FinancialCounsel

Advisers Urged To Seek Legal Counsel To Negotiate Protections Associated With The Current 330% Trailing 12 Recruiting Packages Offered By Merrill Lynch And Morgan Stanley Smith Barney

As wirehouses fight to keep brokers from moving to the independent channels, warring wirehouses are adding fuel to the fire.  Morgan Stanley Smith Barney LLC and Merrill Lynch are going toe-to-toe by offering top reps a recruiting package of up to 330% of annual production.  Sources have said that those are the highest levels ever.  But be careful.  Attorneys at SNSFE negotiate these deals and these deals are complicated and tied to a rep's ability to increase business. It's impossible to know how much each broker will ultimately receive.  UBS, meanwhile, currently is offering deals in the range of 200% to 220% of trailing 12.  Regarding Merrill's and Morgan Stanley deals, it would take 5 years for the rep to reach the top compensation level, which would be paid out in the form of a forgivable loan over nine years.  In the case of Morgan Stanley Smith Barney, reps need to increase assets and production by 50% over the first five years, with specific growth targets set for each year.  These deals are complicated and risky for reps.  Reps absolutely must seek legal counsel to increase their level of protection in case the deals go south.

Source:  InvestmentNews

FINRA Fines Scottrade $600,000 For Inadequate Surveillance System

The Financial Industry Regulatory Authority fined Scottrade $600,000 for failing to have adequate anti-money laundering procedures in place to detect and report suspicious transactions.  In a statement, FINRA noted that as an online brokerage executing more than 150,000 trades daily, Scottrade's business model makes it vulnerable to heightened risks of identity theft, unauthorized access to customer accounts, or even money laundering activities.  The Bank Secrecy Act of 1970 requires brokerages to have anti-money laundering programs tailored to their own unique business models.  "Despite the large volume of online trading at Scottrade, the firm failed to establish any systematic or automated surveillance until 2005," FINRA executive vice president and chief of enforcement Susan Merrill said in the  statement.  "Then the automated system the firm implemented remained inadequate because it focused only on suspicious trading that was accompanied by suspicious money movement." According to Scottrade, it is taking this matter very seriously and it has made enhancements to its anti-money laundering program.

Source: InvestmentNews

Stifel Financial Starting RIA Custody Business

Stifel Financial Corp., which has been expanding its Stifel Nicolaus & Co. retail-brokerage business, is about to make a push into serving registered investment advisers.  The firm has hired a veteran from Merrill Lynch and Pershing to run its Century Securities Associates independent broker-dealer affiliate and add a custodial unit for RIAs.  The venture, likely to be called Century Advisor Services, will be marketed to fee-only RIAs and "hybrid" advisers who want to supplement their fee-based practices with commissions.  A spokesman said that the new unit is focusing on RIAs with a minimum of about $50 million of client assets.

Lawyers at SNSFE frequently review brokerage and custodial agreements for firms.  Advisers should consider hiring competent counsel to review their agreements before signing on.

Source: InvestmentNews

Schwab And Fidelity Cut Prices And Fees For Investment Advisers

Schwab Adviser Services is eliminating fees on a database that helps advisers sell and buy other firms, a move that's part of a broader effort to enhance its business consulting services for independents.  In addition to eliminating fees tied to that database service,  Schwab also announced it added a scorecard that lets advisers measure and track whether their employees are using Schwab online tools.  Schwab also said it is now giving advisers preferred pricing on its Client Audit: Enterprise product, which helps advisers identify referral opportunities and measure client loyalty.

Meanwhile, Fidelity has slashed custodial prices and fees.  In a move designed to capture business from RIAs looking to switch custodians, Fidelity Investments is initiating a sweeping series of price reductions for fees, services and products associated with its custodial service platform.

Source:  FinancialAdvisor Magazine

Monetary Fine Illustrates Securities Regulator's Concern For Privacy Of Customer Information

The Securities and Exchange Commission (SEC) recently fined a broker-dealer and investment adviser $100,000 for failing to protect the privacy of customer information.  Let's examine what went wrong and how customers at the firm, Commonwealth Equity Services, LLP d/b/a Commonwealth Financial Network ("Commonwealth"), were exposed to an Internet pirate.

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Transition And Succession Planning Frequently Desired But Seldom Implemented According To Recent Survey

Although financial advisers think that succession planning is important, many also believe that they aren't getting enough help preparing for that transition, according to a new survey conducted by Mathew Greenwald & Associates for John Hancock Financial group.

The research company performed a blind poll of 516 advisers from a variety of firms for its 2009 John Hancock Financial Network Equity and Succession Survey.  Fully 63% said that succession planning is a concern for them, while 55% of the surveyed representatives said that the financial services industry hasn't done a good job of helping them with succession planning.

Less than one-third (31%) of those surveyed have worked on a succession plan.  Another 34% of the respondents said that they have thought about succession but haven't done anything yet, while 35% haven't even thought of how they will transition their practices.

Source:  InvestmentNews

SNSFE Investigates Illegality of Promissory Note Acceleration Clauses When Reps Leave Firms

Attorneys at SNSFE are investigating whether promissory note acceleration clauses violate state laws against penalties imposed when changing jobs.  

Interesting Trends In Adviser Registrations And Assets Under Management According To The SEC

Andrew Donohue, the Director of the Division of Investment Management, recently spoke before the 9th Annual IA Compliance Fall Conference.  Among other interesting comments, he discussed the pressures he sees on advisers.  They're coming from several different areas.

First, he talked about pressures on advisers as asset values declined and the advisory landscape adjusts to the new market environment.  He said the downturn in the markets over the past year impacted the SEC-registered investment adviser community in many ways.  First, the number of registered investment advisers was virtually unchanged and, at around the beginning of 2009, the number of advisers was actually decreasing.  Furthermore, the Commission experienced approximately 20 percent more withdrawals from registration than usual (about 100 more) with about half of this increase (about 50) resulting from advisers switching from being federally registered to state registration.  Seeing this trend, he said, it appears that smaller advisers with 10 or fewer clients were among the hardest hit and affected by the market events.

Second, he discussed that assets under management by SEC-registered investment advisers drop $9.4 trillion or 22 percent.  The median assets under management reported dropped from $126 million to $97 million.  However, the top 10 percent of advisers that have the most assets under management still manage 92 percent of all assets under management.  This has not changed, he said, over the last year, but these 1,140 advisers did report a 22 percent, or $8.5 trillion, reduction in assets under management.  The other 90 percent of advisers with less assets under management reported a higher reduction of 27 percent in the assets under management.  Again, he said, it appears that smaller advisers were impacted the most.

Finally, as over 95 percent of advisers did and still do charge at least some of their clients fees based on a percentage of assets under management, the income for the majority of advisers has declined in correlation with the market downturn.  He said that he has seen reports that advisory fee rates are also under increasing pressure.

Source:  SEC

SEC Expresses Concern Over Lack Of Risk Management When Using Derivative Instruments

Andrew Donohue, Director, Division of Investment Management of the SEC, recently spoke to the 9th Annual IA Compliance Fall Conference.  He made a number of interesting remarks, including those related to sophisticated products. 

He stated many investment mandates have sought to align the management of the client assets with the client's investment risk and performance expectations by limiting the use of explicit leverage, the percentage of client assets invested in a particular security, issuer or sectors and the prohibition of certain practices.  The use of derivative instruments in managing client portfolios can provide benefits but also pose certain challenges.  Among those challenges, three major ones are (1) that the potential impact of derivatives on a portfolio are not related to the amount invested in the derivatives; (2) derivatives can offset the benefits that a portfolio might be expected to derive from the quantitatively mandated requirements; and (3) derivatives frequently have implicit leverage which can result in technical compliance with limitations on explicit leverage but expose the portfolio to precisely some of the risks associated with leverage that clients sought to avoid.  What to do, he asked?  His suggestion is that you develop the expertise and systems necessary to (1) insure technical compliance with the client's mandates; as you have traditionally done; and (2) insure that the actual exposure that the portfolio represents comply with that which the client would expect.  Conceptually this is, of course correct. Yet, he recognized that the quest is not easy.

SNSFE attorneys work with advisers to tailor their compliance programs. 

Source:  SEC

SNSFE Assists In Transitions As $800 Billion In Client Assets Projected To Change Firms In 2009

$800 billion in client assets is predicted to change firms in 2009. 

Due to large numbers of financial advisors switching employers during these topsy-turvy times, $800 billion in client assets will likely change firms this year, according to Cerulli Associates.

In a recent research report entitled Advisor Migration: The Changing Landscape of Retail Distribution, the Boston-based consulting firm projects that wirehouse firms will lose the most assets and that registered investment advisors and hybrid advisors will gain the most.  The report looks at asset flows across seven different channels.

Cerulli estimates that the wirehouses will lose $188 billion to other channels.  It also estimates outflows of $13 billion and $6 billion for insurance and regional channels, respectively.

On the other hand, dually-registered advisors and RIAs are expected to see inflows of $62 billion and $50 billion, respectively.

Attorneys at SNSFE assist advisors in transitioning from firm-to-firm.

Source:  www.fa-mag.com

SEC Details Its Post-Madoff Reforms

The Securities and Exchange Commission (SEC) recently highlighted what it has been doing to avoid another Bernard Madoff fraudulent scheme.  While the public awaits a report from the SEC's Office of the Inspector General, determining why the SEC failed to detect the Madoff scheme, the SEC is taking the opportunity to explain its "decisive and comprehensive steps to reduce the chances that such frauds will occur or be undetected in the future."  Let's examine the SEC's publication, "The Securities and Exchange Commission Post-Madoff Reforms" (available on its website).

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AIG Advisor Group Reps (Royal Alliance, FSC and SagePoint Financial) May Be Heading Out The Door As SNSFE Negotiates Such Transition Deals

InvestmentNews is reporting of a bonus plan that's stirring the pot at AIG's adviser unit. After a year in which the three broker-dealers of AIG Advisor Group - Royal Alliance Associates, FSC Securities and SagePoint Financial - were put up for sale and then after lengthy and involved negotiations abruptly pulled off the block last month, some advisers either have no stomach for this bonus or are simply heading out the door.  AIG Advisor Group has shut down one giant FSC branch amid this turmoil and confusion.

SNSFE attorneys assist advisers in transitioning to new firms by negotiating critical terms in the employment agreements and promissory notes. 

Source:  InvestmentNews 

Reps With Promissory Note Claims Defenses And Counterclaims Should Be Aware Of Their Options Under Newly Revised FINRA Arbitration Procedures

FINRA has just amended its rules regarding disposition of promissory note claims that are filed in arbitration. According to a FINRA release, FINRA is amending its Code of Arbitration Procedure for Industry Disputes to establish new procedures for administering cases that solely involve a firm's claim that an associated person failed to pay money owed on a promissory note.  FINRA states that in the absence of additional allegations by firms or by associated persons, promissory note cases involve straightforward contracts with few documents entered into evidence. 

Accordingly, parties will choose a single public arbitrator from the roster of arbitrators approved to hear statutory discrimination claims.  FINRA believes that the arbitrators on this roster are especially suited to resolve these disputes because of the depth of their experience and their familiarity with employment law.

Second, if the associated person does not file an answer, simplified discovery procedures will apply and, regardless of the amount in controversy concerning the note, the single arbitrator will render an award based on the pleadings and other materials submitted by the parties.  In other words, no arbitration hearing.

Third, if the associated person files an answer (but does not seek any additional relief or assert any counterclaims or third party claims), regular discovery procedures will apply, and regardless of the amount in controversy, the single arbitrator will hold a hearing.

Finally, if the associated person files a counterclaim or third party claim, then regular discovery procedures will apply and the number of arbitrators will be based on the amount of the counterclaim or third party claim.  If the counterclaim or third party claim is not more than $100,000, exclusive of interest and expenses, the Director will appoint a single public arbitrator from the roster of arbitrators approved to hear statutory discrimination claims. 

These revisions are significant and reps who are dealing with promissory note claims clearly should seek counsel to formulate appropriate defenses and strategies in view of this Rule. 

Source:  FINRA Regulatory Notice 09-48

What's Next Following The SEC's Open Letter To Brokerage Firm CEOs Relating to Recruiting Practices, Payment Of Up-Front Bonuses And Enhanced Commissions?

Chairman Mary Schapiro of the SEC recently sent an open letter to chief executive officers of broker-dealer firms.  Broker-dealer firms need to be wondering, "What's this about?"

The letter, written August 31, 2009 and available on the SEC's website, states as follows:

Recent press articles have reported that some broker-dealer firms may be engaging in a vigorous recruiting program for broker-dealer registered representatives.  Reports suggest some firms are offering substantial inducements to potential registered representatives, including large up-front bonuses and enhanced commissions for sales of investment products.  In light of these reports, I want to remind broker-dealer firms and their CEOs of the significant supervisory responsibilities you have under the federal securities laws to oversee broker-dealer activities, particularly with respect to sales practices.

She continues:

Certain forms of potential compensation may carry with them enhanced risks to customers.  Some types of enhanced compensation practices may lead registered representatives to believe that they must sell securities at a sufficiently high level to justify special arrangements that they have been given.  Those pressures may in turn create incentives to engage in conduct that may violate obligations to investors.  For example, if a registered representative is aware that he or she will receive enhanced compensation for hitting increased commission targets, the registered representative could be motivated to churn customer accounts, recommend unsuitable investment products or otherwise engage in activity that generates commission revenue but is not in investors' interest.

I therefore encourage broker-dealer firm CEOs and their fellow supervisors to be particularly vigilant in ensuring that sales practices are closely monitored and that investor interests are carefully considered in the sale of any security or other investment product.

I also encourage firms and their CEOs to ensure that, in the event a firm's sales force expands, the firm's supervisory and compliance infrastructure retains sufficient size and capacity.

What's in store for brokerage firms engaging in the long-standing practice of paying up-front bonuses as well as enhanced commissions remains to be seen.

A Primer On CFP Board's Ethical Standards And Enforcement Process

Recently I had the pleasure of participating in a panel discussion before an audience of financial planners to address customer complaint issues.  One of my co-panelists, Michael P. Shaw, CFP Board’s Managing Director of Professional Review and Legal, discussed CFP Board’s ethical standards and enforcement process.  That is a topic that should be of great interest not only to financial planners but also to investors who benefit from the work of CFP Board.  Let’s examine why.

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SEC's Sanction Against Royal Alliance For Failure To Detect Adviser's Ponzi Scheme Provides Valuable Lessons To Investors And Advisers

The SEC (Securities and Exchange Commission) has censured Royal Alliance Associates, Inc. and fined it $500,000 due to its failure to supervise one of its former advisers, David McMillan.  From at least January 1999 until December 2004, McMillan was able to operate a Ponzi scheme and defraud no less than 28 investors "by lying about purchases and sales of securities, by misappropriating funds for his personal use, and by sending certain investors falsified statements relating to their investment accounts."  Let's review how McMillan perpetrated this fraud and why the SEC severely has sanctioned Royal Alliance for failing to prevent and/or detect it.

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Wachovia Stops Offering Profit-FormulaTransition Deals And For All Recruits Now Factors In Trailing 3-Month Production

Wachovia has stopped offering profit-formula deals and has tightened up on recruiting offers according to an InvstmentNews article published last week. Wachovia Securities last month stopped offering recruitment packages to potential recruits to its profit-formula platform.

Profit-formula representatives are employee brokers who work in branch offices of Wachovia Securities.  They pay a pro-rata share of branch expenses in return for a higher payout.

The profit-formula platform, according to recruiters, was a great recruiting tool for Wachovia, especially for large producers, because they got the best of both worlds - being not only independent, but also having the support from a large firm.

Only brokers producing $1.25 million, or teams doing $1.75 million or more, qualify for the profit-formula program.  Payouts start at 80%, recruiters said, a bit lower than other independent firms where reps typically got 90% or more of their production.  However, the profit-formula recruitment offers were a little lower than Wachovia's regular package.

The end of the recruitment deals has sparked some speculation that Wells Fargo might want to get rid of the profit-formula platform entirely, which could lead to an exodus of big brokers.  That said, Finet is still recruiting brokers to the program.

In a separate note, Wachovia has tightened up on its recruiting offers by factoring a broker's trailing three-months' production into the deal. The firm is looking at a recruit's trailing three-months, and multiplying by four to project the next year, recruiters said. If that figure is less than 85% of the actual trailing 12-months, Wachovia will use the lesser amount as the basis of the deal.

Recruiters say that other firms are not yet using trailing three- months' production in setting recruitment deals.  But, everybody is looking at the trailing three-months, not necessarily to calculate a deal, but trying to understand the nature of the business they're getting into, according to a recruiter.

SNSFE assists brokers in negotiating the legal agreements backing up transition deals, including the employment agreement, the promissory note and any ancillary agreements. 

Source:  InvestmentNews

Investment Advisers Put On Notice Of Current SEC Compliance Concerns

Recently, Lori Richards of the Securities Exchange Commission notified investment advisers of the SEC's current compliance concerns.  In a speech entitled, "Compliance in Today's Environment: Step Up to the Challenge," the director of the SEC's Office of Compliance Inspections and Examinations urged investment advisers to "take a fresh look" at four compliance risks.  Let's examine those four compliance risks.

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SNSFE Investigating Claims of Fidelity Brokers That They Were Pressured To Sell Proprietary Products And Pressured Not To Disclose The Conflict To Customers

Dozens of brokers serving Fidelity Brokerage Services' most affluent clients left the firm last year, claiming they were handcuffed by a requirement that they obtain certified financial planner certification while being prohibited from disclosing that part of their bonus compensation was tied to selling managed-money programs and other proprietary products.  That's according to a recent article in Investment News.

The Certified Financial Planner Board of Standards' new code of ethics and professional responsibility requires certified planners to tell clients of material conflicts of interest, including compensation arrangements.

Fidelity brokers receive about half their compensation in salary and half in bonuses keyed to customer experience surveys, growth of assets and managers' assessments - with the latter two weighted most heavily.  Brokers and a person close to the firm said that Fidelity had been agnostic about product type in the assessment and growth components until last year, when new management began emphasizing high-margin money management and insurance products after a surge of money market assets flooded in.

"All products are treated equally, including money markets," said Fidelity's representative and that only 9% of a broker's total compensation is tied to product sales.

However, as in most companies, bonuses are tied largely to managers' reviews, and 50% to 60% of those assessments in last year's compensation plan were tied to sale of selected investments.  Another 10% to 20% of the assessment was keyed to a rep's semiannual sales of online financial plans, 20% reflected the supervisor's view of client relationship skills, and 10% was keyed to compliance and teamwork qualities, said a broker citing a 2008 memo.

Brokers said they were pushed hard to sell Fidelity's own life insurance products, particularly annuities, and Portfolio Advisory Services, a program managed by a Fidelity-run registered investment adviser that invests in Fidelity mutual funds or a mix of proprietary and external mutual funds.  One said he had to hit about 80% of his sales target in PAS and annuities to qualify for the investment part of the manager bonus and to avoid a letter of warning about employment.  He asked not to be identified.

"It was very much about selling the PAS product and insurance," said a broker who left Fidelity.  Another said, "We were told to say we were product-agnostic, but a quiet gun was pointed at your head."

Some brokers said they were tracked weekly and, as in many sales organizations, told how they measured against their peers in productivity to stir their efforts.

SNSFE continues to investigate these matters on behalf of registered representatives who feel they have been wronged. 

Source:  InvestmentNews

SNSFE Cautions Against Transitioning Reps Relying Upon Edward Jones' Oral Promise That It Would Not Seek To Enforce Its Written Covenants Not To Compete

For Edward Jones, wirehouse shrinkage spells opportunity.  That's according to an InvestmentNews article. Reflecting the deep changes that the current slump has brought to the securities industry, wirehouse brokers are starting to look to Edward Jones for shelter from the storm.

But because it has a long history of training its own reps and never has offered upfront money, it's no surprise that Jones hasn't always been successful in attracting disaffected wirehouse brokers.  The paper says that may change.

To better attract new recruits, Jones this year revamped its transition package to give new hires a steady income during the transition period. The new transition plan is designed to ensure an income of up to 12 months while recruits get settled in.  A recruit gets one month of income for every $10 million of assets controlled at their old firm.  That amount is based on 40% of trailing 12-month's production.

Jones' transition package also offers a $2,000 bonus for every $1 million in assets transferred in, and during the second six months at the firm, Jones will pay an extra 20%, 30% or 40% of production to recruits who produce at least half of what they generated at their old firm.

That said, be careful with respect to what the firm is telling brokers regarding non-competition.  Let's say the marriage doesn't go as planned.  The firm says that it DOES have a non-competition agreement for brokers who bring over an existing book, but "we're not going to handcuff them" if they want to leave.  Jones readily admits that sometimes it DOES sue brokers who leave. 

Let's be clear, when we negotiate these agreements, we're not going to rely on oral promises in the hopes that a written provision will not be enforced.

Source: InvestmentNews

SNSFE Attorneys Assisting Advisers Transition As Smith Barney Loses Advisers And Assets Pending Morgan Stanley Merger

Smith Barney bleeds as it prepares for merger with Morgan Stanley according to InvestmentNews magazine.  Smith Barney is losing brokers and advisers by the score and assets by the billions as it prepares for its new role as the junior partner to former rival Morgan Stanley in their impending joint venture.

Last year was disastrous for the New York-based firm and this year appears to be starting off little better, according to InvestmentNews.

In 2008, parent Citigroup lost 11% of its sales force - primarily Smith Barney reps and advisers. In the fourth quarter alone, Citigroup Wealth Management, of which Smith Barney is the largest part, lost 970 reps and advisers.

That dropped the firm's head count to 13,765 reps and advisers as of December 31, 2008.  Meanwhile, net-client-asset flows dropped steeply, with the firm losing an astounding $17 billion in client assets during the fourth quarter alone.

According to news reports and market sources, the firm last month alone lost three dozen reps and advisers with close to $2.4 billion in assets under management.  These included:

• Fifteen advisers in the Baltimore area who went to Robert Baird.  The brokers control slightly more than $1 billion in assets.
• Seven reps who departed to open an office in Greensboro, NC for Davenport & Co.  Those advisers made up the lion's share of an office with $760 million in assets.
• Two Smith Barney teams of 12 reps and advisers with $620 million in assets under management were hired by UBS, according to a news report.

SNSFE helps reps transition from firm-to-firm. 

Source: InvestmentNews

SNSFE Fielding Inquiries As Wells Fargo Will Pay No Retention Bonus For Wachovia Reps

On Friday, February 20th, it was announced that Wachovia Securities brokers will not be getting a retention bonus from Wells Fargo.  In a conference call that day, Wachovia Securities chief executive Danny Ludeman said the deal was off, and he explained that it wouldn't look right given that client account values are down 20%, 30% and 40%.  In addition, he said that Wachovia Securities will be renamed Wells Fargo Advisors beginning in May.

The problem is that retention bonuses historically have been used to compensate brokers for the disruption caused by a merger.  One rep interviewed said some guys will be leaving.  And we have no doubt - attorneys at SNSFE negotiate the deals and have been in contact with Wachovia individuals planning to move.  Other firms will be more willing to pay money associated with the transition.

Source:  InvestmentNews

Lower-Producing Wirehouse Refugees May Find Home In Transitioning To Regional And Independent Firms

Recently, Investment News ran an article entitled, "Low-producers to exit wirehouses - Pay cuts likely to force thousands out the door."  According to the author, Dan Jamieson:

There will be a large migration of low producers from the wirehouses this year, industry observers predict.  While brokers at all production levels have been leaving to escape the turmoil at the big firms, cuts in pay for less productive brokers are expected to force out many representatives who produce less than $300,000.  Even $400,000 and $500,000 producers will be looking for new homes as they feel less welcome at the big firms, observers said. 

Production levels vary by firm, but an average 10% to 20% of reps at the major firms could be under $300,000, said a compensation consultant.  As a result, several thousand low-producers are feeling the effects of lower payouts this year.  And it's predicted, there "will be a tsunami" of movement out of the major firms this year and in the coming years.

Regional and independent firms are the likely new homes for many low-producing refugees.  But some regional firms are getting pickier.

Source:  Investment News

 

 

Financial Advisers In Employment Transition: A Primer On The Protocol

In 2004, three financial services firms devised a way to ease the transition of financial advisers from one firm to another.  The three firms - Citigroup Global Markets (Smith Barney), Merrill Lynch, and UBS Financial Services - signed an agreement called the Protocol for Broker Recruiting (the "Protocol").  Since then, at least 75 financial services firms have signed the Protocol.  The result has been a profound increase in the number of transitions and an equally profound decrease in the number of T.R.O. litigation filings!

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Recruitment Deals Slim Down But Still Are About 230% For Million Dollar Producers

Although the press is reporting that recruitment deals are slimming down, they're still very large.  Recall that only a couple of years ago, there were 100% of trailing 12 month commission deals being made.  That has now changed.  We've reached the peak, being about 250% - 260% of trailing 12 for brokers who generate $1 million a year or more. 

And firms are trimming back, but not by much.  Smith Barney has announced that its total deals are down to about 230%.   Merrill Lynch has said that it is doing the same.  Morgan Stanley has said that it's remaining competitive.  The price tag of course comes with promissory note terms of as much as 9 years, but attorneys at SNSFE work with reps to insure that promissory note terms and employment agreement terms are negotiated to fully protect the interest of the reps. 

Now there are some other firms out there that are not paying this kind of money but are doing other things to attract wirehouse reps.  Those are the regionals, for example, who are putting more emphasis on back-end incentives.  Those also include the custodians for investment advisers like Charles Schwab and TD and Fidelity who are putting together other benefits to encourage reps to join their firms.

Merrill Lynch Brokers' November 14th D-Day In Deciding Whether Or Not To Sign On With Bank Of America Is Just The Beginning Of The Transition Analysis

November 14, 2008.  That's D-Day for Merrill Lynch brokers who need to decide whether or not to sign on with Bank of America.  It's not surprising that more than 90% of Merrill Lynch brokers have decided to stay on with Bank of America according to Wall Street Journal Reports.  That's not because of a great arrangement.  Instead, it's because Merrill brokers were given only three weeks to review the deal, to interview with competitors, to negotiate the terms of their employment agreements and promissory notes with any competitors who chose to offer them an enticing package to move. 

But Merrill Lynch brokers have some comfort moving forward, at least short-term.  They were able to convince Merrill Lynch and Bank of America to agree to the protocol protection for moving customer accounts if they choose to move to a new firm. 

Merrill Lynch brokers and staff are highly paid.  That's part of the culture at Merrill Lynch.  Will that culture clash at Bank of America?  It certainly will.  BofA Chief Executive Ken Lewis has vowed to cut $7 billion of cost or 11% of the combined firm's $61.1 billion in cost for 2007.  And he's already said that staffers at Merrill Lynch are making a lot more money than staff people at Bank of America and that "won't last."

In addition, there's a culture clash as the securities firm of Merrill Lynch, known for it's independent streak, merges with Bank of America's more conservative banking culture.  Now competitors out there are paying 150% -200% of Merrill Lynch brokers' trailing twelve.  That's enticing and it ought to continue.

Attorneys at SNSFE assist brokers in transitioning from firm-to-firm and in negotiating these precise legal terms and protections of the employment agreement and the promissory note.

Source:  Wall Street Journal Reports

SEC Sanctions Against Brokerage Firm CEO Underscores Requirement To Supervise Reasonably

Recently the SEC (Securities and Exchange Commission) instituted settled administrative proceedings against Stephen Moynahan (SEC Rel.No. 34-58689).  Moynahan was the former president and CEO of Dolphin & Bradbury, Incorporated, formerly a registered broker-dealer.  The SEC finds that Moynahan failed reasonably to supervise a fraudulent scheme perpetrated by Robert Bradbury, an investment banker and co-owner of the firm.  Without admitting or denying the findings, Moynahan consented to the entry of an order which bars him from supervising, bars him from owning another firm, suspends him for six months and fines him $140,000.  Importantly, the SEC imposes those substantial sanctions despite recognizing that Moynahan had "no knowledge" of Bradbury's fraudulent scheme.  Let's examine why.

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Details Of Merrill Lynch Retention Package May Mean Attrition For Some Reps

Investment News has reported that top Merrill Lynch reps have been shown the money, but that attrition package may drive out low producers.  According to Investment News, in the middle of gut-wrenching times for the stock market, top-producers at Merrill Lynch & Co. Inc. will get retention bonuses in line with recent industry deals to stay with Bank of America Corp.

In a conference call with brokers Friday afternoon, Robert McCann told Merrill's 16,850 reps and advisers about the company's compensation plan, which has been the subject of wide speculation for weeks.  Mr. McCann, vice chairman and president for global wealth management at Merrill Lynch, noted that a retention deal was necessary to hang onto reps and advisers.  "In the context of extraordinary change in financial services and a volatile market and economic environment, it is important for clients, shareholders and the future of the combined company to retain top-performing advisers at the two current firms."

Those reps who annually generate $1.75 million in fees and commissions will receive 75% of their bonus in a seven-year forgivable loan, and another 25% in deferred cash over three years.  The next tier of reps, those who produce $1 million to $1.749 million in fees and commissions, will get a forgivable loan equal to 75% of their prior years's book of business, or "trailing twelve."  Those reps also are in line to receive a potential reward for increasing business of 25% of the trailing twelve.  A broker needs to grow his business by 25% to get that piece of the package.

However, lower-producing Merrill brokers have not fared as well.  "For Merrill advisers doing under $1 million in production, this isn't a retention package, it's an attrition package," said a recruiting firm spokesman.  Brokers producing $750,000 to $999,999 will get a 50% loan and are in line for a 25% growth reward, while brokers producing only $500,000 to $749,000 will receive a 25% loan and can receive a growth award of 25%.  And, brokers producing less than $500,000 will receive incentives ranging from nothing for the lowest producers to a deferred cash bonus of no more than 20% over three years. 

One other very interesting aspect of the deal is what Investment Adviser calls a "particularly tough non-compete clause."  This is part of the retention package as Merrill Lynch would propose it.  Apart from the fact that this may fly in the face of the protocol that Merrill Lynch agreed to, brokers ought to consider counsel before signing on to such an onerous provision.

Source:  Investment News

SNSFE Helping AIG Financial Advisors, FSC Securities and Royal Alliance Reps in Transitioning to Other Financial Services Firms In View of Announced Sales of Units

AIG Advisor Group is assiduously trying to convince financial advisers to stay in their seats while the firm's parent - American International Group Inc. of New York - attempts to find a buyer for three broker-dealers.

Last Monday, during a conference call with representatives from the three AIG broker-dealers - AIG Financial Advisors Inc. of Phoenix, FSC Securities Corp. of Atlanta and Royal Alliance Associates of New York - the firm said that broker-dealers will be sold as part of a package that includes the entire retirement services group.

During the call, the firm said that AIG management will do everything in the best interests of the reps and their clients in finding a buyer.  The firm also said that a retention package of some sort would likely be included in the deal.

The firm would like to see a deal completed by the end of the year.  However, some advisers have said that finding a new owner that's a good fit for the broker-dealer is a key issue and a most important issue for them moving forward.  One said, "I'm not looking to jump ship, but I have to keep my options open."

Meanwhile, the 7,000 reps and advisers at the AIG broker-dealers are being courted heavily by competitors, recruiters and reps said.  "I'm getting two or three letters or postcards each day," said a rep.

If reps are deciding to transition or are in transition, attorneys at SNSFE can help.  As lawyers, we

1. Plan in advance all aspects of a successful transition;
2. Negotiate the terms of the employment agreement with the new firm;
3. Negotiate the terms of the promissory note agreement with the new firm;
4. Be "on call" for difficulties that may arise during the transition to the new firm;
5. Defend the advisers' interest and reputation from defamation by the former firm and/or its advisers, including negotiation of language for the Form U-5 filing;
6. Defend advisers in injunction proceedings and in arbitration relating to their employment agreements, including any non-solicitation and confidentiality agreements at the former firm; and,
7. Plan all corporate, tax, compensation and benefits matters.

In short, we work with advisers to reduce the stress and the distractions associated with even the most successful transitions. 

Source:  InvestmentNews

Regulators Offer Guidance To Improve Policies And Procedures To Protect Senior Investors

State and federal securities regulators, along with FINRA (the Financial Industry Regulatory Authority), recently emphasized that the protection of senior investors is "a top priority."  The regulators have issued a report, entitled, "Protecting Senior Investors:  Compliance, Supervisory and Other Practices Used by Financial Services Firms in Serving Senior Investors."  Let's examine the guidance provided in the report.

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Securities Regulator Highlights Examination Priorities To Protect Investors

FINRA (the Financial Industry Regulatory Authority) has issued its publication, “Improving Examination Results” to highlight “examination priorities”.  Many of the examination priorities relate to investor protection issues, including guidance regarding the recommendation of, and required risk disclosures for, purchases of auction rate securities.  Let’s examine three of the more important investor protection issues.

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SEC Reveals Information To Help Financial Services Firms Survive A Compliance Examination

In a recent speech entitled, "Frequently-Asked Questions About SEC Examinations", Lori Richards, Director of the SEC's Office of Compliance Inspections and Examinations, shared helpful information for financial services firms.  Ms. Richards answered the following questions: will my firm be examined; what issues are SEC examiners focusing on now; what kind of information and documents will examiners request; what are the possible outcomes of an SEC examination; and what can one do to ensure that an examination goes smoothly.  Let's examine the more important points of the speech.

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SEC Reveals “Top 10” Compliance Issues for Investment Advisers

Recently, the Securities and Exchange Commission (SEC) revealed its current examination priorities for investment advisers.  Speaking before the 10^th Annual IA Compliance Best Practices Summit, Lori Richards, Director of the SEC’s Office of Compliance Inspections and Examinations, detailed the “Top 10” issues.  Let’s overview each of these ten issues.

Preliminarily, a shortage of SEC staff examiners to oversee nearly 11,000 investment advisers has forced the SEC to adopt a risk-based approach to examining investment advisory firms.  Nonetheless, the SEC is quick to point out that it continues to conduct “random” examinations, to which all investment advisory firms are subject.  Moreover, the SEC recently has emphasized that it “targets” newly-registered investment advisers.  In these examinations, according to Ms. Richards, “our goal is to obtain information about the adviser’s compliance program and evaluate the overall compliance culture of the firm.”

In all examinations, the SEC is interested in determining the adviser’s “risk-assessment process.”  The “Top 10” areas of SEC focus should be considered in an adviser’s risk assessment.

1. Controls Over Valuation.  Valuing securities is a “Top 10” issue because clients need to know the value of their investments and advisers should not overstate the value in order to overcharge their investment advisory fees (based on a percentage of the value of the investments).  The SEC particularly wants to ensure that an advisory firm has “controls and is implementing those controls when pricing structured products, illiquid securities or other difficult-to-price securities.”

2. Controls Over Non-Public Information / Personal Trading / Code of Ethics.  Ms. Richards reveals that the instances of suspicious trading have increased.  Ms. Richards states that, generally, examiners will focus on “whether a firm has identified the source and type of non-public information that they and employees may be privy to, whether the firm has crafted and implemented adequate procedures to maintain the confidentiality of that information, and is implementing those procedures.”  The SEC also will inquire as to “whether the firm has guidelines with respect to when and to whom it will provide information, for example, information about its portfolio or its trading.”

3. Dealing With Senior Investors.  Protecting seniors, through effective supervisory and compliance programs, is a high priority at the SEC.  According to Ms. Richards, the SEC is focusing on: “marketing and advertising to seniors; account opening; product and account review; ongoing review of the relationship and appropriateness of products; discerning and meeting the changing needs of customers as they age; surveillance and compliance reviews; and training for firm employees.”

4. Compliance and Supervision.  Advisers must tailor their programs to identify and effectively mitigate their particular compliance risks and conflicts of interests.  According to Ms. Richards, the conflicts that the SEC is seeing “include new revenue-sharing payment streams from advisers to broker-dealers for obtaining space on the broker-dealers’ ‘recommended adviser’ lists, and other undisclosed compensation and gifts for business (e.g., to solicitors, fund consultants, and municipal consultants).”  The SEC also is examining for adequate supervision of “dispersed offices and independent advisory contractors.”

5. Portfolio Management.  The SEC continues to review whether investment recommendations are consistent with the adviser’s disclosures and the client’s investment objectives and restrictions.  More recently, the SEC has focused on “client investments in structured products and other complex derivative instruments.”

6. Brokerage Arrangements and Best Execution.  Investment advisers owe fiduciary obligations to their clients. Fiduciary obligations include seeking best execution for trades and “periodically and systematically” evaluating the costs and benefits of their brokerage arrangements.  Along those lines, the SEC is examining for “any inappropriate and/or undisclosed use of soft dollars for the benefit of the adviser, and use of any affiliated or preferenced broker-dealers for excessive commission payments, kickbacks to the adviser, or other undisclosed arrangements.”

7. Allocation of Trades.  Advisers must disclose its policies and procedures and must test them for fairness with respect to allocating IPOs, block trades and investment opportunities among clients and proprietary accounts.

8. Performance Advertising, Marketing, and Fund Distribution Activities.  Advisers must ensure that their claims about their past performance, their advertisements, and other marketing materials contain accurate information.

9. Safety of Clients’ and Funds’ Assets.  The SEC is interested in whether funds and investment advisers have “effective policies and procedures for safeguarding their clients’ assets from theft, loss and misuse.” Notably, Ms. Richards reveals that examiners “assess whether there is a process for regularly reconciling client and fund balances of securities owned with those shown by custodians and ensuring that the books reconcile.”

10. Information Processing and Protection.  This large examination area covers required books and records, disclosures and filings.  It includes effective policies and procedures for capturing, compiling and maintaining email and instant messages.  Moreover, the SEC “will be looking for controls that protect this information from hackers or other unauthorized persons, and from being destroyed in a disaster as part of the firm’s business continuity plan.”

As one can see, investment advisers face a great deal of scrutiny in complying with SEC requirements!

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Edward D. Jones Broker Awarded Damages For Emotional Distress Arising From Employment

An arbitration panel has held Edward D. Jones accountable for emotional distress inflicted upon one of its registered representatives and has awarded that former rep over $141,000 plus legal expenses.  Edward D. Jones, which is widely regarded as one of the best companies to work for, allegedly inflicted emotional distress on a former registered representative and then insisted that she seek psychological help, according to a recent arbitration award.

Ms. Sommer, who worked for St. Louis-based Edward Jones between 2000 and 2005, was awarded damages of $141,000 -- $100,000 of which was intended to compensate her for "emotional distress," according to the award, which was handed down in March.

The award is a reasoned award and part of the award states, "Without any reasonable grounds for doing so, apart from some sporadic instances in which Sommer's communications had a sarcastic tone or used crass language, coupled with the fact that Sommer did not readily take 'no' for an answer and occasionally involved higher-ups in such situations, Jones ordered Sommer to mental health counseling -- in effect an order to involuntarily undergo 'surgery' or be terminated," the arbitrators' decision stated.

Coupled with the threat of immediate termination if Ms. Sommer displayed "inappropriate, unprofessional or insubordinate behavior," the panel said it found that no reasonable person could be expected to continue working under such conditions.  "Sommer had no choice but to resign," according to the decision.

Source:  InvestmentNews

New Handbook Outlines Prudent Practices For Fiduciary Advisers

The Financial Planning Association (FPA) has published a handbook containing practice guidelines for "Fiduciary Advisers" as that term is defined in the Pension Protection Act of 2006.  The FPA states that the handbook "represents a standard of excellence for fiduciary advisers."  As such, it is a must-read for anyone providing investment advice to pension plan participants or beneficiaries with respect to plan assets for fees or other compensation, including those fiduciary advisers employed by trust departments, insurance companies, brokerage firms, registered investment advisers and any agents or affiliates. 

The handbook defines "prudent, or best, practices", and it is organized under a four-step investment management process.  The four steps are:  (1) Organize; (2) Formalize; (3) Implement; and (4) Monitor.  Each practice falls within one of those four steps.  For each practice, there are "criteria" that define the scope or detail of each practice.  Sometimes, a "suggested procedure" is provided to demonstrate how a particular practice should be implemented.

Let's examine the more important practices, criteria and suggested procedures under the four-step investment management process.

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Securities Regulator Provides Guidance Regarding The Review And Supervision Of Electronic Communications

FINRA (the Financial Industry Regulatory Authority) has issued Regulatory Notice 07-59 relating to electronic communications, such as email, instant messaging, text messaging, weblogs and podcasting, which financial services firms and their employees may use to conduct business.  Let’s examine the key points of the notice.

Preliminarily, firms must establish, maintain and enforce electronic communication supervisory systems and procedures reasonably designed to achieve compliance with securities laws and rules.  FINRA recognizes that technological innovations have brought and will continue to bring new challenges in supervising electronic communications.  FINRA also recognizes that supervisory systems and procedures may differ among financial services firms depending upon their size and the type of business that they conduct.  And, with some exceptions for mandatory reviews, firms “generally may decide by employing risk-based principles the extent to which the review of incoming, outgoing and internal electronic communications is necessary in accordance with the supervision of their business.”

In Notice 07-59, FINRA divides its guidance into six categories.  These are: (1) written policies and procedures; (2) types of communications requiring review; (3) identification of the person(s) responsible for the review; (4) method of review; (5) frequency of the review; and (6) documentation of the review.

First, regarding written policies and procedures, FINRA recommends that firms allow employees quick and easy access to their policies and procedures.  Firms should state what forms of electronic communication are permissible, and which are not permissible.  Firms should specify the consequences for non-compliance with those policies and procedures, and should conduct training on a regular and as-needed basis.

Second, regarding the types of electronic communications requiring review, FINRA notes that, regardless of what technology is used, if a firm permits its use, then it must have systems and procedures in place reasonably designed to supervise those communications.  As technologies now extend beyond office network servers and firm email addresses to other email platforms (such as AOL or Yahoo mail), message boards and E-faxes, FINRA notes that some firms choose simply to block access, prohibit use and require compliance certifications by employees.  FINRA also states that it expects firms “to prohibit, through policies and procedures, communications with the public for business purposes from employees’ own electronic devices unless the member is capable of supervising, receiving and retaining such communications."

Third, a firm’s procedures must clearly identify the person(s) responsible for performing the reviews.  While the reviewer may delegate certain functions, ultimately the reviewer remains responsible and must ensure that all reviewers have “sufficient knowledge, experience and training to adequately perform the reviews.”  Finally, an individual must not conduct supervisory reviews of his/her own electronic communications (unless there is no reasonable alternative, as with a sole proprietor-type firm).

Fourth, regarding the method of review, FINRA discusses lexicon-based reviews, random reviews and a combination of both methods.  Lexicon-based reviews should contain a meaningful list of phrases, words and industry jargon based on the type of business that the firm conducts and its customer base.  The list should be able to yield a meaningful sample of “flagged” communications.  The system should be able to read attachments.  When firms select the random review method, they may choose a reasonable percentage sampling technique.  Firms can choose to review either a certain percentage of electronic communications based on a branch, department or business unit, or, in the alternative, can choose to review a certain percentage for each individual in the branch, department or business unit.

Given the strengths and weaknesses of each method, however, FINRA recommends that firms use a combination of both methods – lexicon-based reviews and random reviews.  Additionally, no matter what method firms choose, they must “alert their reviewers as to the issues to be raised and the material to be examined, including acceptable content.”  Likewise, firms must “incorporate ongoing evaluation procedures to identify and address any ‘loopholes’ or other issues that may arise as the means of transmitting sensitive information ‘under the regulatory radar’ become more sophisticated and difficult to capture.”

Fifth, FINRA states that the frequency of the review will vary depending upon the type of business conducted, the type of customers involved, and the scope of the activities, the geographical location of the activities, the disciplinary record of those involved, and the volume of communications subject to review.  FINRA also recommends that firms prescribe reasonable timeframes within which supervisors are expected to complete their reviews, considering factors such as those set forth above.

Finally, firms must document their reviews.  FINRA recommends that, at a minimum, firms must evidence the date of the review and any steps taken as a result of the review.  FINRA cautions that reviewers do not satisfy this requirement merely by opening the electronic communication.

In conclusion, FINRA’s guidance should assist firms navigate through the difficult and ever-changing waters of supervising electronic communications.

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Qualified Pension Plan Participants Should Look Forward To Receiving Specific Investment Advice

The Pension Protection Act of 2006 (the "PPA") should benefit plan participants (and beneficiaries) by providing participant education.  Under the PPA, qualified "Fiduciary Advisers" will help plan participants navigate through their investment selection and allocation decisions.  Although we await the issuance of regulations by the Department of Labor to amplify the provisions of the PPA, let's review the PPA and what plan participants may expect to receive by way of guidance.

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Securities Regulator Makes Protection Of Senior/Retiree Investors A High Priority

Senior investors, as well as Baby Boomers who are retired or who are approaching retirement, should take some comfort from a recent notice to financial services firms, Regulatory Notice 07-43.  The Financial Industry Regulatory Authority (FINRA) states that the purpose of the notice is "to urge firms to review and, when appropriate, enhance their policies and procedures for complying with FINRA sales practice rules, as well as other applicable laws, regulations and ethical principles, in light of the special issues that are common to many senior investors."

Why is FINRA concerned?  The concern stems from demographics - by 2030, almost 1 out of every 5 Americans will be 65 years old or older.  Additionally, the concern is that retirees will live longer, yet fewer and fewer of them will be able to rely on traditional corporate pension plans to fund their retirement.  Therefore, FINRA states that  "the financial decisions made by those who are at or nearing retirement are more important than ever before."

Moreover, FINRA emphasizes that although it does not have "special rules" in place for seniors/retirees, financial services firms especially must be careful when dealing with seniors/retirees.  In executing their duties, the notice provides that "age and life stage (whether pre-retired, semi-retired or retired) can be important factors, and firms should make sure that the procedures they have in place take these considerations into account where appropriate."  Suitability of recommendations and communications aimed at older investors are "of particular concern."  Let's examine FINRA's guidance regarding suitability of investment recommendations...

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Protecting Yourself In Bull And Bear Markets

Ronald M. Amato, an associate attorney in the securities group at SNSFE, presented the webinar, "Protecting Yourself In Bull And Bear Markets:  What Investors, Their Accountants and Advisors Should Know About Investment Product Suitability and Investment Abuse" in November 2006.  If you didn't get the chance to attend the live event, or are interested in a 'refresher', you can play the recorded webinar presentation or listen to the podcast now:

   

The Court's Rejection Of The Broker-Dealer Exemption Rule (The So-Called "Merrill-Lynch Rule")

On July 11, 2007, SNSFE securities associate attorney Ronald M. Amato presented a webinar for investors and financial advisers on the implications of the U.S. Court of Appeals D.C. Circuit Court's decision to vacate SEC Rule 202(a)(11).  In his 30-minute presentation, Ron gives a historical perspective of the Investment Adviser Act, the practical impact of the Rule and its challenge by the Financial Planning Association, and what the Court's rejection of the Rule means for investors and financial advisers.  Press play to watch the recorded presentation or press listen to hear the podcast.

 

The Top 10 Current Compliance Issues For Investment Advisers

This 30-minute recorded presentation from a recent webinar by SNSFE securities associate attorney Christopher J. Moyen covers the basics of what we identify to be the top 10 current compliance issues facing investment advisers today.  Play the webinar or listen to the podcast to learn about these common deficiencies and their remedies.

  

Prudent 72(t) Retirement Planning Requires More Than Just Wishful Thinking

Advisers, and their clients, have been warned about "early retirement investment pitches that promise too much."  A FINRA Investor Alert has cautioned employees to "look before you leave," and two well-publicized regulatory actions have highlighted problems with misleading sales practices and ineffective supervision.  Let's review the warnings, and provide guidance to advisers on how best to stay clear of trouble.

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Securities Industry Publication Identifies Current Investor Protection Issues

Securities firms are required to train their advisers.  To assist firms in doing so, the Securities Industry/Regulatory Council on Continuing Education (the "Council") publishes its annual Firm Element Advisory (the "FEA").  The FEA serves "to identify current regulatory and sales practice issues" for possible use in training advisers.  The FEA also serves as a helpful listing of topics for attorneys in counseling their clients -- whether they are securities firms, financial advisers or aggrieved customers.  Let's examine the more important areas of the 2007 FEA.

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Securities Regulator Issues Important Guidance For Newly-Registered Investment Advisers

The Securities and Exchange Commission (SEC) has published a "plain English" summary of the law to help new advisers understand their compliance responsibilities.  This publication is part of a broader effort to communicate to investment advisers that they have certain critical obligations, and that the SEC will ensure compliance with those obligations through routinely examining investment advisers, issuing deficiency letters to them and, if necessary, bringing enforcement actions against them.  Let's highlight the key sections of this latest SEC guidance.

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Implementing Effective E-Mail And Document Retention Policies And Procedures

This 30-minute podcast orginally was presented on 10/25/05 in webinar format on the importance of effective E-mail and document retention policies and procedures and ways they can be implemented.

 

SEC's "ComplianceAlert" Provides Helpful Guidance To Investment Advisers And Their Attorneys

As part of its compliance outreach program, the Securities and Exchange Commission (SEC) has decided to publicize some of the deficiencies and weaknesses that it has uncovered during its examinations of financial services firms.  Unveiled for the first time in June, 2007, the SEC's "ComplianceAlert" is designed to alert financial professionals so that they can review their practices, procedures and programs, and make whatever improvements are necessary or desirable -- before the SEC examines them!

The scope of this first ComplianceAlert is broad, because it relates to numerous deficiencies found among investment advisers, mutual funds and brokerage firms.  Let's examine two deficiency areas that relate to investment advisers.  They are deficiencies in performance advertising and in disaster recovery plans.

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Buying Or Selling An Investment Advisory Firm - A Lawyer's Perspective

This 30-minute podcast originally was presented as an online seminar on 11/21/05 on the issues involved in buying or selling an investment advisory firm from a lawyer's perspective, including the anatomy of a deal, legal risks, compliance, and due diligence.

 

Prudent Practices For Investment Fiduciaries

Financial advisers, trustees, plan sponsors, and anyone else involved in investment decision-making, face a host of issues as they navigate through complex and sometimes uncertain areas.  But guidance is available. 

One source of guidance deserves our focus.  It is, "Prudent Investment Practices", a handbook for investment fiduciaries, written by the Foundation for Fiduciary Studies.  There are 5 so-called "Steps" and 27 so-called "Practices", which expand on this sound starting proposition:  "To manage a prudent investment process, without which the components of an investment plan cannot be defined, implemented or evaluated."  These Steps and Practices were determined after a review of the major investment fiduciary legislation -- ERISA (Employee Retirement Income Security Act of 1974), UPIA (Uniform Prudent Investor Act) and MPERS (Management of Public Employee Retirement Systems Act).

Let's overview the 5 Steps and some of the 27 Practices.

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Investment Planning For Fiduciaries: An Overview Of The Laws That Have Governed Private Trusts

To understand where we are, sometimes it is helpful to understand where we have been.  That's true of trust investment law.  Let's overview the past two centuries of law that have governed how advisers and fiduciaries must invest trust and retirement plan assets.

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SEC Details Deficiencies Most Commonly Found During Examinations Of Investment Advisers

The Securities and Exchange Commission (SEC) conducts periodic routine audits of investment advisers.  Frequently, SEC staff discuss these examinations and provide helpful guidance to investment advisers.  That happened recently in a speech given in March 2007 by Lori Richards, the SEC's Director of its Office of Compliance Inspections and Examinations.  Let's review the guidance that she provides.  Let's also highlight why the new compliance rules, especially those regarding risk identification and mitigation, present challenges for investment advisers.

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