Dual-Registered Advisors Barred From Recommending 401(k) Rollovers

LPL Financial Bars Its Dual-Registered Advisors From Recommending 401(k) Rollovers in Brokerage Capacity

According to an internal advisor memo, LPL Financial is prohibiting its “hybrid” or dual-registered advisors to recommend 401(k)to IRA rollovers to LPL clients in a brokerage capacity. Investment News reports that the policy was adopted in response to the Department of Labor’s new fiduciary rule. The rule imposes fiduciary duties on financial advisors when giving recommendations regarding 401(k) plans.

What are “hybrid” or dual-registered advisors?

LPL Financial is a FINRA-registered broker-dealer, and FINRA-licensed stockbrokers are registered with LPL to sell securities to clients. A broker may also be (but is not required) licensed separately through the SEC as a Registered Investment Advisor (“RIA”). Federal law and regulations already impose fiduciary duties on RIAs when giving investment recommendations. Brokers, on the other hand, may be held to fiduciary duty standards only under certain circumstances or through state law. FINRA rules only mandate that brokers give recommendations that are “suitable” for a customer based on their customer profile. A recommendation may be “suitable,” but is not in the best interest for that customer, which satisfies FINRA rules but violates the higher fiduciary standard.

Why does LPL care?

Under FINRA rules, common law and securities statutes, LPL has supervisory responsibilities over its registered brokers, including its dual-registered broker / RIAs. FINRA has been clear that brokerage firms can’t turn a blind eye to the activities of their brokers when they supposedly are “wearing the RIA hat”. Depending on the circumstances, it may be better for an investor to keep his or her 401(k) plan, even after leaving an employer, because of lower costs or certain tax advantages. If the rollover recommendation is not in the best interest of the client – above even the broker’s own interest – then it could be a breach of fiduciary duty by the broker and by LPL to make the rollover recommendation. Financial losses caused by the unlawful conduct may be recoverable by the investor.

FINRA is the Financial Industry Regulatory Authority, a self-regulatory organization that is responsible for licensing, regulation, and enforcement of rules governing the activities of 3,800 broker-dealers with 633,300 brokers. FINRA also operates the largest dispute resolution forum for customer disputes with their brokers and brokerage firms. Customers can file a claim in FINRA arbitration to initiate proceedings for improper conduct like unsuitable investment recommendations, selling fraudulent investment products, excessive transactions and commissions (“churning”) in an account, and other claims to recover investment losses caused by such improper conduct.

The Investor Defenders attorneys at Samuels Yoelin Kantor LLP represent investors each day who were unlucky in hiring the wrong adviser. We work to recover investment losses caused by negligent portfolio management, unsuitable product sales, excessive transactions (“churning”), and other bad acts.

If you are concerned about the investments or conduct of your financial adviser, contact the Investor Defenders for a free, confidential initial consultation with an experienced securities litigation attorney.  We represent clients nationwide since 1985.

For more information about different types of securities claims, the FINRA arbitration process, current investigations, sample cases and results, and about our attorneys, please call us: 800-647-8130.

See the full Investment News article about LPL Financial’s on their website.

George Merhoff and Energy Stocks – The Investigation Continues

The Investigation of Klamath Falls Financial Advisor George Merhoff Jr. and Cetera Investments, Pacific West Securities, Inc. Continues

Customer Concerns Grow About Energy Stock Concentration and George Merhoff

Our office continues to investigate Cetera Investments and its representative George Merhoff Jr. Since our last reporting, even more investors have called us to report that they suffered significant losses in their accounts as a result of having virtually all of their investments in energy stocks. We continue to evaluate how widespread this problem is for our clients and potentially others who were customers of George Merhoff. Mr. Merhoff is currently a registered representative of Cetera Investments, and was previously a registered representative of Pacific West Securities, Inc.

If you are or were a customer of George Merhoff and are willing to share your information with us that might help us in this investigation, or if you have lost money in another investment or have concerns about the conduct of another financial advisor, please call our office at 800-647-8130 for a confidential, and free no obligation consultation.

Is Your Investment Portfolio Over-Concentrated in Energy Stocks?

Here is why we are conducting our investigation: When a portfolio is heavily weighted in one particular industry sector, we refer to it as a non-diversified, over-concentrated account. Over-concentration increases volatility and risk in investment portfolios. Licensed securities stockbrokers and have an obligation under the law and FINRA Rule 2110 to recommend only suitable investments and trading strategies, based upon the particular customer’s risk tolerance, investment objectives, investment experience, time frame, and other factors when recommending an investment. If a broker recommends the same types of concentrated energy sector portfolios to a broad array of clients, regardless of their needs for safety and moderation, that suggest that the securities laws may have been violated.

What is FINRA and what is the Suitability Rule?

FINRA (the Financial Industry Regulatory Authority) is the self-regulatory organization that is authorized by Congress to regulate the securities industry.

That includes brokers and brokerage firms. FINRA has various rules to do this including Rules 2110 and 2111, which provide that a broker’s investment recommendations must be “suitable” for the customer. Suitability includes reasonable-basis suitability (that the investment or investment strategy is suitable for at least some investors), customer-specific suitability (the recommendations are suitable for that specific customer), and quantitative suitability (that a series of recommended transactions, even if suitable in isolation, when considered together are not excessive and unsuitable for that customer). Violations of the FINRA suitability rules may implicate other laws such as negligence and breach of fiduciary duty, and financial losses caused by the unlawful conduct may be recoverable by the investor.

Do you have questions about losses in accounts managed by Cetera Investments or George Merhoff?

The fact that you invested with Mr. Merhoff or Cetera does not necessarily mean that there was wrongdoing. However, if your account was over-concentrated in energy stocks and you did not ask for those investments, we would like to hear from you. Bob Banks, a nationally recognized securities attorney, has fought for investors in court and FINRA arbitration since 1985. He has successfully represented investors in over-concentration cases where there has been a failure to diversify investments. He leads the Investor Defenders practice group at Samuels Yoelin Kantor LLP. If you have lost money in an investment, or if you have any concerns about the conduct of your financial adviser, please contact us, or call our office at 800-647-8130 for a free no obligation consultation.

Before Hiring a Financial Professional – Ask These Questions

It’s a new year and you’re looking to hire a broker or investment advisor to help you with your financial planning and investment decisions. What questions should you ask at that first meeting? FINRA recently released an Investor Education top 5 questions to ask:

1. What experience do you have working with people like me?

2. Are you registered with FINRA, the SEC or a state securities regulator?

3. Do you or your firm have an overarching investment philosophy?

4. Do you or your firm impose any minimum account balances on customers?

5. How do you get paid?

Before you entrust your retirement or other savings with a financial professional, it’s important that you understand the answers to these and other questions.

The Investor Defenders attorneys at Samuels Yoelin Kantor represent investors each day who were unlucky in hiring the wrong adviser. We work to recover investment losses caused by negligent portfolio management, unsuitable product sales, excessive transactions (“churning”), and other bad acts.

Investor Defender attorneys Robert S. Banks Jr. and Darlene Pasieczny have the experience, knowledge, and dedication to help you. Since 1985, they have represented clients nationwide. If you have concerns about your investments or the conduct of your financial adviser, please contact us for a free, confidential initial consultation with an experienced securities litigation attorney. For more information about different types of securities claims, the FINRA arbitration process, current investigations, sample cases and results, and our attorneys, visit our website at InvestorDefenders.com and SamuelsLaw.com.

Form U5 Information Gets to BrokerCheck Faster with New FINRA Rule Change

Effective December 12, 2015, certain information provided on the registration termination paperwork (Form U5) for a brokerage firm or terminated broker will be accessible on BrokerCheck in 3 business days instead of 15. The SEC approved the proposed change to FINRA Rule 8312 (FINRA BrokerCheck Disclosure). The Form U5 includes important information for investors researching brokers or firms on BrokerCheck, including whether a broker was fired from a firm and the reason given by the firm for termination.

See the full FINRA Regulatory Notice 15-49.

BrokerCheck and other investor educational materials are available on FINRA’s website.

Investor Defender attorneys Robert S. Banks Jr. and Darlene Pasieczny have the experience, knowledge, and dedication to help you. Mr. Banks himself has over 30 years experience representing investors in recovering millions of dollars in investment losses, and he has served on FINRA’s own National Arbitration and Mediation Committee. If you have concerns about your financial advisor or investment portfolio, please contact us and visit our website at investordefenders.com.

LPL Financial In Trouble Again For Improper Sales of Non-Traded REITs

The North American Securities Administrators Association (NASAA) announced Wednesday a settlement with brokerage firm LPL Financial. The settlement is the result of a multi-state investigation led by the Nevada Secretary of State Securities Division into LPL’s failure to implement adequate supervisory systems and failure to enforce its own written procedures regarding sales of non-traded REIT shares.

Under the terms of the settlement, in addition to remediating certain investor losses, LPL will pay civil penalties of $1.425 million to be distributed among 48 states, the District of Columbia, Puerto Rico, and the U.S. Virgin Islands. LPL already reached a prior settlement with Massachusetts’s securities regulators in 2013, and a separate action by New Hampshire securities regulators is still pending.

This is only the latest sanction against LPL for improper sales of non-traded REIT shares to investors. In May, 2015, the Financial Industry Regulatory Authority (FINRA) ordered LPL to pay about $10 million for broad supervisory failures in the sales of non-traded REITs, non-traditional exchange-traded funds (ETFs), certain variable annuities and other complex products.

My advisor sold me a non-traded REIT…. I didn’t understand the risks. Can I get my money back from these state regulator settlements?

If you have any concerns about a sizable non-traded REIT purchase, contacting an attorney experienced in representing investors in securities litigation and FINRA arbitration is your first stop.   While the recent settlements between LPL and other brokerage firms with state securities regulators may include some limited compensation for certain investors, only a private action in court or FINRA arbitration is the best chance to rescind (unwind) an unsuitable investment sale, or otherwise recover your investment losses from improper investment recommendations.

What’s so Risky About Non-Traded REITs?

  • Not a “liquid” investment. Non-traded means not traded on a public securities exchange. It may be that the only way an investor can re-sell the shares is to take pennies on the dollar in a private secondary market.   A financial advisor should clearly explain this to you before you invest, and you should be willing to take the risk of not having access to your investment. Be wary if your advisor tells you not to worry, that the company will buy it back, or that they can make special arrangements for a sale. A non-traded REIT may occasionally offer to buy back a limited amount of investor shares at some highly discounted value, but the company is not required to do that and it is impossible to predict if or when it may happen.
  • Expected holding time can be long (7-10 years) and may never end. The idea behind a REIT is that it is a pooled investment fund for income-producing real estate with special tax breaks under the Internal Revenue Code. At some point, the real estate project may fully develop and the company has a “liquidity event” – the first date when an investor can sell his or her shares. But, that date can be years away – or never occur – if the underlying real estate investments are unsuccessful.   Retail investors are unsecured creditors if the company goes belly-up, putting you at the end of the line for a payout. Be wary if your advisor recommends a non-traded REIT without explaining the risk of a long time horizon or total loss of your investment, in particular if you are 60+ years old and thinking about retirement needs.
  • High front-end fees that may not be disclosed end up costing investors. Those fees can be up to 16%, so the $10,000 you put in is really only an $8,400 investment. That makes a big difference over time as to how dividend payments are calculated and your principal investment value.

A recent study by the Securities Litigation & Consulting Group found that investors are about $50 billion worse off for having put money into non-traded REITs, versus exchange-traded REITs (which do exist).

  • Those same front-end fees mean big commissions for the financial advisor. Your broker might earn 8 – 10% on the sale of a non-traded REIT. This can create an incentive to recommend unsuitable products to the investor. Be wary if your advisor does not (or cannot) explain the illiquidity, long time horizon, higher risk of loss of investment, and high costs of purchasing a non-traded REIT.

These are some of the most prominent risks of non-traded REIT sales. Many brokerage firms, not only LPL Financial, have been sanctioned for supervisory failures and other sales practice violations regarding these risky products. Whether a non-traded REIT is a suitable component of an investment portfolio is a case-by-case analysis, and the Investor Defender attorneys at Samuels Yoelin Kantor LLP may be able to help recover your money.

Investor Defender attorneys Robert S. Banks Jr. and Darlene Pasieczny have the experience, knowledge, and dedication to help you. Mr. Banks himself has over 30 years experience representing investors in recovering millions of dollars in investment losses, and he has served on FINRA’s own National Arbitration and Mediation Committee. If you have concerns about your financial advisor or investment portfolio, please contact us and visit our website at investordefenders.com.

LPL Financial – More Supervisory Failures in Sales of ETFs, Annuities, REITs

FINRA announced yesterday that as part of a settlement reached with brokerage firm LPL Financial LLC, it is fining LPL $10 million for broad supervisory failures over multiple years and ordered almost $1.7 million in restitution to certain LPL customers. The sanctions are for LPL’s supervisory failures including failure to adequately supervise LPL broker sales of certain complex and often risky products such as non-traditional exchange-traded funds (ETFs), variable annuities, non-traded real estate investment trusts (REITs), and certain fee-generating transactions such as surrendering annuities or selling existing mutual funds to purchase others (“switching”).

This is only FINRA’s latest sanction of LPL, and in particular it highlighted LPL’s improper sales of non-traditional ETFs (leveraged, inverse, and inverse-leveraged ETFs). FINRA ordered LPL to pay approximately $1.7 million in restitution to 327 customer account entitled to receive payments ranging from $1.02 to $86,034.97 within 120 days.

We encourage FINRA Enforcement’s regulatory actions against brokerage firms that harm investors by failing to adequately supervise their brokers. However, most of these disciplinary fines do not go back to the harmed investors to compensate for their investment losses.

Our firm has successfully represented investors nationwide in claims against LPL Financial and other firms selling non-traded REITS, non-traditional ETFs, variable annuities, and for practices that ring up high fees such as improper churning and switching in an account. We recover money for our clients both in court and in the FINRA arbitration process. We continue to investigate firms that sell these products and allow improper handling of brokerage accounts. We welcome calls from investors with questions about their investments or suspicious account activity.

Samuels Yoelin Kantor LLP attorneys Robert S. Banks, Jr. and Darlene Pasieczny have more than 35 years combined experience representing investors in securities industry disputes and FINRA arbitration across the United States. Our clients include institutional investors, pension funds, municipalities, fiduciaries, as well as individual investors. If you have concerns about your financial advisor or investment portfolio, please contact us. For more information about SYK’s Investor Defenders litigation team and securities litigation, visit us online.

This Blog is made available for educational purposes only and incorporates information from the web as well as to give you general information and a general understanding of the law, not to provide specific legal advice. By using this blog site you understand that there is no attorney client relationship between you and Samuels Yoelin Kantor LLC., The Blog opinions should not be used as a substitute for competent legal advice from a licensed professional attorney in your state.

New FINRA/SEC Report: Sales Practices Targeted at Seniors

As part of the “National Senior Investor Initiative”, in 2013 FINRA and the SEC conducted 44 examinations of brokerage firms that focused on how firms conduct business with senior investors (defined as age 65 and older) as they prepare for and enter retirement.  A newly issued report gives the results.

The exams found that among the top five revenue-generating securities based on sales to senior investors were the following:

  • Open-end mutual funds (77% of the examined firms)
  • Variable annuities (68% of the examined firms)
  • Equities (66% of the examined firms)
  • Fixed income investments (25% of the examined firms)
  • Unit Investment Trusts (UITs) and Exchange Traded Funds (ETFs) (almost 25% of the examined firms)
  • Non-traded REITs (almost 20% of the examined firms)
  • Alternative investments such as options, exchange-traded notes, hedge funds, private placements, Business Development Companies (BDCs), and leveraged inverse ETFs (about 15% of the examined firms)
  • Structured products such as structured notes and other market-linked securities, reverse convertible notes, principal-protected notes, and collateralize debt obligations. (11% of the examined firms)

Variable annuities, UITs, ETFs, non-traded REITS, alternative products and structured products often carry increased risks of investment loss and penalties for early withdrawal or an inability to liquidate that are inappropriate for senior investors needed access to retirement funds. These are complicated products that are not always explained when sold to investors. And many of these products are inappropriate for an individual retirement account (IRA). Variable annuities in retirement accounts are often completely unsuitable because any tax advantages of those products are lost in an IRA account.

The report notes that in the 44 exams:

“Staff found evidence indicating that 34% of the [examined] firms made one or more potentially unsuitable recommendations of variable annuities.”

“Approximately 14% of firms made potentially unsuitable recommendations to purchase alternative investments, which can be difficult to value, involve high purchase costs, have limited historical data, and often lack liquidity. For example, at one firm, representatives failed to consider the age (90) and low income of one investor, and the limited investment experience and ‘growth and income’ investment objectives of another. These senior investors held the positions for less than ten days and experienced significant realized losses.”

If you are a senior investor concerned about your investment portfolio or particular products, contact us for a free consultation.

Investor Defender attorneys Robert S. Banks, Jr. and Darlene Pasieczny represent investors in securities industry disputes in FINRA arbitrations across the U.S.   Bob Banks himself has over 33 years of experience in securities litigation and FINRA arbitration, and has served multiple times on the National Arbitration and Mediation Committee, an advisory board to FINRA on its rules, regulations, and procedures.  We know the rules, and we fight for our clients in recovering investment losses.

Previous posts on investment products:

Are FINRA Arbitration Hearings for Securities Disputes Public Record?

We are sometimes asked whether FINRA arbitrations are public.   Anyone can go to a courthouse and observe a hearing or trial unless there are good reasons for the court to order the proceeding closed to the public. However, FINRA arbitration hearings are private proceedings.   That means that only the parties and their attorneys, expert witnesses and the arbitrators may attend the entire arbitration hearing. Fact witnesses are called, but normally they are only present during their own testimony.  Members of the public and other interested persons are generally not allowed to attend FINRA arbitration hearings. Even regulators are not permitted to attend FINRA arbitrations.

While FINRA Awards issued by arbitrators are publicly available through the FINRA Awards Online Database, all materials submitted to FINRA by the parties in a case (such as the Statement of Claim and Answer) are deemed “confidential” and are not made publicly available by FINRA. While an Award will usually give a brief outline of the claims and allegations, the arbitrators are not required to give their reasoning for a decision unless both sides request it. Combined with the private proceedings, that makes it very difficult for a claimant (or attorney unfamiliar with securities claims in FINRA arbitration) to research and understand how similar claims may have been made and argued in other cases.

Having an Attorney Familiar with Securities Claims in FINRA Arbitration Matters

Attorneys Robert S. Banks, Jr. and Darlene Pasieczny use their experience representing claimants in FINRA arbitration across the U.S. at every step of the process, including evaluating claims before filing a case and understanding the procedural rules for effective advocacy. And we are sitting right next to our clients throughout the entire arbitration hearing. As senior counsel, Robert S. Banks, Jr. personally has over 32 years of experience representing investors in FINRA (formerly NASD) arbitration, and has served on FINRA’s own rule-making committees for a deep knowledge of the process.

Do You have a FINRA Arbitration Claim?

Most securities industry disputes – whether an individual investor suing a broker or brokerage firm for improper conduct such as churning an account, negligence, margin calls, unsuitable recommendations, failure to supervise, unauthorized trading, or misrepresentation of an investment, or an intra-industry dispute by a broker against a firm for improper termination, unpaid wages, promissory notes, or form U5 reporting – are handled through FINRA Dispute Resolution and FINRA arbitration. That’s because pre-dispute arbitration clauses are found in almost all brokerage account agreements and registered representative agreements with brokerage firms. A series of U.S. Supreme Court decisions over the past few decades have upheld that those arbitration clauses are usually binding and enforceable.

Investor Defender attorneys Robert S. Banks, Jr. and Darlene Pasieczny at Samuels Yoelin Kantor have the knowledge you want in fighting for investment loss recovery or intra-industry disputes. Our clients include institutional investors, pension funds, municipalities, fiduciaries, as well as individual investors. For a free initial consultation and more information about Samuels Yoelin Kantor’s Investor Defenders litigation team and securities litigation visit: http://investordefenders.com/

FINRA Sanctions Oppenheimer $3.75 Million for Failure to Supervise Ex-Broker Mark Hotton

FINRA announced on March 26, 2015 that it had fined brokerage firm Oppenheimer & Co. Inc. $2.5 million and ordered it to pay $1.25 million in restitution based on failing to supervise its former registered representative Mark Hotton.  Hotton was permanently barred from the securities industry in August, 2013 after stealing money from his clients and excessively trading in client accounts. FINRA found that Oppenheimer had failed in its supervisory responsibilities because the firm: failed to adequately investigate Hotton’s background prior to hiring him (missing the seven customer complaints and other criminal charges); failed to put Hotton on heightened supervision despite knowing that his business partners had sued him for several million dollars based on fraud allegations; failed to respond to “red flags” such correspondence and wire transfer requests that showed Hotton was wiring funds from Oppenheimer client accounts to entities owned or controlled by Hotton; and failed to respond to “red flag” internal surveillance that showed Hotton was trading in client accounts at presumptively excessive levels.

The sanction also reflects FINRA’s frustration with Oppenheimer, which failed to make more than 300 required filings to FINRA about Hotton and other brokers in a timely manner, and failed to provide timely responses to requests for information.

Hotton’s FINRA BrokerCheck report shows 30 reported disclosure events including 24 customer disputes and 2 criminal events.

Samuels Yoelin Kantor LLP attorneys Robert S. Banks, Jr. and Darlene Pasieczny have over 35 years combined experience in representing investors in securities industry disputes in court and FINRA arbitration across the United States. Our clients include institutional investors, pension funds, municipalities, fiduciaries such as trustees, as well as individual investors. If you have concerns about your financial advisor or investment portfolio, contact us. For more information about SYK’s Investor Defenders litigation team and securities litigation, visit our investment claims page.

Investor Confusion from Misleading Brokerage Industry Advertising – When is Your Advisor a Fiduciary?

On March 25, the Public Investors Arbitration Bar Association (PIABA) released its study of confusing advertising messages by major broker-dealer firms like Allstate, UBS, Morgan Stanley, Berthel Fisher, Ameriprise Financial, Merrill Lynch, Fidelity Investments, Wells Fargo, and Charles Schwab. While these firms advertise that they put their clients’ interest first, excerpts from FINRA arbitration filings by these same firms show that when there’s a customer dispute the firms disavow any fiduciary obligation to the client.

Why should you care? Customers expect that financial advisors act in their client’s best interest when making investment recommendations. But that’s not always true. The “fiduciary” standard is the highest level of legal duty, with important ramifications as to the responsibilities of the advisor and types of claims that can be made in court or FINRA arbitration. But, the current reality is there is no uniform fiduciary standard among financial advisors. FINRA-registered brokers and brokerage firms selling investment products have no such duty imposed by federal law. Brokers can essentially put their own interest first – such as the incentive of high commissions for selling products like non-traded REITs, high-fee proprietary mutual funds, or variable annuities – so long as they meet a much lower FINRA standard of reasonably suitable recommendations. In contrast, SEC-licensed Registered Investment Advisors and RIA firms, which provide investment advice but can’t sell products the way a broker can, do have fiduciary duties under the federal Investment Advisers Act of 1940. State law differs, with some states holding brokers to the higher fiduciary standard based on the circumstances.

What happens when your financial advisor is both a FINRA-registered broker and SEC-licensed RIA? Well, that’s where it gets even trickier.   Depending on the type of investment account, the firm may hide behind the advisor wearing only a “broker” hat (for example, in a non-discretionary brokerage account) despite charging wrap fees or other “managed” fee arrangements.

US News & World Report picked up the PIABA study and Daniel Solin wrote about it, saying “It’s funny that there’s even a “debate” over whether brokers should be required to act in the best interest of their clients. It’s even more nonsensical that many investment advisors to retirement plans don’t have this obligation.”

Samuels Yoelin Kantor LLP attorneys Robert S. Banks, Jr. and Darlene Pasieczny have combined over 35 years of experience in representing investors in securities industry disputes in court and FINRA arbitration across the United States. Our clients include institutional investors, pension funds, municipalities, fiduciaries such as trustees, as well as individual investors. If you have concerns about your financial advisor or investment portfolio, contact us. Visit our investment claims site for more information about SYK’s Investor Defenders litigation team and securities litigation.