Financial advisors (“FA’s”) at registered investment advisory firms (“RIA’s”) are facing yet another challenge atop already shaky markets. According to the June 2020 DeVoe & Co. Study Report[1] (the “Report”), owners and senior members of RIA's are “approaching a succession crisis.” The Report notes that while the average RIA owner is in their early 60s and would prefer to pass on their loyal clientele and sell their well-established business internally, nearly 57% of surveyed RIA’s claim that a leadership transition would not only be difficult, but would create a “significant or severe challenge,” for the RIA. However, it is not too late to begin creating and bolstering a comprehensive succession plan. [...]

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. [...]

In the recent appellate case Crosno Construction Inc v. Travelers (2020), the Fourth District Court of Appeal (which includes San Diego, Orange and Riverside counties) determined a “paid when paid” contract clause, asserted by a payment bond surety as a defense to paying the claimant subcontractor, was unenforceable. This clause, found in the general contract, allowed the general contractor to delay payment to its subcontractor in the event the public works entity failed to pay the general contractor, until such time the general contractor was paid. The general contractor in Crosno sued the public entity for payment and the litigation stretched for several years. The surety adopted the clause as applicable to the payment bond and refused to pay the sub. [...]

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. [...]

UBS Financial Services is reportedly facing an onslaught of filed and threatened investor claims after its Yield Enhancement Strategy (“YES”) options portfolio plummeted. The YES strategy was marketed and sold primarily to wealthy investors as a bond portfolio “enhancement.” The strategy purportedly incorporated a “defined maximum loss,” limited to the premiums investors paid. [...]

In March 2020, Congress passed the Coronavirus Aid, Relief, and Economic Security (CARES) Act, injecting more than $2 trillion in emergency stimulus funds into the economy. The initial bill included approximately $350 billion in loan money to be distributed to businesses through the Paycheck Protection Program (PPP). The overwhelming demand for these emergency PPP loans, which can be forgiven under certain circumstances, prompted Congress to release an additional $310 billion in loan funds in late April. With the economy grinding to a halt and wild market volatility, many small to medium-sized RIA firms were eligible for and received a portion of the $670 billion in outstanding PPP loans. Do these loans constitute a “material fact” that must be disclosed via the Form ADV? [...]

On June 5, 2019, the SEC adopted a new rule under the Securities and Exchange Act of 1934, which requires broker-dealers and their representatives to act solely in the “best interest” of their retail clients when making investment recommendations. Among other things, “Regulation Best Interest”–or “Reg BI”–imposes new conflict-of-interest rules and requires broker-dealers to establish, maintain, and enforce policies reasonably designed to identify, and fully and fairly disclose, any such conflicts to investors. [...]

Although COVID-19 has upended many aspects of American life and our economy, the SEC advises that the novel coronavirus will not delay implementation of Reg BI. On June 5, 2019, the SEC adopted a new rule under the Securities and Exchange Act of 1934, which requires that broker-dealers and their representatives act solely in the “best interest” of their retail clients when making investment recommendations. [...]

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. [...]

The past several weeks (which have felt like years) have turned the financial industry on its head. The market has seen unprecedented declines, followed by unprecedented increases as Congress shored up a $2 Trillion–with a T–economic bailout package. That staggering figure represents approximately 10% of the entire country’s annual gross domestic production. Just one of many unprecedented steps the government, and society, have taken to curb the damage caused by the virus. [...]

In February 2020, the Securities and Exchange Commission (SEC) issued an alert, cautioning investors to be wary of scams tied to the Coronavirus pandemic. It is common for fraudsters to use the latest news developments to lure investors into scams. Nothing has been more prevalent on the news over the past several weeks than Coronavirus/Covid-19. [...]

On March 25th, Murphy’s law took full effect when Morgan Stanley’s order entry and order status systems ground to halt, blocking financial advisors and clients from viewing account information and entering trades. The firm later reported that “multiple applications are experiencing latency or may be unstable.” Some clients reported problems accessing their accounts online; others reported seeing incorrect account values and balances. [...]

This is a reminder to registered investment advisers about the requirements surrounding your Form ADV annual amendment filing. For most registered advisers,[1] the deadline to file the firm’s Form ADV is rapidly approaching. According to Rule 204-1 of the Investment Advisers Act of 1940, as amended (the “Advisers Act”), registered advisers are required to file an annual amendment to Form ADV Parts 1 and 2 “annually, within 90 days of the end of your fiscal year.” [...]

The California Consumer Privacy Act (“CCPA”), which took effect on January 1, 2020, significantly changes businesses’ legal obligations in collecting and maintaining consumers’ personal data. Importantly, the CCPA does not apply to all California businesses. The law applies only to non-governmental, for-profit entities that “[do] business in the State of California” and (a) have gross adjusted annual revenues in excess of $25,000,000; (b) annually buy, sell, or receive personal data of 50,000 or more consumers, households, or devices; or (c) derive more than half of their annual revenue from selling consumers’ personal information. [...]

A lot of noise has been made about the new Form CRS, but what exactly does it mean for registered investment advisers? On June 5, 2019, the Securities and Exchange Commission (the “SEC”) adopted Form CRS and new rules, as well as amendments to its forms and rules, under both the Investment Advisers Act of 1940 (“Advisers Act”) and the Securities Exchange Act of 1934 (“Exchange Act”). While changes to the Exchange Act were substantive, for purposes of this article, only changes to the Advisers Act and subsequent additional requirements to investment advisers registered with the SEC will be discussed. Below is a “Q&A” of some of the more common questions being asked about Form CRS. [...]

Investment opportunities come in all shapes and sizes – from traditional 401(k) contributions and Registered Investment Advisor (RIA) firms to hedge funds and venture capital start-ups. Any investment opportunity comes with its own specific set of legal challenges that may jeopardize both novice and seasoned investors alike. Anyone, however, can navigate the uncertain investment landscape and avoid costly legal pitfalls with input from financial professionals and experienced legal counsel. [...]

Each year, the Securities and Exchange Commission (SEC) publishes a list of its examination priorities for the coming year. Similar to the 2019 list, the SEC’s list for 2020 includes enhanced focus areas related to investment advisers, investment companies, broker-dealers and municipal advisors. Specifically, the SEC pledges to focus its resources on examining RIAs that have never been examined, including newly formed RIAs as well as those already in operation. The RIA examinations will include those RIAs advising retail investors as well as private funds. Broker-dealer examinations will focus on issues pertaining to the implementation of new regulations, including regulation “Best Interest,” or Reg BI. [...]

A FINRA arbitration panel has denied J.P. Morgan Securities’ request for a permanent injunction preventing its former broker, Eric Weiss, from contacting clients with whom he worked at the firm. Weiss left J.P. Morgan for Raymond James earlier in 2019. Soon after he resigned, J.P. Morgan sued in Indiana federal court seeking an emergency temporary restraining order (TRO) barring Weiss from contacting clients until FINRA’s arbitration division conducted a full hearing on the dispute. [...]

Last week, a panel of FINRA arbitrators ordered UBS Financial Services Inc. to pay over $11 million to a former supervisor, including $7.5 million in punitive damages, for defaming him on his Form U5 and thus preventing him from obtaining alternative employment. Mark Munizzi worked as market-operations supervisor in UBS’s Chicago office. In February 2018, the market dropped sharply, and two accounts Munizzi oversaw lost significant value. UBS fired Munizzi in April of that year. UBS asserted that Munizzi had failed to respond to a notification of margin calls on the two accounts; Munizzi said he was provided no such notification. UBS also said that Munizzi had failed to properly supervise the risks of an uncovered options strategy and lied during an internal review of the incident. [...]

Last week, a FINRA arbitration panel took the extraordinary step of ordering the parties to an arbitration to request dissolution of a temporary restraining order (TRO) imposed by a district judge in Nevada. On November 12, 2019, Edward Jones had secured a TRO and injunction preventing former broker Mike Peterson from contacting his former clients. Edward Jones argued that after running the company’s Henderson, Nevada office for 13 years, Peterson had decamped for rival Ameriprise, contacted at least 11 former customers using Edward Jones’s confidential client data, and sent transfer paperwork to at least 15 former customers. [...]