Articles Tagged with brokers

As reported in the Wall Street Journal, there has been a recent trend at big brokerages of shifting the power from the headquarters to brokers and branch managers. Apparently big brokerages like Bank Of America, UBS Group, and Merrill Lynch are “unleashing” their brokers and moving power closer to the brokers and their managers, both to keep brokers from leaving their firms and to increase revenues.

These modifications come in the wake of declining revenues and broker exoduses several big brokerages have experienced after the financial crisis. They have also witnessed that brokers who dislike or disagree with their managers and find them unhelpful tend to leave the brokerages more easily. The big brokerages have had to deal with rising regulatory costs and competing with an increasing number of independent advisers. According to research conducted by consulting groups, the registered investment adviser model is more successful as it is a smaller and more tightly integrated groups. Taking a cue from that, the zillion dollar brokerages are making changes aimed at empowering, training and giving their brokers more control over day to day decisions over clients, growth, and resource allocation. Merrill Lynch has plans to restructure the brokerage leadership, emphasize more on productivity and training, and reduce the number of divisions. UBS also made similar changes last year.

There are plans underway to also automate investment advisory and make use of robos to cater to a younger clientele so that the brokers can be freed up to deal with high net worth clients. All in all, this gradual shift is geared towards taking things back to how they were before the financial crisis hit, when the field agents and managers had more autonomy to structure their branches, price and sell services, be less accountable to corporate headquarters, hold more power and sway.

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There is an interesting point in this week’s Wall Street Journal titled “Brokerage Files Don’t Give The Full Pictures,” which talks about the how brokerage firms and individual brokers are held to different standards, when it comes to their BrokerCheck records. BrokerCheck, the online search tool from FINRA for brokers and brokerages, reports arbitration decisions that are not in a securities firm’s favor but not the negotiated legal settlements, whereas every settlement in a broker’s record is clearly delineated. So why does this gap exist in reporting and how does it continue to happen?

FINRA is not a government body, but it is overseen by the Securities and Exchange Commission (SEC). Within 30 days of reaching a settlement, brokerage firms are obligated to report agreements to FINRA, if the amount meets a certain threshold. However, BrokerCheck records pull information from an SEC document named “Form BD” that doesn’t ask brokerage firms about negotiated settlements. The agreement that gets reported to FINRA in the event of a settlement is not currently a part of SEC approved list of documents. This loophole in communication and reporting allows brokerage firms to maintain clean BrokerCheck records, without disclosing settlements to investors. As far as brokers are concerned, the BrokerCheck information comes from a different FINRA form that does require brokerages to disclose if they paid settlements on behalf of any employees over $15,000. It should be noted that many or most settlement payouts for brokers are actually paid for by brokerage firms and these firms are listed as co-defendants or only defendants in the FINRA arbitration proceedings.

Many individuals in the securities industry feel that data about brokerage firms should be more transparent so that they can be ranked based on this information. There are others who are “shocked” by this gaping hole in the BrokerCheck that does not paint the “full picture”, as per the WSJ story. Those in favor of the current scenario, argue that brokerage firms settle for many reasons without admitting to wrongdoing, so reporting settlements would create an unfair perception about the brokerage firm in an investors’ mind.

Financial industry stakeholders are all locked in a guessing game about the fate of the DOL Fiduciary rule in the new Trump administration. In 2015, the Obama administration and the DOL had introduced the Fiduciary rule that requires financial advisers to always act in the best interest of their clients when handling their retirement savings and removing unnecessary fees. Wall Street had continued to oppose it on the grounds of excessive costs and paperwork. The initial implementation deadline for the rule is set for April 2017.

According to an Investment News report, industry lobbyists are now expecting a quick response from the seemingly “business first” Trump administration to delay this investment advice rule. They expect the Fiduciary rule to be one of the first targets of the new administration. This delay could come in the form of a directive to agency heads to review and delay regulations that are not operational.

There are two courses that are expected: the Trump administration may issue an order to delay the implementation of the fiduciary rule and have another regulation, an “interim rule” in its place. Or they could propose a delay but this would be tricky because for a rule that technically became effective last June, the administration is legally obligated under the Administrative Procedure Act to go through a public notice and comment period.

Retirement SavingsLast year, the Obama administration introduced the Fiduciary rule that requires financial advisers to always act in the best interest of their clients when handling their retirement savings. It was expected to be a big industry shakeup, making financial advice more reliable, compensating advisers with a flat-fee model and reasonable compensations, incentivizing them to really act on their client’s best interest as opposed to their own personal gain. The DOL’s Fiduciary rule was aimed at stopping the $17 billion a year that gets wasted in exorbitant fees.

The banks and Wall Street have continued to oppose this rule on grounds of lengthy paperwork and compliance expenses. Financial firms were anxious that once the rule is in effect, they will not be able to make as much money. Republicans have expressed that repealing this rule is on their agenda. Now with Trump as the President elect, and Republicans holding majority in both Houses, there is a fear that legislative action will be taken to kill the much-needed Fiduciary rule.

Joseph Peiffer of PIABA (Public Investors Arbitration Bar Association) was quoted in the InvestmentNews, “If he (Trump) wins, no one knows what the hell is going to happen.” Now that Trump has won, the fate of the rule hangs in the balance. There are others who think that the rule is here to stay, inspite of the unpredictability.

The securities and investment fraud attorneys at Malecki Law are interested in hearing from investors who have purchased Variable Universal Life Insurance (VUL) policies.

According to Investopedia, VUL policies combine a death benefit with investment feature.  The investment feature generally includes sub-accounts, as with other variable annuities, that invest in stocks and bonds, or mutual funds that have exposure to stocks and bonds.  While a VUL investment feature may offer an opportunity to gain an increased rate of return by investing in securities, it generally comes with higher management fees and commissions.  As a result, these commissions and fees must be weighed against the risk of loss in the securities purchased.  These risks must be disclosed to the investor prior to investment.

Issues surrounding VUL policies are not new.  A U.S. News and World Report article from 2011 highlighted that these types of policies generally come with higher fees, fewer investment options and sometimes surrender policies.

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In February 2016, academics Mark Egan, Gregor Matvos and Amit Seru at the University of Minnesota and University of Chicago business schools released a report titled “The Market for Financial Adviser Misconduct” on financial advisers in the United States. The report reveals how rampant securities fraud and broker misconduct is throughout the country. For the purpose of the study, these academics have analyzed the full set of disclosures of approximately 10% of employees in the finance and insurance sectors between 2005 and 2015, and taken in to account customer complaints, arbitrations, regulatory actions, terminations, bankruptcy filings and criminal proceedings. Based on this study, 7% of advisers were reported to have engaged in misconduct. The actual unreported cases may add to this number.

Here at Malecki Law, it is our mission to protect individuals who have been victimized by unscrupulous brokers. Here are some excerpts highlighting the important findings from this study:

  • According to the report, prior offenders are five times more likely to repeat their misconduct as compared to an average adviser. Approximately one-third of advisers with misconduct reports are repeat offenders. That is why we encourage all investors to investigate their broker on FINRA’s BrokerCheck

money lossThe Financial Industry Regulatory Authority (FINRA) has announced that it barred broker George E. Johnson from the securities industry for allegedly engaging in manipulation of stock trading, and for committing fraud.  FINRA also imposed a 6-month suspension against a second broker, Joseph Mahalick, and a 2 year suspension against a supervisor, Christopher Wayne.  All three individuals are reported to have worked at the time for the brokerage firm Meyers Associates, L.P. out of the firm’s Chicago, Illinois office.  Mr. Johnson has been working for and was registered by Newport Coast Securities, Inc. from April 2013.

FINRA’s Order stated that during May 2012, Mr. Johnson manipulated the market for the common stock of IceWEB, Inc. (OTCBB: IWEB) by soliciting customers to buy the stock while also soliciting other customers to sell at increasingly higher and artificially inflated prices and frequently effecting matched orders among his own customers.  Before and during this time, FINRA’s Order set forth that Mr. Johnson distributed to his clients misleading research and sales materials concerning IWEB, and failed to disclose material information.

The Order alleged that Mr. Johnson first became involved with IWEB when his employer acted as a placement agent for the company, and that he continued to recommend the stock to his clients through private placements and in the open market, despite the company having years of financial issues.  At the time, IWEB stock was valued at around .12/share, and the Order alleged that Mr. Johnson solicited purchases and sales in the stock to artificially increase the share price to .17/share, allegedly for the purpose of earning placement agent business from IWEB to earn substantial placement fees.

Investors who have been watching the recent financial news know that securities markets have become very volatile over the past month.  Increased volatility in the markets makes leveraged products like Exchange Traded Funds (EFTs) and Exchange Traded Notes particularly risky for most individuals investors, as noted in a recent Wall Street Journal article published on September 4, 2015.

These securities products incorporate borrowed money (termed leverage in the securities industry), which has the effect of amplifying gains and losses tied to baskets of securities that are often concentrated in one industry or commodity.

Malecki Law has written about these products in the past, noting that broker-dealer firms such as Stifel, Nicolaus & Co., Inc. and Century Securities Associates Inc. were fined by the Financial Industry Regulatory Authority (FINRA) for making unsuitable recommendations to investors.

According to a Letter of Acceptance Waiver and Consent filed with the Financial Industry Regulatory Authority (“FINRA”), Thomas Buck has been barred by FINRA from working with any FINRA member firms. Mr. Buck was a former top broker at Bank of America Merrill Lynch and was at the time a broker at RBC Wealth Management.

Mr. Buck was a registered broker at Merrill Lynch’s Carmel, Indiana office, which was part of the firm’s Indiana complex. While at Merrill Lynch, Mr. Buck, who reportedly oversaw $1.3 billion in assets, was accused of failing to discuss pricing alternatives with customers, among other allegations.  In addition, Mr. Buck was accused of unauthorized trading and using discretion in customer accounts improperly and in violation of FINRA Rules.

Buck was reportedly fired from Merrill Lynch in March.  Just four months after, he was reported as being barred from working at any FINRA-associated broker-dealer.  According to FINRA, Mr. Buck used commission-based accounts even though fee-based accounts would have been less expensive for clients. In some cases, clients were allegedly charged significantly more in commissions by virtue of the fact that they were not placed in fee-based accounts.

This week, the attorneys at Malecki Law sent letters to several United States Senate and House of Representatives members, urging them to support the Department of Labor’s (DOL) proposal to hold financial advisors to a higher standard and act in the best interest of retirement investors. These members of the Congress include the Honorable Charles E. Schumer, the Honorable Jerrold Nadler, and the Honorable Kirsten E. Gillibrand.

Millions of Americans have worked their whole life to build a retirement nest egg and count on their retirement savings to support them through their golden years. The DOL’s proposal addresses loopholes in the current rules that make it far too easy for some advisers to take advantage of these hard-working Americans and line their own pockets with retirement savings. Our system is so broken that brokers often can and do put their own interest in commissions above the interests of their clients, causing them to be in unsuitable products just so the broker could earn additional commissions.

When someone turns their life savings over to someone for advice, they believe their financial adviser is going to do what’s best for them.  We have never heard a client recount a story of a financial advisor that told them that they are not fiduciaries, in fact, we hear just the opposite.  We all see the advertisements on television that say the financial advisers are there to help us, but we need to know that financial advisers are obligated to put client interests first, as well as be able to receive that assurance in writing.