A homestead exemption protects a specified dollar amount of a debtor’s equity in his or her principal dwelling from attachment by a judgment creditor. In California, debtors are automatically protected by the homestead exemption contained in California Code of Civil Procedure section 704.730. Currently, section 704.730 provides a judgment debtor $75,000 to $175,000 of protection based on a multitude of factors including family, age, and income. Under current law, a single judgment debtor has an exemption of $75,000 of equity, while a husband and wife enjoy an exemption of $100,000. The exemption may be increased to the maximum of $175,000 if the judgment debtor meets specific age, disability, and/or income requirements.
Acknowledging that for most California homeowners the current Homestead Exemptions are inadequate to offer meaningful protection to their principal home, California recently adopted a significant overhaul of its Homestead Exemption. Effective January 1, 2021, California’s Homestead Exemption will be between $300,000 and $600,000 based on the county median home sale price in which a debtor’s home is located. If the home is in a county with a median sale price of $300,000 or less, the exemption will be $300,000. If the home is in a county with a median sale price greater than $300,000, the exemption will be equal to the median sale price up to a maximum of $600,000.
The amended exemption greatly increases protection for a judgment debtor’s equity in their principal residence. The new protection will make it more difficult to collect on a court ordered judgment and may require a reevaluation of strategy for both plaintiffs and defendants in many cases. If you have questions about how the amended Homestead Exemption affects you, contact Shustak Reynolds and Partners today for a confidential and complimentary consultation.
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. Attorney Erwin J. Shustak can be reached in the firm’s San Diego office at (619) 696-9500.
It can be difficult to know whether a broker’s mistake constitutes a private securities trading violation. Some rules are clear-cut; others are not.
While employed as a Morgan Stanley Wealth Management broker, Christopher Reid executed approximately 200 equity and options trades for a new client his employer previously had rejected as a potential firm client. After being rejected by Morgan Stanley, that client opened a self-directed brokerage account with another FINRA member brokerage in June 2018. The name of the brokerage firm where these trades took place was not disclosed in the Letter of Acceptance, Waiver and Consent (“Consent Letter”), which is a document commonly created through settlement of the FINRA disciplinary process. The letter did state that Reid participated in the client’s self-directed account “by advising the owner of the account on trading strategy and by directly placing trades in the account” through the outside firm’s website. Reid received no compensation for his participation. The account, however, lost 90% of its $100,000 value in less than three months so Reid obviously was neither a great advisor nor investor.
Morgan Stanley was investigating Reid when he resigned from the firm in September 2018. FINRA, in turn, began investigating Reid after receiving Morgan Stanley’s U-5 separation form which indicated Reid was under investigation when he resigned. (That tricky item 7 box which triggers an automatic FINRA investigation, even for voluntary resignations). It is very common and routine that anytime a broker is terminated, or permitted to resign from a FINRA firm, FINRA investigates why the broker was let go or permitted to resign. Following his investigation, FINRA charged Reid with unauthorized trading activity. Reid received a four-month suspension and a $5,000 fine.
FINRA’s disciplinary decision focused on two rules. Rule 3280 prohibits unauthorized private securities transactions. Reid clearly violated this rule by participating in these transactions without first providing written notice to his employer, Morgan Stanley. Rule 2010 requires brokers observe “high standards of commercial honor and just and equitable principles of trade.” This rule is nebulous, far-reaching, and serves as a catch-all for the sort of bad faith or unethical conduct that is not contemplated by FINRA’s other rules. FINRA did not explicitly say how Reid violated Rule 2010, and the Consent Letter provides few details. Reid may have run afoul of the catch-all rule because his active participation resulted in such extreme losses for the account, thus creating a presumption of bad faith.
In any event, Reid could have understood his ethical obligations better by consulting with a securities attorney.
We greatly appreciate Andrew Steiger’s contribution to our firm! Shustak Reynolds & Partners, P.C. focuses its practice on securities and financial services law and complex business disputes. We routinely represent broker-dealers and financial advisors in arbitrations, financial advisor transitions, broker protocol disputes and related matters. Please direct any questions to our managing partner, Erwin J. Shustak, Esq. and contact us today for a confidential, complimentary consultation.
The CFP Board certifies and bestows the CFP designation on professionals who meet rigorous education, training, and ethics standards. In an average year, the CFP Board conducts 6,900 background checks as part of their dual mission of CFP certification and enforcement of professional standards.
Until recently, the CFP Board primarily relied on self-disclosure by the CFP professionals and applicants when evaluating their experience level, education, and criminal history for awarding or continuing the CFP designation for them. Some CFP professionals, however, abused the self-disclosure system and misrepresented their qualifications and history. This led to red flags going unnoticed that could have prevented unqualified financial professionals from receiving or continuing to enjoy the CFP designation and all its benefits.
In response to criticism of its self-disclosure, self-policing policy by The Wall Street Journal, Forbes and other publications, the CFP Board recently adopted a new practice of independently reviewing public records of those seeking to obtain or renew a CFP certification. Prior to awarding the CFP certification, the CFP Board now references the Financial Industry Regulatory Authority’s (FINRA) BrokerCheck database, and the U.S. Securities and Exchange Commission’s (SEC) Investment Adviser Public Disclosure database. To further enhance accountability, the CFP Board also created an independent task force to examine the existing enforcement program and recommend improvements.
Effective June 30, 2020, the new Procedural Rules follow from recommendations of the independent task force, and replace both the Disciplinary Rules and Procedures and the Appeals Rules and Procedures. These new rules align with the October 2019 Code of Ethics and Standards of Conduct, and describe the updated enforcement procedures. In an effort to make the updated rules more accessible to CFP professionals, the Board also released a companion Enforcement Process Guide containing flow charts describing the investigative, settlement, and hearing sub-processes. Other related documents that the CFP Board updated to match the new rules include: Fitness Standards, Sanction Guidelines, and Terms and Conditions of Certification and Trademark License. Some highlights of the new CFP procedural rules are:
There is a new time limitation requiring the CFP Board to issue a Notice of Investigation within 7 years after the alleged violation or forfeit the option to do so.
There is a new time limitation for filing an arbitration when a CFP professional wishes to challenge a final decision made by the Appeals Committee on a disciplinary order. The CFP must file the arbitration within 60 days from the final decision or forfeit the option to do so.
There is a new expedited process for complaints against CFP professionals involving a single bankruptcy, either of a personal nature or of a business entity which the CFP controls. In some cases, the CFP professional now may avoid a Disciplinary and Ethics Commission hearing by accepting public censure.
Final determinations by civil courts of any legal or enforcement proceedings affecting a CFP professional are now binding on the CFP Board in their enforcement proceedings.
We greatly appreciate Andrew Steiger’s contribution to our firm! Shustak Reynolds & Partners, P.C. focuses its practice on securities and financial services law and complex business disputes. We routinely represent broker-dealers and financial advisors in arbitrations, financial advisor transitions, broker protocol disputes and related matters. Please direct any questions to our managing partner, Erwin J. Shustak, Esq. and contact us today for a confidential, complimentary consultation.
FINRA recently announced that Merrill Lynch will pay $7.2 million in restitution to customers overcharged on mutual fund accounts. FINRA’s enforcement action and fine affects over 13,000 separate Merrill Lynch accounts whose owners did not receive the available sales charge waivers and fee rebates available through rights of reinstatement. According to FINRA, rights of reinstatement allow investors to purchase shares of a fund after previously selling shares of that fund or another fund in the same fund family, without incurring a front-end sales charge, or to recoup all or part of a contingent deferred sales charge. The overcharges impacted customers in the aggregate amount of approximately $6 million. FINRA considers this to be a “Supervisory Failure” by Merrill Lynch.
FINRA charged that Merrill Lynch failed to establish reasonable systems and procedures to ensure that all accounts eligible to receive these sales charge waivers and fee rebates actually received them. According to the FINRA charges, Merrill Lynch relied on individual registered representatives to manually determine customer eligibility rather than using an automated system with sufficient supervisory checks and balances to ensure that every eligible account actually received the rebates and waivers. FINRA charged that between April 2011 and April 2017, Merrill’s supervisory failure lead to the affected Merrill customers paying in the aggregate approximately $6 million in excess sales charges and fees. And this was not an isolated instance of Merrill’s supervisory failure in this area. In 2011, Merrill agreed to a censure for a similar violation, $8 million in fines and approximately $24.2 million in restitution for supervision and suitability violations regarding the sales of mutual fund shares. Sometimes Merrill and other firms just don’t learn from their costly mistakes.
FINRA took Merrill Lynch’s “extraordinary cooperation” into consideration when determining the appropriate monetary sanction on the new violations. Merrill agreed to hire an outside consulting firm to identify customer accounts impacted by this oversight and calculate the total remediation. Merrill Lynch also assisted the FINRA investigation and promptly paid the restitution to impacted customers. Merrill Lynch neither admitted nor denied the charges, but consented to the entry of FINRA’s findings.
We greatly appreciate Holly Nicoll’s contribution to our firm! Shustak Reynolds & Partners, P.C. focuses its practice on securities and financial services law and complex business disputes. We routinely represent broker-dealers and financial advisors in arbitrations, financial advisor transitions, broker protocol disputes and related matters. Please direct any questions to our managing partner, Erwin J. Shustak, Esq. and contact us today for a confidential, complimentary consultation.
Expensive changes are coming to FINRA’s expungement request. Under revised, proposed rules submitted by FINRA, expungements requests soon will be more limited, and will be more expensive in light of a revised fee schedule FINRA recently submitted for approval by the SEC. Changes to FINRA expungement rules have been expected for more than two years since FINRA first proposed them.
In December 2017, FINRA notified all members and registered persons that it proposed a complete overhaul of the expungement rules for registered person who want to expunge – or, in lay language, erase from public disclosure – certain disclosure items that appear on their CRD records and FINRA’s BrokerCheck available to the public. The 2017 proposal required requests for expungement be brought within one-year of the customer complaint being reported on the CRD or settlement of the underlying customer arbitration. Moreover, the associated person seeking expungement of his or her CRD record would be required to bring their expungement actions during the underlying customer arbitration; would be required to personally appear at the expungement hearing; a request for expungement would require a unanimous decision from a three-person panel of arbitrators; and there would be increased filing fees for expungement requests. These proposals were met with significant backlash from those in the industry because they would make it significantly more difficult and expensive for an adviser to be granted expungement and have a negative disclosure item removed from their public FINRA records.
Before those changes to the FINRA rules can take effect, however, FINRA must follow a series of steps to obtain the SEC’s approval of the proposed rule changes. This includes formally submitting the proposed changes to the SEC, which then publishes the proposed amendments in the Federal Register, solicits and obtains comments on the proposed changes from the public and industry, provides proposed amendments, and ultimately approves or rejects FINRA’s proposal.
Since the revised expungement rules were announced in late 2017, FINRA has only submitted one of these proposals to the SEC for approval and, if the SEC signs off on the proposed change, the cost of expungement will increase significantly. In February of this year, FINRA submitted SR-FINRA-2020-005 to the SEC for approval. This proposal seeks to increase the minimum fees for filing expungement requests and eliminates one-arbitrator panels for expungement requests that only include a nominal monetary claim. Upon SEC approval of the proposal, FINRA will provide a 60-day notice to members before the change is implemented. The pending proposal will increase the minimum fee for expungement requests from $300 to a whopping $9,475. That is a very substantial and serious increase in the filing fee alone of more than three thousand percent!
In the fee increase proposal, FINRA stated the reason for this increase is to ensure all parties pay the same minimum fee for expungement requests. Previously FINRA charged different rates depending on the type of expungement requested. An expungement request that claims $1 in compensatory damages lowers the total fees paid to $300 compared to the $9,475 paid by non-monetary claims. The minimum fee proposed to the SEC aligns with the current fee structure of non-monetary claims. If a party adds a monetary claim for compensatory damages to the request, the filing fee will be the greater of the applicable filing fee based on the claim or the fee for a non-monetary claim.
A breakdown of the fee changes will be as follows:
Filing Fee: Prior Rule ($50) / New Rule ($1,575)
Pre-hearing Session Fee: Prior Rule ($50) / New Rule ($1,125)
Hearing Session Fee: Prior Rule ($50) / New Rule ($1,125)
Member Surcharge: Prior Rule ($150) / New Rule ($1,900)
Processing Fee: Prior Rule (Waived on claims under $25,000) / New Rule ($3,750)
All the additional items from the 2017 proposal have not yet been be submitted to the SEC for final approval: only the fee changes. In March 2019, Senator Elizabeth Warren wrote to FINRA asking them when they planned to submit the expanded rules on expungement to the SEC. In her letter Senator Warren pushed for stronger regulations around the expungement process to protect investors.
Recently Richard Berry, the head of FINRA’s Office of Dispute Resolution, announced FINRA would instead proceed with modified versions of the 2017 proposals. He announced FINRA is no longer proposing expungement requests require a unanimous decision, instead moving to a majority decision for expungement claims heard by a panel of three FINRA approved arbitrators. FINRA proposes a two-year period to file expungement requests rather then the original proposal of a one-year. FINRA, however, is sticking with the proposed change that if an associated person is named in a customer’s complaint they must file for expungement during the underlying arbitration and no longer will be able to wait until the outcome of the underlying case and bringing an expungement proceeding later on before a different panel. These adjustments are somewhat more lenient than the original 2017 proposal but still provide significantly more restrictions than the current rules. Forcing an associated person to seek expungement from the same panel hearing the customer’s complaint against that broker, ultimately will make it more difficult to convince a panel that expungement is warranted.
This amended proposal has not yet been sent to the SEC for approval and FINRA has not yet provided any timeline for going forward with the proposed changes.
We greatly appreciate Holly Nicoll’s contribution to our firm! Shustak Reynolds & Partners, P.C. focuses its practice on securities and financial services law and complex business disputes. We routinely represent broker-dealers and financial advisors in arbitrations, financial advisor transitions, broker protocol disputes and related matters. Please direct any questions to our managing partner, Erwin J. Shustak, Esq. and contact us today for a confidential, complimentary consultation.
FINRA rule 2010 is a sweeping provision that mandates brokers and licensed persons subject to FINRA’s jurisdiction maintain “high standards of commercial honor”. One of the most common violations of that rule, which are aggressively pursued by both employing firms and FINRA, is the prohibition against modifying, completing or altering, in any way, a signed client account document or other form. A recent case illustrates the risk to licensed persons who modify, complete or alter those forms and documents- even if they do so at the client’s request or for the client’s benefit and particularly during the coronavirus pandemic.
Claire Cail was a 25-year veteran of the securities industry who spent the last 19 of those years at Morgan Stanley in Manchester, New Hampshire. She did something she thought was for the client’s benefit, but which resulted in her loss of her job at Morgan, suspension from the securities industry and a FINRA fine. She filled in missing information on a signed client form, including relatively innocuous information as filling in the client’s address and telephone number and checking a beneficiary box. She filled out new account and beneficiary forms for a Morgan Stanley prospective client the firm previously had rejected by combining the forms with prior signature pages and submitting them to the firm for processing.
As a result, the firm violated FINRA’s books-and-records rules by maintaining incorrect client data. In turn, Cail violated FINRA’s Rule 2010 by altering the documents. When Morgan discovered what she had done, they terminated her and reported her actions to FINRA. In turn, she was suspended from FINRA for three months and fined $5,000.00. FINRA’s letter assessing the suspension and fine states “Altering or completing signed customer documents violates FINRA Rule 2010 even when done to accommodate a customer”.
In other words, even if the client requests the changes or additions be made; or if the broker thinks he or she is helping and accommodating the customer, it is a black and white “no-no”. Do not, under any circumstances, modify, amend, complete or in any way alter a signed client document. Only the customer can make those changes, regardless of how difficult it may be for the customer.
We expect to see more of these cases coming down the pike during the coronavirus pandemic. Many clients cannot travel; get to the mail; may not know how to scan, print or email; and may ask, or expect, their broker to make the changes necessary to the account forms. It doesn’t matter, however, why the broker made changes or additions to the client documents and it is absolutely no defense to take the position the changes were made for the customer’s benefit. It is strictly prohibited by the rules of every member firm and by FINRA’s own rules, most notably 2010. What happened to Claire Cail is a lesson for every registered person. No good deed goes unpunished. Do not make any changes, of any kind, to signed client account forms and documents.
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.
Kara Siegel has broad experience in complex commercial and employment litigation, including financial-services and class-action matters. She began her career at major New York law firms, where she litigated complex commercial matters on behalf of public corporations and privately held firms in the U.S. and abroad, as well as their individual directors, officers, and stakeholders. Before joining the firm, she practiced at Paul Plevin Sullivan & Connaughton LLP in San Diego, focusing on issues specific to employment and higher education. Read More
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.
Recently, Waddell & Reed, Inc. announced it would be closing all of its offices by the end of 2020, forcing all of its representatives to find- and pay for- their own office space, assistants and other expenses that Waddell & Reed may be contractually obligated to pay for. Those affected advisors may have substantial legal claims against the firm for breach of contract and other claims.
Many Waddell & Reed advisors, who joined the firm under the Choice Financial Advisor or Professional Career agreements, were assured, many in writing, that the firm would pay for branch office space, OSJ and Compliance fees, pre- and post-sale support and other expenses. Many advisors were given letters by management assuring them the firm would pay for these expenses despite the actual contract language that required the advisor to bear these expenses. Many of the affected advisors appear to have joined the firm prior to 2017 when Waddell & Reed was using form contracts it then modified by letters that contradicted portions of the contracts that discuss the payment of office space and these other expenses.
Now that Waddell & Reed has announce it will be closing its offices, and shifting the expense for office space and other overhead to the advisors, it is asking many advisors to sign a new form of agreement that “supersedes and replaces” the prior agreements. Those unwitting advisors who actually sign the new agreement may be jeopardizing their legal claims against the firm for shifting to the advisors various expenses the firm had committed to paying.
We are happy to speak to and Waddell & Reed employees affected by the new policy of closing offices and shifting expenses to the advisor to discuss their rights and determine whether they have viable, and in many cases, substantial claims against the firm that could be used to reduce any loan balances owed by the advisor to the firm and recover monies from the firm based on this change of business plan.
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 at [email protected], or call 800.496.5900 ext. 109.
In the seminal, 1987 decision of Shearson v. McMahon, the U.S. Supreme Court decided that pre-dispute agreements to arbitrate securities disagreements were binding on investors. Since then, financial service firms have uniformly required that their customers sign these agreements and agree to waive a jury or court trial and, instead, head to the FINRA (formerly the NASD) arbitration panels to resolve their disputes with their firms. Before the 1987 decision in Shearson v. McMahon, arbitration was voluntary because, under federal law, arbitration agreements were considered unenforceable against investors.
At the time, securities firms had long been using arbitration to settle intra-industry disputes–those that arose between firms, or between firms and their employees. But until 1987, those firms could not compel customers to arbitrate; customers could go to court if they so choose.
Back then, the customer also had the option of going to arbitration. The by-laws of both the New York Stock Exchange and the NASD (and the other exchanges) required members (i.e., the brokerage firms) to arbitrate disputes with customers if the customer (but not the firm) elected arbitration. It was a one-way choice that clearly favored investors. They could choose their preferred forum. In the McMahon case, however, the securities industry challenged the then-existing interpretation of federal law- and won in the Supreme Court. Thereafter, mandatory agreements to arbitrate securities disputes would be enforceable against all investors.
The McMahon case effectively ended one-way choice. With the securities firms uniformly requiring that customers sign arbitration agreements, and with the courts enforcing them, there was no choice at all. Since then, virtually all consumer securities cases have gone to arbitration, and the system that has been created, now run by FINRA, has been termed “mandatory arbitration.”
Over the years there have been numerous studies and arguments that mandatory arbitration of securities disputes between customers and their firms was unfair and many writers argued in favor of eliminating the mandatory arbitration of securities disputes. During the Obama administration a bill was proposed eliminating mandatory arbitration, but it never got out of committee and died on the vine.
Recently, however, new legislation was proposed by Sen. Sherrod Brown, D-Ohio, a ranking member of the Senate Banking Committee, known as the Arbitration Fairness for Consumers Act, which would put an end to pre-dispute, mandatory arbitration agreements that are and have for many years been ubiquitous and a part of almost every brokerage/financial services agreement between an investor and his or her firm.
Earlier this year, another bill was introduced in the House and Senate, the Forced Arbitration Injustice Repeal Act, that was broader in scope than Senator Brown’s bill and would further amend the Federal Arbitration Act. Both proposed bills were welcomed by PIABA, the Public Investor Arbitration Bar Association, a pro-investor legal group that has been anti-mandatory arbitration since its founding around the time of the McMahon decision. PIABA has conducted numerous studies showing how poorly investors fair in mandatory arbitrations and asserts that customers should have the option of choosing arbitration or the courts when filing claims against investment professionals.
The proposed legislation, however, may face serious challenges on Capital Hill, where the House is controlled by Democrats, who tend to favor the end of mandatory arbitration and Republicans, who tend to favor mandatory arbitration and side with the securities industry, control the Senate.
The Dodd-Frank financial reform law gave the Securities and Exchange Commission the authority to end mandatory arbitration, but the agency has yet to take up and consider the issue.
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.
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.
