New York Securities Fraud Lawyers Blog

Surely My Financial Advisor Has an Insurance Policy to Protect Me When Things Go Wrong, Right? Not So Fast…

February 10, 2023 | Adam G. Schreck

Although a handful of states have requirements in place, surprisingly few Registered Investment Advisors (RIAs) across the country carry liability insurance to protect clients from their own wrongdoing leaving investors as the only party left to bear the brunt of losses when things go sideways.

The professional liability insurance industry for Registered Investment Advisors (RIAs) has been described by one in the industry as, “the Wild West.” There is immense uncertainty as to the number of independent RIAs who carry professional liability insurance as well as extreme variability within the specifics of the policies offered to RIAs. While there are some states that require RIAs to carry insurance, most states do not have mandates in place, and the federal government has yet to draft any laws on the matter.

At the forefront of requiring RIAs to maintain insurance coverage are Oregon and Oklahoma. In 2018, Oregon became the first state to pass legislation requiring RIAs registered with the state to carry professional liability insurance. The Oregon law requires RIAs to carry at least $1 million in coverage and to show proof of such coverage during the state’s licensing process. Similarly, in 2020, Oklahoma passed legislation requiring RIAs registered with the state to carry professional liability and cybersecurity insurance. Curiously, the Oklahoma law fails to indicate how much insurance coverage is required for RIAs. If you are an investor in Oregon, Oklahoma, or any other state, who believes you have lost money due to your RIA’s wrongdoing, you should consult with a Securities Law Firm like Malecki Law.

Know Your Custodian – Uniform Transfers and Gifts to Minors Acts

January 18, 2023 | Malecki Law Team

The Uniform Transfers to Minors Act (UTMA) and Uniform Gifts to Minors Act (UGMA) allow adults to give or transfer assets to minor beneficiaries. The slight difference between the accounts is that the UGMA is limited to financial assets while the UTMA includes any tangible or intangible assets. These accounts allow children to safely invest and build up capital legally before they become adults. There are also tax benefits to these accounts as contributions are made with after-tax dollars. If you believe your brokerage firm failed to supervise your trust account or the advisor managing your trust, you need to consult a New York Failure to Supervise Trusts Law Firm like Malecki Law.

Each of these accounts have a custodian who acts in the child’s interest as a fiduciary. This means that the investments made and the way the money in the accounts is managed must be for the child’s benefit. When the minor reaches the age of majority, the custodian no longer has authority to make decisions on behalf of the beneficiary and the beneficiary continues to monitor the account on their own. Additionally, once the money is transferred to the beneficiary, it is permanently their property.

FINRA Rule 2090, the “Know your Customer” rule, requires firms “verify the authority of any person purporting to act on behalf of the customer. So, brokerage firms and their members are supposed to know the essential details about who is acting on behalf of the customer (i.e. the custodian). Did your brokerage firm fail to “know” your custodian? Did you suffer losses because of this? You should reach out to a New York Failure to Supervise Trusts Lawyer like the lawyers at Malecki Law for a free consultation. The member must not only know the customer at the beginning of their relationship (account opening) but throughout the whole of the relationship. In line with this “Know your Customer” rule, firms are supposed to have a supervisory system for their members, which makes sure brokers are in compliance with procedures. The problem is that many firms do not have supervisory procedures in place for UT/UGMAs. In turn, the brokers do not know their customers, resulting in custodians not being monitored.

Should Sports Betting Fall Under Securities Regulatory Scrutiny?

January 10, 2023 | Malecki Law Team

Introduction

Sports betting is an activity that originated in ancient times. Back then, people wagered currency, food, or even livestock. Today, we usually wager cash or other securities. Federal government entities never regulated sports betting activities. Originally, there were no rules to govern the use of the funds that were generated from sports betting activities and, as a result, a lot of organized crime ensued. Over the last 40 years, the federal government attempted to regulate sports betting to curtail this increase in organized crime. If you think you have been subjected to securities fraud, you need a New York Securities Fraud Law Firm like Malecki Law to review your portfolio, at no cost.

These governmental attempts to regulate sports betting were often met with the question of whether these efforts overstepped the federal government’s constitutional authority. This question was constantly debated until 1992 when Congress passed the Professional and Amateur Sports Protection Act (PAPSA). This act prohibited the states from sponsoring, operating, advertising, or promoting sports betting schemes. This act also applied, not only to the state level, but to individuals as well. Although Congress put its “foot down” on the issue of regulating sports betting, many states believed that PAPSA was an unconstitutional overreach of Congress’ authority. From 1992-2018, states continued to sponsor initiatives to regulate sports betting within their own jurisdictions. New Jersey was one of the states that were on the front lines of this fight and eventually, won its battle with the federal government.

Reg D Fraud Lawyers Can Help Recover Trillions of Investor Losses

October 31, 2022 | Jenice L. Malecki, Esq.

The Securities and Exchange Commission governs private placements exemption from registration of securities on an exchange that are still sold to the investing public via Regulation D (Reg D). Reg D offerings are attempted by private companies or entrepreneurs because funding is faster at a lower cost than in a heavily reviewed and documented public offering. The problem many investors face are illiquidity, company failure and the end of promised distribution income.

Studies show that in the past 14 years, there have been $20 trillion in Reg D offerings, $7.7 trillion sold by brokers; $4.8 trillion of that has happened since 2016. Reg D Fraud Lawyers in New York at Malecki Law know the losses these investments can cause investors.

Studies estimate that close to 10% of Reg D offerings fail, meaning likely in excess of $5 trillion sold by brokers in the past 6 years may have failed. Approximately one-third of Reg D offerings reportedly fail within the first six years and approximately 25% are sold by high-risk brokerage firms.

The Impact of Cloud Computing on the Securities Industry

October 14, 2022 | Malecki Law Team

Cloud computing is the delivery of computing services (i.e., storage and network infrastructure and software-as-a-service (“SaaS”)) on the internet rather than your computer’s hard drive. Currently, cloud computing is considered a valuable asset to firms, industry wide. It is important to have Malecki Law’s FINRA Regulatory Lawyers in New York assist in ensuring your firm’s storage systems are sufficient. As a result, the Financial Industry Regulatory Authority’s (“FINRA”) Office of Financial Innovation (“OFI”) published a report addressing the results of a study regarding the state of cloud adoption within the securities industry. In drafting the report, FINRA obtained data from roughly 40 broker-dealer firms, cloud service providers, industry analysts, and technology consultants.

The report noted that cloud computing strengthens a brokerage firm’s ability to scale operations, generate business continuity solutions and quickly deploy products. Moreover, firms claimed that there are both benefits and challenges regarding agility, resiliency, costs, cybersecurity, staffing, and operations. Additionally, many firms claimed that migrating to the cloud may allow them to be more innovative and offer products at a faster speed. Firms also felt that cloud computing enables them to more efficiently scale computer usage to assist with the increase in IT resources.

As part of its recommendations, FINRA advised broker-firms that use third-party service providers that they have an ongoing responsibility to monitor and supervise the provider’s performance and create oversight procedures. FINRA also encourages companies and vendors to “re-evaluate their approach to security, including reviewing cloud misconfigurations and poor access controls; update data-related policies and procedures if a firm’s cloud adoption leads to changes in how it collects, stores, analyzes, and shares sensitive customer data; create, maintain, and annually review a written business continuity plan, in line with the FINRA Rule 4370 (Business Continuity Plans and Emergency Contact Information); consider the risk posed by cloud vendors and service providers; ensure that any data and information stored in the cloud is compliant with Exchange Act Rule 17a -4, and are preserved in a non-rewriteable and non-erasable format.”

Elder Investment Fraud and Exploitation

October 5, 2022 | Malecki Law Team

Elders Need Protection from Exploitation

When a client entrusts their financial professional with their money, the client assumes that the best care will be taken. Clients expect loyalty and guidance from their broker. Unfortunately, elders can be exploited and defrauded by them instead. This is why it is important to have Elder Fraud Lawyers in New York to review your elder’s portfolio at no cost.

While an investment advisor has a fiduciary duty to their clients, a broker only follows the regulation best interest rule, which is similar but systematically different. A fiduciary duty is one made up of trust, loyalty, and a duty to prevent one’s clients from engaging in any transaction that operates as fraud or deceit (Section 206 – Investment Advisers Act). The fiduciary relationship applies to the whole relationship between the client or prospective client and advisor. Fiduciaries have the affirmative duty to act with utmost good faith and full disclosure of material facts.

Brokerage Firm JSC’s Supervisory Failures – What Not to Do

September 27, 2022 | Malecki Law Team

Brokerage firms owe its clients the duty to supervise its employees and personnel. This is a very important duty in the financial industry, as it ensures the associated persons under the brokerage firm’s umbrella are compliant with FINRA’s rules. Firms should maintain its duty to supervise, and ensure that it has adequate procedures in place to prevent any potential misconduct that would be harmful to its clients. If your brokerage firm had inadequate supervisory procedures in place, the firm may be subject to failure to supervise claims. You need a New York Securities Industry Lawyer like the lawyers at Malecki Law.

A faulty compliance system can rise to the level of a failure to supervise. Broker-dealer Joseph Stone Capital (JSC) apparently dealt with exactly that. FINRA found that the firm’s compliance system had been insufficient in supervising its brokers, from January 2015 through June 2020. Specifically, JSC received exception reports that revealed potential excessive trading red flags. However, JSC failed to further investigate or prevent such activity.

To prevent this problem from occurring, a JSC supervisor responsible for reviewing the exception reports should have reviewed the clearing firm’s exception report daily. That supervisor would have discovered the possibility of excessive trading. If your brokerage firm failed to further investigate or prevent misconduct like JSC, it may be prone to failure to supervise claims. You need a Regulatory Defense Law Firm in New York, like Malecki Law. Additionally, after discovering these excessive trades, management should have questioned the broker about this trading activity, instead of restricting commissions. Supervisors should have reviewed every trade confirmation in the accounts in question and evaluated whether the trades were solicited (where the broker recommended the trade) or unsolicited (where the client recommended the trade). If the confirmations stated “solicited”, then management could ask for the broker’s thought process for making these trades. This would have identified the crux of the issue more efficiently and would have led to a quicker resolution. One can argue that JSC should improve its compliance software, but the software was not truly at issue during this investigation. According to all evidence, the compliance software seemed to work. The FINRA Order shows that the problem truly stemmed from JSC’s supervisors’ failure to act accordingly to stop their brokers’ activities of excessive trading. If your brokerage firm failed to act accordingly when discovering potential broker misconduct, it may be susceptible to failure to supervise claims. You need a Regulatory Defense Attorney in New York, like the lawyers at Malecki Law. It is unclear how JSC’s compliance software works, but they could also look to incorporate artificial intelligence and machine learning to generate quicker and more accurate compliance reports.

How Might a Brokerage Firm Fail to Supervise Its Brokers’ Misconduct?

September 19, 2022 | Malecki Law Team

Securities Industry Background

The securities industry is one of the most regulated industries in the United States. Statutes, common law, and federal regulations all govern the conduct of securities firms and their representatives. Securities firms must register with the Financial Industry Regulatory Authority (FINRA). FINRA is a self-regulated organization (SRO) that protects investors by ensuring that the securities industry operates honestly and fairly. An SRO is an organization that has power to create and enforce industry regulations on its own. This means that FINRA has the authority to create and enforce its rules on securities firms that register with FINRA. A broker-dealer is a securities firm that must register with FINRA. Broker-dealers engage in the business of buying and selling securities. Broker-dealers also offer services such as trade execution, selling securities out of inventory, and lending. Since all broker-dealers and its registered representatives (its individual brokers) must register with FINRA, FINRA’s rules and regulations apply to broker-dealers. If you notice all your investments declined at the same time, it may be a clue that your broker engaged in misconduct. Your brokerage firm has a duty to supervise its brokers to detect and prevent misconduct. You may have a failure to supervise claim. You need a New York Failure to Supervise Lawyer like the lawyers at Malecki Law to review your portfolio, at no cost.

Failure to Supervise Broker Misconduct

Jenice L. Malecki Speaking on Discovery Issues In Securities Arbitration this Thursday at Live CLE Event – Registration Still Open

September 6, 2022 | Malecki Law Team

This Thursday, September 8, 2022, New York City securities lawyer, Jenice L. Malecki, Esq., will be part of a live panel at the PLI’s Securities Arbitration 2022 program, a 1-day Continuing Legal Education (CLE) event on best practices and the latest trends in securities arbitration. The event will be hosted by the Practising Law Institute (PLI), and will be held at PLI New York, 1177 Avenue of the Americas, as well as online as part of a live Webcast.

At the event, Ms. Malecki is scheduled to speak at 2:45 p.m. on Discovery Issues in FINRA arbitration. As part of a panel, Ms. Malecki will discuss FINRA’s discovery rules and procedures, understanding the role of arbitrators in the discovery process, how to execute orders of confidentiality, concepts around producing electronically stored information (ESI) such as proportionality, and how to avoid discovery abuse and related sanctions. Other presenters at the event include other securities attorneys and arbitrators, including Richard Berry, Director of Dispute Resolution at the Financial Industry Regulatory Authority (FINRA). The event’s programming includes an update on FINRA arbitration statistics and trends, what is new at FINRA Dispute Resolution Services, as well as recent technology updates and FINRA’s latest response to Covid-19 and how to comply.

Ms. Malecki is a regular presenter and panelist at securities industry events. She is known for her nearly thirty-five years of securities industry practice and is the founder and principal of Malecki Law, a Manhattan-based securities law firm that provides both national and international representation, and has helped retail investors recover tens of millions of dollars in stock market losses, whether due to brokerage firm negligence, Ponzi schemes, or other financial frauds. Malecki Law also represents securities industry financial professionals in employment disputes with their firms, expunge unjustified customer complaints or defamatory comments from their Form U5 and BrokerCheck CRD, and defends them when faced with regulatory inquiries, including responding to SEC subpoenas and FINRA 8210 requests. Ms. Malecki is a former board member of FINRA and member of its National Arbitration and Mediation Committee (NAMC). She is presently the co-chair of the New York State Bar Association’s Securities Arbitration Committee, as well as an adjunct professor in the securities clinic at the New York Law School.

New York State Bar Association’s Securities Arbitration Committee to Host Lunchtime Panel: “Representing Employees in the Securities Industry”

July 18, 2022 | Malecki Law Team

On July 27, 2022, the Securities Arbitration Committee of the Commercial and Federal Litigation Section of the New York State Bar Association will put on a free, lunch hour (12:15 PM to 1:30 PM) educational panel to discuss issues unique to the legal representation of employees in the securities industry. The seminar will feature panelists Pearl Zuchlewski and Kirsten Patzer, experienced attorneys who will discuss “An Employee’s Perils: Securities Arbitration in a Regulated World.” The panel will share their experiences in employee representation as it relates to industry rules set forth by the Financial Industry Regulatory Authority (FINRA) and the Securities Exchange Commission (SEC), respectively applying to financial professionals registered with broker dealer and investment advisory institutions.

The lunchtime discussion will focus on differences between representing registered individuals in different forums, whether relating to customer or industry disputes in FINRA Arbitration or the American Arbitration Association (AAA). Discussion will also include common issues relating to registration (e.g., U4/U5 disputes) or other employment disputes, regulatory implications for financial professionals called before the SEC or FINRA (i.e., via subpoena or FINRA 8210 requests), and considerations for when there are civil or criminal penalties at stake. Special attention will be devoted to resulting issues likely to impact a financial professional’s future employment, whether inside or outside the securities industry, as well as a discussion on the latest regulatory trends in this space.

The New York State Bar Association (NYSBA) and its Securities Arbitration Committee regularly hosts seminars and educational panels like this one. The committee is co-chaired by Jenice L. Malecki, Esq., founder and proprietor of Malecki Law, a Manhattan-based securities firm that has provided national legal representation to securities industry professionals before regulators (SEC and FINRA) as well as in customer arbitrations, expungement hearings, and U4/U5 disputes for over twenty-five years. Ms. Malecki has additionally served on FINRA’s National Arbitration and Mediation Committee (NAMC), on the board of the Public Investors Advocate Bar Association (PIABA), and is currently an adjunct professor in the Securities Arbitration Clinic at the New York Law School.