Business Memo: Defending Against Allegations of Unsuitability – Part I

As pointed out in our July, 2003 issue, far and away the most frequent allegation brought against broker-dealers and RRs is alleged “unsuitability” of recommendations by RRs. As also pointed out in that issue, a claimant alleging unsuitability must show that the securities or investment program recommended were (1) unsuitable to the investor’s circumstances; and (2) that the broker-dealer and RR held sufficient “control” over the investor.

In that issue, we discussed what aspects of the RR’s recommendations could be unsuitable. In the next two issues, i.e., February, 2004 and September, 2004, we discussed what constituted “control” and what constituted a “recommendation.” In this issue we will discuss briefly the defenses available to a broker-dealer to a claim of unsuitability.

Continue reading »

New NASD Code of Arbitration for Customer Disputes is Effective

The long-awaited new NASD codes of arbitration became effective April 17, 2007. They are reorganized into three different codes: member-customer disputes, industry disputes and mediation. We will discuss here the code likely to be the most used, i.e. the code for member-customer disputes.

Although the provisions for customer-member disputes were almost totally rewritten in the new rules, there are surprisingly few substantive changes in them. I have, somewhat arbitrarily, broken the more important substantive changes into categories.

Continue reading »

Private Placement Broker-Dealers

Both federal and state securities laws require registration of “every person engaged in the business of effecting transactions in securities . . . . ” And such registration, of course, requires that principals and RRs take initial and continuing examinations, and that firms meet net capital and extensive ongoing record-keeping and reporting requirements. The examinations require an understanding of the public securities markets, evaluation of the nature of publicly-held securities vis-à-vis the suitability of various investors, the structure of mutual funds, annuities, derivatives and other types of investments, and other concerns of full-service B-Ds.

So, you might ask, do these not simply assure that B-Ds and their RR know how to carry out their business and report their financial well-being, thereby protecting the investing public? What is the problem?

Continue reading »

Business Memo: Are You A Fiduciary? Why Do You Care?

A lawn care service company sells products and provides services. Registered representatives (“RRs”) and broker-dealers (“B-Ds”) also provide services and sell products (securities, etc.) to their customers. The question here is whether RRs and B-Ds have a significantly higher duty—a fiduciary duty—to their customers.

Most RRs and BDs would automatically react that they provide much more sophisticated services and products than a lawn care service and therefore treat their customers with a higher level of care. However, when that customer complains about their service, and perhaps brings a claim in arbitration or litigation, well-advised B-Ds and RRs argue that their duty was not that of a fiduciary.  Liability on such a claim frequently turns on whether, and is much more likely if, the arbitrators or court believes that the B-D and RR had a fiduciary duty to the customer.

Continue reading »

Recent Changes to Branch and Small Office Requirements:Getting Out in the Neighborhood

The structure of the regulation of the securities industry continues to change to accommodate changes in customer demand and technological capabilities of the industry. As discussed in detail below, the National Association of Securities Dealers (NASD), the New York Stock Exchange (NYSE) and the North American Securities Administrators Association (NASAA) have proposed, and the Securities and Exchange Commission (SEC) has approved, a new and uniform definition of “branch office” (the “Uniform Definition”) and the transition to a centralized, CRD-based branch office application system, using a new Form BR. The new Form BR will allow member organizations to submit a single filing to simultaneously fulfill the branch office registration/approval requirements of the NASD, the NYSE and most states. And, in a more recent development, the SEC has approved the NYSE’s proposed Interpretation of its Rule 342 (concerning supervision and control of offices) to permit waiver of the otherwise normally required level of supervisory qualifications of resident branch office managers for “limited purposes offices” which have more than three registered representatives (RRs).

Continue reading »

Selling Away: You and Your RR Can Both Be Honest and Still Be Liable to Someone Who is Not

“Selling away”, as you know, occurs when an RR invests his client’s money without doing so at or through the brokerage firm at which he is employed. Although it occurs in all types of brokerage situations, it occurs most frequently in non-traditional, generally off-site situations. According to the NASD, selling away is the most frequently committed violation by off-site RRs. For example, RRs who also sell insurance products frequently operate in off-site locations, and selling away frequently occurs on the part of independent insurance agents registered only as Series 6 investment company and variable contract products representatives. These RRs are frequently targeted by issuers, promoters and marketing agents to sell variable contracts and promissory notes to their customers. In many instances these products constitute securities, but their promoters market them to RRs as non-securities products that do not have to be sold through the RR’s broker-dealer.

“Selling away”, also known as “private securities transactions”, is a violation by the RR of his obligation to submit to the supervision of his BD, and to allow it is a violation by the BD of its duty to supervise all securities transactions by the RR. “Selling away” is easy to do even without knowing it.

Continue reading »

Financing the Entrepreneur: Determining the Best Method for Your Client

Although the financing sources available to small business clients do not fit a logical pattern, some guidelines may be developed to assist the attorney to help his client seek and evaluate financing sources.

The optimum source and type of financing will vary with the nature of the client, the client’s present and future needs, the client’s stage of development and possible legal problems. An understanding of such variations may allow the attorney to protect the client from a harmful transaction, and will at least avoid wasting time and effort on inappropriate types and sources of financing.

Continue reading »