Q:
I work for three credit unions that offer investment services to members. I replaced a man who had been here for years and was fired for “selling away.” He had signed a contract with a poorly rated (Best B-/S&P BB) annuity company, was holding client files at home and received commissions at home. Three years ago, the FBI seized the client files and submitted a report showing he'd taken more than $291,000 in commissions from the credit unions and broker/dealer.
The rep, a CFP who continues to use that designation, is still in business. Nothing shows on his NASD file. It's frustrating for me because clients often ask how, if he did what he did, can he still be in business? I don't have a good answer. I wonder the same thing.
A:
The decision to report is usually made by legal (or compliance) people. Reporting can lead to further regulatory review and to aggrieved customers being encouraged to seek redress. Since the rules require that the report on the rep's CRD also go on the firm's CRD, reporting is just not good for business.
NASD Reporting Requirements, paragraph eight, mandate reporting whenever a member is the subject of a damages claim by a customer, broker or dealer whose settlement exceeds $25,000 and for a member's associate when the claim exceeds $15,000.
This appears to describe your situation, yet there was no report. It seems wrong, but remember, those are lawyers deciding whether to report. A very narrow reading of “customer” can lead to the (warped) conclusion no report need be made. The “customer” who made the complaint was the “customer” of the annuity company, not the broker/dealer where the rep was licensed. Thus, an unscrupulous broker/dealer can assert it had no duty to report about the bonding company's settlement of the complaint regarding a customer of another firm. I think that would be wrong, but the system isn't set up to police these nonreports.
Prof. Seth Lipner
Baruch College, New York
Member, Deutsch & Lipner, Garden City, N.Y.
Phone: 516-294-8899
Email: [email protected]
A:
The advisor's circumstances for leaving affect what is listed on his CRD. For instance, was the rep's registration terminated “voluntarily,” “involuntarily” or was he simply “permitted to resign”?
If the CRD shows that the rep was terminated, then the cause for such action may be listed as well. However, if the NASD did not demand that the firm provide a reason for the termination, they may have simply opted not to provide one on his U5.
If the CRD reads “voluntary” or “permitted to resign,” there is a chance that once again the infraction was never reported by the employing firm.
The last possibility is that the rep took legal action to have the incident expunged from his record.
As far as what action can be taken, attorneys at the NASD are available by phone to discuss such matters.
Laura E. Anthony, Esq.
West Palm Beach, Fla.
Phone: 800-341-2684
Email: [email protected]
Q:
I worked for a major wirehouse and hooked up with a rookie to do seminars and put any accounts from our efforts into a joint number. The rookie was trading options in his wife's account. The compliance officer told me he was moving the account to my FA number because apparently there was a restriction on rookies with options.
The account was moved. The trainee continued trading, but I never spoke to the wife. Then, the wife notified our office by letter she was suing her husband for unauthorized trading and forgery, adding I had nothing to do with it.
The firm's attorney's questioned me, but agreed I had nothing to do with it. Eighteen months later, the CBOE started investigating and found while I should have spoken to the wife, there'd be no disciplinary action against me. Before this opinion was issued, my firm fired me, claiming I hadn't followed management's instructions.
I was permitted to resign, but lost clients. The firm put a false statement on my license. I was out of work for three months. Do I have any recourse?
A:
A false and defamatory Form U5 may act as a virtual industry blackball, having significant effects on the likelihood and nature of future employment in the industry. Based on the facts you described, you may have an arbitration claim against your former firm for wrongful termination, defamation and tortuous interference with prospective economic advantage.
Your recourse is to file an arbitration claim as soon as possible, as your state's laws may provide a short statute of limitations period for these causes of actions. Your arbitration claim should also seek the expungement of any defamatory language from your U5 so that your record remains unblemished.
Howard S. Meyers
Meyers & Heim LLP, New York
Phone: 212-355-7188
Email: [email protected]
A:
It was not good judgment on your part to have allowed the switch to your personal FA number when: (a) You knew another broker, not you, would be communicating with the client, and (b) you knew it was to get around a rule. Rules are there just for this reason.
However, your firm was more at fault than you for condoning, if not directing, the activity. Do you have any proof of the firm's involvement in the switch? If so, then you may have a claim against the firm for mucking up your CRD and affecting your livelihood.
The time period within which you can bring an action depends upon which state law applies. You should consult with a lawyer to determine your rights.
Tracy Pride Stoneman
Tracy Pride Stoneman, P.C., Denver
Phone: 719-783-0303
Email: [email protected]
Q:
The Patriot Act requires brokerage firms to file suspicious activity reports containing specific information, possibly sensitive or protected by attorney-client or work-product privilege. Often, the requirement to file may be triggered by a customer transaction or in conjunction with an internal investigation.
I am concerned that SAR information may be used by industry regulators to levy a fine or launch an additional investigation. Are brokerage firms required to supply securities regulators with SAR data when there's privileged or protected information involved? If so, can a firm minimize its exposure to regulators?
A:
Unfortunately, opportunist regulators have been a fact of life in the securities industry since the SEC was founded. The USA Patriot Act and its attendant regulations to file SARs are the latest incarnation of such regulation.
Nonetheless, any attempt to limit or “wash” required information from an SAR will lead to serious consequences against the member firm or individual who filed the SAR. Only privileged information, including attorney-client communications, attorney work-product and information that would incriminate the person asked to turn it over (this protection doesn't apply to nonhumans like corporations) may be kept from federal and state regulators, such as the SEC.
SRO regulators from NASD and NYSE suffer no such impediment. They assume their member firms and registered reps will provide all information upon request, under threat of membership expulsion for noncompliance. Further, if you comply with these SRO requests, federal and state regulators will most likely obtain the information from SROs and then subject firms and individuals to criminal or civil sanctions.
The simplest way to minimize exposure to these regulators is to establish (and enforce) policies and procedures to prevent and detect activity that embroils member firms and registered reps in questionable or inappropriate activity.
Ernest E. Badway
Saiber Schlesinger Satz & Goldstein
Newark, N.J.
Phone: 973-622-3333
Email: [email protected]
A:
Does the Patriot Act Suspicious Activity Report require disclosure of privileged or protected information?
Let's first examine the problem. Global money laundering is a $1.5 trillion business. It trails only legal currency exchange and worldwide auto production in dollar volume. Its U.S. volume has been estimated at $300 billion annually.
Reporting requirements have been on the law books since the Bank Secrecy Act of 1970. The types of data required in SARs are used to investigate and prosecute criminal activity. The legal concepts of privilege are very particular. It doesn't protect one from reporting ongoing criminal activity.
The Patriot Act also provides required communication between law enforcement and regulated businesses. The Act provides immunity for persons filing required reports from persons reported on. Generally SAR data coming into the hands of the brokerage firm has lost its privilege. Firms must educate and train employees with SAR reporting requirements to accurately and timely disclose required information.
Gail E. Boliver
Boliver Law Firm
Marshalltown, Iowa
Phone: 641-752-7757
Email: [email protected]
The Ethical Rep is our monthly column through which more than 30 prominent securities attorneys, experts and law school professors answer questions you, our readers, send anonymously to us.
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