broker-dealer Archives - Stoll Berne | Attorneys | Class-Action, Securities, IP, Real Estate, Business Litigation

The North American Securities Administrators Association (“NASAA”), an organization made up of state and provincial securities regulators in the U.S., Canada, and Mexico, with a mission that includes protecting investors, announced a model rule for NASAA members to implement continuing education requirements for investment adviser representatives (“IARs”). Unlike other financial industry professionals, such as lawyers and registered representatives, there is no continuing education requirement for IARs to maintain a license through a state securities regulator and advise investor and retiree clients.

Every 12 months, the model rule requires IARs to complete 6 credits of regulatory and ethics content and another 6 credits of products and practice content. For comparison, lawyers in Oregon must complete 45 continuing legal education credits every three years, and registered representatives regulated by FINRA must complete regular continuing education that involves compliance, regulatory, ethical and sales practice standards, along with training through their broker-dealer.

In an October 29, 2020, regulatory notice, FINRA announced the adoption of a new rule that creates new requirements before any person associated with a firm regulated by FINRA obtains power of attorney or is named a beneficiary, executor, or trustee for or on behalf of a customer. Rule 3241 now requires firms regulated by FINRA to review and approve or disapprove any such status or role by a registered person associated with the firm.

The rule is intended to limit conflicts of interest that arise when a broker or registered representative is a customer’s beneficiary, executor, trustee, or has power of attorney. These conflicts are problematic and dangerous for any investor, but especially for elderly and unsophisticated investors. In explaining the new rule, FINRA said many member firms already address this potential conflict by prohibiting or imposing limitations on an associated person from being named as a beneficiary or to a position of trust when there is not a family relationship with the customer. FINRA added, “Nonetheless, FINRA observed situations where registered representatives tried to circumvent firm policies, such as resigning as a customer’s registered representative, transferring the customer to another registered representative, or having the customer name the registered representative’s spouse or child as the customer’s beneficiary.”

By requiring the registered person to provide written notice of such proposed status to the member firm and receive written approval from the firm, the new rule may provide limited additional protection for investors.

Investors have access to free electronic search tools through self-regulatory organizations, federal, and state regulators to research investment firms and professionals. This post describes several free tools that give access to information beyond what you can learn using Google and other search engines.

FINRA’s BrokerCheck is a good starting place to learn about registration and reported discipline. BrokerCheck allows you to search for an investment firm or professional by name or CRD number. BrokerCheck will tell you whether a firm is a broker or an individual is a registered representative regulated by FINRA. If regulated by FINRA, a BrokerCheck search will include information about reported disclosures, such as arbitrations or customer disputes, and provide information about registration. Click on the “Detailed Report” link—as the name of the link implies—for more detailed information, including summaries of any complaints. Also, keep in mind that through expungement, a broker can ask FINRA to remove customer complaints and arbitrations from records available through BrokerCheck. This means that an expunged complaint will not show up in your BrokerCheck search. Further, customer complaints are not always timely reported and may be missing from BrokerCheck.

FINRA also provides a free search tool for certain disciplinary actions since 2005. This search tool is available at https://www.finra.org/rules-guidance/oversight-enforcement/finra-disciplinary-actions-online.

If a firm is registered as an investment adviser or an individual is registered as an investment adviser representative, searching for the firm or individual using BrokerCheck will provide you with a link to the SEC’s Investment Adviser Public Disclosure website. For investment adviser representatives, the SEC’s Investment Adviser Public Disclosure search provides information similar to what FINRA makes available about brokers and registered representatives using BrokerCheck. For investment adviser firms, the SEC’s search tool gives access to the firm’s Form ADV, brochure, and Form CRS. These documents include information about an investment adviser’s business, including information about fees.

You should also check with the division in your state that regulates investment advisers. Some state regulators make available free information about investment advisers licensed to conduct business in the state. For example, the State of Oregon provides a free search tool that gives access to limited license information here: https://www4.cbs.state.or.us/ex/dfcs/dfcslic/adviser/.

In Interactive Brokers LLC v. Saroop, No. 19-1077, 2020 WL 4668551 (4th Cir. 2020), the Fourth Circuit Court of Appeals recently confirmed that a violation of FINRA rules can be a breach of an agreement between an investor and a broker-dealer.

Three investors opened accounts with Interactive Brokers, an online broker-dealer. The investors’ agreements with Interactive Brokers had an arbitration clause. Trading on margin, a third-party investment manager invested the accounts in an exchange-traded note that moved based on the stability of the market and also sold naked call options. FINRA rules prohibit trades of some high risk securities on margin, including the exchange traded note. A large, one-day drop in the markets in August 2015 led to Interactive Brokers liquidating the accounts and a margin call.

The investors brought claims in FINRA arbitration against Interactive Brokers. The arbitration panel found for the investors. In dismissing a counterclaim brought by Interactive Brokers, the arbitrators referred to FINRA Rule 4210, which includes the prohibition against trading certain high risk securities on margin. Interactive Brokers challenged the award in federal district court.

The district court sent the case back to the arbitrators, seeking an explanation of the award. The arbitrators referred to FINRA rules in explaining the award and wrote, “To ignore a FINRA rule by the Panel would defeat the purpose of FINRA.” Interactive Brokers again moved to vacate the panel’s award. The district court did so, finding that by basing liability on FINRA Rule 4210, the arbitrators disregarded the law because there is no private right of action to enforce FINRA rules.

The investors appealed to the Fourth Circuit. The Fourth Circuit vacated the judgment of the district court and instructed the district court to confirm the arbitration award. In its opinion, Interactive Brokers LLC v. Saroop, No. 19-1077, 2020 WL 4668551 (4th Cir. 2020), the Fourth Circuit explained that the agreement between the investors and Interactive Brokers provided that all transactions were subject to rules and polices of relevant markets and clearinghouses, and applicable laws and regulation. The Court held, “[t]his, of course, includes the publicly available FINRA rules (citation omitted). As such, the clause could well be read as incorporation the FINRA rules, making a violation of the rules a breach of the parties’ contract.”