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The Cost of Compliance

Q: I am a big fan of the Ethical Rep section of the magazine. As a registered representative, I often encounter situations where my licensing and continuing education do not provide me with the necessary guidance. For instance, my current firm recently hired a non-licensed wholesaler to begin marketing our mutual fund family to a territory that I used to support. The new wholesaler would like me to


I am a big fan of the Ethical Rep section of the magazine. As a registered representative, I often encounter situations where my licensing and continuing education do not provide me with the necessary guidance. For instance, my current firm recently hired a non-licensed wholesaler to begin marketing our mutual fund family to a territory that I used to support. The new wholesaler would like me to take him through the territory and make an initial round of sales calls.

Here's my dilemma: I hold a Series 24 license. I know the wholesaler does not hold a securities license but he is out soliciting business for investment products.

My question comes in a few parts: What liability do I have, given that the wholesaler is not licensed and given that he is making sales calls representing investment products?

If I travel with this individual, do I expose myself to potential NASD violations? Do I have a responsibility to notify the NASD of my concerns about this wholesaler's non-licensed status? Is my firm in violation of NASD rules and regulations? If so, I do not want to get caught up in this and would prefer to seek other opportunities.

Can you provide me with some guidelines on how to find an attorney to represent a licensed individual in a potential legal matter?

(There is some back history to my questions. In February, I had contacted my firm's human resources department about a compensation issue. When this became known to my supervisor, he attempted to put me on probation and have me “written up” for insubordination. Corporate HR refused to allow this because he does not have any grounds. I have a clean employment record with three different officer level promotions in six years. Since my superior was notified by HR of my claim, he's made my work environment extremely intimidating and hostile.)


You would spend an awful lot of time and money determining whether your wholesaler (a) needed licenses, (b) was “soliciting” prospective customers or (c) getting you in trouble for merely tagging along (and being thoughtful regarding your obligations under the securities laws). Indeed, you would be hard-pressed to find three lawyers to agree on the same answers to the problems posed, but there is one thing you can bank on: The regulators would be in complete agreement that licenses are required.

In this era where “best practices” reign, your concern is perfectly appropriate and whomever at your firm is trying to skate on the edge of the rules is the person who truly needs counsel.

I think, in the interest of your job security, the way to approach the problem is ask candidly where is the wholesaler's licenses in light of the work she is doing? The wrong answer is that “the wholesaler and her firm determined that licenses are not needed.” You (and your firm) must care about your exposure for aiding and abetting the activities of an unlicensed person, and you must err on the side of compliance as to all matters.

Concerning attorney referrals, you should start by asking your colleagues. The problem is that there are few lawyers who actually specialize in financial services counseling and litigation, especially for individuals. (Local bar associations supply the names of lawyers focusing on specific areas, but that source is merely a fancy yellow pages.)

Your task is a bit harder because you need not a litigator, but really a career coach who, if the going got rough, could send lawyers' letters to your (then-ex) employer. The lawyer you engage will focus on whether you are a member of a protected class under federal and state civil rights laws; if you are not, spend your energies elsewhere.

In any event, you must remember that you are an employee-at-will. If the employer does not like you, you must go elsewhere. You must do so before you are fired and your Form U5 bears the permanent, and unique securities industry, tattoo of you being “involuntarily terminated.”

Anthony Paduano
Paduano & Weintraub
New York

[email protected]


A fabulous resource for lawyers familiar with the brokerage industry is the Public Investors Arbitration Bar Association (PIABA). At the PIABA Web site — — you can search for PIABA members by zip code. Being a national organization, PIABA has members all over the country. Naturally, some lawyers have more experience than others. Many attorneys you find on the PIABA site have their own sites that you can click right through to. Often the Web sites will describe the nature of the lawyer's practice.

Though by definition, PIABA attorneys have securities-related experience, as in any bar organization, some have more experience than others. Here are some questions you might ask to find the most suitable securities attorney in your area.

Because of your unique situation, explore the lawyer's prior experience representing stockbrokers in employment disputes. What PIABA members have in common is that they all represent investors (hence, the name). Not all PIABA members represent stockbrokers in cases against their firm, however, many of them do. This is the most important subject area for you to explore, because the universe of lawyers in the country with this type of experience is rather small.

How many years has the lawyer been doing securities work? This is an important question as there are many lawyers who have recently entered this area of practice.

Does the lawyer do anything other than securities work? If a significant percentage of work is in other areas, you probably ought to look elsewhere since there are so many gifted securities attorneys.

You can ask about fee structure, but my inkling is that you are more likely to pay hourly since your damages are not that substantial or quantitative at this juncture.

Before you seek out any attorney's help, make sure that you have put together a good outline for the attorney, which will include a chronology of events, any and all key documents and what sort of redress you are seeking. You may lose the opportunity to hire an excellent securities attorney by not following this step.

If you are unable to find a lawyer with whom you are comfortable where you live, do not hesitate to look elsewhere. Because your case will be in arbitration, as opposed to court, the only significant additional expense that you will incur in hiring a lawyer who is not “local” is plane fare and hotel costs if your case is arbitrated. I say “if” because the vast majority of cases that are filed in arbitration — both by investors and stockbrokers — settle before the arbitration day arrives. That means that your lawyer will not have to travel anywhere to represent you.

One exception to that rule is if your case is mediated in advance of arbitration. Mediation is something to which both parties have to agree. The mediator separates the parties into separate rooms and goes back and forth attempting to get the brokerage firm to pay more and the claimant to accept less. The mediator's role is to attempt to settle the case, not to decide it. If you agree to mediation, then you would pay your lawyer's costs to fly to the mediation.

As a general rule, I typically do not agree to mediate my cases unless the other side has made a good faith offer. I have been to one mediation too many where the brokerage firm offers pennies on the dollar to settle the case, and it is a total waste of time. This information should serve you well with respect to selection of a lawyer to represent you.

Since I represent brokers, too, let me give you a few pointers on your potential case.

It sounds like your manager has it out for you. If you have a clean CRD and good production, I might suggest leaving before this manager tarnishes your spotless record and embroils you in a legal battle.

But if changing firms is not an option, think about documenting what is occurring. Of course, if you are reading this in the Ethical Rep section of Registered Rep., then the magazine has already documented your concerns!

You might send something to corporate HR regarding your manager's conduct. While it may aggravate the situation, you will have covered your bases if things blow up. Better yet, you may head off a worse situation. Without documentation, it will only be your word against his.

Tracy Pride Stoneman
Tracy Pride Stoneman LLC

[email protected]

Ethical Rep is a monthly feature in which more than 30 prominent securities attorneys, experts and law school professors help Rep. readers deal with work-related ethical quandaries. Have you encountered a situation at work that makes you uncomfortable? Are you confused about how your responsibilities to clients might change as regulations continue to evolve? Drop a line to Rep.'s contributing editor, Ann Therese Palmer, and our group of experts will help you work through the problem.

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