Advisor

Mar

2014

Sarbanes-Oxley Whistleblower Protections can Include Private Company Employees

From the Desk of Jim Eccleston at Eccleston Law Offices:

On March 4th, the U.S. Supreme Court ruled that the whistleblower protection provisions of the Sarbanes-Oxley Act protect the employees of a public company’s private contractors. The plaintiffs were employees of the investment advisor to a mutual fund. They claim they were wrongly fired after reporting a putative fraud concerning the mutual funds. Defendants sought dismissal, contending that the Act’s whistleblower protections did not cover plaintiffs because plaintiffs were employed by the advisor, a private company, and not the SEC-registered mutual funds. The Supreme Court disagreed. It held that when read as a whole, the Sarbanes-Oxley Act includes the employees of a public company’s contractor.

The attorneys of Eccleston Law Offices represent investors and advisers nationwide in securities and employment matters. Our attorneys draw on a combined experience of nearly 50 years in delivering the highest quality legal services.

Mar

2014

Wells Fargo Loses $1 Million Promissory Note Quarrel

From the Desk of Jim Eccleston at Eccleston Law Offices:

A FINRA arbitration panel has denied Wells Fargo’sclaim on a promissory note, and instead has been ordered Wells Fargo to pay the adviser, Michael Hawkes, $925,000 in compensatory damages and attorneys’ fees.

The rep claimed that he was forced to resign based on false allegations that he had forged a client signature, and that the firm had retaliated against him by placing defamatory remarks on his CRD.

Mar

2014

2014 Outlook Prompts Advisor Movement

From the Desk of Jim Eccleston at Eccleston Law Offices:

The Elzweig Report reveals the following helpful information for advisors who are considering a transition.

Recruiting Outlook for 2014

According to industry recruiter Mark Elzweig, recruiting among financial advisors is off to a fast start in 2014. But he also states that uncertainties in 2014 test advisors’ confidence to move. On balance, stellar productions and optimistic clients still will be the factors encouraging advisors to move forward.

Trend of Advisor’s Movement

According to Cerulli Associate reports, more than one third of financial advisors are planning to leave the business in the next 10 years. However, firms can’t replace advisors as fast as they leave. On the one hand, trainees take a long time to bring up to speed, on the other hand, experienced advisors always have large recruiting package guarantees.

Retention Packages Aging

Retention packages offered by wirehouses increase and contracts last longer. As these obligations continue to age, so does the financial penalty for jumping to a new broker-dealer. For wirehouse advisors, taking a recruiting deal from a competitor makes more financial sense with each passing year.

‘Smaller’ Producers More Valued at Regional and Independent Broker-Dealers

Advisors grossing less than $500,000 are leaving wirehouses and moving to regionals and independents, which value their production, – and offer deals, higher payouts and greater access to home office staff. In the independent channel, advisors with smallerbooks increasingly are joining more well-capitalized broker-dealers with broader and deeper resources.

Fee-Only is Winning Over Traditional Advisors.

As advisors do more fee-based business, many are shedding broker-dealers entirely and are starting their own RIAs or joining existing ones. Independent RIAs enjoy a 100% payout and pay lower ticket charges, though operational costs often can be underestimated.

Succession Planning

Many advisors in their 50s and older are moving as part of their succession planning. They are joining new firms that pay them signing bonuses and then preparing to hand off their books to younger advisors at the conclusion of their deals. This way they can capture two bonuses: one for joining the firm and one for the gross done from their book after they retire.

Mar

2014

FINRA Eyes Reverse Churning In Hybrid Advisory Accounts, According to Industry Panelist

From the Desk of Jim Eccleston at Eccleston Law Offices:

The Financial Industry Regulatory Authority is looking very closely at advisory accounts in dually registered investment advisor/broker-dealer firms, Morgan Stanley Compliance and Regulatory Group Head Debra Roth said Wednesday.

“If you are not trading, are you really advising the client?” Roth asked rhetorically at a dual registrant seminar for the Practising Law Institute. Others in the industry have raised this issue as well, noting some clients who are charged fees for investment management but aren’t getting much financial advice would pay less if they were charged commissions instead.

Roth warned the attendees that Financial Industry Regulatory Authority and the Securities and Exchange Commission have significantly improved their ability to collect and analyze electronic records from advisory firms and brokers. And, she observed “We have found them to be impatient,” the Morgan Stanley compliance executive said.

RCS Capital Chief Compliance Officer Joseph Neary remarked that having separate compliance manuals for investment advisors and broker-dealers can go a long way to persuading the regulators that the two business operations are distinct. He noted in the last three or four years, FINRA has become much more attuned to the advisory side of financial firms that also offer brokerage services.

Specially, it was noted that advertising and marketing have become an area of pain for dual registrants, particularly for workers wearing multiple hats, SEI Investments Distribution General Counsel John Munch said. There are fundamental differences in advertising and marketing rules for IAs and BDs.

Feb

2014

The SEC Discloses Specifics of New Advisor Exams

From the Desk of Jim Eccleston at Eccleston Law Offices:

The “Never-Before Examined Initiative” is aimed at targeting unexamined advisors that have been registered with the SEC for three or more years.

Two approaches include risk-assessment and focused reviews. The risk-assessment approach includes a high-level examination of an advisor’s overall business activities with a particular focus on its compliance program. The focused review will look at higher-risk areas of the advisor’s business operations including filings and disclosure, marketing, portfolio management as well as safekeeping of client assets.

Specifically, the SEC details the following:

Compliance Program. Registered investment advisers are required to adopt and implement written policies and procedures that are reasonably designed to prevent violations of the Advisers Act.

Filings/Disclosure. Investment advisers must disclose all material facts regarding conflicts or potential conflicts of interest so that clients can make an informed decision regarding entering into or continuing an advisory relationship.

Marketing. Investment advisers must utilize fair and balanced marketing materials to solicit new clients or retain existing clients.

Feb

2014

FINRA Moves Forward with SEC Approvals Related to BrokerCheck, Arbitration and Expungement

From the Desk of Jim Eccleston at Eccleston Law Offices:

FINRA’s board authorized FINRA to seek comment on a revised proposal to amend Rule 2210 (communications with the public) to require firms to include a readily apparent reference and link to BrokerCheck on any member firm’s website that is available to retail investors.

The board also authorized FINRA to file with the SEC proposed amendments to the customer and industry codes of arbitration procedure to refine and reorganize the definitions of “nonpublic” and “public” arbitrator.

In addition, the board authorized FINRA to file with the SEC proposed Rule 2081, which would prohibit conditioning an arbitration settlement on the expungement of the customer dispute information.

Finally, the board authorized FINRA to file with the SEC proposed amendments to Rule Series 9800 (temporary cease and desist orders), Rule Series 9550 (expedited proceedings) and related rules in the Code of Procedure.

Feb

2014

Acquisitions Become Popular Growth Strategy

From the Desk of Jim Eccleston at Eccleston Law Offices:

Acquisition is a popular way to grow an advisory business, especially for young advisors facing challenges of gaining a critical mass of clients and increasing their assets under management.

For example, Karsten Advisors, a Fort Worth, Texas-based firm with four financial advisers, all under the age of 40, has acquired nine advisory practices in the last 13 years to reach a total of $250 million in client AUM. In fact, a quarter of advisory firms with $100 million to $1 billion in AUM actively are seeking to acquire other firms, according to a 2013 RIA benchmarking study by The Charles Schwab Corp.

Despite their popularity, acquisitions are much more challenging to complete than most advisers think. The criterion for a successful acquisition is culture fit similar investment philosophies and similar work-flow processes. In addition, advisors who acquire firmsshould have sufficient staffing and technology to handle the additional clients.

In the absence of those similarities, internal growth, particularly through client referrals, may be a better way to go.

Feb

2014

A Succession Crisis Faced by the Advisory Industry

From the Desk of Jim Eccleston at Eccleston Law Offices:

According to a report from Cerulli Associate Inc., there are more than $2.3 trillion in assets managed by advisors 60 and older, but less than 25% of those advisors have a succession plan. Moreover, more than one-third of U.S. financial advisers are planning to leave the business within a decade while the demand for professional advisors is increasing. The report warns that advisors need to develop a succession plan before they retire, even though the task of recruiting and training new talents is complex and time consuming.

Notably, the execution of a succession plan can take a year or longer, particularly for advisers with unique specializations, diverse business lines or out-of-the-way locations.

Feb

2014

FINRA Proposes Greater Transparency in Non-traded REIT Statements

From the Desk of Jim Eccleston at Eccleston Law Offices:

FINRA has proposed rule changes that would disclose a more accurate cost of shares of a non-traded real estate investment trust (REIT).

The new rule change would consider the various fees and commissions paid to brokers and dealer managers, reducing the share price reflected on customer account statements.The proposed rule has two methodologies that broker-dealers can use when an estimated value is presumed reliable: net investment and independent valuation.

With net investment valuation, non-traded REITs now do not have to show an estimated per-share valuation until 18 months after the sponsors stop raising funds, which in many cases can take two or three years. The FINRA proposal drastically speeds up the process by which investors would see a more accurate valuation (e.g. less than $10 per share).

The alternative method is independent valuation. This could be used at any time. It would consist of the most recent valuation disclosed in the issuer’s periodic or current reports and would require a third-party valuation determination.

Feb

2014

FINRA May Curb Brokers’ Ability to Cleanse CRD Records

From the Desk of Jim Eccleston at Eccleston Law Offices:

FINRA intends to modify the expungement processby proposing to eliminate brokers’ ability to demand CRD expungement as a condition in a settlementagreement with an investor.

In recent guidance to arbitrators, Finra underscored the “extraordinary nature of expungement relief” and urged them to consider carefully whether clearing a broker’s record could deny important information to investors reviewing a rep’s background.

We will update readers as this effect unfolds.