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Many clients are asking whether FINRA arbitration claims can be brought against a bank and/or its employees for losses sustained in their investment accounts.  The answer is yes.  There are more than 5,000 commercial banks in the United States.  Along with traditional banking services, many of these banks also provide in house “financial advisors.”  In order to charge their customers more, these bank branch financial advisors encourage bank customers to invest their savings with them.  Now more than ever, bank customers are being pressured into using these services, and their life savings are being invested rather than saved.  This can lead to losses in customer accounts, where customers would have been better off keeping their funds in a savings account.  Malecki Law’s FINRA arbitration attorneys have handled many cases involving claims where customers lost money investing with a commercial bank financial advisor.

Up until Congress repealed the Glass Steagall act in 1999, commercial banks, banks that take in cash deposits and make loans, could not offer investment services.  The Glass Steagall Act separated commercial banks and investments banks and prohibited commercial banks from providing any investment service to its customers.  Once the act was repealed, in order to make greater profit, banks took advantage and began offering these services.  Although banks often incentivize their customers to use these services, such as offering lower fees or free checking, the bank’s investment services, however, are not free.

Investing funds with a bank is no safer than investing funds through an online or traditional brokerage firm.  Customers ordinarily use banks for savings, checking, CDs, and, sometimes, securing a mortgage or other type of loan.  These types of accounts are a bank’s specialty and are FDIC insured, meaning that these are vehicles designed to prevent the loss of money in customer accounts.  Contrarily, investments are not a bank’s specialty and investing with a bank’s financial advisor, similar to making an investment in an online or traditional brokerage account, comes with risk, often incurring higher fees than an online or traditional brokerage account.  Moreover, not only do the investment products offered at banks charge higher fees, but the quality and diversity of investment products is limited, which increases risk to the customer’s investments.

Many clients are asking, “can my arbitration hearing be done online by video?” The answer is yes.  FINRA allows for remote hearing services, via Zoom and teleconference, to parties in all cases.  In arbitration, all parties can agree as to almost anything and FINRA will allow it – such as who the arbitrators are, methods of picking arbitrators and/or how the hearing will happen.  The trick is to get your adversary to agree to alternative hearing methods or to get a sitting arbitration panel to order (force) your adversary to do it. A hearing can happen a number of ways with FINRA’s blessing, so long as it can be recorded.  Next week, we expect that FINRA will set out more formal guidelines and we will update this blog in a new post.

Zoom is a user-friendly video platform that provides high-quality and secure options for conducting remote hearings.  The platform allows parties, arbitrators, counsel, and witnesses to share documents and their screens with other participants.  Zoom is a viable option for parties unable to attend an in-person hearing. Malecki Law’s FINRA arbitration attorneys have experience and systems in place, ready to use this method for hearings in investor arbitrations, as well as industry employment and regulatory matters.  For many years, remote witnesses have participated and testified via video and telephonic methods.  It is really not a completely new concept.

Whether the hearing is remote or in-person, the prehearing process will not be hindered.  In customer dispute cases, where customers bring claims against their broker and/or broker-dealer, all aspects, except for an in-person hearing, are done remotely (such as filing the claims, resolving discovery disputes, and interviewing witnesses).  As a matter of fact, most claims against a broker and/or broker-dealer will settle before the hearing is scheduled to begin.

U.S. oil prices have been on a roller coaster ride over the last few weeks, at one point dropping below $0 for the first time in history to -$37.63 a barrel.  Oil has since rebounded from its subzero levels, but it remains questionable as to whether it can stay there.  It begs the question, what does this mean for investors and the U.S. oil market generally?

When prices cratered below zero, there were those that weighed in that it was nothing to worry about.  After all, the subzero price drop really had more to do with the expiration of contracts for oil futures.  It was explained that the current demand for oil is so low that producers would rather put their oil in storage and then sell it at some point in the future.  Placing additional strain on the market, the U.S. is running out of places to store it, with backlogs of oil tankers from Saudi Arabia out at sea and being turned away from U.S. shipping ports.

The U.S. has traditionally been a net importer of oil, but with the emergence of oil fracking, the U.S. at one point in 2019 surpassed Saudi Arabia as the world’s top oil exporter.  This trend towards parity gave many observers of the U.S. oil market a feeling of confidence that the U.S. was a rising oil power, with President Trump going so far as describing the U.S. level of participation as “energy dominance.”  But as pointed out by professionals, increased participation in the market has little to do with control over the market.  For instance, the price of U.S. oil recently began to spiral down when Russia and Saudi Arabia started to increase their production levels.  U.S. oil prices teetered even further, and then below zero, when the global and U.S. economic response to the spread of Covid-19 began to take shape – every state being under some level of a stay-at-home order, with fewer cars on the road, fewer people travelling by air, and U.S. oil workers in Texas and elsewhere being laid off in the tens of thousands.  The pumps have stopped and oil companies are already declaring bankruptcy, with likely more to follow.

Getting a Rule 8210 Notice from FINRA can be a jarring event.  If you have received an 8210 notice, you should take it seriously, as well as immediate steps to develop your best course of action to comply with the request. An 8210 Notice is a subpoena from FINRA that is typically sent to registered representatives in connection with an informal inquiry that does not have to be reported on your form U4. When you first receive an 8210 notice, FINRA is likely trying to determine if there have been any violations of securities and/or industry rules and/or regulations.  You should notify your compliance officer, as they will likely have already received a copy from FINRA, but being transparent is important.

It is important to meet with an attorney as soon as possible to determine the best ways in which to protect your interests during the process.  All involved parties will not necessarily share the same interests, i.e., your firm and/or supervisor may have their own self-preservation interests.   As part of the 8210 notice, you will be required to answer a list of questions (interrogatories) and produce sometimes a wide range of documents, both business and personal.  The attorneys at Malecki Law are experienced in defending FINRA registered representatives and firms in FINRA disciplinary matters and can work with you in responding to interrogatories and assist you with your document production using state of the art electronic discovery tools.

In working with your attorney to respond to interrogatories and produce documents you should also start to prepare for a potential “on the record” interview (or “OTR” for short).  OTRs before FINRA involve sitting in a conference room with investigators and answering their questions under oath.  You should have your attorney prepare and accompany you to an OTR. While not all cases involve an OTR, many do.  Experienced counsel will know the best way to couch what happened with the right language and explanation.  Furthermore, it is important to identify and explain mitigating circumstances as soon as possible before enforcement decisions are made.

Predicated on fear of a global slowdown and the uncertainty around coronavirus, the stock has experienced extreme volatility as it heads into bear territory. While it may be expected for even the bluest of blue-chip stocks to experience volatility,  investors should pay particular attention to their entire investment portfolios as it is in violate market climates that broker misconduct may reveal itself, especially as it relates to your investment objectives and suitability.

When the market suddenly drops, investment portfolios will reflect not only the fluctuations, but also the risks inherent inparticular strategies and investments. 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.

The investment and securities fraud attorneys at Malecki Law are currently investigating UBS’s Yield Enhancement Strategy (“YES”) for the purpose of investor recoveries. Our attorneys are interested in hearing from investors and others who have information and/or have experienced losses due to UBS YES or other complex yield enhancing investments regardless of the brokerage firm.

It appears that the YES strategy may have been sold to UBS clients as a conservative and low-risk investment strategy that would provide them with an increased yield (income) in their portfolio. In fact, in our opinion, the strategy was an esoteric leveraged options strategy that utilized an options strategy known as the Iron Condor, which is inherently risky as it relies on consistent stability in the markets.

USB YES employing the esoteric Iron Condor strategy uses a leveraged options strategy in a client’s portfolio. UBS would use the client’s assets as collateral in a margin account then execute four different options trades, simultaneously selling calls and puts in an attempt to generate income and buying calls and puts in an attempt to hedge risk. This resulted in the creation of a price spread. If the price of the index or security the options were a derivative of stayed within the spread it would produce a premium to the investor. However, the excessive volatility experienced by the markets recently and most notably in the fourth quarter of 2018 blew through these spreads resulting in serious losses to investors.

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.

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