After dropping its proposal in June, 2013 that would have required brokers to disclose recruiting bonuses and “up-front” forgivable loans they receive for switching firms, FINRA (the Financial Industry Regulatory Authority), which oversees all broker-dealers and the more than 650,000 registered financial representatives, yesterday released a revised compensation disclosure proposal.
Under the revised proposal, all brokerage firms would be required to send an “educational communication” to clients of transitioning brokers outlining questions they should ask their broker about compensation and other inducements the broker receives for switching firms. The proposed rule would require all broker-dealers to send that communication to clients working with a broker who is moving to a new firm. The document would list questions investors should ask their broker about compensation and other inducements the broker is receiving from the new firm, including the amount of any traditional, “up front” forgivable loans that are common in the industry and often reach into the millions of dollars.
According to FINRA, the questions would help investors determine whether the financial incentives their broker is receiving to change firm affiliations creates a conflict of interest and whether the customers would incur costs by following that broker to his or her new firm.
The revised rule is a modification of the rule FINRA proposed, and then withdrew, back in 2013. The original rule would have required brokers to disclose to customers all recruiting incentives above $100,000 they received for switching firms. It also would have required firms to report to FINRA all “significant” compensation increases for recruited brokers.
Critics of the revised, “educational communication” rule call it a watered down version that does not go far enough to educate investors of exactly what compensation and incentives their broker is receiving for changing firms. According to FINRA, however, “…the revised proposal is a more effective approach. The educational communication allows for more context and explanation about financial incentives and is more likely to prompt a discussion with the transferring representative or current firm”.
Brokers, on the other hand, would rather not have to explain the amount and nature of their transition packages for obvious reasons. There also is concern that firms will use this “educational communication” as a way to increase their leverage to keep clients of departing brokers.
FINRA is soliciting public comments on the proposal until July 13th.
Shustak Reynolds & Partners, P.C. focuses in the area of financial services law, representing broker-dealers, financial institutions, registered persons, investment advisors and advisory firms, hedge funds, investment advisors and others in the financial world. Contact us with any questions you may have.
A panel of three FINRA arbitrators recently found that a promissory note between Morgan Stanley and its former advisor John Offenburger was “unenforceable.” The case involved an employment dispute between Offenburger and Morgan Stanley stemming from his recruitment to the firm in 2008.
According to the award, Morgan Stanley failed to fulfill promises made to Offenburger during his recruitment, including a promise that Offenburger would be given a management position. Soon after joining the firm, however, Morgan Stanley closed its joint venuture with Smith Barney, which resulted in the elimination of his proimsed management position. Offenburger also alleged Morgan Stanley made defamatory statements to his clients after he was forced to resign from the firm in 2012. Morgan Stanley, meanwhile, sought to collect approximately $519,000 Offenburger owed on a forgivable promissory notes. Up-front bonuses tied to forgivable promissory notes are common in the securities industry, particulary among higher-producing advisors.
The panel concluded that Morgan Stanley’s promissory note “was unenforceable” and denied the firm’s claim in its entirety. The panel then awarded Offenburger $500,000 in affirmative damages. But there was a catch. The damages awarded to Offenburger were deemed “fully satisfied” by the forgiveness of the note. The net effect is a virtual wash.
Shustak Reynolds & Partners’ FINRA lawyers have decades of experience representing financial advisors and brokers in securities industry disputes, including up-front, forgivable promissory note disputes, bonus disputes and in broker protcol, trade secret and financial advisor transition disputes. Contact us today at (619) 696-9500 or at www.shufirm.com for a confidential analysis of your situation.
Investment News recently released a list of the top 25 independent broker-dealers ranked by 2014 total revenues, with LPL Financial LLC in first place, followed by Ameriprise Financial Services and Raymond James Financial Services LLC. According to the release, LPL’s 2014 revenue was $4.29 billion. The top 25 broker-dealer firms’ total revenue increased by approximately 10% over 2014, rising from $18.5 billion total in 2013 to $20.4 billion in 2014. The Investment News article also highlights the yet-to-be determined impact of the U.S. Department of Labor’s recent definition of “fiduciary” on broker-dealers. Adam Antoniades, President of independent B-D Cetera Financial Group, opined that the DOL’s definition likely “will drive fee-based business”.
The Investment News release reflects, in part, the results of advisors leaving traditional wirehouses en masse in recent years. Shustak Reynolds & Partners has decades of experience representing financial professionals and independent brokerage firms in broker protcol and financial advisor transition matters. If you or any financial services professional you know requires legal consultation on transferring from one firm to another, contact us at (619) 696-9500 or www.shufirm.com. We advise clients on matters ranging from broker protocol compliance, portfolio transition, and all other aspects of securities firm transitions.
The Financial Industry Regulatory Authority (FINRA), a private corporation charged with regulating the securities industry, recently launched a toll-free help line to assist senior investors with concerns about their brokerage accounts and investments. Senior investors may call the hotline (844-57-HELPS) from 9 a.m. to 5 p.m. Eastern, Monday through Friday. FINRA pledges to provide seniors with “neutral, knowledgeable assistance” in reviewing investment portfolio and account statements; addressing concerns about the handling of brokerage accounts; and in providing information regarding FINRA’s investor tools and resources, including the BrokerCheck system.
“FINRA views the protection of senior investors as a key priority,” according to a press released published on the regulator’s site in late April. With the social security administration estimating that 10,000 Americans will turn 65 every day for the next 15 years, elder abuse, unsuitable investments and other issues unique to senior investors are sure to rise.
Shustak Reynolds & Partners’ FINRA arbitration lawyers and securities litigation attorneys handle a wide range of securities industry disputes. Contact us today for a confidential analysis of your situation.
