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Monthly Archives: July 2014

Is FINRA Hurting Investors?

30 Wednesday Jul 2014

Posted by Barry M. Bordetsky, Esq. in Uncategorized

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Arbitration, Broker, Central Registration Depository, CRD, Expungement, FINRA, FINRA Hurting Public, FINRA Rule 2081, Investing Public, Investor Loss, SEC, Settlement, Stockbroker

Negotiating a settlement of any dispute is difficult. Parties often have an emotional attachment to the claim, and when the claim involves the loss of money, emotions run that much higher. This money could have been targeted for retirement, a child’s college education, or simply an account meant to grow in value over time. An arbitration between an investor on the one hand who lost money and the broker on the other hand who was handling the account, is resolved before the Financial Industry Regulatory Authority (“FINRA”).

Because of the very personal nature of the claim, in many cases a mediator is brought in to work with the parties to try to reach a settlement. It is not unheard of during a mediation the parties will not even meet to say hello at the day and place of the mediation.

You have undoubtedly heard the phrase “thinking outside the box”, something which can result in a good settlement in the course of a mediation. One important tool in settlement discussions is to give away something that does not cost anything, but get something of value in return. A good settlement is often one that both sides are unhappy with; and to get to that point the attorneys and the mediator must be able to use all tools necessary to reach a settlement agreeable to all.

In a FINRA setting, when a broker is named in an arbitration, the proceeding is on the broker’s permanent record maintained on FINRA’s central registration depository (“CRD”). This is a record that is generally available to the public. The arbitration can only be removed from the CRD if there is an award of expungement from a FINRA arbitration panel, and that award is subsequently confirmed by a court.

Parties to an arbitration will engage in settlement discussions prior to discovery, during discovery and often times on the day of an arbitration hearing.  For the investor involved in the settlement process, the goal is simple: get back as much of the money that was lost as possible. A tool referred to above for the investor, giving something that is of no value to the broker to get more settlement money, was the expungement tool. Said differently, in exchange for giving the investor money for the settlement, the broker would secure an agreement from the settling investor that he or she would not contest the broker’s expungement request. Keep in mind, this expungement request requires an independent hearing before a panel of FINRA arbitrators.  Simply including language in a settlement agreement was no guarantee the expungement would be granted.

The SEC recently approved FINRA Rule 2081, a rule that summarily removes this critical tool utilized by both sides when settling customer complaints. The rule reads “No member or associated person shall condition or seek to condition settlement of a dispute with a customer on, or to otherwise compensate the customer for, the customer’s agreement to consent to, or not to oppose, the member’s or associated person’s request to expunge such customer dispute information from the CRD system.”

In a word, FINRA Rule 2081 is foolhardy.  To answer the question raised in the title of this article, this rule not only works against the investing public, but hurts  investors trying to settle a claim. The expungement tool was used in the past to put together a good settlement for an investor, trading off the agreement not to oppose an expungement for a higher dollar settlement, or perhaps a settlement payment in a quicker time period.  It was a good trade-off for all the parties involved, and now it has been removed, making it that much more difficult for an investor to procure a better settlement.

If you have questions relating to expungement or investment issues, please contact The Law Offices of Barry M. Bordetsky by calling Barry M. Bordetsky at (800) 998-7705 or emailing at barry@bordetskylaw.com.

The Importance of The Activity Letter

23 Wednesday Jul 2014

Posted by Barry M. Bordetsky, Esq. in Uncategorized

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Activity Letter, Broker, Churning, Compliance, Discretionary Trading, FINRA, Know Your Customer, Securities Arbitration, Stockbroker, Suitability, Supervision, Unauthorized Trading

You have a brokerage account. One day you open up your mail (you are responsible for opening the mail) and find a letter from your brokerage firm. The letter thanks you for being a customer of the firm.  The letter then begins the process of reiterating the trading objectives you selected when you opened the account or when the account information was updated. The letter may contain additional information such as the amount of trades in your account over a three-month period of time or the commissions generated from the account (the money the broker and firm is making from the trading in your account). Most likely the letter ends with a request that you countersign the letter to confirm your objectives have not changed, that you authorized and approve of the trading in your account. In some instances the letter will end with a statement indicating the firm will presume all is okay with the trading in the account unless the firm hears anything to the contrary from you. If written correctly, the letter invites you to call with any questions.

Gee, isn’t this nice, you’re thinking. The brokerage firm is checking in on me.

Actually, the brokerage firm is checking in on your broker. The firm is utilizing a very important tool to determine whether the activity in the account is what you have directed and is suitable for you. The letter is aptly called an Activity Letter.

The Activity Letter seeks to determine, for instance, if you are controlling the account or if the broker is controlling the account. To be clear, while there is such a thing as de facto control, if your broker is calling you and recommending a buy or sell, you are demonstrating a manner of control over your account when you agree or disagree with the recommendation. Unless your account is discretionary (meaning your broker trades without the need to speak to you) the broker must discuss, on the day of a trade, the particular recommendation to buy or sell.

The Activity Letter also allows the firm to confirm, independently from the broker, whether it is your intention to trade your account aggressively, conservatively, or somewhere in the middle. The Activity Letter confirms you are not only aware of the trading in the account, but approve of it as it takes place.

The Activity Letter is an important tool not only for the firm, but also you. In most instances the letter is from a compliance officer, branch manager or supervisor at the brokerage firm. If you have any questions relating to your account, take the opportunity to call and ask the questions. The benefit of the Activity Letter from someone other than your broker is you should not feel uncomfortable with the call, but rather emboldened to make sure your investments are being handled as you have instructed.

When you sign and return the Activity Letter to the firm, the firm is relying upon that information in terms of supervising both the account and the broker. Do not sign something that is not accurate. As I have written in the past, you are responsible for reading a document, knowing its content and will be bound by the terms of the document that bears your acknowledgement signature. An informed investor is a smart investor. If you have questions, whether to the broker or supervisor, take the time to ask them. Do not assume. We all know what happens then.

If you have questions relating to this topic or other investment matters, please contact The Law Offices of Barry M. Bordetsky by calling Barry M. Bordetsky at (800) 998-7705 or emailing at barry@bordetskylaw.com.

Accountant = Superman?

20 Sunday Jul 2014

Posted by Barry M. Bordetsky, Esq. in Uncategorized

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Accountant, Arbitration, Commissions, Complaints, FINRA, Frequent Trading, Investment Attorney, Securities Attorney, Stockbrokers, Tax Returns, Trading Responsibility, Unauthorized Trading

You know the story.  Little Billy is playing with matches on the hot summer day.   He strikes the match, puts it to the small leaves he’s gathered and watches at first with pure joy as the small fire sparks and snaps as he expected. And then the wind picks up, spreading that small fire across the forest, moving ever so close to threatening the small family farm neighboring the forest. The fire is now beyond little Billy’s control and he can’t undo the damage. And then, just as the fire spreads to the farmhouse, Superman swoops in and puts out the fire. While there is damage from the fire, it is nothing compared to what would have occurred had Superman not arrived “in the nick of time”.

Like little Billy starting a fire, often your broker is playing recklessly with your investments, not looking to the long-term effects of the buying or selling of investments or paying attention to the investment environment. Because of this your investments throughout the year are consistently declining in value putting at risk your retirement goals. Your broker is telling you during this time the strategy he has put in place must be followed, for your benefit. However, like little Billy’s fire, it is moving to a dangerous place.

While accountants are not flying in and saving any farmhouses from fires, they are in place to play the part of Superman when it comes to your investments. In the first quarter of every year your accountant reviews your investment information for tax reporting purposes. Your accountant looks at your investment gains and losses. More importantly, your accountant reviews (or should) the commissions generated from the investment account as well as the number of trades made in the account.   Superman uses his “freeze breath” to stop the fire; your accountant uses his or her calculator.  With that tool, your accountant can tell you that when your broker said “all of these trades are necessary to reach your investment goals” what he really meant was “thanks for all these commissions” as the value of the account actually decreased over the last year.

Your accountant isn’t there to stop the trading before it happens, but with your accountant’s preparation of your tax returns, your accountant may very well play the role of Superman by “swooping in” and working with you to put a stop to the improper trading, ensuring your retirement does not go up in smoke.   While you may not feel comfortable initially confronting your broker about the trading or the commissions in your account, talk to your accountant about what it is you want from your investment account, whether you authorized each of the trades in the account and whether you regularly talk to your broker. Your answers may very well put your accountant in place to “put out the fire” before it threatens your retirement.

When your broker improperly trades your investment account there are means to seek recoupment of the losses. There is a process in place to right such wrongs. However, use the means available to you, such as your accountant, to stop losses, significant losses, before they take place.

If you have questions relating to this topic or other investment matters, please contact The Law Offices of Barry M. Bordetsky by calling Barry M. Bordetsky at (800) 998-7705 or emailing at barry@bordetskylaw.com.

 

 

 

 

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Law Offices of Barry M. Bordetsky

570 Lexington Avenue, 44th Floor
New York, New York 10022

22 N. Park Place, 2nd Floor
Morristown, New Jersey 07960
(800) 998-7705

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