Are You Accountable For Staff Members' Compliance Errors?
My sales assistant falsely attested in our firm's records that she had verbally confirmed a check disbursement request with a customer who she thought had emailed the request. In fact, the email was sent by a hacker who was impersonating the client. We've reimbursed the customer, but to what extent, if any, could I be held responsible as her supervisor?
Determining if a particular person is a supervisor depends on whether, under the facts and circumstances of a particular case, that person has the requisite degree of responsibility, ability or authority to affect the conduct of the employee whose behavior is at issue.
A person's actual responsibilities and authority, rather than his or her "line" or "non-line" status, determine whether he or she is a supervisor for purposes of Exchange Act rules.
One pertinent question in this regard is whether you have, or had, the power to affect the sales assistant's conduct.
If so, then the next question is, did you do enough to verify that she was complying with the firm's policies such that you could have prevented the violation from occurring? In some cases, the firm itself may be to blame for "failure to supervise" if its controls were inadequate.
For example, if the policies merely said you would review the log to see if the verbal confirmation occurred, should there have been an additional step to ensure that employees didn't lie?
What is reasonable under the circumstances? Does a supervisor need to call the client to verify that the client was called?
At some point, I think you should be allowed to rely on the fact that employees are supposed to do their job.
However, if you had reason to suspect that your sales assistant was misrepresenting the facts in the log, then that's a different story.
I recently met with a client who questioned his required mandatory distribution. He took too much. I have a feeling that he might call my manager and complain. I have a lot of documentation, including letters I sent telling him the correct amount he needed to take, but he nevertheless asked for more and initialed the change. His additional tax liability due to the excess RMD is about $8,000. Do you think this would be reportable on my U4, and would management consider my documentation as a mitigating factor?
Assuming the client were to complain, it all depends on what the client alleges in such a complaint and how your firm interprets it.
The applicable U4 question is 14I(3), which asks: "Within the past 24 months, have you been the subject of an investment-related, consumer-initiated written complaint … which: (a) alleged that you were involved in one or more sales practice violations and contained a claim for compensatory damages of $5,000 or more (if no damage amount is alleged, the arbitration claim or civil litigation must be reported unless the firm has made a good faith determination that the damages from the alleged conduct would be less than $5,000), or: (b) alleged that you were involved in forgery, theft, misappropriation or conversion of funds or securities."
Obviously, (b) is unlikely, so we'll focus on (a). Assuming that the client claims damages of $8,000, the question then becomes whether the client's allegation would be considered a sales practice violation.
This violation is defined as "any conduct directed at or involving a customer which would constitute a violation of any rules for which a person could be disciplined by any self-regulatory organization."
If the client were to allege, for example, that you were negligent, the only possible "rule for which you could be disciplined" would be the "catchall" in Rule 2010 that requires representatives to observe "high standards of commercial honor and just and equitable principles of trade."
It's possible, however, that you could argue that a simple claim of negligence doesn't fall into that category, but it's difficult to say for sure.
Of course, if the client were to allege that the transactions were "unsuitable," then that clearly implicates Rule 2111.
Remember, the question isn't whether the client can prove it, but simply has he or she filed a complaint that alleges a sales practice violation (with damages in excess of $5,000).
As to whether the firm would consider your documentation in deciding whether to impose any internal discipline, I would expect that it would.
I just learned that one of my reps had an arbitration claim filed against him over three years ago that wound up being dismissed. I don't know why we didn't pick up on this, but my question concerns how to answer the U4 questions or if I even have to file a U4 amendment?
This is a bit tricky. Currently, there would be no "yes" answer required on any of the 14I questions.
The matter is not still pending; it did not result in an arbitration award against the rep; it was not settled; and it's been over 24 months.
However, at the time the arbitration was filed, an amended U4 should have been filed for the rep (presumably by his brokerage firm at the time) answering yes to 14I(1)(a) (named in an arbitration that's still pending) and/or 14I(5)(a) (the subject of an arbitration claim in the last 24 months alleging sales practice violations with damages over $5,000).
That would have created the disclosure reporting page, which then would have been updated with the status when the case was dismissed.
Once the case was dismissed, the matter would be made "nondisclosable" and would not show up on BrokerCheck.
However, if you look at his actual U4, it should be there under the "non-disclosable" section.
If, for some reason, this is not showing up on his CRD report, you should check with FINRA.
If you're responsible for hiring at your firm, don't simply rely on BrokerCheck. Make sure whoever is in charge of background checks looks at the actual CRD report itself.
How can I compensate a "finder"? I have some private placements that I believe are good investments, and I know a number of people with connections to wealthy investors. I want to incentivize them by paying them a finder's fee when they bring me investors. I know a lot of people do this, but I've been told that it violates the securities rules. So how are people getting away with it?
One answer is that they may just have not been caught yet.
Quite frankly, in most cases I've seen of finders being compensated for bringing investors to the table, the parties involved are violating Section 15(a)(l) of the Exchange Act.
The statute generally provides that any broker effecting transactions in securities, or inducing or attempting to induce the purchase or sale of securities, must be registered with the commission.
A person's receipt of transaction-based compensation in connection with these activities is the very definition of broker-dealer activity.
When a finder introduces investors to the issuer, there is generally some prescreening going on of the potential investor to determine their eligibility, as well as preselling of the securities to gauge the investor's interest.
More important, however, the receipt of compensation directly tied to successful investments by the investor is considered "transaction-based compensation" and gives the finder a "salesman's stake" in the proposed transaction.
Accordingly, the finder would require broker-dealer registration. The alternative might be to hire the finder on a flat-fee basis, regardless of the success or failure of the transaction.
The incentive for the finder to do a good job is the promise of continuing the engagement. If he doesn't bring in investors, then you fire him (or don't renew his contract).
Alan J. Foxman is a contributing writer for On Wall Street, a partner in the law firm of Dew Foxman & Haugh and a senior consultant with National Compliance Services in Delray Beach, Fla.