By George C. Miller

Large up-front, forgivable promissory notes were once the gold standard in financial advisor recruiting.  From the early 2000’s through 2017, they were extremely common and used as a way to entice high producing brokers to join (or remain at) the firm recruiting the talent.  Virtually all firms–including Morgan Stanley, Merrill Lynch, UBS and Wells Fargo–used these notes as their primary recruiting tool, and almost all were structured the same way–providing for a large, often multi-million dollar “bonus” tied to a promissory note and forgiven over time.  Deals totaling 300-350%+ of an advisor’s trailing-12 production were not uncommon. The money was flowing, and many advisors were eager to jump from one firm to another chasing a big payout.

But that all came to a grinding halt in mid-2017, due in part to anticipated regulatory scrutiny of these deals in light of the Department of Labor’s proposed fiduciary rule.  At the same time, firms realized they were carrying billions of dollars of what often turned out to be “bad debt” on their books, as advisors often disputed their obligation to repay the notes when things didn’t work out at the recruiting firm.  With the exception of Wells Fargo, which continues to offer large transition bonuses to lure advisors into the firm (likely due to the severe reputational damage and attrition the firm has sustained), none of the major wirehouses are offering large recruitment deals.  Instead, they are focusing on retaining their existing advisor force, whether through carrots like higher payouts and other perks, or sticks, such as the decision to withdraw from the broker protocol and changes to advisor trade secret and non-compete/non-solicit agreements.

Just as one act closed, entering stage left were the independent broker-dealers, who had seen extraordinary growth over the past decade and now had an opportunity to continue that growth by taking a play out of the wirehouse book.  Wells Fargo Advisors, Ameriprise, LPL Financial, Raymond James, Cetera and others are now offering unprecedented signing “bonuses,” transition assistance packages and other financial motivators to lure advisors out of the wirehouses or other competing independent firms.  We have yet to return to the heyday of bonuses, but deals approaching 100% of an advisors trailing-12 are not uncommon.  We saw how the play ended for the wirehouses.  It remains to be seen whether the independents will succeed in this new-to-them strategy.

Shustak Reynolds & Partners, P.C.’s San Diego securities and FINRA lawyers, Irvine FINRA lawyers, Los Angeles FINRA lawyers, San Francisco FINRA lawyers and New York FINRA lawyers represent registered representatives, financial advisors, investment advisors, financial institutions and others in a wide variety of securities-related disputes, including broker protocol disputes and non-compete, restrictive covenant and trade secret litigation.  The firm’s financial services attorneys, FINRA attorneys and broker protocol lawyers have extensive experience handling intra-industry employment, recruitment and broker transition disputes, including golden handcuff and forgivable promissory note disputes.  The firm’s FINRA attorneys are uniquely experienced in handling FINRA employment disputes involving promissory notes, allegations of misappropriation of trade secrets or broker protocol violations.  Partner George C. Miller is based in the firm’s San Diego offices and can be reached at 619.696.9500.

Shustak Reynolds & Partners, P.C.’s San Diego securities and FINRA lawyers, Irvine FINRA lawyers, Los Angeles FINRA lawyers, San Francisco FINRA lawyers and New York FINRA lawyers represent registered representatives, financial advisors, investment advisors, financial institutions and others in a wide variety of securities-related disputes, including broker protocol disputes and non-compete, restrictive covenant and trade secret litigation.  The firm’s financial services attorneys, FINRA attorneys and broker protocol lawyers have extensive experience handling intra-industry employment, recruitment and broker transition disputes, including golden handcuff and forgivable promissory note disputes.  The firm’s FINRA attorneys are uniquely experienced in handling FINRA employment disputes involving promissory notes, allegations of misappropriation of trade secrets or broker protocol violations.  Partner George C. Miller is based in the firm’s San Diego offices and can be reached at 619.696.9500.

By Erwin J. Shustak

In its 2019 Risk Monitoring and Examination Priorities Letter, The Financial Industry Regulatory Authority, FINRA, announced its 2019 priorities examination list.

Topping the list is new and increased focus on Internet sales of unregistered private placements; mark-up and mark-down disclosures for fixed income products and regulatory technology.  Within that Letter, FINRA makes it clear that new topics are high on its list of topics certain to be the focus of examinations during the coming year.

Suitability, for example, again appears on the annual list. FINRA will be increasing its focus on issue including overconcentration of illiquid securities, such as variable annuities, non-traded alternative investments (often referred to as “alts”) and unregistered private placements as well as high fee mutual fund share classes that may not align with a customer’s investment objectives and risk tolerance.

One of the repeat topics on FINRA’s list is senior investor protection, as seniors continue to be the targets of numerous scams, bad investment advice and rip-offs. This year, FINRA announced its will be monitoring member firms for compliance with obtaining trusted contacts for senior investors and placing quick holds on distributions from accounts that exhibit suspicious activity.  FINRA also is focusing on situations where a broker holds a power of attorney or is a trustee, or other fiduciary, for older clients.

In an announcement accompanying the 2019 focus list, FINRA chief executive Robert Cook said:  “While we continue to review and examine for longstanding priorities discussed in greater detail in past letters, we agree with the suggestion from many of our member firms that a sharper focus on emerging issues will help them better determine whether those issues are relevant to their businesses and how they should be addressed”.

The streamlined 2019 focus list is seven pages; four pages shorter than last year’s list. Fewer focus items allows compliance personnel to focus on the more pressing issues and was welcomed by most compliance professionals.  A shorter, more focused list allows compliance departments to better assess their own, internal regulatory procedures and controls.  One of the items on the FINRA list was a new emphasis on regulatory technology.  FINRA intends to take a hard look at how firms utilize software to perform compliance functions.  FINRA does not want firms to take short cuts on compliance by relying too heavily on technology.

Shustak Reynolds & Partners, P.C.  focuses its practice on securities and financial services law and complex business disputes.  We represent many broker-dealers, registered representatives, investment advisors, investors and businesses. For more information, contact Erwin J. Shustak, Managing Partner [email protected], or call 800.496.5900 ext. 109.