Consumer Protection

FINRA Drops Bid to Regulate Investment Advisors – For Now

May 16, 2014 | by Staff Attorney

Most people do not realize that there is a big distinction between brokers and investment advisors. Many people think, they both recommend securities. While that is true, that is pretty much where the similarities end.

A broker is regulated by The Financial Industry Regulatory Authority (FINRA) a self-regulatory organization (SRO) as provided for under the Securities and Exchange Act of 1934. On the other hand investment advisors are regulated by the Securities and Exchange Commission as provided under the Investment Advisors Act of 1940 (IAA).

A broker is more akin to salesman. A broker’s obligation is to make sure that his or her recommendation is suitable and appropriate for the investor given the investors objectives and other information. However, an investment advisor is more like an appraiser of securities, his or her job is not only to make recommendations that are not only suitable but to continually monitor the investors account to ensure that the investor has a viable financial plan over time. Consequently, a broker is compensated on a transactional basis while an investment advisor is paid a percentage of the assets managed by the advisor.

Two MetLife Advisors Alleged to Have Wrongfully Exchanged Variable Annuities

May 14, 2014 | by Staff Attorney

On March 27, 2014, the Financial Industry Regulatory Authority (FINRA) filed a regulatory complaint against two former brokers from MetLife Securities, Inc., a unit of MetLife Inc. According to the complaint, Christopher Birli (Birli) and Patrick Chapin (Chapin), who both worked for MetLife in Williamsville, New York, until 2012, participated in a seven-year scheme to inflate commissions. According to the allegations, the advisors preyed on the employees of the State University of New York, having these retirement-plan participants switch $21 million in annuities. The specific allegations claim that from a period spanning from 2004 to 2011, Birli and Chapin encouraged forty-five of their customers to switch the MetLife variable annuities that they held in their respective accounts in exchange for new variable annuities held in individual retirements accounts, which were outside of the university plan that the State University of New York employees should have adhered to.

MetLife has certain policies in place. One such policy prohibits exchanging certain types of variable annuities. It has been alleged that the two MetLife advisors deceptively designed the deals for their customers in a manner explicitly intended to circumvent this policy. Birli and Chapin allegedly evaded detection by utilizing a three-step process. First, they advised their clients to sell their retirement plan annuities and take the cash. Next, the two advisors had their clients purchase a different security within the retirement plan, which they were required to hold for ninety days. Finally, Birli and Chapin instructed their clients to sell that security in order to buy a variable annuity through an individual retirement account.

Over the seven-year period, a total of $21 million was craftily shifted from the MetLife retirement plan product into the TIAA-CREF plan product, then subsequently placed into the MetLife retail annuities. All the while, Birli and Chapin allegedly reaped commissions of 7.15% for transferring the money into the retail annuities. If the two brokers had followed protocol and sought an exception with MetLife to allow the internal exchange of the retirement plan annuity product for a retail variable annuity, they would have only earned the standard 2% gross dealer concessions. The advisors’ alledged improprieties essentially netted them nearly four times the commissions that they were rightfully entitled to, generating hundreds of thousands of dollars for their own pockets. According to the filings, MetLife terminated Birli and Chapin in 2012. Neither individual presently works in the securities industry, according to filings.

FINRA Approves Expanded Broker Background Checks and Disclosures

May 12, 2014 | by Staff Attorney

The Financial Industry Regulatory Authority (FINRA) announced approval of amendments to FINRA’s supervision rule that would expand the obligations of brokerage firms to check the background of applicant brokers upon registration. The rule would encompass first-time applications as well as transfers between firms and require the brokerage firm to verify the accuracy and completeness of the information contained in an applicant’s Form U4. Under the new rule brokerage firms must adopt written procedures in their supervisory manuals that include searching public records in order to check the accuracy of the information. The amendments to the supervision rule will be submitted to the Securities and Exchange Commission for review and approval.

The U4 Form is the foundation of FINRA’s BrokerCheck system that helps investors find red flags that would indicate potential problems and signs of misconduct by their brokers. FINRA’s BrokerCheck come under fire recently by investor advocacy groups and federal lawmakers for its inaccuracies and lack of complete information.

In addition, FINRA will also search public financial records for all registered representatives and also search other publicly available information including criminal records of brokers. FINRA intends to conduct periodic reviews of public records to ensure that the organizations BrokerCheck database and information is accurate. Also under consideration is whether to add additional information to a broker’s publically available Central Registration Depository such as broker scores on securities exams.

FINRA Determines that Charles Schwab Cannot Bar Clients From Participating in Class Actions

May 9, 2014 | by Staff Attorney

The Financial Industry Regulatory Authority (FINRA) has determined that Charles Schwab & Co. (Charles Schwab) violated the self-regulatory organization’s rules by adding waiver languages to agreements that prohibited customers from participating in any class action cases against the firm. Schwab settled the claims and was fined of $500,000. The firm also agreed to tell all its customers that the requirement is no longer in effect.

In October 2011, Schwab made amendments to the customer account arbitration agreement of over 6.8 million investors after it settled a class action securities case accusing the brokerage firm of misleading thousands of customers about its YieldPlus money market fund. The YieldPlus fund sustained huge losses in 2008 and Schwab paid $235 million to resolve the allegations against the firm.

In the wake of Schwab settlement the firm amended its arbitration agreement to include a waiver provisions mandating that customers consent that any claims against the firm could only be arbitrated individually.

Securities Watchdog is Actually Asleep At the Wheel

May 8, 2014 | by Staff Attorney

People have joked that securities regulators are asleep at the wheel due to the number of frauds that go unpunished for so long. However, a recent Bloomberg BusinessWeek article exposed that the phrase is literally true in some cases.

Every dispute an investor has with their brokerage firm must be arbitrated through the Financial Industry Regulatory Authority (FINRA). FINRA hires and purportedly screens arbitrators who hear customer disputes with the industry. Due to the private nature of arbitration, the general public is often unaware how poorly equipped this system is at times to handle matters entrusted to it. While I have been satisfied with the quality of arbitrators in many cases, I have also had the unfortunate and all too common experiences complained of in the Bloomberg article.

According to the article, FINRA’s arbitration panels has a pool of 6,375 people who are often retired brokers, lawyers, or accountants. Arbitrators are paid about $400 a day when serving on a panel. FINRA provides arbitrators with 14 hours of instruction that can be completed online. Awards rendered by FINRA arbitrators are typically brief, and the decision often provides no reasoning and only a bare outline of the claim and no explanation of how the amount of the award was determined.

How Elderly Investors Can Protect Their Retirement Savings

May 6, 2014 | by Staff Attorney

Saving enough money for retirement is challenging enough. Unfortunately, senior investors now need to worry about trusting financial advisors and investment promoters in order to avoid losing their hard earned savings. There are steps and precautions seniors can take to help guard their investments.

First, fraudsters tend to target people who they can easily build a relationship of trust with. Thus, common frauds include affinity fraud through community groups, clubs, associations, and religious places of worship. Older people are also generally more trusting than the average person. The elderly are also more available to answer phone calls during the day.

Investors should always proceed with caution. Be wary of limited time offers or investments that you need to make a quick decision on. Also ask about the cost or commission for investing. If the commission is 10% that means that only 90% of your money will go to work for you and there may be considerable risks that need to be taken in order for the investment to earn a profit. Common frauds and scams also purport to offer a high rate of return or income rate.

FINRA Announces UBS Puerto Rico Bond Fund Cases to Move Forward

April 21, 2014 | by Staff Attorney

On Monday, April 14, 2014, the Financial Industry Regulatory Authority (FINRA) announced that it would lift the hold that it had put on some cases related to the collapse of Puerto Rico Bond Funds.

FINRA has been able to expand its pool of arbitrators that will be available to hear the cases. There are approximately 700 eligible arbitrators on its roster who have agreed to serve in Puerto Rico, where the majority of the 209 cases received to this point, are to be heard.

Last summer, investor fears began to rise when Detroit filed for bankruptcy. Investors, seeing a city go bankrupt, became concerned with Puerto Rico’s $70 billion in municipal debt. As fear set in, investors in the UBS Puerto Rico family of closed-end municipal bond funds began to lose billions. Nineteen of these funds lost $1.66 billion during the first nine months of 2013.

Hits of the 80’s and 90’s Sounding Like Fraud: Gana LLP Files Suit Against Producer of Classic Tunes

April 16, 2014 | by Staff Attorney

Music lovers looking to reminisce while enjoying classic hits from the 80’s and 90’s may not be getting what they paid for. Producers have created and marketed a compilation of some of those classic tunes, which include songs such as “Only In My Dreams” by Debbie Gibson, “Jenny/867-5309” by Tommy Tutone, “Hold On” by Wilson Phillips, and “Ice Ice Baby” by Vanilla Ice. Unfortunately, the packaging and marketing of these discs never alerted consumers to the fact that they were not purchasing the original recordings.

On March 20, 2014, Gana Weinstein LLP filed a class action suit, on behalf of Celeste Farrell and other individuals who purchased the music albums: “Hits of the 80’s: Platinum Collection” 2-CD set and/or “Hits of the 90’s: Platinum Collection” 2-CD set. The Complaint alleges that Tutm Entertainment (also known as Drew’s Entertainment) misled consumers by failing to indicate that these albums were comprised of inferior quality re-recorded songs. The Complaint further avers that Tutm Entertainment allowed consumers to believe that they were purchasing a compilation of original recordings, and thus distorted their ability to make an informed purchase decision.

The story has gained significant traction, as it was picked up by various news outlets only two days after the Complaint was filed with the United States District Court, District of New Jersey. As reported by Hollywoodreporter.com, re-recording is considered to be an open secret within the music industry, with musicians often having legitimate, albeit self-serving, reasons for re-recording their original hits. The site explains that artists are often required to work around contractual obligations and copyright termination to generate additional revenue from some of their classic hits. Musicians rights to re-record, however, do not absolve Tutm Entertainment and other music producers and sellers of music of their obligation to be completely forthcoming with consumers. The New Jersey Consumer Fraud Act explicitly prohibits any deception, misrepresentation, or knowing concealment intended to be relied on in connection with the sale or advertisement of merchandise.

FCC Clamps Down on Unsolicited Texts and Phone Calls

December 25, 2013 | by Staff Attorney

Consumers receive unwanted texts and calls from companies. Overtime consumers become frustrated by the plethora of messages on their home phones, faxes or mobile devices. The intrusion can not only be harassing, but also is costly for consumers. The Telephone Consumer Protection Act (TCPA) and the Controlling the Assault of Non-Solicited Pornography and Marketing Act (CAN-SPAM) address the underlying problems faced by many consumers.

The TCPA restricts solicitation and the use of automated telephone equipment. Unsolicited communications under the TCPA is broadly defined to include “any material advertising the commercial availability or quality of any property, good or services which is transmitted to any person without that person’s prior express invitation or permission in writing or otherwise.” The types of restricted activity include:

To make any call using any automated telephone dialing service or prerecorded voice.