Friday, January 25, 2019

2018 FINRA Exam Report: Does Your Investment Portfolio Need a Legal Audit?

The Financial Industry Regulatory Authority (“FINRA”) released its 2018 Examination Findings Report on December 7, 2018.  This examination report recounts specific areas in which FINRA members are not measuring up to industry standards.  So, if your investment advisers just sent to you statements for your investment portfolio and you think perhaps it’s not what you expected, then it may be because they engaged in some of the substandard practices as identified by FINRA in this report. And if you have those concerns, then it may be advisable to have a legal audit of your investment portfolio performed by experienced securities industry attorneys.

Two significant areas that require better accountability in the industry as highlighted by FINRA in its 2018 report are (1) product suitability and (2) abuse of authority.  Product suitability is just what it sounds like.  FINRA observed that investment representatives continue to make unsuitable recommendations to retail investors based on a number of factors, including the customer’s financial situation and needs, investment experience, risk tolerance, time horizon, investment objectives and perhaps most importantly liquidity needs.  And there are legal standards that apply to these factors. Time and time again, for example, investment advisers put their clients into long-term investments that makes them unavailable for their customer’s short-term needs.  If you think this applies to you, then you should have a legal audit conducted on your investment portfolio.

Abuse of authority is also just what it sounds like, namely customers give registered representatives authority to act on their behalf and these advisers exceed that authority.  This is usually seen in the form of unsuitable or excessive trading, which FINRA observed in its report   as a problem that continues in the industry.  For example, FINRA found “situations where some firms or registered representatives exposed investors to unnecessary risks and firms had not established controls – including those to comply with obligations under FINRA Rule 2510 (Discretionary Accounts) – to mitigate those risks.” Those risks included some registered representatives exercising discretion in their customer accounts without the customer’s prior written authorization, exercising discretion after the authority to do so had expired, and having customer’s sign blank suitability or new account forms.  And, even if you provide authorization for your representative to engage in discretionary trading, you should still have your accounts reviewed at frequent intervals.  Again, if you think this may apply to you, a legal audit conducted on your investment portfolio may uncover abuse of authority by your investment adviser.

If you need a legal audit conducted on your investment portfolio, then you may wish to consult with experienced counsel at Cosgrove Law Group.

Author: Brian St. James

Wednesday, January 9, 2019


Are you a financial adviser who has been terminated unfairly?  Well, if you are, you are not alone.  The attorneys at Cosgrove Law Group, LLC have represented advisers all over the country who have fallen prey to a system very unique to the financial services industry – the internet publication of involuntary termination justifications via the Form U-5.  And while the regulators thought this system would be a good thing for investors, it has proven to be a devastating system for many innocent advisers.  We refer to it as “the weaponization of the U-5.”

You will not obtain a new position with a Broker-Dealer or hybrid until your U-5 is filed.  And you probably will not get hired if it contains a negative narrative or one of the answers to question #7 (a) – (f) is marked in the affirmative.  Nor will your home state or FINRA register you until they are done investigating the purported reasons for termination.  If you are in this horrible situation, call us for help today.

Tuesday, January 8, 2019

Purchasers of 1st Global Capital Finance Securities in Missouri May Be Able to Recover from Their Brokers

On August 23, 2018, the U.S. Securities andExchange Commission (“SEC”) filed a complaint for injunctive and other relief against 1 Global Capital, LLC (“1st Global Capital”) in the U.S. District Court for the Southern District of Florida alleging, among other things, that 1st Global Capital “fraudulently raised more than $287 million from more than 3,400 investors.” And as 1st Global Capital filed for Chapter 11 bankruptcy protection, it’s unlikely the victims of this fraud will recover more than a fraction of their money from 1st Global Finance. But all may not be lost if you are such a victim of this fraud and if you purchased your investment in Missouri.  Another avenue of recovery may be against the sales agents that brokered these investments to you in Missouri on behalf of 1st Global Capital.

1st Global Capital sourced its capital through a “network of barred brokers, registered and unregistered investment advisers, and other sales agents – to whom they paid millions in commissions – to offer and sell unregistered securities to investors in no fewer than 25 states” according the complaint filed by the SEC. Missouri was one of those states. And, these brokers, investment advisers and sales agents who brokered these sales in Missouri may be liable to these investors in Missouri for the following reasons:

First, these investments in the forms of a “9-month Promissory Note,” “Memorandum of Indebtedness” or “Loan Agreement” from 1st Global Capital constitute “securities” within the meaning of Section 2(a)(1) of the Securities Act of 1933 [15 U.S.C. § 77b(a)(1)] (the “Securities Act”).  As such, they were required to be registered with the SEC pursuant to the Securities Act or exempted from registration therefrom. No such registration statement was filed and no exemption from registration existed for the 1st Global Capital securities. So, under federal and state law, including the Securities Act, you may be able to bring a private right of action against the sellers of these securities for the recovery of your investment.

Second, because the brokers, investment advisers and sales agents who brokered these securities in Missouri are governed by the rulings of the Eighth U.S. Circuit Court of Appeals, the definition of what constitutes a “seller” of securities under the Securities Act is not limited to the person who actually passes title of the securities to the purchaser. This definition has been broadened to include the intermediary who facilitated the sale of the security to the purchaser, if that intermediary was made aware of questionable circumstances surrounding the transaction and “was uniquely positioned to ask relevant questions, acquire additional information, or disclose his findings” to the purchaser. Wasson v. SEC, 558 F.2d 879, 886 (8th Cir. 1977). Moreover, a different panel of the Eighth U.S. Circuit Court of Appeals adopted the “substantial factor” test, in which a person “whose participation in the buy-sell transaction [was] a ‘substantial factor’ in causing the transaction to take place” was held to be a seller under the Securities Act. Stokes v. Lokken, 644 F. 2d 779, 785 (8th Cir. 1981).

If you purchased 1st Global Capital securities in Missouri, then there are laws that could provide you with the right to recover from the broker, investment adviser or sales agent who brokered that investment to you, including the Securities Act, the Missouri Uniform Securities Act, §§409.1.1, et seq., RSMo. (2016), and the Missouri common law. These laws could entitle you to recover the money paid for the securities, with interests and costs, and in some cases your reasonable attorneys’ fees and punitive damages.

There are many decisions you need to make such as what laws give you the best chance of recovering your investment, what relief should you should seek, and whether to file your lawsuit in federal or Missouri state court. If you need assistance, you may wish to consult with experienced counsel at CosgroveLaw Group, LLC.

Author: Brian St. James

Thursday, January 3, 2019

SEC Cracking Down on Share Class Selection: High Standards and High Stakes

Last February the Securities and Exchange Commission ("SEC") announced their Share Class Selection Disclosure Initiative. This initiative is to prevent Investment Advisers from having their clients purchase shares with higher 12b-1 fees when cheaper ones are available. 12b-1 fees are paid by shareholders for the marketing, advertising, mailing of fund literature and prospectuses to clients, and paying the brokers.

Recently, the SEC settled with American Portfolio Advisers to pay $895,353 in disgorgement and prejudgment interest and a civil penalty of $250,000 due to inadequate client disclaimers regarding conflict of interests with 12b-1 fees.

In their Initiative Announcement, the SEC defined Investment Advisers receiving 12b-1 fees to mean (1) directly receiving fees, (2) a supervised person receiving fees, or (3) an affiliated broker dealer receiving fees. The SEC went on to state a proper disclosure does two things: it describes the conflict of interest in (1) making investment decisions in light of receipt of 12b-1 fees, and (2) selecting more expensive 12b-1 fee paying shares when lower cost shares are available for the same fund.

The initiative notes that disclosing that investment advisers “may” receive a 12b-1 fee and that there “may” be a conflict of interest was not enough. If the adviser is in fact receiving a 12b-1 fee they must say so and if the client is eligible for a lower cost share the adviser must inform them.

This duty stems from Section 206(2) of the Investment Advisers Act of 1940 ("Advisers Act"). Interpreted in SEC v. Capital Gains ResearchBureau, Inc., 375 U.S. 180, 194 (1963) to impose a financial duty on Investment Advisers to disclose to its clients all conflicts of interest which might incline an investment adviser consciously or unconsciously to render advice that is not disinterested.

These are high-standards and high-stakes for Registered Investment Advisers and for the Investment Advisers themselves. If you questions related to these standards or other SEC initiatives or regulatory standards, please call us at Cosgrove Law Group, LLC.