FINRA

FINRA Fines Commonwealth Financial Network Concerning Email Supervisory Failures

June 11, 2014 | by Staff Attorney

The Financial Industry Regulatory Authority (FINRA) recently fined brokerage firm Commonwealth Financial Network (CFN) $250,000 on allegations that from December 7, 2009 to January 28, 2012, CFN’s supervisory system: (a) failed to subject about 12.6 million outgoing e-mails to daily e-mail surveillance protocol, constituting 90% of the e-mails that the firm’s registered representatives sent through doing business as (DBA) e-mail accounts; and (b) failed to survey approximately 474,380 registered representatives e-mails. FINRA also found that the firm failed to establish and maintain procedures to test its e-mail supervisory system to timely identify systemic failures.

CFN has been a member of FINRA since 1979 and the firm has approximately 4,550 associated persons operating from 1,154 branch offices. CFN’s primary office is located in Waltham, Massachusetts. CFN’s registered representatives are independent contractors and many of them operate from branch offices under one or more DBA names. Most of CFN’s brokers use non-CFN e-mail domains names.

During the period from December 2009, to January 2012, CFN used a system to archive, preserve, and supervise business related e-mails of its associated persons. FINRA found that e-mails sent through DBA email domains were automatically transmitted to CFN’s system for retention and review. CFN’s supervisory procedures required the firm’s emails to be transmitted through CFN’s server so that the firm could capture and review its brokers’ emails. CFN’s supervisory system required a daily review of its registered representatives’ e-mails including lexicon searches and a random sampling of emails.

Ameriprise Broker Jeffrey Davis Barred Accused of Converting Client Funds

June 5, 2014 | by Staff Attorney

The Financial Industry Regulatory Authority (FINRA) recently barred Ameriprise Financial Services (Ameriprise) broker Jeffrey Davis (Davis) concerning allegations that the broker committed securities fraud by converting client funds. FINRA alleged that from May 2012, through June 2013, Davis converted $116,976 from five Ameriprise customers for his personal use and benefit. According to FINRA, Davis initiated 71 unauthorized electronic Automated Clearing House (ACH) payments from the customers’ brokerage accounts to personal credit card accounts held in Davis’ name. FINRA found that these transfers converted customer funds and violated FINRA Rules 2150 and 2010.

Davis entered the securities industry in June 1998. Davis became associated with Ameriprise in September 2000 and remained with the firm until he was terminated on July 19, 2013. In a Form U5 Uniform Termination Notice dated July 24, 2013, Ameriprise reported that Davis was terminated for misappropriating customer funds to ‘pay personal credit cards.

FINRA Rule 2150(a) prohibits members or person associated with a member from making improper use of a customer’s funds. Improper use of customer funds constitutes conversion of the client’s funds when there is an intentional and unauthorized taking of or exercise of ownership by one who neither owns the property nor is entitled to possess it.

FINRA Sanctions Larry Steven Werbel for Selling Away and Other FINRA Violations

June 4, 2014 | by Staff Attorney

On March 10, 2014, Larry Steven Werbel submitted a Letter of Acceptance, agreeing to accept the sanctions handed down by the Financial Industry Regulatory Authority (FINRA) for alleged violations relating to the sale of penny stocks during his tenure at LPL Financial, LLC.

Larry Werbel entered the securities industry in 1976 as a Series 1, Registered Representative at Cigna Financial Advisors, Inc., where he was employed for twenty years. Thereafter, in February 2009, after a thirteen-year stint at FSC Securities Corporation, Werbel began working for LPL Financial, until his termination in February 2011.

During a three-week period, spanning from on or about October 26, 2010 through on or about November 17, 2010, while registered with LPL Financial, Werbel allegedly solicited eight customers to invest in QLotus Holdings Inc. (“QLTS”), a low-priced security that Werbel himself had previously purchased. According to FINRA, Werbel’s firm, LPL Financial, prohibited the solicitation of low-priced securities, such as QLTS, and so Werbel coded the QLTS sales as unsolicited despite the fact that they were all solicited. Werbel’s improper coding caused LPL’s books and records to be inaccurate in violation of NASD Rule 3110(a).

Mislead into Investing in Tenants-in-Common (TIC) Property?

May 22, 2014 | by Staff Attorney

The sales of Tenants-in-Common (TIC) interests grew significantly during the early 2000s from approximately $150 million in 2001 to approximately $2 billion by 2004. The Financial Industry Regulatory Authority (FINRA) has noted that TICs are illiquid investments for which no secondary market exists and that subsequent sales of the property may occur at a discount to the value of the real property interest. FINRA has also warned that the risk that the fces and expenses charged by the TIC sponsor can outweigh the potential tax benefits associated with a Section 1031 Exchange. FINRA also instructed members that they have an obligation to comply with all applicable conduct rules when selling TICs by ensuring that promotional materials used are fair, accurate, and balanced.

According to FINRA former brokerage firm CapWest Securities, Inc., (CapWest) violated industry content standards in communications with the public. FINRA found that the communications: (1) were not fair and balanced and failed to provide a sound basis for evaluating TIC investments being promoted; (2) used exaggerated and or misleading statements; (3) used prohibited statements by projecting the results of the products being promoted; and (4) used customer testimonials without proper disclosures. FINRA also found that CapWest violated supervisory standards by failing to implement effective supervisory procedures. FINRA found that all of these violations and conduct were inconsistent with just and equitable principles of trade.

FINRA’s investigation involved CapWest’s promotion and sales of Section 1031 Exchanges and TIC investments that started being sold in the early 2000s. CapWest made public communications to promote tax-deferred exchanges of real property under Section 1031 of the Internal Revenue Code (IRC) as well as TIC investments. The IRC permits an investor to defer paying capital gains tax on the sale of real estate held for use for investment by exchanging the investment for “like-kind” property of equal or greater value.

FINRA Drops Bid to Regulate Investment Advisors – For Now

May 16, 2014 | by Staff Attorney

Most people do not realize that there is a big distinction between brokers and investment advisors. Many people think, they both recommend securities. While that is true, that is pretty much where the similarities end.

A broker is regulated by The Financial Industry Regulatory Authority (FINRA) a self-regulatory organization (SRO) as provided for under the Securities and Exchange Act of 1934. On the other hand investment advisors are regulated by the Securities and Exchange Commission as provided under the Investment Advisors Act of 1940 (IAA).

A broker is more akin to salesman. A broker’s obligation is to make sure that his or her recommendation is suitable and appropriate for the investor given the investors objectives and other information. However, an investment advisor is more like an appraiser of securities, his or her job is not only to make recommendations that are not only suitable but to continually monitor the investors account to ensure that the investor has a viable financial plan over time. Consequently, a broker is compensated on a transactional basis while an investment advisor is paid a percentage of the assets managed by the advisor.

FINRA Approves Expanded Broker Background Checks and Disclosures

May 12, 2014 | by Staff Attorney

The Financial Industry Regulatory Authority (FINRA) announced approval of amendments to FINRA’s supervision rule that would expand the obligations of brokerage firms to check the background of applicant brokers upon registration. The rule would encompass first-time applications as well as transfers between firms and require the brokerage firm to verify the accuracy and completeness of the information contained in an applicant’s Form U4. Under the new rule brokerage firms must adopt written procedures in their supervisory manuals that include searching public records in order to check the accuracy of the information. The amendments to the supervision rule will be submitted to the Securities and Exchange Commission for review and approval.

The U4 Form is the foundation of FINRA’s BrokerCheck system that helps investors find red flags that would indicate potential problems and signs of misconduct by their brokers. FINRA’s BrokerCheck come under fire recently by investor advocacy groups and federal lawmakers for its inaccuracies and lack of complete information.

In addition, FINRA will also search public financial records for all registered representatives and also search other publicly available information including criminal records of brokers. FINRA intends to conduct periodic reviews of public records to ensure that the organizations BrokerCheck database and information is accurate. Also under consideration is whether to add additional information to a broker’s publically available Central Registration Depository such as broker scores on securities exams.

FINRA Determines that Charles Schwab Cannot Bar Clients From Participating in Class Actions

May 9, 2014 | by Staff Attorney

The Financial Industry Regulatory Authority (FINRA) has determined that Charles Schwab & Co. (Charles Schwab) violated the self-regulatory organization’s rules by adding waiver languages to agreements that prohibited customers from participating in any class action cases against the firm. Schwab settled the claims and was fined of $500,000. The firm also agreed to tell all its customers that the requirement is no longer in effect.

In October 2011, Schwab made amendments to the customer account arbitration agreement of over 6.8 million investors after it settled a class action securities case accusing the brokerage firm of misleading thousands of customers about its YieldPlus money market fund. The YieldPlus fund sustained huge losses in 2008 and Schwab paid $235 million to resolve the allegations against the firm.

In the wake of Schwab settlement the firm amended its arbitration agreement to include a waiver provisions mandating that customers consent that any claims against the firm could only be arbitrated individually.

Securities Watchdog is Actually Asleep At the Wheel

May 8, 2014 | by Staff Attorney

People have joked that securities regulators are asleep at the wheel due to the number of frauds that go unpunished for so long. However, a recent Bloomberg BusinessWeek article exposed that the phrase is literally true in some cases.

Every dispute an investor has with their brokerage firm must be arbitrated through the Financial Industry Regulatory Authority (FINRA). FINRA hires and purportedly screens arbitrators who hear customer disputes with the industry. Due to the private nature of arbitration, the general public is often unaware how poorly equipped this system is at times to handle matters entrusted to it. While I have been satisfied with the quality of arbitrators in many cases, I have also had the unfortunate and all too common experiences complained of in the Bloomberg article.

According to the article, FINRA’s arbitration panels has a pool of 6,375 people who are often retired brokers, lawyers, or accountants. Arbitrators are paid about $400 a day when serving on a panel. FINRA provides arbitrators with 14 hours of instruction that can be completed online. Awards rendered by FINRA arbitrators are typically brief, and the decision often provides no reasoning and only a bare outline of the claim and no explanation of how the amount of the award was determined.

How Elderly Investors Can Protect Their Retirement Savings

May 6, 2014 | by Staff Attorney

Saving enough money for retirement is challenging enough. Unfortunately, senior investors now need to worry about trusting financial advisors and investment promoters in order to avoid losing their hard earned savings. There are steps and precautions seniors can take to help guard their investments.

First, fraudsters tend to target people who they can easily build a relationship of trust with. Thus, common frauds include affinity fraud through community groups, clubs, associations, and religious places of worship. Older people are also generally more trusting than the average person. The elderly are also more available to answer phone calls during the day.

Investors should always proceed with caution. Be wary of limited time offers or investments that you need to make a quick decision on. Also ask about the cost or commission for investing. If the commission is 10% that means that only 90% of your money will go to work for you and there may be considerable risks that need to be taken in order for the investment to earn a profit. Common frauds and scams also purport to offer a high rate of return or income rate.

The Risks of Investing In Variable Annuities

May 5, 2014 | by Staff Attorney

The Financial Industry Regulatory Authority (FINRA) has barred broker Mark R. Talley (Talley) formerly of Fifth Third Securities, Inc. concerning allegations of misrepresenting the properties of a variable annuity product to a customer. Our firm has received complaints concerning variable annuities from a number of clients complaining that their broker failed to explain the risks of these complex products.

A variable annuity is an investment and insurance product with significant risks and features the investor should be aware of before investing. Recently the Securities and Exchange Commission (SEC) released a publication entitled: Variable Annuities: What You Should Know. The SEC encouraged investors considering a purchase of a variable annuity to “ask your insurance agent, broker, financial planner, or other financial professional lots of questions about whether a variable annuity is right for you.”

A variable annuity is a contract with an insurance company where the insurer agrees to make periodic payments to you. The investor chooses investments to be made in the annuity and the value of the variable annuity will vary depending on the performance of the investment options chosen. The investment options for a variable annuity are usually mutual funds.