will have a dramatic impact on the recruiting market, especially at the high end where people have really deep relationships with their clients.” It will be interesting to see whether there will be a large numbers of transitions prior to the possible implementation of the new rule, in order for registered representatives to escape the disclosure requirement. Many industry experts, broker-dealers, financial services professionals and attorneys submitted comments regarding the proposed rule. Lax & Neville LLP submitted a comment which can be viewed here: Lax & Neville LLP Comment On FINRA Proposed Rule. Currently, FINRA is reviewing the comments in response to this proposed rule change to determine whether the proposed rule should be submitted to the SEC for approval.
FINRA Arbitration Panel Denies Wells Fargo’s Raiding Claim Against Stifel Nicolaus And Orders Wells Fargo To Pay Stifel $800,000 In Attorneys’ Fees and Costs
On April 18, 2013, a Financial Industry Regulatory Authority, Inc. (“FINRA”) arbitration panel issued an award which denied all claims raised by the broker-dealer, Wells Fargo Advisors, LLC (“Wells Fargo”), against Stifel, Nicolaus & Co., Inc. (“Stifel”), a competitor broker-dealer, and Gary P. Endres, a registered representative and former branch manager, regarding Stifel’s alleged raiding of Wells Fargo brokers in the Carlsbad and Escondido, California branch offices. See Award, FINRA Dispute Resolution No. 09-04869. Wells Fargo filed its Statement of Claim on August 19, 2009 against Wells Fargo and its broker, Mr. Endres, who left Wells Fargo to join Stifel in April 2009, along with seven other former registered representatives. Wells Fargo raised the following causes of action in its statement of claim: raiding and unfair competition; tortious interference; conversion and misappropriation of trade secrets; breach of duty of loyalty and breach of fiduciary duty; and unlawful conspiracy. Further, Wells Fargo requested over $10 million in compensatory damages, exemplary/punitive damages, and an order enjoining and restraining Stifel and Endres from hiring or soliciting the hiring of more than 40 of the financial advisors from any Wells Fargo branch. Stifel and Endres filed an Answer denying the allegations contained in the Statement of Claim, and asserting various affirmative defenses. Further, Stifel counterclaimed and requested a declaration that Stifel is permitted to recruit and/or hire Wells Fargo employees so long as it conducts itself in accordance with the Protocol for Broker Recruiting (“Protocol”) and industry standards. The Protocol permits brokers and registered representatives who move from one signatory firm to another signatory firm to solicit their clients if certain conditions are met. The primary goal of the Protocol is to further the clients’ interest of privacy and freedom of choice in connection with the movement of brokers between investment firms. After 28 hearing sessions, the FINRA arbitration panel denied all of Wells Fargo’s claims. Moreover, the panel ordered Wells Fargo to pay Stifel $800,000 in attorneys’ fees and costs pursuant to the mutual request exception to the American rule.