Registered representatives who operate under FINRA regulation, are aware of the requirements, both of FINRA and their broker-dealer firms, to disclose and obtain firm approval of all Outside Business Activities. FINRA proposes modifying the OBA rule and is now seeking comments on the new rule. The proposed changes to the Rule are contained within Regulatory Notice 17-20. That Notice can be found at: http://www.finra.org/industry/notices/17-20
According to the Notice, FINRA routinely evaluates its various rules to determine whether a particular rule is meeting its intended investor-protection objectives by reasonably objective means. FINRA has, in turn, identified the OBA rules, contained within FINRA Rule 3720 (which can be found at http://finra.complinet.com/en/display/display_main.html?rbid=2403&element_id=9467 as one of the rules it has decided to re-examine. The Rule governs firm employees’ business and securities activities outside of the employing firm; activities that are outside of, and presumably not governed by, the rules of the employing firm. FINRA has determined that the ability of firm personnel to engage in outside business activities may be of benefit to some investors and the firm but, at the same time, FINRA seeks to protect the investing public from “potentially problematic or risky activities that are unknown to the firm but could be perceived by the investing public as either part of the firm’s business or having the firm’s imprimatur”.
To determine whether exiting Rule 3720 is accomplishing its intended purpose, FINRA seeks comments from the public and industry on four subjects:
1. Has the rule effectively addressed the problem it was intended to mitigate? Are there alternative ways to achieve the goals of the rule that should be considered?
2. What have been the experiences with implementation of the rule, including any ambiguities in the rule or challenges in compliance with it?
3. What have been the economic impacts arising from the rule? To what extent would these economic impacts differ by business attributes, such as firm size or differences in the various business models of various firms?
4. Can FINRA make the rule, its interpretation or administration more efficient and effective?
In our firm’s experience, it is the existence of Outside Business Activities, whether disclosed to the firm or not, that often create problems for the investing public. As one example, we represented a very elderly woman with a sizable estate. Her long time, trusted broker operated a non-securities business with his wife and approached the elderly client seeking a loan for “his wife’s business,” despite the fact he was a majority owner in the business and the loan would personally benefit him. While this particular firm, and all firms, prohibit registered representatives from soliciting or accepting loans from clients, this broker did it anyway, never told the firm, and, until a complaint was filed with FINRA by family members who discovered the loan, none of the principal or interest had been repaid to the elderly client.
Once the firm was made aware of the solicitation and acceptance of the loan, it immediately fired the broker but the damage already was done. The broker had taken money from an elderly client and the unpaid loan- but for a relative who caught the transaction and questioned it- may never have been repaid.
Shustak Reynolds & Partners, P.C. focuses in the areas of securities, financial services and complex business disputes. For more information, contact our managing partner, Erwin Shustak. More information is available at www.shufirm.com.
Wells Fargo reported a loss of 225 registered representatives in the first quarter of 2017, making a total of 429 representatives lost over the last six months amid the scandal involving Wells Fargo retail banking. Wells Fargo was reported to have opened thousands of false accounts, credit cards, and other loans for unsuspecting customers who never asked for the accounts or loans and had no idea their identity was being used by Wells Fargo personnel in order to meet account quotas imposed by the Bank.
Last fall, Wells Fargo was fined $185 million after it was discovered that its retail banking unit was padding customer fees by opening multiple accounts on their behalf, and without their knowledge.
Shustak Reynolds & Partners, P.C. focuses in the areas of securities, financial services and complex business disputes. For more information, contact our managing partner, Erwin Shustak. More information is available at www.shufirm.com.
In May 2017, Merrill Lynch announced plans to do away with large, up-front recruiting bonuses before the June 9, 2017, implementation of the Department of Labor’s (DOL) new fiduciary rule. That rule will require firms and registered representatives to act in the best interests of their clients and prohibit certain transaction based compensation in retirement accounts unless the requirements of an exemption are met. Guidance from the DOL suggests that up-front bonuses, which firms historically have used to lure advisors–and their book of clients–away from competing broker-dealers, may run afoul of the rule.
While the DOL fiduciary rule officially went into effect June 9th, the Department of Labor has publicly stated it will not enforce the rule until January 1, 2018, at the earliest, after firms have had an opportunity to make required disclosures to customers and update their customer agreements. The rule’s ultimate fate remains uncertain. The House recently voted to repeal the DOL fiduciary rule in its entirety, and the SEC has hinted at its own forthcoming fiduciary rule proposal.
In shifting away from the traditional recruitment bonus packages, which swelled to 300% or more of a financial advisors gross trailing-12 commission revenues and often totaled millions of dollars, Merrill plans to focus on retaining existing advisors, perhaps through retention bonuses or other compensation incentives to existing employees, and on developing younger advisors through the use of its discount Merrill Edge investment platform. While reports surfaced indicating that Merrill was reconsidering its decision, as recently as June 9th the firm confirmed it was, in fact, moving away from traditional recruiting bonus structures.
Merrill is not alone in its decision. UBS Financial Services, Inc. previously announced changes to its compensation plan and strategy, including a reduced focus on recruiting bonuses in lieu of higher grid payout rates. Morgan Stanley followed suit, first doing away with “back end” bonuses in 2016 (e.g., bonuses tied to a recruited advisor’s assets and production after joining the recruiting firm) and now announcing a “significant reduction” in its broker recruiting efforts. Wells Fargo, meanwhile, which faced a hailstorm of criticism following revelations the firm encouraged employees to open millions of fake bank and consumer credit accounts, has doubled down on recruitment bonuses. Its brokerage division, Wells Fargo Advisors, recently announced plans to boost advisor signing bonuses to counter Merrill, Morgan and UBS and take advantage of the current market.
The financial advisor recruitment landscape is in the midst of a shakeup. For the past 20+ years, large up-front and back-end bonuses have been the primary recruiting tool for most wirehouse firms. The practice became so prevalent that even small independent brokerage firms and registered investment advisory firms began offering transition compensation, though nowhere near the dollars offered by the Wall Street firms. But on Wall Street, where the almighty dollar rules above all else, the days of high dollar recruiting bonuses and transition compensation are, in this lawyer’s opinion, likely to return. Perhaps after Congress guts or kills altogether the DOL fiduciary rule, or perhaps after firms have seen significantly reduced profits in the absence of billions of dollars in new client assets funneling into the firm each year.
Shustak Reynolds & Partners, P.C.’s experienced California securities and financial services lawyers are well versed in the financial services industry. We routinely represent brokerage firms, registered representatives, registered investment advisory firms (RIAs) and others employed in the securities and financial services industry. Contact our San Diego FINRA lawyers today for a free consultation.
In the past six months, SEC enforcement actions against broker-dealers were up 20% and now account for a quarter of all SEC enforcement actions.
The SEC filed 334 enforcement actions during that six month period, down from 372 filings one year earlier, largely due to a 50% decline in actions against delinquent filers. The majority of the enforcement proceedings were in the form of administrative proceedings rather than civil actions.
In addition to the increase in actions involving broker-dealers, there was a jump of 34% in issuer reporting and disclosure actions, and a 34% increase in actions related to securities offerings.
Shustak Reynolds & Partners, P.C. focuses in the areas of securities, financial services and complex business disputes. For more information, contact our managing partner, Erwin Shustak. More information is available at www.shufirm.com.
Jeffrey Kluge, a 25 year veteran of Merrill Lynch based in St. Paul, Minneapolis, plead guilty to two counts of bank fraud for his part in an elaborate, long-running scheme that stole $8.7 million from two banks.
Kluge, while working at Merrill Lynch, created false Merrill Lynch account statements in connection with a fraud that pledged phony collateral to the banks to establish multi-million dollar lines of credit from those banks. He also created a phony Internet domain name, www.mymerrillonline.com, and a phony Merrill email address from which he sent the fabricated account statements and he created the false identify of a Merrill Lynch employee, whose fabricated name he used with the fictitious email addresses in communicating with the banks.
Mr. Kluge’s scheme started in 2001 and ran through November, 2016, a fifteen year period. In 2001, Kluge first obtained a $150,000.00 line of credit with Alliance Bank, providing phony statements showing a municipal bond portfolio sufficient to secure the line of credit. He provided phony, falsified account statements to substantiate the non-existent municipal bond holdings. Those bonds already were pledged to Merrill Lynch to cover other loans he had with the firm. In 2007, he obtained a $1 million line of credit from Platinum Bank using the same scheme, pledging assets to Platinum that already were pledged to Merrill Lynch.
Mr. Kluge is awaiting sentencing and has been suspended from the securities industry.
Shustak Reynolds & Partners, P.C. focuses in the areas of securities, financial services and complex business disputes. For more information, contact our managing partner, Erwin Shustak. More information is available at www.shufirm.com.
