Category Archives: U5 and FINRA

The Costs and Benefits of Arbitration

If you have questions on arbitration contact the experienced employment law attorneys at Maya Murphy, P.C. today at (203) 221-3100 or JMaya@Mayalaw.com. In the past few decades, arbitration has become a mainstay in resolving legal disputes. But is arbitration right for you? To find out, learn about the advantages and disadvantages of this dispute resolution technique. That way, you […]

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Electronic Discovery: What it Can Mean for Corporate Law

For assistance with your business law or litigation case, please call (203) 221-3100 or email Joe Maya, Esq. at JMaya@Mayalaw.com.  Electronic Discovery Can Bring CIOs to Court Chief information officers ill-informed about collecting and preserving electronic evidence during lawsuits could hamper defense of their company and leave it open to heavy fines and court sanctions. CIOs and […]

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Clients Overcharged on Mutual-fund Sales Awarded $30M

If you have questions about FINRA rules or Forms U4 and U5, please contact the experienced securities attorneys at Maya Murphy, P.C. at (203) 221-3100 or at JMaya@Mayalaw.com.

Finra says wealth-management units failed to waive mutual-fund sales fees

Wall Street’s self-regulator ordered three of the nation’s biggest brokerages to pay more than $30 million in restitution to clients overcharged on mutual-fund sales.

The wealth-management units of Wells Fargo & Co., Raymond James Financial Inc. and LPL Financial Holdings Inc. failed to waive mutual-fund sales fees for certain retirement-plan customers and charitable organizations, the Financial Industry Regulatory Authority Inc. said Monday.

Wells Fargo will have to pay about $15 million, Raymond James $8.7 million, and LPL $6.3 million.

The restitution follows a similar order against Merrill Lynch last year. Finra ordered the Bank of America Corp. unit in June 2014 to pay an $8 million fine and $24.4 million in restitution to settle allegations that it improperly applied mutual-fund sales charges to certain accounts.

Mutual-fund companies provide sales-charge waivers for retirement plans to keep them in line with Employee Retirement Income Security Act rules that are designed to reduce conflicts of interest.

But the various waiver programs can be difficult to manage.

Wells Fargo, Raymond James and LPL don’t have to pay a fine because the firms themselves discovered that the fees had been charged to its customers and they then reported the problem to Finra.

Still, the firms failed to adequately supervise the sale of mutual funds that offered sales charge waivers, Finra said.

”The firms unreasonably relied on financial advisors to waive charges for retirement and eligible charitable organization accounts, without providing them with critical information and training,” the regulator said.

Finra’s enforcement chief, Brad Bennett, said the regulator “is ordering meaningful restitution to adversely affected investors consistent with our commitment to ensure that mutual fund investors get the full benefit of available fee and expense reductions.”

A spokesman for Raymond James said the firm “proactively initiated client refunds and self-reported the findings.”

An LPL spokeswoman said the firm “has begun providing restitution to affected investors as well as implementing process changes to further protect investors for this issue in the future.”

Wells Fargo declined to comment.

All three firms consented to the restitution without admitting nor denying Finra’s charges.[1]

If you have questions about FINRA rules or Forms U4 and U5, please contact the experienced securities attorneys at Maya Murphy, P.C. at (203) 221-3100 or at JMaya@Mayalaw.com.

[1] “Finra Orders Wells Fargo, Raymond James, LPL to Pay $30 Million to Clients,” posted by the Wall Street Journal. July 6, 2015: http://www.wsj.com/articles/finra-orders-wells-fargo-raymond-james-lpl-to-pay-30-million-to-clients-1436197310

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Types of Prohibited Conduct in the Securities Industry

If you have questions about FINRA rules or Forms U4 and U5, please contact the experienced securities attorneys at Maya Murphy, P.C. at (203) 221-3100 or at JMaya@Mayalaw.com.

A “security” is a catch-all term for many kinds of investments—stocks, bonds, mutual funds, etc. (One trick is to think of a security as an intangible investment. For example, if you buy gold bars, that’s not a security. But if you buy stock in a precious metal fund, that’s a security. Also, securities do not include tangible assets like a car or a home.) The laws and rules that govern the securities industry in the United States derive from a simple and straightforward concept: all investors, whether large institutions or private individuals, should have access to certain basic facts about an investment prior to buying it, and so long as they hold it.

Prohibited conduct in the securities industry includes:

Recommending to a customer the purchase or sale of a security that is unsuitable given the customer’s age, financial situation, investment objective and investment experience. Investment in a particular type of security may be unsuitable, or the amount or frequency of transactions may be excessive and therefore unsuitable for a given customer.
Purchasing or selling securities in a customer’s account without first contacting the customer and receiving the customer’s authorization to make the sale or purchase, unless the broker has received from the customer written discretionary authority to effect transactions in the account or the broker was given discretion as to price and time.
Switching a customer from one mutual fund to another when there is no legitimate investment purpose for the switch.
Misrepresenting or failing to disclose material facts concerning an investment. Examples of information that may be considered material and that should be accurately presented to customers include: the risks of investing in a particular security; the charges or fees involved; company financial information; and technical or analytical information, such as bond ratings.
Removing funds or securities from a customer’s account without the customer’s prior authorization.
Charging a customer excessive markups, markdowns or commissions on the purchase or sale of securities.
Guaranteeing customers that they will not lose money on a particular securities transaction, making specific price predictions or agreeing to share in any losses in the customer’s account.
Private securities transactions between a broker and a customer that may violate FINRA rules, particularly where the transactions are done without the knowledge and permission of the sales representative’s firm.
“Trading ahead,” which involves placing an order for the firm’s account before entering a customer’s limit order, without having a valid exception.
Failure by a market maker to display a customer limit order in its published quotes, without a valid exception.
Failing to use reasonable diligence to see that a customer’s order is executed at the best possible price, given prevailing market conditions.
Purchasing or selling a security while in possession of material, non-public information about an issuer.
Using manipulative, deceptive or other fraudulent methods to effect a transaction in, or induce the purchase or sale of, a security.[1]
If you have questions about FINRA rules or Forms U4 and U5, please contact the experienced securities attorneys at Maya Murphy, P.C. at (203) 221-3100 or at JMaya@Mayalaw.com.

[1] “Prohibited Conduct,” posted by FINRA. http://www.finra.org/investors/prohibited-conduct

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Most Common Problems Reported in Investor Complaints

If you need assistance with a customer complaint, or have any other questions regarding FINRA, please contact the experienced securities attorneys at Maya Murphy, P.C. at (203) 221-3100 or at JMaya@Mayalaw.com.

FINRA operates an Investor Complaint Center that is designed to receive complaints from investors regarding their brokers and/or the firms that employ them. FINRA’s role is to investigate these complaints for potential violations of securities laws or regulations.

Listed here are the four most frequent problems reported in investor complaints received by FINRA:

misrepresentation—untrue representations or omissions of material facts relating to the investment.
cold-calling—unsolicited or unwanted phone calls using high-pressure, persistent tactics.
unsuitability—an investment made by a broker that is inconsistent with the investor’s investing objectives and profile.
unauthorized trading—sale or purchase of securities without the investor’s prior knowledge and authorization.
Misrepresentation

Misrepresentation can occur when a broker purposefully makes untrue representations of material facts or omits material information. This can happen in any security in any account, but this problem is commonly found with low-priced, speculative securities because of their increased risk.

Cold-calling

High-pressure sales calls (sometimes referred to as cold-calling) occur when an investor receives unsolicited or unwanted phone calls—using high-pressure, persistent tactics—soliciting the purchase of securities. This is most frequently found with low-priced, speculative securities.

Unsuitability

A suitability problem can involve any security and occurs when an investment made by a broker is inconsistent with the investor’s objectives and investing profile (e.g., age, financial status, long-term goals, income and net worth of the customer). For instance, the broker encourages an investor to purchase an investment that the broker wants vs. an investment that may be best suited to the investor. An example of such an investment would be a recommendation to make a significant investment in a highly speculative security to an investor with a fixed income or the need for monthly income.

Unauthorized trading

Unauthorized trading involves the purchase or sale of securities in a customer’s account without the customer’s prior knowledge and authorization. This can occur with any security. For example, the broker may believe a transaction is in the investor’s best interest but cannot or does not contact the investor, and then makes the trade anyway. Or, the broker attempts to convince the investor of the benefits to the transactions in the hopes that the investor ratifies trades after the fact. Remember, brokers generate commissions through executing transactions (sales or purchases). That is why you should pay close attention to activity in your account.[1]

If you need assistance with a customer complaint, or have any other questions regarding FINRA, please contact the experienced securities attorneys at Maya Murphy, P.C. at (203) 221-3100 or at JMaya@Mayalaw.com.

[1] “Avoid Common Investor Problems,” posted by FINRA. http://www.finra.org/investors/avoid-common-investor-problems

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Seeking Expungement Under Rule 2080: Arbitration Procedure

If you have questions about FINRA arbitration, please contact the experienced securities attorneys at Maya Murphy, P.C. at (203) 221-3100 or at JMaya@Mayalaw.com.

Steps a respondent should take in an arbitration proceeding seeking expungement under Rule 2080

A party seeking expungement in an arbitration proceeding should request expungement, preferably in his or her answer, counterclaim or statement of claim. The arbitrators will decide whether to grant a request for expungement on the basis of one or more of the three standards specified in Rule 2080.

In addition, FINRA’s Code of Arbitration Procedure for Customer Disputes and Code of Arbitration Procedure for Industry Disputes (collectively, the “Arbitration Code”) contains special procedural requirements relating to requests to expunge customer dispute information, including that:

arbitrators hold a recorded in-person or telephonic hearing;
review settlement documents; and
consider the amount of payments made to any party and any other terms and conditions of settlement.
If the arbitrators grant expungement relief, the Arbitration Code also requires that they briefly explain in the award the factual basis for finding that expungement is appropriate under one or more of the Rule 2080 standards.

If you have questions about FINRA arbitration, please contact the experienced securities attorneys at Maya Murphy, P.C. at (203) 221-3100 or at JMaya@Mayalaw.com.

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Expungement of FINRA Customer Dispute Information

If you have questions about FINRA arbitration, please contact the experienced securities attorneys at Maya Murphy, P.C. at (203) 221-3100 or at JMaya@Mayalaw.com.

Rule 2080 pertains to customer dispute information. This is typically information involving disputes between customers and member firms or their associated persons that has been reported on Forms U4 or U5 in response to the Customer Complaint/Arbitration/Civil Litigation Disclosure questions and associated disclosure reporting pages.

According to Rule 2080, members or associated persons seeking to expunge information from the CRD system arising from disputes with customers must obtain an order from a court of competent jurisdiction directing such expungement or confirming an arbitration award containing expungement relief.

Members or associated persons petitioning a court for expungement relief or seeking judicial confirmation of an arbitration award containing expungement relief must name FINRA as an additional party and serve FINRA with all appropriate documents unless this requirement is waived.

Upon request, FINRA may waive the obligation to name FINRA as a party if FINRA determines that the expungement relief is based on affirmative judicial or arbitral findings that:

the claim, allegation or information is factually impossible or clearly erroneous;
the registered person was not involved in the alleged investment-related sales practice violation, forgery, theft, misappropriation or conversion of funds; or
the claim, allegation or information is false.
If the expungement relief is based on judicial or arbitral findings other than those described above, FINRA, in its sole discretion and under extraordinary circumstances, also may waive the obligation to name FINRA as a party if it determines that:

the expungement relief and accompanying findings on which it is based are meritorious; and
the expungement would have no material adverse effect on investor protection, the integrity of the CRD system or regulatory requirements.
A party seeking expungement in an arbitration proceeding should request expungement, preferably in his or her answer, counterclaim or statement of claim. The arbitrators will decide whether to grant a request for expungement on the basis of one or more of the three standards specified in Rule 2080.

In addition, FINRA’s Code of Arbitration Procedure for Customer Disputes and Code of Arbitration Procedure for Industry Disputes (collectively, the “Arbitration Code”) contains special procedural requirements relating to requests to expunge customer dispute information, including that:

arbitrators hold a recorded in-person or telephonic hearing;
review settlement documents; and
consider the amount of payments made to any party and any other terms and conditions of settlement.
If the arbitrators grant expungement relief, the Arbitration Code also requires that they briefly explain in the award the factual basis for finding that expungement is appropriate under one or more of the Rule 2080 standards.

If you have questions about FINRA arbitration, please contact the experienced securities attorneys at Maya Murphy, P.C. at (203) 221-3100 or at JMaya@Mayalaw.com.

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Extension of FINRA Arbitration Deadlines

No claim shall be eligible for submission to FINRA arbitration under the Code where six years have elapsed from the occurrence or event giving rise to the claim. The panel will resolve any questions regarding the eligibility of a claim under this rule. If a party submits a claim to a court of competent jurisdiction, the six-year time limitation will not run while the court retains jurisdiction of the claim matter. (FINRA Rule 13206).

The parties to a FINRA arbitration may agree in writing to extend or modify any deadline for:

• Serving an answer;
• Returning arbitrator or chairperson lists;
• Responding to motions; or
• Exchanging documents or witness lists.

If the parties agree to extend or modify a deadline under this rule, they must notify the Director of the new deadline in writing. The panel may extend or modify any deadline listed in paragraph (a), or any other deadline set by the panel, either on its own initiative or upon motion of a party. The Director may extend or modify any deadline or time period set by the Code for good cause. The Director may also extend or modify any deadline or time period set by the panel in extraordinary circumstances. (FINRA Rule 13207).

If you have questions about FINRA arbitration, please contact the experienced securities attorneys at Maya Murphy, P.C. at (203) 221-3100 or at JMaya@Mayalaw.com.

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FINRA’s Code of Arbitration Procedure for Industry Disputes

Failure to Act Under Provisions of Code of Arbitration Procedure for Industry Disputes

Amongst other rules, FINRA’s Code of Arbitration Procedure for Industry Disputes requires that a dispute must be arbitrated under the Code if the dispute arises out of the business activities of a member or an associated person and is between or among:
• Members;
• Members and Associated Persons; or
• Associated Persons. (FINRA Rule 13200).

It may be deemed conduct inconsistent with just and equitable principles of trade and a violation of Rule 2010 for a member or a person associated with a member to:

(a) fail to submit a dispute for arbitration under the Code as required by the Code;
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(b) fail to comply with any injunctive order issued pursuant to the Code;

(c) fail to appear or to produce any document in his possession or control as directed pursuant to provisions of the Code;

(d) fail to honor an award, or comply with a written and executed settlement agreement, obtained in connection with an arbitration submitted for disposition pursuant to the rules applicable to the arbitration of disputes before FINRA or other dispute resolution forum selected by the parties where timely motion has not been made to vacate or modify such award pursuant to applicable law; or

(e) fail to comply with a written and executed settlement agreement, obtained in connection with a mediation submitted for disposition pursuant to the procedures specified by FINRA.

All awards shall be honored by a cash payment to the prevailing party of the exact dollar amount stated in the award. Awards may not be honored by crediting the prevailing party’s account with the dollar amount of the award, unless authorized by the express terms of the award or consented to in writing by the parties. Awards shall be honored upon receipt thereof, or within such other time period as may be prescribed by the award.

It may be deemed conduct inconsistent with just and equitable principles of trade and a violation of Rule 2010 for a member to require associated persons to waive the arbitration of disputes contrary to the provisions of the Code of Arbitration Procedure.
If you have questions about FINRA arbitration, please contact the experienced securities attorneys at Maya Murphy, P.C. at (203) 221-3100 or at JMaya@Mayalaw.com.

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Disclosures Required of FINRA Arbitrators

Before appointing the panel of FINRA arbitrators, the Director will notify the arbitrators of the nature of the dispute and the identity of the parties. Each potential arbitrator must make a reasonable effort to learn of, and must disclose to the Director, any circumstances which might preclude the arbitrator from rendering an objective and impartial determination in the proceeding, including:
(1) Any direct or indirect financial or personal interest in the outcome of the arbitration;
(2) Any existing or past financial, business, professional, family, social, or other relationships or circumstances with any party, any party’s representative, or anyone who the arbitrator is told may be a witness in the proceeding, that are likely to affect impartiality or might reasonably create an appearance of partiality or bias;
(3) Any such relationship or circumstances involving members of the arbitrator’s family or the arbitrator’s current employers, partners, or business associates; and
(4) Any existing or past service as a mediator for any of the parties in the case for which the arbitrator has been selected.

The obligation to disclose interests, relationships, or circumstances that might preclude an arbitrator from rendering an objective and impartial determination described in paragraph (a) is a continuing duty that requires an arbitrator who accepts appointment to an arbitration proceeding to disclose, at any stage of the proceeding, any such interests, relationships, or circumstances that arise, or are recalled or discovered.

The Director will inform the parties to the arbitration of any information disclosed to the Director under this rule unless the arbitrator who disclosed the information declines appointment or voluntarily withdraws from the panel as soon as the arbitrator learns of any interest, relationship or circumstance that might preclude the arbitrator from rendering an objective and impartial determination in the proceeding, or the Director removes the arbitrator. (FINRA Rule 13408).

If you have questions about FINRA arbitration, please contact the experienced securities attorneys at Maya Murphy, P.C. at (203) 221-3100 or at JMaya@Mayalaw.com.

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