Tag Archives: Suitability

FINRA Targeting Senior Investors

21 Tuesday Apr 2015

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The Financial Industry Regulatory Authority (“FINRA”) appears to be targeting seniors – – or at least the brokers that provide financial services to them. This may very well create a new waive of enforcement actions as FINRA seeks the spotlight to inform the public it is out to protect this group of investors. Even if that means protect them from themselves.

FINRA member firms, supervisors and brokers should be proactive to ensure their work with senior investors aligns with suitability requirements, FINRA guidelines and various state statutory requirements. When an account for a senior investor is being opened by a broker, the broker must take note of the client’s age as the information is being included in the new account paperwork. Bells should go off with the broker the new client’s time horizon for investments is significantly shorter than most. What that means is the types of investments that are to be offered must be carefully selected. By way of example, a variable annuity that pays out in 20 years may not be the best of selections as an investment vehicle for an 80 year-old investor. Similarly, in-and-out short term trading most likely should not be the recommended strategy. There are, however, always exceptions.

From a supervisory standpoint, the person responsible for authorizing the opening of the account must take note not only of the new client’s age and corresponding trading strategy, but also should ensure the firm is taking steps to educate brokers on how best to deal with financial strategies involving seniors. FINRA has provided Notice to Members and many, if not all states in the country have statutes designed to protect seniors from predatory brokers. Both supervisors and the brokers should take the time to review FINRA’s writings on the topic and ensure that the recommendations to senior investors are in line not only with the investment objectives on the new account documentation, but also in line with the provisions of FINRA guidelines and state statutory guidelines.

If a broker finds himself working with a large group of senior aged clients, the broker must be very careful to not try to take advantage clientele and begin utilizing a self-created title, such as Advisor to Senior Investors. Again, guidelines are in place as to the titles utilized by brokers, and those representing investors in FINRA arbitrations will utilize the fancy, but unearned titled, to impale the broker’s defense of the case. Similarly, if a supervisor sees a broker’s clientele is growing with this group of investors, there should be an aggressive review of the broker’s work. There should not be an assumption of wrongdoing, but an understanding of the broker’s strategy with each senior client and review as to the suitability of the trading in the account.

The beginning and end of the work should be this for brokers and their employing firms: be smart and aggressive in terms of protecting yourself. That does not mean a broker should not provide the client with the investments sought. What it does mean is the broker, with the assistance of the supervisor, should work directly with the senior investor to ensure the investor has a complete understanding as to: (i) the type of investment being recommended; (ii) the risks associated with the investment; and (iii) the fees and/or commissions that will be generated by the investment.

The Law Offices of Barry M. Bordetsky represents customers and industry members and representatives in FINRA arbitrations as well as before state and federal courts. If you have questions regarding the process, please contact Barry Bordetsky by telephone at (800) 998-7705 or email barry@bordetskylaw.com. The information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

When The Consequences Outweigh the Risk

19 Monday Jan 2015

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It is not difficult, doing the right thing. There are rules regardless of what game in life you’re playing. Ignorance is no defense.

Unfortunately, just as the simplicities of the day, the “Pleases” and “Thank Yous” have fallen by the wayside, so too has the mindset “I will work hard and succeed.” Instead, today is about the quick fix, the shortcuts and unfortunately, the cheating and the breaking of the law.

For those who are taking the shortcuts, who are cheating others to get ahead, chances are you’re going to be caught, and it will cost you more than you gained. For those stockbrokers who are trying to cheat the system, by making the unauthorized trades in a client’s account, trading the account for the purpose of generating commissions or making an unsuitable recommendation to a client, there are consequences.

These consequences come in many forms, one of which is an arbitration claim. Stockbrokers are registered with the Financial Industry Regulatory Authority (“FINRA”). When a customer opens a trading account, there is an arbitration requirement that mandates any claims relating to the trading in the account to be filed before FINRA’s dispute resolution. Depending upon the dollar amount of the losses, FINRA will provide (at a fee) one or three arbitrators to hear the case. The filing fee for the complaining investor is relatively small and in most instances the attorney handling the cases take the matters on a contingency basis (attorney does not charge on an hourly rate, but takes a percentage of any money recovered).

Pursuant to FINRA rules, an investor has six years from the date of the trade to file a claim against the broker. Once an arbitration claim has been filed, FINRA has streamlined discovery, a process in which the parties exchange documents prior to the actual arbitration. Pursuant to FINRA rules, there are certain categories of documents deemed “presumptively discoverable” and must be produced if they exist. While the burden of proof is always on the person bringing the claim, FINRA appears to do all it can to assist the investors in bringing their claims to a hearing.

For the broker who is looking to make a quick dollar, say a $500 commission on an unauthorized trade, and then another, and then another, the legal fees associated with the defense of the claim can be up to ten times the original commission. And this does not account for any award assessed by the arbitrators, the FINRA hearing fees assessed by the arbitrators or the possibility of punitive (punishment) damages.  An arbitration award is regularly converted into a judgment by the courts, and if not paid, the investor can go after your income or assets to collect on the judgment.

The stockbroker who thinks no one will notice the cheating is shortsighted. On a daily basis the trading is reviewed by a supervisor and often times a person in the firm’s compliance office. From the investor standpoint, not only does the investor see the trading from confirmations and account statements, but most likely the investor’s accountant is reviewing the trading for the tax purposes.

While it’s a lost art, hard work really does pay in the long run. The consequences simply are not worth the risks.

The Law Offices of Barry M. Bordetsky represents customers and industry representatives in FINRA securities and employment arbitrations as well as litigants before state and federal courts. If you have questions about an issue you are involved with, please contact Barry at (800) 998-7705 or email barry@bordetskylaw.com.

Time To Return the Favor of “The Talk” With Your Parents

12 Monday Jan 2015

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As parents, there often are situations with children that necessitate a series of uncomfortable discussions, where questions must be asked and sensitive topics discussed. Regardless of what can be an awkward situation – – for both parents and the children, it is the responsibility of the parent to have the conversations. The phrase “I’m not here to be their friend”, is undoubtedly uttered on a daily, if not hourly or minute basis by parents.

But what happens when the proverbial shoe is on the other foot? What of the situation where it is the child, now an adult, that must discuss issues and raise questions to the parents; questions that are uncomfortable for everyone, but for the protection of the parents?

Nothing can make for a more uncomfortable conversation than a discussion about money with your parents. Unfortunately, like the “birds and bees” conversation you had decades ago, this is just as important. As our parents get older, there are times when their decision-making abilities are lessened, and the opportunity for someone to take advantage of them financially has increased.

It is not coincidental states have laws on the books that protect older investors. There unfortunately are people who will target such investors, knowing they can be worn down much more easily than others and will place their trust in strangers.

And now the uncomfortable conversation. Most likely, before having the “talk” with you, your parents prepared themselves. Just as they may have taken the time to bring the topic to you, you should do the same with them. Your parents may have spoken to your teachers or your friend’s parents; today there is nothing wrong with you having a conversation with your parent’s accountant to make sure at the very least the accountant is another set of eyes reviewing your parent’s investments.

When talking with your parents, start with basic conversation about where they have their money invested, but do so with an understanding of basic investing principals. Here are some basic terms and rules to help you out in the process.

First, Discretionary versus Non-discretionary account. A discretionary account permits the broker to buy and sell securities in your parent’s account without the requirement of speaking to them first. A non-discretionary account, which is the majority of securities accounts, requires the broker to speak to your parents before every single trade. Ask your parents about what their broker is recommending, and when your parents learn of the trade – before it is effectuated or when they receive their monthly statements?

The next point you should know about is suitability. A broker is required to comply with the Know Your Customer Rule. This rule requires the broker to know about your parent’s investment experience, net worth, liquid net worth, level of risk they are prepared to take in their investments and their primary investment goals. No trade may properly be recommended to your parents unless the broker takes each of the above points into consideration.

The strength and resolve of a parent is not being concerned about the awkwardness of a conversation, but rather protecting you. It may be time to return the favor.

The Law Offices of Barry M. Bordetsky represents customers and industry representatives in FINRA securities and employment arbitrations as well as litigants before state and federal courts. If you have questions about an issue you are involved with, please contact Barry Bordetsky at (800) 998-7705 or email barry@bordetskylaw.com.

The Starting Point Is Now

05 Monday Jan 2015

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It’s the New Year, what is undeniably the greatest false start time of the year. People use the date as a starting point for something, whether it be starting a new hobby, starting a new business or simply reconnecting with old friends.

For investors, this is the time when they will be receiving a year-end statement from their broker-dealers. Often times this is the document provided to accountants from clients, to assist with the calculation of gains and losses for tax purposes.   For accountants, like the diet that your clients were always wanting to start but never did, many times investing clients are overwhelmed with the investing process and did not pay attention to their investment accounts as closely as they should have during the year. Now is as good a time as any for accountants to address the issue with their clients.

Upon receipt of the clients’ trading information, accountants may want to call their clients and pose the following form of questions: Tell me what you wanted to do with your account? What did your broker tell you before the trades took place? How many trades do you think took place in the account?

The answers to these questions will be very telling, the start of an understanding of what took place in the account. By way of example, if the client states she wanted the account to conservatively sit and grow with no activity, but there were thirty trades over the year, there is an explanation that should be received as to why the trades took place. Similarly, if the trading was unsuitable, or not in line with the client’s objectives (i.e., risk level, financial wherewithal, experience), then a stop should be put to the improper trading. Importantly, the suitability analysis takes place at the time of the trades, not at the time of the complaint, thus necessitating an immediate review of the trading.

On that note, unless the account is discretionary, brokers are required to speak to investors and receive specific authorization for every trade, buys and sells. If this did not happen, then there is a problem. In terms of the number of trades that took place, there comes a time when the trading in the account only makes money for one person – – and that is the broker. However, if the investor sits for years silently, riding the profits of the trading in the account and then complains years after the fact, such complaint may very well be looked at suspiciously as only a belated attempt to utilize the broker-dealer as an insurance company for market losses. By sitting silently, the investor may very well be waiving the ability to move forward on a viable claim. An investor has six years to file an arbitration claim against a broker before the Financial Industry Regulatory Authority (“FINRA”).

The New Year is a great time for accountants to work with clients and provide them with the necessary nudge to protect their investments.

The Law Offices of Barry M. Bordetsky represents customers and industry representatives in FINRA securities and employment arbitrations as well as litigants before state and federal courts. If you have questions about an issue you are involved with, please contact Barry Bordetsky at (800) 998-7705 or email barry@bordetskylaw.com.

Treat Your Brokerage Account Like Your Car? Absolutely.

01 Friday Aug 2014

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Believe it or not, your car provides a perfect analogy of how you should handle your investment account and the broker working with you. Most people have little if any knowledge of cars or how they work. Similar to how you have your broker guide you with your investments, you bring your car to your local mechanic.

Cars receive oil changes every 3,000 miles, and when it is time for your oil change, you bring the car to the service station. When getting the oil changed your mechanic tells you instead of every 3,000 miles, you should get your oil changed every 500 miles.   This just doesn’t make any sense, but you decide to go ahead anyway, because in your mind, the mechanic is the one who does this work for a living, so he must know what he’s talking about.

Stop there. If it doesn’t make sense to you, chances are, you are right on point.  You don’t need to be an expert in the field to know when something is simply off.  First thing you should do: ask to speak to the supervisor.  This should be no different with your stockbroker.

The Financial Industry Regulatory Industry (“FINRA”) recently filed charges against the New York broker-dealer Newport Coast Securities and five of its current and former brokers, charging them of “knowingly engaging in a manipulative and deceptive and fraudulent scheme to churn the accounts of some two dozen customers to boost their commissions.” FINRA alleges rampant churning of customer accounts and other misdeeds that caused significant losses to retirees and other investors.

FINRA is taking action to correct the alleged wrongs of the firm and brokers, and if the firm and brokers are found to have violated both securities law and FINRA rules, there will be be heavy fines issued, as well as the possibility of suspensions and perhaps expulsions from the industry.   This action by FINRA is similar to what the district attorney’s office does with a criminal that steals money from someone.

The present enforcement action by FINRA relating to churning should be a warning to all investors, old and young. Churning is the act of over-trading an account where an exorbitant amount of commissions are generated from the trading.    By way of example, presume an investor has $100,000 in her account. The broker opens the account with a buy of $100,000 of Facebook stock. The broker then repeatedly sells, buys and then sells again the stock twenty times over a one-year period. Each sale is quickly followed by a repurchase.

When one of the sales results in a quick profit, the broker will undoubtedly call and tell you how happy you should be that he made you money on the trade. But did he? Here’s where the churning analysis comes into play. If the broker did not overly trade the position, but rather bought and held, the position would have grown with the market movement of the stock. Instead, the investor’s portfolio has decreased because the broker’s commissions on the buys and sells have actually eaten into the profits in the account, and in many cases simply decrease the portfolio value. The only parties making money on this trading are the broker and his firm.  This type of trading should raise questions – – questions that must be asked before allowing the activity to continue.  And like your mechanic, ask for the broker’s supervisor before things get out of hand with your account.

In addition to enforcement proceedings, FINRA provides investors the ability to bring a civil action against the broker and his employing firm through the arbitration process, a very condensed court-like action. Those who lost money from Newport Coast or any other firm through churning, or other improper acts and omissions, have the opportunity to seek a remedy on their own. Those investors get their proverbial “day in court” in an expedited arbitration process that streamlines both cost and time to have the merits of the claim heard by a panel of arbitrators.

The Law Offices of Barry M. Bordetsky represents parties in arbitrations involving churning, unsuitable trading and other investment related claims. If you have questions relating to investment issues, please contact The Law Offices of Barry M. Bordetsky by calling Barry Bordetsky at (800) 998-7705 or emailing at barry@bordetskylaw.com.

 

 

The Importance of The Activity Letter

23 Wednesday Jul 2014

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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.

You Agreed to What?

14 Friday Mar 2014

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If you were asked to sign an agreement containing the language below, you would think a joke was being played on you:

BY SIGNING BELOW YOU ARE GIVING YOUR LIFE

SAVINGS TO [FILL IN LEAST FAVORITE PERSON]

          X_______________________________________________

You would think the joke continued if above the signature block on the next page of the agreement contained the following:

BY SIGNING THIS AGREEMENT YOU ARE AGREEING TO:

          (i)          KL**AJSDF;

          (ii)         LK AKJKJADFE; and

          (iii)        KAJD-KJT

          X_______________________________________________

As much as these examples may bring a smile to your face because of the respective absurdity or incongruity of each, they, or more detailed examples of the same, can be found in any number of breach of contract cases.

With respect to the first, many people haphazardly review a document before signing it, not taking the time to read each and every paragraph or appreciate the significance and legal consequence of each term. What inevitably takes place, most likely at the signer’s deposition, is the signer testifies: “I didn’t think this was going to be enforced.”   The reason contracts have many paragraphs is because the party or parties intend each and every term and paragraph to be enforceable against the other.   By signing an agreement, the signatory is agreeing to each of the terms set forth in the document.

The second example comes into play more often than not in business transactions involving individuals.  The irony here is for each person that reads the above unintelligible example thinking “who would sign an agreement with language they don’t understand”, three others have just signed contracts containing language the signers did not read or simply do not understand.

Courts have made it very clear a party is responsible for and will be held accountable to the terms and corresponding obligations set forth in an agreement that is signed by the party.  Naiveté and ignorance are not proper or acceptable defenses.

Take the time to read documents put in front of you that require your signature. If you do not understand a term or reasoning for the inclusion of a paragraph, ask as many questions as you need to so you understand the content. If asking the questions you still do not feel comfortable with the answer or you still do not have an understanding as to how that term or paragraph will effect you, do not sign the agreement.

Otherwise, the last laugh may very well be at you.

 

If you have questions relating to this topic or other contractual 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.

 

Where Are You Going: Arbitration or Court?

11 Tuesday Mar 2014

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The charge goes out from the client: Sue Them!   Doing the due diligence before drafting a complaint the attorney discovers an agreement between the parties that permits the claim to be filed before an arbitration forum or court.

So where to go?  Choosing which forum to commence the proceeding can prove critical to the case.  The importance of the forum analysis cannot be overlooked.  Factors to be considered include the amount of time it will take to have the trier of fact (judge, jury or arbitrator) render a decision, the type of discovery that will take place in each forum and the costs associated with each forum.

Arbitration includes a generally expedited process where a claim is heard within a year or eighteen months after the filing of the claim.  Conversely, a court proceeding can last from one to three years. Generally no depositions or interrogatories are permitted in the arbitration process. In English, this means unlike a court proceeding a party in the arbitration process has no idea what the other party is going to say when called to the stand. Arbitration attorneys often call the process trial-by-ambush.

An advantage seen in the arbitration process, particularly for individuals as opposed to corporate parties, is the decreased cost associated with the diminished discovery permitted in the forum.   Discovery for an average commercial matter can be the most expensive part of a proceeding. Some, however, do not see the cost benefit of limited discovery.  If the potential claims are believed to be in the range of hundreds of thousands of dollars, then spending tens of thousands of dollars to ensure you acquire the relevant information to prove your case can be seen as money well spent.

Where a party chooses to litigate a case in court, the judge is randomly selected upon the filing of the complaint, where parties to an arbitration will select the arbitrators. This judge in the court case will determine issues ranging from discovery to substantive motions filed by the parties.  In most jurisdictions this will be the same judge that presides over the trial.  In the event a court renders a decision, whether on a pre-trial matter or on the decision from the trial, a party has a right to appeal the issue to an appellate court.

Like a judge, arbitrators rule on various motions including discovery motions such as motions to compel, motions to exclude as well as motions to dismiss certain causes of action.  These are heard prior to the arbitrators ruling on the merits of the case. Importantly, unlike a court proceeding, these decisions by the arbitrators are not immediately appealable.  Moreover, after arbitrators render their final decision, it is very difficult for a party to overturn, or vacate, the arbitration award.  Said differently, the appeal process in arbitrations is substantially more difficult than in court proceedings.

The decision of the forum is critical and should not be disregarded as inconsequential.  Prior to any filing, take the time to determine which forum is better for your matter.

The Law Offices of Barry M. Bordetsky represents parties before courts and arbitration forums. If you have any questions, please contact us by telephone (800) 998-7705 or by email at barry@bordetskylaw.com.