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>>>

FINRA Releases Social Media Guidance For Brokers

FINRA released its Regulatory Notice on Communications with the Pubic Through Social Networking Web Sites today, a full month ahead of schedule. The notice will undoubtedly become the standard by which firms, and FINRA, will gauge compliance in the use of sites such as LinkedIn, Facebook and Twitter. While some firms may still prohibit the use of these sites, others may take some level of comfort in the release, and permit limited use of these sites by registered persons. It is Regulatory Notice 10-06.

I am a panelist on a webinar tomorrow, Advisers and LinkedIn: What you can, cannot and should be doing - and will be discussing the implications of the Notice. The webinar is free, and registration information is available at
http://www.investmentnews.com/apps/pbcs.dll/article?AID=/20100110/STATIC/100119998

2009 Good Year for Most Hedge Funds

Although more than 20% of hedge funds shut down in the past two years, as 1,500 funds were liquidated in 2008 and 900 more in 2009, the Morningstar 1000 Hedge Fund Index ended the year up an impressive 19.5%, just missing 2003’s 20.3% rise, according to preliminary data from Morningstar, and the currency-hedged Morningstar MSCI Hedge Fund Index, finished the year up 14.1%. Details are at Financial-Planning.com. More>>>

TARP Payback Widens Losses At BofA

Bank of America lost $5.2 billion over the last three months of 2009. Things aren't going so well over there. Losing 5 BILLION dollars in three months is quite an accomplishment. However, $4 billion of that was in charges related to its repayment of $45 billion in TARP loans. At least the taxpayers recouped 45 billion dollars. More>>>

Has anyone seen a summary of what was loaned under TARP, what has been paid back, and what the American people are out of pocket to date?

Compensation Cuts Leads to Broker Transitions

In my practice I have seen a huge increase in the number of wirehouse brokers who are changing firms, as those firms consolidate and attempt to increase their profits.

Unfortunately for some, the wirehouses are ramping up profits at the expense of their brokers, and ultimately, their customers. In all of the years that I have been representing wirehouse brokers, I have never seen such a large number of brokers who are being terminated on the basis of trumped up charges. I certainly understand the need and desire to run a compliant firm, and to weed out brokers who have difficulty following the rules. And I am aware that brokers, like everyone else, tend to downplay their own culpability in such matters. But really, some of these terminations are simply beyond the pale, and nothing more than an asset grab.

I have been saying for almost a decade that the wirehouses want to get rid of brokers and move their business model to salaried employees. See my column from the January 1998 issue of Research Magazine - Death of a Salesman. But now there is a new attack - lower payouts.

It started with the small producers - who can forget Bank of America's decision to cut payouts for brokers on the banking side by 50%, causing a exodus of brokers from the firm, and a mess of promissory note arbitrations.

Citigroup, never the friend to its brokers, apparently has plans to force its brokers into a fee based model, regardless of what the customers want, or need. In an article titled "FAs Disgruntled over New Comp Plan at Citi Personal Wealth Management", David Geracioti, the editor-in-chief of Registered Rep magazine, details the information he has received regarding this forced transition from broker to investment adviser.

As Mr. Gercioti points out, brokers are upset; and leaving. Just take a look at the discussion at the Advisor Forum at Registered Rep titled "Citi PWM Exodus" for a peek at what some brokers are facing, and thinking.

Certainly, in many instances, the fee based model works for customers, and brokers. In many cases, it aligns the interests of the broker with the interests of the customer, and both do well if the assets increase in value, without any selling pressure on the broker or the customer.

But it doesn't work well for everyone. Customers with fixed income accounts, customers who adjust their portfolios once a year, and a host of others, will pay lower fees with a commission based account. Unless of course you lower the management fee to less than a percent.

Citigroup would obviously love to get rid of brokers, and the payouts, and it just may get its wish. Brokers are leaving. If a broker wants to be an RIA, he certainly can do so without the heavy hand of a wirehouse.

Setting up an investment advisory firm, using the platform of a major broker-dealer like Fidelity, is not expensive, nor is it difficult. For the enterprising professional, it is an excellent business model. For an overview of what is involved, take a look at my article, Registration and Regulation of Investment Advisers at SECLaw.com and our update of the SEC publication, Guide to Broker-Dealer Registration.

Or, becoming an independent, and associating with an independent broker-dealer. Doing so lets brokers do exactly what they and their customers need - the flexibility to use a commission based model when appropriate, or a fee based model for those customers who need that model.

Some brokers are reluctant to go into business on their own, and certainly some customers will be reluctant to leave a "big" name like Citigroup. Brokers who stay may find their compensation continually reduced, being forced into teams, and their smaller accounts sent to a call center. Ultimately, the firms will keep the assets, and continue to have less overhead, and more profit, all to the detriment of the financial professionals who cultivated those relationships and serviced those clients.

Does the big name make a difference? I am sure it does. But given the recent financial crisis, are customers still impressed with those "big" name wirehouses? Do customers really believe that those firm offer better advice than an independent? Are they in better financial shape than their competitors? Aren't customers really relying on the relationship with their financial adviser?

Time will tell, but like the brokers in the Registered Rep forums and those who are calling my office, the outlook is not good.

Naturally, any move needs the assistance of professionals, including an experienced securities attorney. Creating an investment advisory firm is not difficult, but requires guidance through the regulatory maze. But all of that can be achieved with effort, and the cost is going to be less than the loss that you will incur over the course of a single month.

My firm offers free consultations to financial professionals who are seeking to change firms, join independents or to start their own RIAs or broker-dealers. Feel free to email me at astarita@beamlaw.com, or to call 212-509-6544 to discuss the possibilities.

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Nationwide Financial Tells Advisors To Find New BDs

Nationwide Financial has advised its independent financial advisers to find new broker-dealer relationships before April 30, according to Investment News.

The article states that the move is intended by Nationwide to focus its efforts on its proprietary sales force and to expand its insurance business.

Independent brokers have a number of choices for new affiliations, as there are any number of independent firms that are available, depending on the needs of the adviser and his clients. I would like to remind brokers that these agreements should be reviewed by an attorney prior to moving to a new firm, as there are a number of clauses which could cause difficulties down the road. While many brokers believe that employment agreements, promissory notes and related contracts are not negotiable, many are, depending on the circumstances. Additional consulting an attorney before entering into any type of agreement involving your career and clients is money well spent, if for no reason other than to prevent surprises down the road.
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