Employment Law

Morgan Stanley No Longer Bound by the Protocol for Broker Recruiting

November 30, 2017 | Herskovits, PLLC

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In a move that could be categorized as ‘seismic,’ Morgan Stanley has decided to quit the Protocol for Broker Recruiting. Originated in 2004, the document created a methodology to engineer the departure of brokers from one firm to join another.

Since then, it has protected departing brokers from litigation and temporary restraining orders, and ensured they do not share client information with their new firm without the clients’ consent.

For nearly 13 years, we have observed brokers moving between firms, and clients following them, more often than not. Meanwhile, brokerages have tried to train new recruits who can hold on to the clients of more experienced advisers. Now, Morgan Stanley will no longer be restrained by the Protocol, and they will likely go after departing brokers (who have taken their clients with them) much more aggressively.

Former UBS Broker Wins $3 Million in Defamation Case

November 10, 2017 | Herskovits, PLLC

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A FINRA arbitration panel has just awarded James L. Springer Jr.; a Sarasota investment adviser, $3 million in damages, to be paid by his former employer, UBS. Springer, who managed $350 million in client assets during his 12 years with the company, claims UBS defamed him in a desperate attempt to keep his clients after he decided to leave.

In 2014, the broker prepared to leave UBS for a lucrative position at Merrill Lynch. Two days before he was supposed to resign, UBS fired him and proceeded to make allegedly false statements to his former clients.

UBS claimed Springer was being fired because he had used a corporate credit card to make personal purchases. The dollar amount of the purchases was, however, insignificant, especially when considering that the broker’s work yielded multi-million dollar profits for the company.

FINRA VOWS TO LIMIT EXPUNGEMENTS – Rules and Realities

October 10, 2017 | Herskovits, PLLC

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“Arbitrators have a unique, distinct role in ensuring that customer dispute information is expunged from the CRD system only when it has no meaningful investor protection or regulatory value.” FINRA (September, 2017)

In a new push for closer scrutiny over expungements, FINRA has just updated its Notice to Arbitrators and Parties on Expanded Expungement Guidance. In the revised document, FINRA zeroes in on expungement-only cases, specifically addressing the issue of customers who may be unaware of the existence of expungement claims.

The regulator’s document states that,

Raiding Cases in the Securities Industry – Navigating Claims, Damages & the Rest

August 22, 2017 | Herskovits, PLLC

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Raiding, hiring groups of brokers from a competitor, happens frequently in the securities industry giving rise to complex disputes and damage claims. Whether your firm is the victim or the accused raiding entity, you will need to understand these basics:

What is raiding in the securities industry?
Which legal claims are asserted?

$4.8M in FINRA Fines for 4 Firms on Supervisory Gap & Deutsche Bank $12.5M on Failed Supervision of Internal Comms

August 16, 2017 | Herskovits, PLLC

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Last month, Deutsche Bank Securities Inc., Citigroup Global Markets Inc., JP Morgan Securities LLC and Interactive Brokers LLC agreed to pay a collective $4.8 million to end FINRA´s probe over inadequate risk controls.

According to FINRA´s allegations, the financial institutions violated the Market Access Rule, which establishes requirements for maintaining risk management controls that supervise clients’ access to the market.

FINRA sources explained that, “The purpose of this requirement is to prevent firms from jeopardizing their own financial condition and that of other market participants, while also ensuring the stability and integrity of the financial system and the securities markets.”

Keeping the Record Straight – FINRA Cracks Down on Firms for Failing to Protect Records

August 3, 2017 | Herskovits, PLLC

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Regulatory compliance is often less costly than FINRA’s steep fines. Yet companies continue to face millions of dollars in penalties for not complying with FINRA’s regulations. In this particular time, there is a clear intent from FINRA to hold such companies accountable. Unfortunately, many of them have learned this the hard way.

FINRA has just fined State Street Global Markets and Acorns Securities $2 million for an easily avoidable violation: improper retention of customer records. FINRA has very specific requirements for record-keeping, which should be done in a manner that prevents them from being altered or destroyed.

For State Street, this is the second blow in a row, after Richard Boomgaardt, a former executive with the company pleaded guilty to securities fraud and wire fraud involving secret commissions on billions of dollars of trades. Edward Pennings, another former State Street exec also pleaded guilty in the same case.

Broker Denied FINRA Expungement after Settlement – Tightening Rules and the Need for Legal Representation

May 15, 2017 | Herskovits, PLLC

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Michael James Malone, a FINRA arbitrator in Detroit, recently denied an expungement request from broker Kathie Lee Foreman. Foreman was seeking expungement of a customer complaint in connection with “unsuitable” investments allegedly leading to the, also alleged, loss of $20,000.

Foreman, formerly of Sigma Financial Corp.; had also been accused by Troy William Johnson of failing to cash him out in spite of several requests to do so. According to the arbitrator, Foreman characterized Johnson as “an unsophisticated, nervous investor,” who had the bad fortune of investing during “the worst quarter since 2011.”

The case of Johnson v. Foreman was settled in December. Barely a day after Johnson withdrew his complaint (in exchange for an undisclosed sum) Foreman decided to file a request for expungement. Johnson did not oppose the request. At this time, neither the claimant nor the respondent opted for legal representation. They made the often ill-advised decision of “appearing pro se.”

FINRA Implements New Rule and Procedures to Prevent Financial Exploitation of Seniors

April 11, 2017 | Herskovits, PLLC

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New FINRA Rule 2165 (Financial Exploitation of Specified Adults) and Amendments to FINRA Rule 4512 (Customer Account Information)

America’s population is rapidly aging. The number of US residents over the age of 65 is expected to double over the next 30 years. Today, seniors, specifically baby boomers, control 50% of all existing investable assets across the country.

This portion of the US population has a combined net worth of over $30 trillion. According to a 2016 survey by Public Policy, about one in five Americans over the age of 65 have “been taken advantage of financially in terms of an inappropriate investment, unreasonably high fees for financial services, or outright fraud.”

FINRA Is Looking for Additional Disclosure on Up Front Loans to Reps

January 15, 2013 | Herskovits, PLLC

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It is commonplace in the securities industry for reps to transition from one broker-dealer to another. If the rep is a big producer, it is typical for the hiring firm to offer the rep a “forgivable loan” as an inducement to join. Depending upon the size of the producer’s book, the forgivable loan can equal 100% to 200% of the producer’s trailing 12 month’s of production, and is typically forgiven in equal increments annually over a 7 to 9 year period.

FINRA just published Regulatory Notice 13-02, seeking comments on a proposed rule to require disclosure of “conflicts of interest” relating to recruitment compensation practices. The proposed rule, called “Enhanced Compensation”, has the following components:

For one year following the rep’s start date, the “recruiting” broker-dealer must disclose the “details” of the enhanced compensation “at the time of first individualized contact by the recruiting member or registered person with the former customer after the registered person has terminated his or her association with the previous firm.” That should make for an interesting first conversation with the customer.

Fidelity Wins Against Morgan Stanley in a Non-Protocol Solicitation Case

October 16, 2012 | Herskovits, PLLC

In Fidelity Brokerage Services LLC v. Morgan Stanley Smith Barney LLC and Brian Wilder(FINRA Arbitration No. 11-03937), a FINRA arbitration panel found against respondents and annexed a 25 page Arbitrators’ Report to the Award which excoriated respondents for misappropriation of trade secrets (Fidelity’s customer list) among other violations. The Award stands out for various reasons, including the punitive damages awarded against Morgan Stanley and the sizable attorneys’ fees awarded to Fidelity. Most interesting, however, is the Arbitrators’ Report itself, which carefully applied the facts to the law and is a must-read for any broker who may be considering jumping ship from a firm which is not a signatory to the Protocol for Broker Recruiting.

Facts of the Case

The underlying facts are straightforward. The rep had an employment agreement with Fidelity which contained non-solicitation and confidentiality clauses. The confidentiality clause stated that customer lists and contact information were deemed to be trade secrets by Fidelity. Prior to leaving Fidelity, the rep met with counsel and created a list of customer contact information purportedly in conformity with the Protocol for Broker Recruiting even though Fidelity is not a signatory to the Protocol. Upon leaving Fidelity, the rep began calling his former customers to inform them of his new employment and sent ACAT forms to a sub-set of his former customers.