Articles Posted in securities Industry

In the “worst day of 2019” for the market, the Dow Jones Industrial Average dropped 767 points by closing on Monday. When the market suddenly drops, investment portfolios will reflect not only the fluctuations but also the risks inherent in that particular strategy. All securities carry risk, but some investment products have more than others. Risk tolerance refers to the level of uncertainty in investment performance that is acceptable to the investor. An investor’s risk tolerance is reflective of their financial situation, needs, age, objectives, time requirements, and other considerations. Generally, investors can be categorized within varying levels of conservative, moderate, or aggressive. The types of investments in an investor’s portfolio should reflect their risk tolerance. The changes that investors noticed in their portfolio during market shifts could be indicative of where their portfolio falls on this spectrum.

Investors with the lower risk tolerances should have a conservative investment strategy in place that shields their portfolio from significant declines in market downturns. The goal of conservative investors is to prioritize principal protection and liquidity over risky appreciation. A conservative investment portfolio will be mainly comprised of safer, low-risk fixed-income investments, such as bonds and certificates of deposits. While low-risk investments do not generate the highest returns, the chances of losing principal are much lower. Older individuals closer to retirement should have investment profiles that reflect a more conservative investment portfolio. It is a huge red flag for any conservative investors to have noticed a complete decline in their portfolio from the market downturn.

Aggressive investment portfolios consist of substantially riskier investments that could potentially produce higher returns. However, these speculative investments come at the cost of potentially losing most or almost all of their principal. Younger investors with the time to recover losses are the demographic group that may be able and/or willing to weather a more aggressive investment strategy. Younger investors can usually benefit from saving as much as possible in retirement accounts in anticipation of the market’s eventual recovery and benefit from the compounding returns. However, investors of all ages who are more apt to want to sell at market downturns immediately should not be in this speculative investment strategy.

The House of Representatives has voted to block funding for the highly contentious four-pronged investment advice reform package deemed “Regulation Best Interest” through an amendment to the Financial Services and General Government Appropriations Act. Huge fiduciary duty proponent, Rep.  Maxine Waters, D-California proposed this amendment which prevents the SEC from using any funds under the Act to enforce Regulation Best Interest. The amendment could halt the SEC’s recently approved advice package, which includes Regulation Best Interest, Form CRS Relationship Summary and the agency’s interpretations of two concepts under the Investment Advisors Act. Our investor fraud attorneys echo Maxine Waters sentiments that the final rules fail to include the much-needed fiduciary duty and only facilitates further confusion, which is a far cry from strengthening investor protection.

Regulation Best Interest emerges a year the courts repealed Obama Era’s Department of Labor’s fiduciary standard, which required advisors to put their client interests first. Historically, the regulatory landscape distinguished between financial advisors who were obligated to legitimately act as fiduciaries and brokers not held to as stringent of a standard. Investment advisors are required to show an ongoing duty of loyalty and care, in serving their clients best interests at all times under the Investment Advisors Act of 1940. Meanwhile, brokers were only obliged to meet a “suitability standard,” according to FINRA rules, when recommending securities to investors. Under FINRA rule 2111, brokers must have a “reasonable” belief that a potential investment product or strategy is “suitable” for the investor based on the customer’s age, objectives, risk tolerance, and other information.

The most significant rule included in the standards reform package, Regulation Best Interest is intended to strengthen the duty of care owed by brokers above just the suitability standard. The SEC claims that the regulations would disclose conflicts and clarify the duties owed to investors. However, under these rules, broker-dealers are only required to disclose, but not necessarily mitigate any conflicts of interests with investors, unless state law is more strict. With this in mind, brokers are still not required to put their client’s interests entirely before their own genuinely if state law does not provide protection. Essentially, brokers can now advertise themselves as serving their clients’ “best interest” while not putting their clients’ interests first absent state prohibitions. While more disclosures are always beneficial, Regulation Best Interest fails to raise the standard of care enough to help investors not get taken advantage of by unscrupulous financial professionals.

A significant way that the Securities and Exchange Commission enforces federal securities laws is through levying fines on wrongdoers in the financial services industry.  Within the past few years, the SEC has issued billions of dollars in civil penalties and disgorgements in civil enforcement proceedings against defendants. The SEC allocates received fines, amongst other things, to compensate victims of securities violations. The unfortunate reality, however, is that the SEC only collects a little over half of the fines imposed through settlements and judgments according to agency statistics reported by Wall Street Journal.

In a five-year fiscal period ending in September 2018, the SEC reportedly collected 55% of the 20 billion dollars in fines imposed upon wrongdoers in the industry. Between 2009 and 2013, the SEC issued $14.6 billion in fines but collected 60% from the defendants. In the fiscal year 2018 alone, the SEC only received about 28% of their 4 billion dollars in fines levied through 821 enforcement actions. Out of the total owed fines, $1.7 billion comes from a settlement with an international oil company, Petrobras and the SEC is permitting this owed money to go to Brazilian authorities instead. Therefore, it is not unlikely that the SEC will never collect this significant fine that could have gone to funds meant for harmed investors.

The SEC has struggled with collecting civil penalties and disgorgement ordered in enforcement proceedings for quite some time. Based on the kinds of people and entities fined, the SEC often holds a low chance of actually getting the money. Fined defendants often do not have the money to pay, on top of dealing with the other consequences of their actions such as serving prison time and owing civil suits. After all, several fraud perpetrators, such as Ponzi Schemers get charged for their actions only after losing money needed to maintain their scheme. Even if the defendants can afford to pay the fine, the SEC does not have the right to force payment by seizing a debtor’s property or assets. Instead, the SEC must go through the long, tedious process of collecting money through liens and other court remedies to collect on the judgments.

Getting called by the SEC can be a frightening experience for anyone. Such a call is especially serious for financial professionals including those that trade in stock or work for public companies or companies which had stock that sold in private offerings. The SEC can oblige any American citizen to comply with any demands for information that could assist in their enforcement of federal securities laws. One of the more frequently asked questions that our securities regulatory law team answers in our free consultations is: “Should I respond to the SEC’s phone call?”  The answer is yes, but only after retaining an experienced securities regulatory attorney to represent you in the process and be your intermediary. The contacted party should take down the SEC caller’s name and information to call back later.

Our securities regulatory attorneys advise individuals not to respond immediately and without a lawyer to mitigate risks. Through this course of action, contacted parties are more protected from unwarranted charges and other risks that arise when speaking with the SEC unprepared.  The SEC may tell you that you are not a target, but they will not make any enforceable promises in that regard. It is up to you to make sure that you do not become a target.  Remember, the English language can be tricky, and lawyers’ use of it is different from that of the average layperson. A point to keep in mind is that when the SEC calls, it has an agenda that prioritizes their mission and not your specific interests.

The SEC reaches out to people to gather facts to determine whether any provisions of federal securities laws or rules have been violated. Thus, financial professionals contacted by the SEC are either the target of an investigation or believed to have related knowledge. The SEC may use the information you provide in the testimony to pursue civil charges through administrative or court proceedings. Additionally, the SEC may provide information to other agencies for their own separate federal, state, local or foreign administrative, civil or criminal proceedings. Individuals contacted by the SEC must respond fully, truthfully, and honestly or risk receiving fines and even possibly terms of imprisonment. In certain cases, it may be in your best interest to asset your fifth amendment rights and not testify at all.

The current ongoing federal government shutdown adversely affects the Securities and Exchange Commission with a “very limited number of staff members available” to carry out the agency’s tasks. The SEC handles the enforcement of federal securities laws through overseeing approximately $90 trillion in annual securities trading as well as the activities of over 27,0000 registered entities and self-regulatory organizations. The SEC’s Division of Enforcement investigates into potential securities laws or regulatory violations and recommends any required action against perpetrators. Now, the SEC is reportedly operating at 5.8% and the enforcement division at 8% of capacity. In fact, the Division will take months after the shutdown ends to recover, according to the SEC’s Office of Internet Enforcement’s chief, John Stark. The constraints posed by the government shutdown come after the SEC’s outstanding enforcement and accomplishments in 2018, posted in their second annual report.

Starting with the first 2017 report, the Division assesses the performance of their fiscal year with five core principles in mind. These Division of Enforcement’s five principles are a focus on the Main Street Investor; individual accountability; keep pace with technological change; impose remedies that most effectively further enforcement goals; and continuously assess the allocation of resources. Based on their assessment, SEC’s codirectors Stephanie Avakin and Steven Peikin described the Division of Enforcement’s efforts this year as a “great success”. In evaluating their effectiveness, the Division’s assessment focuses more on the “nature, quality, and effects” of their enforcement actions, rather than just the quantitative metrics.

Nonetheless, the Division did accomplish impressive numeric feats as well despite the constraints of a hiring freeze and the Supreme Court’s 2017 decision in Kovesh v. SEC. The Division has investigated and recommended hundreds of cases alleging misconduct, leading to $794 million returned to harmed investors. Compared to the prior year, the SEC filed more enforcement actions (821) with higher numbers for stand alones (490), follow-on admin proceedings (210) and delinquent filings (121) in 2018.  The most common stand-alone enforcement actions involved securities offerings, investment advisors, and issuer reporting as well as disclosure. Despite Kovesh v. SEC limiting the window of time for collecting, the SEC ordered around $2.5 million in disgorgement and another $1.5 million in penalties.

In recent years, exchange-traded products, “ETFs,” have become increasingly more popular on Wall Street and in the investor community. Institutional investors and retail investors alike have invested in exchange-traded products. Astoundingly, exchange-traded funds are a trillion-dollar market that continues to grow in value with passing time. While some ETFs are like mutual funds, others are a speculative gamble. There are many ETFs that investors should be wary of before deciding to invest. Not all ETFs are created equal.

What are Exchange-Traded Funds and How Do They Work?

Exchange-traded funds are securities that track an index, basket of stocks, bonds or a commodity. For an investor to own an ETF is the equivalent of indirectly holding a share of the total basket of underlying assets. In return, the investor receives a proportional amount of the fund’s profits and residuals. Investors can also use exchange-traded funds as a tracking mechanism for exposure to a specific index or collection of securities.

Brokers can end up with unwarranted customer complaints, arbitrations, terminations, and other adverse disclosures on their CRD for reasons beyond their control. While plenty of investors have a legitimate “beef” against their investment professional, some people vet illegitimate or unwarranted frustrations by filing complaints to a broker’s employer or FINRA and it can stay with a broker and hurt his career forever. Sometimes, the brokerage firm, the market or other external forces are actually at fault for the customers’ losses, not the broker. Some customer complaints could be emotional or financially driven rather than rational. Similarly, firms sometimes have “ulterior motives” in terminating and reporting a termination of an investment professional, which could be false and lead to a FINRA 8210 inquiry, investigation or disciplinary hearing, as well as hurt future employment potential forever.

The CRD, short for Central Registration Depository, is the online registration and licensing system FINRA uses as their database for broker records. Potential customers, regulators, and employers have access to most of the CRD’s information through FINRA’s publicly available online resource, BrokerCheck. Customer disclosures permanently show on the CRD irrespective of a broker’s actual culpability for the alleged misconduct. It can negatively change a broker’s career forever.

Frivolous marks on a Form U5 can damage the stellar reputation any well-intentioned brokers craft after years of successful securities industry experience. Fortunately, in the appropriate circumstances, brokers can have marks removed from the CRD in FINRA arbitration or court proceedings. The experienced expungement attorneys at Malecki Law can help brokers pursue removal of negative customers disclosures FINRA arbitration proceedings. It is more difficult, expensive, and time-consuming for investment professionals to pursue expungement requests in courts with FINRA as an adverse party, but an investment professional can file in court as well.

Yesterday, a Financial Industry Regulatory Authority (FINRA) arbitration panel in Boca Raton, Florida awarded Malecki Law attorneys $397,823.00 for principal investment losses against Morgan Stanley & Co., LLC.  Malecki Law brought the case on behalf of an elderly and retired couple with conservative investment objectives on claims that Morgan Stanley failed to supervise their accounts and unsuitably over-concentrated their portfolio in risky oil and gas master limited partnerships (MLPs).  In addition to the compensatory damages, the panel also ordered Morgan Stanley to pay the claimants in this case 9% in interest, $15,000.00 in costs, attorneys’ fees, $11,812.50 in forum fees, and a $20,000.00 penalty for the firm’s late production of relevant documents at and just prior to hearing.

Malecki Law regularly brings claims on behalf of investors against unscrupulous conduct by brokers and brokerage firms, and holds them accountable for mismanaging investor retirement accounts.  Elderly investors such as these find themselves especially at risk from poor investment recommendations made by brokers and securities firms because senior citizens are typically out of the workforce and have much less time and ability to recoup their losses than younger investors.  This is pertinent to yesterday’s win because, in setting the damages figure, the arbitration panel rightfully did not deduct investment income (i.e., dividends), which the claimants earned while they had their accounts open with Morgan Stanley.

This is also a notable win for Malecki Law because the case involved the purchase of MLPs, which is a “hot investment” on Wall Street these days.  MLPs offer high yields, but are generally recognized as risky and volatile investments, typically within the oil and energy sector, and are not suitable for most retirement accounts or conservative investors looking to preserve their capital.  In May of last year, the Securities and Exchange Commission (SEC) issued an investor alert on MLPs to warn investors of the significant risks in these products, including unexpected tax consequences, fluctuations in distributions, and concentration exposure in the energy sector with acute sensitivity to shifts in the prices of oil and gas.

It seems like every day there is a new “hot stock” being pushed by financial pundits and brokerage houses alike.  Seadrill Limited (ticker symbol, SDRL) was once one of these hot stocks, but it has since fallen from grace, with wide reports that it will be declaring chapter 11 bankruptcy by early next week.  SDRL’s stock was known for its generous quarterly dividend, and, to the detriment of retiree investment portfolios, benefited from excessive promotions it received from those within the brokerage and investment industry.

SDRL is an offshore deep-water drilling contractor in the oil and gas sector.  It was founded in 2005 by John Fredriksen, a Norwegian-born billionaire, who was well-known for his triumphs in the oil and shipping industry during the 1980s.  The company grew quickly by way of aggressive management and acquisitions, and its stock price in September of 2013 surged to its high of over $47 per share.  However, SDRL has since spectacularly nosedived, falling by more than 99% in value to its current trading price of $0.23 per share.

As early as February 2012, Mad Money’s Jim Cramer was bullish on SDRL.  But so were big name brokerage firms like Morgan Stanley, which issued a research report in November 2013 that confidently touted SDRL as an overweight value stock.  In a subsequent research report from March 2014, Wells Fargo Securities named Seadrill’s subsidiary, Seadrill Partners, LLC (ticker symbol, SDLP), its “top Marine MLP Pick” and predicted “solid distribution growth” through 2015.  Notably, SDLP’s investment performance took a similar trajectory to its parent SDRL, at one-point trading over $34 per share in August of 2014, but now sitting barely above $3 per share today.

Can I Sue My Brokerage Firm for Filing a False Form U5?

Financial firms that deal in securities do carry legal liability for filing a Form U5 with false information, and financial advisors can indeed sue their former firms for filing an inaccurate Form U5.

Whenever a brokerage firm terminates the employment of a broker or financial advisor, the firm must file a Form U5 – the Uniform Termination Notice for Securities Industry Registration – with the Financial Industry Regulatory Authority (FINRA) within thirty days of termination.  The Form U5 is differentiated from the Form U4 – the Uniform Application for Securities Industry Registration or Transfer – which is filed upon a broker’s registration with a firm, whereas the Form U5 is filed upon the broker’s termination. The Form U5 requires a firm to provide accurate answers to various questions, including the reason for a broker’s termination.