Eccleston Law Offices

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.

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.

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.

Feb

2014

Due Diligence Risk Alert Issued to Adviser Selecting Alternative Investment

From the Desk of Jim Eccleston at Eccleston Law Offices:

The SEC is concerned with the due diligence process that investment advisors perform when they recommend or place clients’ assets in alternative investments such as hedge funds, private equity funds, or funds of private funds.

The SEC’s alter notes current industry trends and practices, and highlights certain deficiencies in several of the advisory firms examined.

According to the SEC, investment advisors tend to seek information and data directly from the managers of alternative investments, and then use third parties to supplement and validate that information. In addition, they perform additional quantitative analysis and risk assessment of alternative investments and their managers.

Notably, one deficiency is that many investment advisers failed to review their due diligence polices and procedures in their annual review.

Another deficiency is that many investment advisors do not follow their due diligence procedures described in their advisors’ Form ADV.

Nov

2013

Jim Eccleston: Panel Orders First Command to Pay $1.1M to Former Advisors

From the Desk of Jim Eccleston at Eccleston Law Offices:

A FINRA arbitration panel has ordered First Command Financial Planning (“First Command”) to pay $1.1 million in deferred compensation to a group of eight advisors and staff who left the firm back in May 2012. According to the arbitration award, First Command “switched back to a commissions sales model, hurting their business.” In addition, the panel reprimanded First Command for filing U5 termination forms saying the reps were let go for wrongdoing, and ordered their disciplinary records to be expunged to indicate they left voluntarily. The dispute occurred in 2012, when a branch manager left First Command with his team to form an independent hybrid firm clearing through LPL Financial (“LPL”).

Oct

2013

Jim Eccleston: Non-Solicitation Agreements: What Can You Say Without Crossing the Line?

From the Desk of Jim Eccleston at Eccleston Law:

John Lindsey, a former Edward Jones broker, found himself in hot water after accusations that he violated his non-solicitation agreement. In March 2012, Mr. Lindsey left Edward Jones to go independent, taking with him about half his clients. In response, Edward Jones promptly filed a request for an injunction and temporary restraining order. Edward Jones claimed Mr. Lindsey had violated his one-year non-solicitation agreement by misappropriating client information and wrongly soliciting clients. Specifically, Edward Jones’ non-solicitation agreement prohibits an advisor from soliciting clients of the firm for one year after the advisor’s departure.

In May 2012, the Ventura County Superior Court in Ventura, California granted the injunction, upholding Edward Jones’ non-solicitation agreement. However, Judge Tari Cody’s also found that nothing in that agreement prohibited Mr. Lindsey from servicing Edward Jones clients who reached out to him directly. Subsequent to the ruling, Edward Jones asked a FINRA arbitration panel to make the injunction permanent and requested $5 million in compensatory damages. Both of those requests were denied.

The arbitrators’ decision reaffirmed previous guidance given by FINRA’s predecessor, the National Association of Securities Dealers, which had issued a notice stating “that obtaining temporary restraining orders to prevent customers from following a registered representative to a different firm may be similar to the unfair practice of delaying transfers” of clients to a new advisor.

FINRA’s position has been that firms cannot do anything to stop clients from going to a broker of their choice. The court’s ruling reflects a similar position, stating that “[n]othing herein [the non-solicitation agreement] shall prohibit [Mr. Lindsey] or anyone else from: (a) continuing to provide services to [Mr. Lindsey’s] clients who have already moved business away from Edward Jones; (b) providing services to persons who have indicated that they wish to transfer their accounts from Edward Jones to permit [Mr. Lindsey] to continue as their financial advisor.”

The attorneys of Eccleston Law 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.

Oct

2013

Jim Eccleston: FINRA’s Proposed Procedure for Reps Not Named in Arbitration to Obtain Expungement of U-4 and U-5 Filings

From the Desk of Jim Eccleston at Eccleston Law:

FINRA has proposed new rules that would permit unnamed financial advisers who are the “subject of” allegations of sales practice violations made in investment-related customer-initiated arbitration claims, but who are not named as parties to the arbitration, to seek expungement relief by initiated In reexpungement proceedings at the conclusion of the underlying customer-initiated arbitration case. Specifically, the following are the new proposed FINRA rules: Rule 12100(z) (“Unnamed Person”); Rule 12806 (“Expungement of Customer Dispute Information by Persons Named as Parties); Rule 13100(cc) (“Unnamed Person”); Rule 13806 (“Expungement of Customer Dispute Information by Persons Named as Parties); and Rule 13807 (“Expungement of Customer Dispute Information by an Unnamed Person”).

The current Code of Arbitration Procedure for Customer Disputes and the Code of Arbitration Procedure for Industry Disputes do not provide unnamed persons with express procedures to seek expungement of those types of allegations. The SEC is expected to set an approval date of early 2014.

There are several benefits for brokers. First, the new rules would allow unnamed brokers to use this explicit procedure instead of having to intervene in the arbitration filed by the investor or initiate a new arbitration case in which the broker requests expungement relief and names the investor or firm as the respondent. Another benefit is that the expungement proceedings would commence only after the underlying customer arbitration is concluded. Another benefit is the possibility that the arbitrator reviewing the In reexpungement proceedings will already be familiar with the case. Under the proposed rules, the public chairperson of the underlying arbitration would handle the In reexpungement proceedings.

While our adviser clients currently do have avenues for expungement, FINRA’s new rule proposals greatly would expedite and simplify the entire process.

Oct

2013

Jim Eccleston: Ponzi Scheme Perpetrated by Richard Schwartz Leads Indiana Officials to Freeze Assets | Investor

From the Desk of Jim Eccleston at Eccleston Law:

The State of Indiana has sought to freeze the assets of the estate of a former Kokomo investment adviser in order to provide possible, partial restitution to victims of a Ponzi Scheme. At the time, Mr. Schwartz was employed by and under the supervision of a major brokerage firm still in existence. According to Indiana Secretary of State Connie Lawson, this Ponzi scheme allegedly includes former National Football League players. Specifically, the Indiana Attorney General’s office filed the lawsuit in Howard Superior Court in Kokomo against the estate of Richard Schwartz, whom Lawson alleges deceived clients across the country out of $5 million to $10 million.