Monday, January 25, 2010

FINRA Releases Social Media Guidance For Brokers

FINRA released its Regulatory Notice on Communications with the Pubic Through Social Networking Web Sites today, a full month ahead of schedule. The notice will undoubtedly become the standard by which firms, and FINRA, will gauge compliance in the use of sites such as LinkedIn, Facebook and Twitter. While some firms may still prohibit the use of these sites, others may take some level of comfort in the release, and permit limited use of these sites by registered persons. It is Regulatory Notice 10-06.

I am a panelist on a webinar tomorrow, Advisers and LinkedIn: What you can, cannot and should be doing - and will be discussing the implications of the Notice. The webinar is free, and registration information is available at

2009 Good Year for Most Hedge Funds

Although more than 20% of hedge funds shut down in the past two years, as 1,500 funds were liquidated in 2008 and 900 more in 2009, the Morningstar 1000 Hedge Fund Index ended the year up an impressive 19.5%, just missing 2003’s 20.3% rise, according to preliminary data from Morningstar, and the currency-hedged Morningstar MSCI Hedge Fund Index, finished the year up 14.1%. Details are at More>>>

Wednesday, January 20, 2010

TARP Payback Widens Losses At BofA

Bank of America lost $5.2 billion over the last three months of 2009. Things aren't going so well over there. Losing 5 BILLION dollars in three months is quite an accomplishment. However, $4 billion of that was in charges related to its repayment of $45 billion in TARP loans. At least the taxpayers recouped 45 billion dollars. More>>>

Has anyone seen a summary of what was loaned under TARP, what has been paid back, and what the American people are out of pocket to date?

Tuesday, January 19, 2010

Compensation Cuts Leads to Broker Transitions

In my practice I have seen a huge increase in the number of wirehouse brokers who are changing firms, as those firms consolidate and attempt to increase their profits.

Unfortunately for some, the wirehouses are ramping up profits at the expense of their brokers, and ultimately, their customers. In all of the years that I have been representing wirehouse brokers, I have never seen such a large number of brokers who are being terminated on the basis of trumped up charges. I certainly understand the need and desire to run a compliant firm, and to weed out brokers who have difficulty following the rules. And I am aware that brokers, like everyone else, tend to downplay their own culpability in such matters. But really, some of these terminations are simply beyond the pale, and nothing more than an asset grab.

I have been saying for almost a decade that the wirehouses want to get rid of brokers and move their business model to salaried employees. See my column from the January 1998 issue of Research Magazine - Death of a Salesman. But now there is a new attack - lower payouts.

It started with the small producers - who can forget Bank of America's decision to cut payouts for brokers on the banking side by 50%, causing a exodus of brokers from the firm, and a mess of promissory note arbitrations.

Citigroup, never the friend to its brokers, apparently has plans to force its brokers into a fee based model, regardless of what the customers want, or need. In an article titled "FAs Disgruntled over New Comp Plan at Citi Personal Wealth Management", David Geracioti, the editor-in-chief of Registered Rep magazine, details the information he has received regarding this forced transition from broker to investment adviser.

As Mr. Gercioti points out, brokers are upset; and leaving. Just take a look at the discussion at the Advisor Forum at Registered Rep titled "Citi PWM Exodus" for a peek at what some brokers are facing, and thinking.

Certainly, in many instances, the fee based model works for customers, and brokers. In many cases, it aligns the interests of the broker with the interests of the customer, and both do well if the assets increase in value, without any selling pressure on the broker or the customer.

But it doesn't work well for everyone. Customers with fixed income accounts, customers who adjust their portfolios once a year, and a host of others, will pay lower fees with a commission based account. Unless of course you lower the management fee to less than a percent.

Citigroup would obviously love to get rid of brokers, and the payouts, and it just may get its wish. Brokers are leaving. If a broker wants to be an RIA, he certainly can do so without the heavy hand of a wirehouse.

Setting up an investment advisory firm, using the platform of a major broker-dealer like Fidelity, is not expensive, nor is it difficult. For the enterprising professional, it is an excellent business model. For an overview of what is involved, take a look at my article, Registration and Regulation of Investment Advisers at and our update of the SEC publication, Guide to Broker-Dealer Registration.

Or, becoming an independent, and associating with an independent broker-dealer. Doing so lets brokers do exactly what they and their customers need - the flexibility to use a commission based model when appropriate, or a fee based model for those customers who need that model.

Some brokers are reluctant to go into business on their own, and certainly some customers will be reluctant to leave a "big" name like Citigroup. Brokers who stay may find their compensation continually reduced, being forced into teams, and their smaller accounts sent to a call center. Ultimately, the firms will keep the assets, and continue to have less overhead, and more profit, all to the detriment of the financial professionals who cultivated those relationships and serviced those clients.

Does the big name make a difference? I am sure it does. But given the recent financial crisis, are customers still impressed with those "big" name wirehouses? Do customers really believe that those firm offer better advice than an independent? Are they in better financial shape than their competitors? Aren't customers really relying on the relationship with their financial adviser?

Time will tell, but like the brokers in the Registered Rep forums and those who are calling my office, the outlook is not good.

Naturally, any move needs the assistance of professionals, including an experienced securities attorney. Creating an investment advisory firm is not difficult, but requires guidance through the regulatory maze. But all of that can be achieved with effort, and the cost is going to be less than the loss that you will incur over the course of a single month.

My firm offers free consultations to financial professionals who are seeking to change firms, join independents or to start their own RIAs or broker-dealers. Feel free to email me at, or to call 212-509-6544 to discuss the possibilities.


Monday, January 18, 2010

Nationwide Financial Tells Advisors To Find New BDs

Nationwide Financial has advised its independent financial advisers to find new broker-dealer relationships before April 30, according to Investment News.

The article states that the move is intended by Nationwide to focus its efforts on its proprietary sales force and to expand its insurance business.

Independent brokers have a number of choices for new affiliations, as there are any number of independent firms that are available, depending on the needs of the adviser and his clients. I would like to remind brokers that these agreements should be reviewed by an attorney prior to moving to a new firm, as there are a number of clauses which could cause difficulties down the road. While many brokers believe that employment agreements, promissory notes and related contracts are not negotiable, many are, depending on the circumstances. Additional consulting an attorney before entering into any type of agreement involving your career and clients is money well spent, if for no reason other than to prevent surprises down the road.

Tuesday, January 12, 2010

Custodial Firm Not Liable for RIA's Alleged MisManagement

Clearing firms, those entities which perform back office, bookkeeping, accounting, custodian and record-keeping functions for other broker-dealers, hedge funds and investment advisers, are not liable for the investment losses of their client's customers. That has been clear for quite some time, and really isn't in dispute.

The outcome makes sense. Firms like Fidelity and Schwab are not in direct contact with the customers of the firms and RIAs that they carry accounts for, they do not make decisions in the account, and are not the party providing investment advice. They are not compensated for selling securities, or for giving advice, and have no responsibility for the investments, or the advice that the broker or investment adviser provides.

Certainly, if the firm makes a mistake or is negligent in carrying out its obligations, it might be liable to the customer damaged by the negligence, but that is not the same as bearing responsibility for investment losses.

Securities attorneys are well aware of this legal concept, and you don't see many cases brought against clearing firms alleging violations of sales practice violations or inappropriate investment recommendations or choices. But every once in a while you see one, and the decision is typically in line with the concept.

A FINRA arbitration panel rendered such an award, and  gave a zero award to an investor who tried to claim that Fidelity was responsible for the losses in their RIA managed accounts. The panel denied the claim as against Fidelity. The RIA was not a party to the arbitration, presumably because there was no arbitration agreement with the RIA firm.

Another interesting point. The customers claimed that they stopped opening their statements when the investments went bad. That was a huge mistake, as the panel found, since customers are charged with the knowledge of the information contained in those statements. Further, by not opening the statements, customers have denied themselves of the ability to monitor and control their own investments, putting a damper on any claim that they were unaware of ignorant of the investments, or the losses.

Read your statements. Take action when you think something is wrong, or run the risk of a zero award.


SEC Charges Father-Son Team in Hedge Fund Fraud

According to the lead paragraph in the SEC's press release, they are charging an investment adviser with securities fraud for misleading investors about the financial condition of their funds, and that they were controlling the investment decisions of the funds, when same were controlled by a third party.

Overstating your asset values by as much as $160 million certainly smells like a fraud, but not telling investors who is actually managing the investments is a fraud? It certainly can be, but is it.

If the person controlling the investments has been charged with securities fraud, and has had his assets frozen, that omission may very well be fraud. It could be a material part of an investor's decision to invest, and depending on the circumstances; a fraud.

We will have to see if the SEC can prove its allegations, but for now, the complaint is linked at its press release.  More>>>