Bad Advice -Ignore FINRA Social Media Guidance

Securities regulation is a big deal for those in the industry. The mix of rules, regulations and regulators is a dangerous web of potential violations, fines and suspensions. But those who are in the industry know that the regulators are serious, that they are looking for violations, and will bring actions for those violations.

Maybe it is a sign of the Madoff times, but I can't help but shutter when I read comments from supposedly educated and experienced people who comment on rules and regulations. We all know that FINRA has released its social media guidelines. And we know that like most topics, there can be more than one opinion on the impact of new pronouncements.

Some think that the guidelines are too vague, and therefore meaningless. The vagueness that they are referring to is a desire to meet two goals - first to insure that new rules and regulations address a wide range of situations, and second, to allow firms to create their own supervisory system to meet the challenges of their particular mix of issues. For the inexperienced, bright line tests are better because they are easier. The experienced prefer principle-based regulation - tell me what you want to accomplish, and I will figure out the best way for me and my firm to get there.

But that claim of vagueness has led to another unfortunate, and potentially dangerous conclusion. From a legal blog today, talking about FINRA's social media guidelines:

Investing blogs seem to be eyeing the rules with a wary eye, but the consensus seems to be something a long the lines of "it's impossible for them to enforce this, and they're probably not going to be too aggressive anyway."

I hope that any financial professional who is guided by that statement has my business card on his desk. He is going to need it shortly.

FINRA is taking this seriously, and is already requesting documents regarding the use of Facebook, LinkedIn and Twitter. It is not impossible for them to monitor the use of social media, they will do so, and will seek sanctions for misuse.

Investors Filing Claims Against Lehman Brokers

Investors are starting to file arbitration claims against their Lehman brokers, in an attempt to collect their losses on investments in Lehman principal protected notes. I warned of this eventuality some time ago, as customers who lost money in the notes are going to look to recover those losses. Obviously suing Lehman is not going to accomplish anything, but some customers and their attorneys believe that suing the broker just might.

Lehman brokers have been through quite a bit. These professionals relied management's statements that "all is well" with the company, and were blindsided by the failure of Lehman.  The demise of Lehman was devastating for many, for not only did they lose their jobs, they lost their investments, their deferred compensation and for many, their retirement funds, which were invested in Lehman stock.

Now the other shoe is dropping. Many Lehman brokers recommended the principal protected notes to their customers, relying on the information provided to them by Lehman itself. With the corporation gone, these brokers are being forced to defend themselves from claims for those losses - in effect paying twice for the failure of their employer.

Those claims are going to be difficult for the customers to win, but the brokers still have to defend themselves from the claims. Should a customer prevail in an arbitration and obtain an award, that award has to be paid in 30 days, or the broker's securities license will be suspended. And an arbitration award can be confirmed in a court, at which time it becomes a judgment, enforceable like any other judgment.

The solution? Unfortunately there is no good solution. If customers are going to blame their broker for the demise of Lehman, the brokers must defend themselves. Using an experienced securities arbitration defense attorney is the first step, and hiring one who is familiar with Lehman principal protected notes is another. These cases will be difficult for the customer to win, but the experience of the attorney will not only provide a better chance for success, it might even result in reduced defense costs, as there is no learning curve.
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Mark Astarita, Esq. is a securities attorney who represents brokers and firms in every aspect of their litigation, compliance and regulatory matters. He can be contacted at 212-509-6544 or by email at astarita@beamlaw.com

Merrill Hiring Rookies

In order to combat the mass of brokers who left ML since the BofA takover, Bank of America plans to rebuild its brokerage force in 2010 by adding rookie advisors rather than competing for talent in the industry’s expensive recruiting war according to a story in Registered Rep and Financial Times. Maybe Merrill is rethinking its "strategy" of firing brokers for trumped up reasons and forcing others to leave?
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FINRA Fines Firm $300,000 For Failing to Verify Account Identity

For those readers who think that the requirement to verify the identity of account holders is not a big deal, think again. FINRA has fined Pinnacle Capital Markets $300,000 for failing to do exactly that.

The FINRA press release does not have any comments from the firm, but I suspect that because the accounts were sub-accounts, the firm may have believed that verification was not necessary. I am guessing of course, but the point is $300,000 is a pretty hefty fine for not obtaining proper account documentation. More>>>

Brokers, Advisers, LinkedIn and Twitter

I was a panelist in January for a webinar on Investment Advisers and LinkedIn. We were all set to go, my slides were all prepared and submitted, and the day before the webinar FINRA released Regulatory Notice 10-06 – Guidance on Blogs and Social Networking Web Sites.

The timing of the release caused me to scramble a bit to re-work my presentation for the webinar, but it all worked out. It was a great webinar, as the other three panelists were experts on marketing and business practices for financial advisers, with significant experience using social media for marketing. A replay is available at InvestmentNews.com.

As to the release itself, there was nothing very surprising, but the guidance from FINRA was very helpful. The most significant part of the release was the discussion of Twitter, and its use by financial professionals.

A basic premise that underlies all of this is that the use of the Internet, in whatever form, is advertising, or a communication with the public, by FINRA and for investment advisers, the SEC as well as the state regulators. FINRA has specific rules regarding advertising and public communications. However, the rules are somewhat convoluted, and sometimes it is not intuitive when you attempt to apply those rules to new technologies.

One basic tenant of advertising rules that is true across the board – advertising and public appearances must be supervised, archived, and stored. And therein lies the challenge for Twitter and other real-time communications.

FINRA had two choices with Twitter – either treat it as a discussion in a chat room, or treat it as a web site. It’s like a chat room, in that it is real-time, but it is also permanent and lasting, like a web site. The difference is significant, since a web site requires pre-approval by the firm, and a filing with FINRA. A chat room discussion does not require pre-approval or filing. Both require archiving and storage.

For brokers and compliance departments, the distinction is not important; the question is how do you want me to treat these communications? Without guidance, most firms will do what was done with email – they will ban it.

Fortunately, FINRA’s approach to real-time social media, which includes Twitter, Facebook status updates and LinkedIn network updates, is reasonable, and workable. FINRA was faced with two choices, but adopted a third choice – treat tweets and similar posts like email.

Tweets and updates are not like emails from a regulatory perspective, since FINRA has always treated one-on-one emails and one-to-many emails differently, but kudos to FINRA for taking a reasoned and practical approach. The release states that firms may adopt supervisory procedures similar to those outlined for electronic correspondence (email) as set forth in Regulatory Notice 07-59. That notice provides that firms may employ risk-based principles to determine the extent to which the review of incoming, outgoing and internal electronic communications is necessary for the proper supervision of their business.

Allowing firms to treat tweets like email, and permitting firms to decide the best practice for their own business model, is a significant step. Some firms will continue to ban tweets, but others will use software similar to that used to monitor email, and allow their brokers to use Twitter.

This will require firms to adopt written supervisory procedures and train and approve brokers who are going to use social media, and the modification of the software that is used to monitor emails, but that is reasonable, once the software vendors upgrade their systems.

Writing the procedures and providing the training in the newest electronic communications methods may not be a simple task for some firms. However, Twitter has proven itself to be an excellent communications and marketing platform, one that innovative firms, and their brokers, will benefit from.

My next post will deal with LinkedIn and financial professionals. One heads up – think about recommendations and third party links!
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Mark Astarita, Esq. is a securities attorney who represents financial professionals nationwide on all aspects of their business and compliance needs. He has been online for over 20 years. Follow him on twitter at www.twitter.com/astarita

Obama's Hedge Fund Tax

I am certainly no tax maven, but do represent hedge fund managers. According to Bloomberg News "[t]he budget proposes to require general partners at private-equity firms and other investment partnerships such as venture-capital firms and hedge funds to pay ordinary income-tax rates on their compensatory share of profits called “carried interest,” which currently qualifies for the 15 percent capital-gains treatment. That proposal, which would exempt real- estate partnerships, would raise $24 billion.
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President Obama's Budget Contains $1.9 Trillion in Tax Increases

From the Tax Professor Blog:

Follow the link for a roundup of press and blog coverage of the tax increases:

* Associated Press, Obama Budget Would Impose Host of Tax Increases
* ataxingmatter, Obama's FY 2011 Budget
* Bloomberg, Obama Budget Drops Plan for $87 Billion Tax Rise on Companies
* Bloomberg, Obama Seeks $1.9 Trillion Tax Rise on Rich, Business
* Dow Jones, Obama Budget Includes $400 Billion In Business Tax Hikes
* Reuters, Obama Tones Down International Corporate Tax Aims
* TaxVox, Obama’s Mind-numbing Budget
* Wall Street Journal, Budget Would Raise Tax Rates on Wealthy, Limit Deductions
* Wall Street Journal, Plan Would Raise Taxes on Businesses More>>>