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On November 11, 2019, the Hong Kong Securities and Futures Commission (“SFC”) announced that UBS Financial Services (“UBS”) was fined $51.09 million for overcharging thousands of clients throughout the last decade. The SFC said in its statement that their investigation found that UBS overcharged up to 5,000 clients on “post-trade spread increases,” and that these charges were far in excess of standard firm fee disclosures and rates. UBS also agreed to pay approximately $25.5 million in restitution to affected clients.

According to the SFC, UBS stated that the investigation was triggered by a self-reported discovery of systemic internal control failures. Most firms have compliance software in place that prevents fees or spread markups in excess of certain ratios, with manual overrides required to circumvent these controls. Based on the SFC statement, it was unclear to the public which specific internal controls were breached and whether the breaches were caused by software or human error. UBS issued the following response to the SFC statement:

The relevant conduct predominately relates to limit orders of certain debt securities and structured note transactions, which account for a very small percentage of the bank’s order processing system.

According to a Complaint filed by Janney Montgomery Scott (“Janney”) in the Eastern District of Pennsylvania, financial advisor Jordan Braunstein (“Braunstein”) left with firm client data and violated the restrictive covenants in his contracts. The Complaint recited that when Braunstein departed Janney for Paradigm Wealth Management, he took not only his own client list, but also a list of all the clients serviced by the Lexington Avenue Wealth management team that he led, including many who were introduced and serviced by other advisors on the team.

Janney took the position that Braunstein violated both the Protocol for Broker Recruiting (“the Protocol”) and the Lexington Avenue Team Agreement, arguing that Braunstein was allowed to take only a limited list of legacy clients he brought over from Morgan Stanley and clients he introduced to the Lexington Avenue Team while at Janney. But, Janney reasoned, he could not take clients that other members of the team had originated. Pending a hearing on the matter, the Judge issued a temporary restraining order (“TRO”) barring Braunstein from soliciting any of Janney’s clients.  Firms can obtain TROs through any court of competent jurisdiction, pursuant to FINRA Rule 13804 upon a showing of three elements: (1) a likelihood of ultimate success on the merits; (2) the prospect of irreparable injury if the provisional relief is withheld; and (3) a balance of equities tipping in the moving party’s favor.  A party seeking a TRO from court is also required to submit to arbitration and at the same time file with the Director a statement of claim requesting permanent injunctive and all other relief relating to the same dispute.  A party will then need to prevail at an arbitration hearing in order to convert the TRO into a permanent injunction.

Whenever a financial professional exits a team, important legal questions arise surrounding the sourcing of client relationships, the servicing of clients, the existence of joint rep codes or client revenue sharing agreements, and ultimately the ownership of client relationships. While brokerage firms have the incentive to restrict departing brokers’ client contact to prevent customers and assets from leaving the firm, brokers clearly have the incentive to retain their books of business upon switching firms to the extent same does not violate any restrictive covenants in their employment agreements. Firms are required by FINRA Regulatory Notice 19-10 to provide customers with a departing broker’s new contact information if the firms have it, but only if the customers ask. Successfully navigating FINRA Rules, federal privacy laws and employment agreements can mean the difference between a smooth transition and receiving a TRO preventing the solicitation or servicing of clients at a new firm.

Lax & Neville has obtained a settlement for a managing director of a New York hedge fund in what the United Stated District Court for the Southern District of New York described as a “bitter employment dispute.”  The managing director was forced to bring a claim for breach of contract, unjust enrichment, and violation of the New York Labor Law (“NYLL”) after his former employer terminated him without cause and refused to pay him more than $3 million in earned compensation.

The parties reached a settlement after the District Court denied the hedge fund’s motion for summary judgment.  The hedge fund had sought to dismiss each of the managing director’s claims on various grounds, but primarily argued that the NYLL claim should be dismissed on the ground that carried interest and performance bonuses are not “wages” under the statute.  Relying upon clear precedent in the New York Court of Appeals and Second Circuit, the Court held that “although ‘incentive pay’ like the disputed bonus amounts in this case ‘does not constitute a wage until it is actually earned and vested,’ when it is ‘guaranteed under [a] formula to be a percentage of the revenues . . . generated’ and ‘not left to [the employer’s] discretion,’ it constitutes protected ‘wages’ under the Labor Law.” (quoting Reilly v. Natwest Markets Grp., 181 F.3d 253, 264-65 (2d Cir. 1999)).  The District Court allowed the managing director’s claims, including for liquidated damages, prejudgment interest, and attorneys’ fees under the NYLL, to proceed and ordered the parties to prepare for trial.  The parties settled shortly thereafter.

Courts and FINRA arbitration panels have considered the applicability of the New York Labor Law to brokers and other financial services professionals in several recent cases involving attempts by financial services firms to evade deferred compensation and bonus obligations to their former employees.  Lax & Neville has extensive experience helping professionals in the financial services industry enforce their rights under the New York Labor Law in FINRA, state and federal court, and AAA and JAMS arbitrations.  For a free consultation, please call (212) 696-1999.

On September 16, 2019 the Securities and Exchange Commission (“SEC”) announced that Stifel, Nicolaus & Co. (“Stifel”) and BMO Capital Markets Corp. (“BMO”), two large broker-dealers, agreed to pay fines of $2.7 million and $1.95 million, respectively, to settle charges for providing the SEC with inaccurate and incomplete securities trading information, known as “blue sheet data.”

The SEC’s investigation found that Stifel and BMO made frequent deficient blue sheet submissions, primarily due to undetected software coding errors. According to the SEC, Stifel failed to report data for approximately 9.8 million transactions and provided erroneous information for approximately 1.4 million.  According to the SEC, BMO’s deficiencies led to missing or incorrect data for 5.4 million transactions. Inaccurate reporting of blue sheet data impedes regulators ability to halt harmful or fraudulent activity, such as insider trading, which can potentially harm investors and the integrity of the markets.

The SEC found that both firms lacked adequate systems for catching these errors and did not have proper processes in place to validate the accuracy of submissions.  As such, the SEC determined that Stifel and BMO both willfully violated the broker-dealer books and records and reporting requirements of federal securities laws.

On September 16, 2019, the Financial Industry National Regulatory Authority (“FINRA”) reported that it had censured and fined J.P. Morgan Securities (“JPM”) $1.1 million for failing to timely disclose 89 internal investigations. Firms have a regulatory obligation to disclose to FINRA or the appropriate regulatory body all internal reviews and allegations of misconduct by registered individuals or associated persons.

Broker-dealers such as JPM are required to file with FINRA a Uniform Termination Notice for Securities Industry Registration (“Form U5”) within 30 days of terminating a registered representative. They are also required to file an amendment with FINRA within 30 days of learning that anything previously disclosed on the Form U5 is inaccurate or incomplete. Firms are required to disclose allegations involving fraud, wrongful taking of property, or violations of investment-related statutes, regulations, rules or industry standards of conduct.

FINRA uses the information filed in the Form U5 to help identify and investigate potential misconduct and sanction individuals as appropriate. The Form U5 is a critical source of information on a financial adviser, and informs regulators, future employers, and potential clients of the nature of the adviser’s misconduct.  State securities regulators and other regulators use the information to make informed regulatory and licensing decisions.

On August 14, 2019, the Securities and Exchange Commission (“SEC”) charged Canaccord Genuity LLC (“Canaccord”) with violating gatekeeping provisions aimed to protect investors. Small market cap, thinly traded securities, such as those that trade over-the-counter (“OTC”), are generally not subject to the same level of investor scrutiny and due diligence as stocks that trade on large established exchanges and are covered by assigned analysts. As such, broker-dealers such as Canaccord are expected to provide some “gatekeeping” functions, before listing the securities offerings of small cap companies.

The Exchange Act Rule 15c2-11 mandates that broker-dealers have a reasonable basis for believing that the prospectus and other information made available by the issuer of the securities are accurate. According to the SEC, Canaccord enabled dozens of OTC companies to list and trade, without making any proper effort to ensure prospectus information and offering figures were accurate or obtained from reliable sources. The SEC alleged that Canaccord assigned a compliance associate to review OTC listings; however, the compliance associate had no trading experience or training required by the rule. For example, the SEC noted that he did not have experience related to the analysis of financial statements. Simply assigning a compliance individual to a task does not waive firms of their obligations to ensure the task is done properly, adequately, and to full extent mandated by the SEC and/or the Financial Industry National Regulatory Authority. Compliance is a robust process of checks and balances so as to ensure fairness and transparency within the financial services industry.

Canaccord consented to the institution of cease and desist proceedings ordering that it cease and desist from committing or causing any violations relating to Exchange Act Rule 15c2-11, and it agreed to pay a $250,000 fine and censure.

On April 5, 2019, the Financial Industry Regulatory Authority (“FINRA”) issued Regulatory Notice 19-10, which clarifies conduct regarding how brokerage firms and brokers should communicate with clients in the event a broker transitions to a new firm. FINRA Regulatory Notice 19-10 makes two key points:

1. in the event of a registered representative’s departure, the member firm should promptly and clearly communicate to affected customers how their accounts will continue to be serviced; and
2. the firm should provide customers with timely and complete answers, if known, when the customer asks questions about a departing registered representative.

On March 5, 2019, the Securities and Exchange Commission (“SEC”) entered into a settlement agreement with BB&T Securities in which the firm agreed to return approximately $5 million to retail investors and pay a penalty of $500,000. These fines and violations were related to the brokerage firm Valley Forge Asset Management (“Valley Forge”), which was acquired by BB&T, making BB&T responsible for Valley Forge’s liabilities.

Valley Forge represented to clients that it was a full-service brokerage house with high levels of client servicing, and clients must pay a premium for that servicing. Valley Forge did not disclose to clients that investors who did not choose in house advisory services paid fees 25% less than those who used the in-house service. Valley Forge justified these high fees by making false representations to clients that the fees were actually discounted by 70%, when in fact there was no higher price they were discounted from, and even the supposedly discounted rate was far above market rates for the level of service provided.
The SEC increasingly scrutinizes small broker-dealers and investment advisors for charging fees for services that have not in fact been delivered, or for charging fees not in line with the general mark to market for that level of service.  The attorneys at Lax & Neville LLP have extensive experience in successfully prosecuting claims on behalf of customers who have suffered losses as a result of investment and securities fraud. Additionally, attorneys at Lax & Neville are experienced with employment law in the financial services industry, and dealing with regulatory bodies such as the SEC. If you are a victim of fraud or are a Financial Advisor with a prospective regulatory issue, please contact Lax & Neville LLP today at (212) 696-1999 to schedule a consultation.

On February 8, 2019 the Financial Industry Regulatory Authority (“FINRA”) accepted an Acceptance Waiver and Consent (“AWC”) from Elizabeth Marie Garcia, a Merrill Lynch Financial Advisor, pursuant to which Ms. Garcia consented to a complete and total bar from the securities industry. FINRA’s investigation concluded that Ms. Garcia filed fake childcare reimbursement expenses to Merrill Lynch, through the Merrill Lynch Business Development Account (“BDA”). The investigation concluded that approximately $9,015 in false expenses were improperly reimbursed to Ms. Garcia.

Financial services firms such as Merrill Lynch have business development accounts, or travel and entertainment spending allowances, for Financial Advisors, and other client facing/business development personnel. It is common for firms to contribute a sum to the accounts, and Financial Advisors to also contribute to the account, and there are generally tax advantages to this practice. Because Financial Advisors contribute their own money to the account, there is a trend towards advisors filing false expense reports, as they view a large portion of the money set aside as their own.

This view is unfounded: a percentage of the monies in any BDA account are contributed by the firm, therefore some percentage of any fraudulent expense is paid for with firm money. Additionally, filing a false expense report is taken very seriously by FINRA, and seen as both a violation of the just and equitable principles of trade, and a violation of the requirement to maintain accurate books and records. Individuals who file false expense reports can expect to face possible termination by their employer, face negative U5 language, and be investigated by FINRA. These investigations can have a wide range of outcome, with anything from a letter of warning, to a complete bar from the industry, depending on FINRA’s view of the specific circumstances surrounding the matter.

On January 17, 2018 State Street Advisors announced the intention to reduce its work force by 1,500 employees, including 15% of senior management positions. This layoff may affect many veteran employees, impacting complicated compensation packages involving deferred compensation, equity awards, and bonuses in addition to base pay.

Lax & Neville has extensive experience negotiating severance packages on behalf of financial services executives. Lax & Neville can help ensure executives are protected when they transition to a new firm and provide input on draft U4 and/or U5 language to make it more favorable for the departing individual.

Lax & Neville can also assist departing employees in navigating restrictive covenants within their former firm’s employment agreements and negotiate contract language and compensation in new firm agreements.