Thursday, September 17, 2020

The Financial Advisor Succession Agreement

 “The Financial Advisor Succession Agreement: Can the Receiving Financial Advisor Contact Clients Associated with the Financial Advisor Succession Agreement upon Departure from the Firm?” 

What happens when a financial advisor enters into a Financial Advisor Succession Agreement and subsequently chooses to depart the firm? Is she or he able to contact those succession account clients after she or he lands at the new firm? As with most questions of this nature, the answer is “it depends.” 

A Financial Advisor Succession Agreement (the “Agreement”) is generally by and among the retiring financial advisor (the "Retiring FA"), the receiving financial advisor (the "Receiving FA") and the firm (the “Firm”), and is entered into pursuant to the terms of a Financial Advisor Succession Program.  The purposes are generally to  provide for trailing commissions to be paid the Retiring FA (the "Post-Retirement Payments") following the retirement date, and to ensure clients serviced by Retiring FA (the "Financial Advisor Succession Accounts") enjoy uninterrupted service throughout the defined post-retirement period as set forth in the Agreement (the “Post-Retirement Period"). Also, Receiving FA services the Financial Advisor Succession Accounts as a participant under the Agreement, and generally if Receiving FA departs the Firm for any reason during the Post-Retirement Period, then generally the Firm will re-assign the Financial Advisor Succession Accounts for servicing to another receiving FA so Post-Retirement Payments can continue until the end of the Post-Retirement Period. 

The Agreement may or may not contain a non-solicitation provision that prevents the solicitation of clients associated with the Financial Advisor Succession Accounts by the Receiving FA for a period of time after departure from the Firm. An industry-standard non-solicitation clause generally provides in some form or fashion for the following essential terms:

 “If Receiving FA's employment with the Firm terminates for any reason prior to the end of the Post-Retirement Period, she or he will not, for a period of one (1) year following such transition, directly or indirectly, on his or her behalf or on behalf of any other person,  solicit any clients associated with the Financial Advisor Succession Accounts for the purposes of providing financial services identical to or reasonably substitutable for the Firm’s financial services.  Solicitation shall include, but not limited to, contact or communication by mail, phone, email, or by any other means, either directly or indirectly, with any other person or party, for the purpose of requesting, encouraging, or inviting the transfer of an account from the Firm, the opening of new accounts with any other organization that does business in securities, or discontinuing any relationship with the Firm."  

The Agreement also may or not contain a non-disclosure provision that prevents the use of client information by the Receiving FA to solicit clients after departure from the Firm. An industry-standard non-disclosure provision may generally state as follows: 

Receiving FA shall not remove, use, disclose or transmit any confidential information or documents related to the Financial Advisor Succession Accounts or clients associated with the Financial Advisor Succession Accounts, including, but not limited to the names, addresses, phone numbers, account holdings or financial information related to the  Financial Advisor Succession Accounts."  

Based upon the inter-working of the non-solicitation and non-disclosure provisions, it seems abundantly clear that Receiving FA cannot contact any clients associated with the Financial Advisor Succession Accounts without breaching the Agreement. The analytical framework requires looking in two places to determine whether this is correct or not. 

The first is the Protocol for Broker Recruiting (the "Protocol"). In general, when a registered representative (“RR”) moves from one firm to another and both are signatories to the Protocol, the departing RR may take with him/her the client name, address, phone number, email address and account title of clients that she or he serviced while at the departing firm with him/her (the "Client Information"). RRs who comply with the Protocol are "free to solicit customers that they serviced while at their former firm" after she or he joins their new firms, and with the exceptions of team agreements and raiding cases, neither the departing RR or the firm that she or he joins "would have any monetary or other liability by reason of the RR taking Client Information or the solicitation of clients." 

The Protocol therefore seems rather definitive that Receiving FA can take Client Information with him/her to another signatory to the Protocol, but that is not the case with the Agreement, with respect to which the Protocol clearly states: "[i]f accounts serviced by the departing RR were transferred to the departing RR pursuant to  a retirement program that pays a retiring RR trailing commissions on the accounts in return for certain assistance provided by the retiring RR prior to his or her retirement in transitioning the accounts to the departing RR, the departing RR's ability to take Client Information related to those accounts and the departing RR's right to solicit those accounts shall be governed by the terms of the contract between the retiring RR, the departing RR, and the firm with which both were affiliated.” So, this does not work. 

The second place to look is at the non-solicitation and non-disclosure provisions themselves.  With respect to the non-solicitation provision, it restricts Receiving FA from directly or indirectly soliciting any clients associated with the Financial Advisor Succession Accounts. So, it is necessary to determine what constitutes a "solicitation." Pursuant to the Agreement, "solicitation" is defined to "include, but not limited to, contact or communication by mail, or by any other means, either directly or indirectly, with any other person or party, for the purpose of requesting, encouraging, or inviting the transfer of an account from the Firm, the opening of new accounts with any other organization that does business in securities, or discontinuing any relationship with the Firm."  Consequently, whether or not Receiving FA solicits any clients associated with the Financial Advisor Succession Accounts clients turns on Receiving FA’s intent when contacting the former clients.  

Under Missouri law, if Receiving FA does not do "anything but inform [his/her] former clients of [his/her] new employment," it is not a solicitation. Edward D. Jones & Co. v. Kerr, 415 F.Supp.3d 861, 874 (S.D. Ind. 2019) (applying Missouri law). (See, also fn. 11 that cites several cases for the proposition that merely contacting former clients to inform them of their departure and provide new contact information was not an indirect solicitation). This finding is consistent with Bittiker v. State Bd. of Registration for Healing Arts, 404 S.W.2d 402, 405 (Mo. App. 1966), a seminal Missouri case on what constitutes “soliciting” that states: soliciting "means to ask for or to request something or some action in language which convinces that the asking or requesting is done in earnest and that the solicitor wants results." A mere announcement would not according to Bittiker.    

The Kerr case was cited in Edward D. Jones & Co., L.P. v. Clyburn, No. 7:20CV00433, 2020 WL 4819547 (W.D. Va. Aug. 19, 2020), another case applying Missouri law and involving an industry-standard non-solicitation provision that states as follows: 

"Your agreement not to solicit means that you will not, during your employment with Edward Jones, and for a period of one year thereafter, initiate any contact or communication of any kind whatsoever for the purpose of inviting, encouraging or requesting any Edward Jones client to transfer from Edward Jones to you or to your new employer, to open a new account with you or to your new employer, to open a new account with you or with your new employer or to otherwise discontinue his/her/its patronage and business relationships with Edward Jones."  

Clyburn distinguished Kerr by finding "the district court specifically emphasized that there was 'no evidence to show that Mr. Kerr did anything but inform his former clients of his new employment.'" (citation omitted). Here "Mr. Clyburn contacted specific clients to schedule appointments, ... asked at least three particular clients to move their accounts to Ameriprise, and ... contacted another client more than once and advised her that he wanted to complete the paperwork necessary for her to switch firms." Consequently, there appears to be good authority under Missouri law that if Receiving FA does not do "anything but inform [his/her] former clients of [his/her] new employment," it is not a solicitation. But this safe harbor may be difficult to navigate given the factual circumstances of each client contact in connection with a departure. 

The second question is how to respect the non-disclosure provision without breaching the Agreement. And "Courts are more likely to find … contact constitutes a solicitation when there is evidence that the defendants - employees improperly used confidential records or trade secrets obtained while at their former employers to issue the announcements." Kerr, 414 F.Supp.3d at 877, fn. 12 (and cases cited therein).  

In Kerr it was specifically found that "Mr. Kerr denies using any of Edward Jones's information when issuing his announcement," and that "the transferee clients, who first learned of Mr. Kerr's transition from his announcement, had pre-existing, personal relationships with Mr. Kerr." So, it appears that one way to respect the non-disclosure provision without breaching the Agreement is for Receiving FA to limit the announcement of his/her transition to former clients who have pre-existing, personal relationships with him/her, such as family members or close friends.  Another way appears to be if Receiving FA is also dual registered as an RIA. If so, then the argument can be made that consistent with Receiving FA’s fiduciary duty of care, she or he has to inform his or her former clients of his or her departure from the Firm.  The argument would be that this fiduciary duty is not satisfied by relying upon the Firm to inform your customers, and that this fiduciary duty supersedes the non-disclosure obligation as it relates to using confidential information as to customer names and addresses to issue the announcements.   

Therefore, there is a lot to unpack regarding “it depends.” So, if you need assistance in this regard, you may wish to consult with experienced securities industry counsel at Cosgrove Law Group.  

Author: Brian St. James

Please follow us on Twitter @CosLawGroup, on LinkedIn at Cosgrove LawGroup, LLC, and on Facebook at Cosgrove Law Group, LLC. 

Thursday, August 27, 2020

SEC Publishes Final Rule that Expands the Definition of ‘Accredited Investor’ for Private Placements

On August 26, 2020, the U.S. Securities and Exchange Commission (the “SEC”) published its Final Rule that amends the definition of “Accredited Investor” (for private placements pursuant to Regulation D) to “add new categories of natural persons that may qualify as accredited investors based on certain professional certifications or designations or other credentials or their status as a private fund’s ‘knowledgeable employee,’ expand the list of entities that may qualify as accredited investors, add entities owning $5 million in investments, add family offices with at least $5 million in assets under management and their family clients, and add the term ‘spousal equivalent’ to the definition.”[1] The stated purposes of the Final Rule is “to update and improve the definition to identify more effectively investors that have sufficient knowledge and expertise to participate in investment opportunities that do not have the rigorous disclosure and procedural requirements, and related investor protections, provided by registration under the Securities Act of 1933.”[2]

 The amendments to the “accredited investor” definition added new categories for both natural persons and entities. For natural persons,[3] the SEC designated in a separate order (a) as the initial certifications, designations, or credentials, those natural persons holding in good standing the “General Securities Representative license (Series 7), the Private Securities Offerings Representative license (Series 82), and the Licensed Investment Adviser Representative (Series 65),” and (b) certain “knowledgeable employees” of private funds for investments in the funds.[4]

With respect to entities, the Final Rule amends the definition of “accredited investor” to include (a) all SEC and state-registered investment advisers, (b) exempt reporting advisers, (c) rural business investment companies, (d) any entity owning “investments,” and (e) certain “family offices” and their “family clients”.[5]

The SEC also now allows natural persons to include the joint income from spousal equivalents when calculating joint income Rule 501(a)(6) and to include spousal equivalents when determining net worth under Rule 501(a)(5)  “Spousal equivalents” is defined as a cohabitant occupying a relationship generally equivalent to that of a spouse.

Christopher W. Gerold, President of the NASAA, is critical of the Final Rule, as set forth in the following statement also issued on August 26: 

“The Commission’s vote today continues its deregulatory campaign to expand private markets, while showing little regard for the potential adverse effects on investors and the public markets. The SEC should focus on growing and promoting the public markets rather than incentivizing issuers to raise capital in the private markets. Further expansion of private markets comes at the expense of the public markets, which are essential to the health of the economy.” 

“The Commission squandered an opportunity to fulfill its mandate to protect investors by failing to address long overdue changes to the wealth and income standards defining accredited investors. For the past 38 years, the Commission’s failure to index these standards to account for inflation has eroded the investor protections they were designed to provide.  Each year the Commission fails to address these standards only expands the pool of accredited investors, including investors who only meet the wealth standard based on their accumulated retirement savings. The Commission had the opportunity, but once again failed, to protect seniors or other vulnerable investors from the inherent risks associated with the lack of transparency and liquidity that exists in the private securities marketplace.”[6] 

This Final Rule becomes effective 60 days after it is published in the Federal Register.  

Author: Brian St. James

Please follow us on Twitter @CosLawGroup, on LinkedIn at Cosgrove Law Group, LLC, and on Facebook at Cosgrove Law Group, LLC



[1] SECURITIES AND EXCHANGE COMMISSION 17 CFR PARTS 230 and 240 (“Release Nos. 33-10824; 34-89669; File No. S7-25-19) RIN 3235-AM19 “Amending the “Accredited Investor” Definition.

[2] Id.

[3] Previously with respect to a natural person, s/he had to have (1) individual net worth, or joint net worth with that person’s spouse, at the time of purchase that exceeded $1 million, or (2) income or joint income with that person’s spouse that exceeds $200,000 or $300,000, respectively, in each of the two most recent years, and who has a reasonable expectation of reaching that same income level in the current year.

[4] Trustees and advisory board members, or persons serving in a similar capacity, of a Section 3(c)(1) or 3(c)(7) fund or an affiliated person of the fund that oversees the fund’s investments, as well as employees of the private fund or the affiliated person of the fund (other than employees performing solely clerical, secretarial, or administrative functions) who in connection with the employees’ regular functions or duties, have participated in the investment activities of such private fund for at least 12 months.

[5] The definition encompasses a “family office” as defined in the “family office rule” [17 CFR § 275.202(a)(11)(G)-1] that meets the following additional requirements: (i) it has at least $5 million in assets under management, (ii) it is not formed for the specific purpose of acquiring the securities offered, and (iii) its prospective investment is directed by a person who has such knowledge and experience in financial and busines matters that such family office is capable of evaluating the merits and risks of the prospective investment.  “Family clients” (as defined in the family office rule) of a family office must meet the requirements stated in (i), (ii), and (iii) above, whose prospective investment in the issuer is directed by the family office. 

Monday, August 10, 2020

Proposed FINRA Rule 3241 (Registered Person Being Named a Customer’s Beneficiary or Holding a Position of Trust for a Customer)

            On July 2, 2020, the U.S. Securities and Exchange Commission (the “SEC”) published its notice to solicit comments on Proposed FINRA Rule 3241 (the “Notice”).[1] This proposed rule change would allow registered persons[2] to be named as beneficiaries or appointed to positions of trust,[3] and states as follows: 

            “Proposed FINRA Rule 3241 would provide that a registered person must decline: 

(1)    Being named a beneficiary of a customer’s estate or receiving a bequest from a customer’s estate upon learning of such status unless the registered person provides written notice upon learning of such status and receives written approval from the member firm prior to being named a beneficiary of a customer’s estate or receiving a bequest from the customer’s estate; and

(2)   Being named as an executor or trustee or holding a power of attorney or similar position for or on behalf of the customer unless:

a.       Upon learning of such status, the registered person provides written notice and receives written approval from the member firm prior to acting in such capacity or receiving any fees, assets, or other benefit in relation acting in such capacity; and

b.      The registered person does not derive financial gain from acting in such capacity other than from fees or other charges that are reasonable and customary for acting in such capacity.[4]” 

            Being designated a customer’s beneficiary, trustee or executor and/or holding a customer’s power of attorney raises actual or potential conflicts of interest, and registered person’s had been known to circumvent these conflicts in form rather than substance. FINRA proposed this rule change “to create a uniform, national standard to govern registered persons holding positions of trust” in order to ostensibly “better protect investors and provide consistency across member firms’ policies and procedures.”[5]    

A close examination of the rule change reveals that it would do little regarding a registered person’s actual or potential conflict of interest, which FINRA proposes to assess “to determine the effectiveness of the rule addressing potential conflicts of interest and evaluate whether additional rule making or other action is appropriate”[6] if the rule change passes. This further assessment may be why the NASAA[7] opposes the rule change as written, and instead proposes to limit its application to registered persons who are immediate family members, and even in that case require the member to implement heightened supervision standards regarding that registered person.[8] 

If passed, the proposed rule change would become effective either (a) within 45 days of the date of the publication of the Notice, or (b) within such longer period not to exceed 90 days of such date if the SEC finds it appropriate.   

 Author: Brian St. James

Please follow us on Twitter @CosLawGroup, on LinkedIn at Cosgrove Law Group, LLC, and on Facebook at Cosgrove Law Group, LLC. 

[1] SECURITIES AND EXCHANGE COMMISSION (“Release No. 34-89218; File No. SR-FINRA-2020-020").

[2] “Registered person” means an “associated person of a member” as set forth in FINRA By-Law Article I (rr).

[3] The text of the proposed rule is available at

[4] The proposed rule change would not apply where the customer is a member of the registered person’s immediate family.

[5] SECURITIES AND EXCHANGE COMMISSION (“Release No. 34-89218; File No. SR-FINRA-2020-020.

[6] Id.

[7] North American Securities Administrators Association, Inc.

[8] NASAA comments to Proposed FINRA Rule 3241 (Registered Person Being Names a Customer’s Beneficiary or Holding a Position of Trust for a Customer), dated July 30, 2020.

Tuesday, August 4, 2020

Whistleblower Update

       A.    Who is a Protected Whistleblower?

The following is from an excellent SIFMA presentation provided by Wayne Carlin and Cheryl Haas.

On February 21, 2018, the U.S. Supreme Court issued its decision in Digital Realty Trust v. Somers, 138 S. Ct. 767 (2018), holding unanimously that Dodd-Frank prohibits retaliation against whistleblowers only if they report suspected wrongdoing to the SEC directly. Accordingly, whistleblowers who report their suspicions to their employer or another entity without also going to the SEC will receive no protection from retaliation under Dodd-Frank. The unanimous opinion invalidated an SEC interpretive rule which construed the anti-retaliation protections of Dodd-Frank as applying to employees who reported potential violations to their employers, even if no report was made to the commission.

The Supreme Court focused on the clear statutory language, ruling that Section 78u-6 “describes who is eligible for protection- namely a ‘whistleblower’ who provides pertinent information ‘to the commission.’” The Court stressed that the “core objective” of the Dodd-Frank Whistleblower Program was to “motivate people who know of securities law violations to tell the SEC.” Id. (quoting S. Rep. No. 111-176 at 38). The Ninth Circuit in Digital Realty had previously held that an employee was entitled to anti-retaliation protections notwithstanding his failure to report the wrongdoing to the SEC. 850 F.3d 1045 (9th Cir. 2017). That court reasoned that the meaning of “whistleblower” under the statute was ambiguous and thus deferred to the Commission’s interpretation that the term as broad enough to cover those who report wrongdoing internally instead of to the Commission. The Supreme Court decision resolved a Circuit split: the Ninth Circuit’s decision was consistent with the holding of the Second Circuit in Berman v. Neo@Ogilvy LLC, 801 F.3d 145 (2nd Cir. 2015) but in opposition to the Fifth Circuit, which came to a contrary result in Asadi v. G.E.Energy (USA), LLC, 720 F. 3d 620 (5th Cir. 2013).

Whistleblowers who report internally but do not to the SEC may still have some recourse against retaliation under state law or Sarbanes-Oxley. However, the process is more cumbersome and lengthier. Thus, whether the ruling has a significant impact on how and where whistleblowers make their initial reports remains to be seen. On June 28, 208, the SEC announced that it had voted to propose new whistleblower rule amendments. See SEC Press Release, SEC Proposes Whistleblower Rule Amendments (June 28, 2018). Among other things, the SEC proposed rule amendments in response to the Supreme Court’s holding in Digital Realty which essentially invalidated the Commission’s rule interpreting Section 21F’s anti-retaliation protections to apply to internal reports. The proposed rules would modify Rule 21F-2 by, among other things, establishing a uniform definition of “whistleblower” that would apply to all aspects of Exchange Act Section 21F- i.e., the award program, the heightened confidentiality requirements, and the employment anti-retaliation protections. For purposes of retaliation protection, an individual would be required to report information about possible securities laws violations to the Commission “in writing.” The SEC anticipates new rules being adopted in FY 2020.

On July 9, 2019, the House of Representatives passed the Whistleblower Protection Reform Act of 2019 (H.R.2015). The Act would clarify that whistleblowers who report potential violations of securities laws to their employers are protected by the anti-retaliation provisions of Dodd-Frank, effectively overturning the holding in Digital Realty. The bill is now awaiting action in the Senate.

Under the SEC whistleblower-reward program, the SEC issues rewards to eligible whistleblowers who provide original information that leads to successful SEC enforcement actions with total monetary sanctions exceeding $1 million. The SEC has awarded approximately $387 million to 67 whistleblowers since issuing its first award in 2012. In FY 2019, the SEC awarded approximately $60 million to eight, significantly less than the $168 million awarded last year. The SEC’s proposed rule amendments would give the agency additional discretion to increase or decrease the size of the award under certain circumstances and allow the payment of awards to whistleblowers even when the matter is resolved outside of the context of a judicial or administrative proceeding.

      B.     Impeding Whistleblowing Activity

In April 2015, the SEC brought its first enforcement action against a company for using improperly restrictive language in confidentiality agreements with the potential to stifle the whistleblowing process. See SEC Press Release, Agency Announces First Whistleblower Protection Case Involving Restrictive Language (April 1, 2015). In that case, the SEC charged Houston-based technology and engineering firm, KBR, with violating whistleblower protection Rule 21F-17 enacted under Dodd-Frank. KBR required witnesses in certain internal investigation interviews to sign confidentially statements with language warning that they could in fact discipline and even be fired if they discussed the matters with outside parties without the approval of the law department. The SEC found that these terms violated Rule 21F-17 which prohibits companies from taking any action to impede whistleblowers from reporting possible securities violations to the SEC. The SEC said that its rules prohibit employers from taking measures through confidentiality, employment, severance, or other type of agreements that may silence potential whistleblowers before they can reach out to the SEC.

       C.    More Recent Actions

The SEC has been very focused on whistleblower-related issues. In FY 2017, the SEC instituted administrative proceedings against four companies for violating Rule 21F-17. In the space of one week in August 2016, the SEC brought two enforcement actions reiterating its focus on protecting the rights of whistleblowers. In each case, companies attempted to remove the financial incentives for departing employees to submit whistleblower reports to the SEC. The result instead was a pair of administrative orders (on a neither admit nor deny basis) finding that each company violated SEC Rule 21F-17, which prohibits any person from taking any action to impede a whistleblower from communicating with the SEC about possible securities law violations. In the Matter of BlueLinx Holdings Inc., Rel No. 78528 (August 10, 2016); In the Matter of Health Net, Inc., Rel. No. 78590 (August 16, 2016).

Both of these cases involved severance agreements entered into with individuals in connection with the termination of their employment relationship, as a condition to the receipt of severance payments and benefits. As is common, such agreements included language that memorialized the departing employee’s obligation to maintain the confidentiality of company information. Notwithstanding the confidentiality provisions, BlueLinx included language in its agreements that acknowledged, among other things, the employee’s right to “file a charge” with the SEC. The BlueLinx agreements went on, however, to provide that “Employee understands and agrees that Employee is waiving the right to any monetary recovery in connection with any such complaint or charge…” Similarly, Health Net’s severance agreements included a provision in which the departing employee expressly waived the right to file an application for a whistleblower award pursuant to Section 21F of the Securities Exchange of 1934. Health Net removed the specific reference to the Exchange Act from later agreements, but still retained language providing that the employee waived any right to monetary recovery in any proceeding based on any communication by the employee to any government agency.

While the principal focus of these cases is the relatively unusual interference with financial incentives discussed above, the BlueLinx agreements also included a more common-place provision requiring employees to notify the company’s legal department in the event that they believed they were required by law or legal process to disclose any confidential information. BlueLinx thus raises the question whether the SEC would assert that a notice requirement without an express carve-out for whistleblowing violates Rule 21F-17, even if it is entered into at a time when no investigation is in progress or contemplated and even if there are no provisions in the agreement directly aimed at deterring whistleblower activity.

On September 29, 2016, the SEC filed its first stand-alone retaliation action against International Game Technology, a casino-gaming company. In the Matter of Game Technology, Rel. No. 78991 (Sept. 29, 2016). IGT agreed to pay a half-million-dollar penalty for discharging an employee because he reported to senior management and the SEC that the company’s financial statements might be distorted. The SEC found that the employee was removed from significant work assignments within weeks of raising concerns and fired approximately three months later.

A number of recent actions continue to focus on agreements that improperly hurt or discourage employees or former employees from reporting suspicions of wrongdoing to the SEC. On December 17, 2016, the SEC announced a settlement with Neustar, Inc., pursuant to which the company agreed to pay a penalty of $180,000 to settle charges involving its severance agreements. See SECPress Release, Company Violated Rule Aimed at Protecting Potential Whistleblowers (Dec. 19, 2016). Those agreements contained a broad non-disparagement clause forbidding former employees from engaging with the SEC in “any communication that disparages, denigrates or maligns or impugns” the company. The next day, the SEC revealed an agreement to settle charges with SandiRidge Energy Inc. See SEC Press Release, Company Settles Charges in Whistleblower Retaliation Case (Dec. 20, 2016). The company used retaliation language in its separation agreements prohibiting outgoing employees from participating in any government investigation or disclosing information potentially harmful or embarrassing to the company. On January 19, 2017, financial services company HomeStreet Inc. agreed to pay a $500,000 penalty to resolve charges that it conducted improper hedge accounting and then took steps to impede potential whistleblowers. See SEC Press Release, FinancialCompany Charged with Improper Accounting and Impeding Whistleblowers (Jan. 19, 2017). Those steps included suggesting to one individual that the company might deny indemnification for legal costs during the SEC investigation and requiring several employees to sign severance agreements waiving potential whistleblower awards or risk losing their severance payments and other post-employment benefits.

Most recently, the SEC filed an amended complaint against Collectors Café alleging that it had violated Rule 21F-17 by interfering with an investor’s ability to communicate with eh SEC about possible misconduct in the company. See Amended Complaint, SEC v. Collectors Café Inc. et al, 19-cv-04355-LGS-GWG (S.D.N.Y. 11/4/19). The Complaint alleges that the company included a representation in a stock purchase agreement with investors who had raised concerns with the company about their investments that they had not and would not contact any third party for the purpose of commencing or promoting an investigating, including governmental or administrative agencies. This is the first time that the SEC has applied the rule outside the context of the traditional employer/employee relationship.

These enforcement actions confirm that the SEC continues to focus on protecting whistleblower rights. Companies should review all forms of agreements with employees, including standard form separation agreements and releases, to ensure that the terms do not prohibit an employee from exercising any legally protected whistleblower rights, and should not consider including an express exclusion with that effect. In light of the SEC’s position in Collectors Café, companies should also pay particular attention to these issues when preparing agreements with outside investors.

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Friday, July 31, 2020


           The SEC recently filed suit against a Texas man it alleged to have defrauded investors out of $14,000,000.  Many of the scheme’s victims were retired police officers.  

            According to the civil complaint, which you can read here, Victor Farias and his company, Integrity Aviation and Leasing, solicited investments from almost 100 different individuals.  The defendant company was supposed to use the funds as capital to support a business model in which it bought and leased aviation parts.  Instead, millions went toward unrelated ventures and personal expenses, such as country club bills.  Moreover, in true “Ponzi” fashion, funds from new investors were used to satiate the demands of earlier investors. 

            On a somewhat happier note, a Georgia businessman will pay back $23 million to at least 100 investors in his plan of converting landfill waste in to fuel.  As is common, the promoter over-stated the success of his business model and promised generous investment returns while diverting funds to support a lavish lifestyle.  According to the SEC, the businessman knew his company “never had the ability or expertise to develop [the project].” 

            The attorneys and paralegals at Cosgrove Law Group, LLC have been representing defrauded investors around the nation for over a decade.  Let us know if you need our help.

Thursday, July 30, 2020


As of June 30, 2020, broker-dealers are required to be in compliance with the new Regulation Best Interest (“Reg BI”) standard of conduct. Firms were given one year to mold their compliance apparatus, train representatives, draft policies, and implement procedures to fit the heightened standard. However, anyone working in corporate compliance or project management understands that implementing change on a company wide scale in such a short time is an enormous task.  Now that the new standard has been in effect for a month, we believe it is important to highlight some aspects of the Reg BI standard which may have been overlooked when overhauling a firm’s compliance systems. 

Reg BI replaces the suitability standard and sets out more robust investor protections than had been required under suitability. 

§240.15l-1   Regulation best interest.

(a) Best interest obligation. (1) A broker, dealer, or a natural person who is an associated person of a broker or dealer, when making a recommendation of any securities transaction or investment strategy involving securities (including account recommendations) to a retail customer, shall act in the best interest of the retail customer at the time the recommendation is made, without placing the financial or other interest of the broker, dealer, or natural person who is an associated person of a broker or dealer making the recommendation ahead of the interest of the retail customer.


Reg BI goes on to enumerate four obligations which must be satisfied when making any security or investment recommendation. Broadly speaking, those obligations are: 1) Disclosure- written disclosure of material facts relating to the scope of the relationship including fees, limitations on securities investments[1]; 2) Care- suitability on steroids[2]; 3) Conflict- identification, disclosure, and/or mitigation of incentives, limitations, and conflicts which may exist; and 4) Compliance- maintenance and enforcement of written policies and procedures designed to achieve compliance with Reg BI. 

Over the past year, broker-dealers should have received training on each of these obligations and firms’ compliance departments should have implemented the use of new forms to document their adherence. However, given the deluge of new forms broker-dealers are using to evidence compliance, two of the most important differences between suitability and Reg BI may have gone overlooked. 

Reg BI requires that a broker-dealer act in the customer’s best interest at the time the recommendation is made. Under the new standard, “recommendation” will be interpreted broadly and even includes instances where a recommendation is made but the customer does not execute the order.[3] 

Reg BI also defines “retail customer” more broadly than it was defined under the suitability standard. Under the suitability standard, certain high net worth individuals could be treated as institutional investors rather than retail customers if certain other circumstances applied. Thus changing the applicability of the suitability analysis. However, that is not the case under Reg BI: any “natural person” regardless of their wealth or accredited investor status is a “retail customer”. It should also be noted that there is no de minimus exception. So, in any instance that a broker-dealer makes a recommendation to a natural person for their personal, household or family use, Reg BI applies. 

Now that Reg BI is in effect, FINRA expects all firms and broker-dealers to be in compliance. However, even firms giving their best efforts may fall short of full Reg BI compliance. The attorneys at Cosgrove Law Group, LLC have decades of experience interpreting securities regulations, auditing firm compliance, and responding to regulatory investigations. If there is any doubt as to whether your firm has met its Reg BI obligations, it may be time to contact experienced securities counsel to navigate the regulatory landscape.

Author: Max Simpson

[1] Reg BI also creates an obligation to make supplemental oral disclosures for topics not covered in forms which would create a conflict given the specific circumstance. Best practice is to follow oral disclosure with written disclosure to memorialize that the disclosure did in fact occur.

[2] Of course this is an oversimplification of Reg BI’s care standard which deserves its own separate blog. Suffice it to say, the obligation of care is robust.

[3] FINRA UNscripted, EP63, Regulation Best Interest: Implementing a New Standard of Conduct, July 7, 2020.

Friday, July 24, 2020

Moloney Securities of Missouri in Trouble Yet Again

According to the public record available on the internet for Moloney Securities, the small broker-dealer has had seven regulatory events, including a FINRA censure and fines and an SEC cease and desist order going back to 2000.  It has also paid out hundreds of thousands of dollars in arbitration awards against it. 

The most recent settlement came in May of this year.  According to a public disclosure from FINRA, “an AWC was issued in which the firm was censured, fined $100,000 and ordered to pay $15,574.13, plus interest, in restitution to a customer. Without admitting or denying the findings, the firm consented to the sanctions and to the entry of findings that it failed to establish and maintain a supervisory system, including WSPs, reasonably designed to achieve compliance with FINRA’s suitability rule with respect to qualitative suitability and concentration in high-risk products. Further, the firm did not provide any training to its regional managers on reviewing the suitability of recommendations in such products, nor did it issue any instructional materials or alerts, such as compliance bulletins, addressing these issues.  The firm also failed to provide regional managers with reasonable automated tools that would have helped them perform those reviews. A firm registered representative recommended that senior customers purchase risky oil and gas limited partnerships and oil and gas exchange traded funds which caused them to become concentrated in these products. The firm’s electronic surveillance system did not flag the transactions for concentration issues, nor was the concentration questioned or reviewed by anyone at the firm. Similarly, an elderly customer accepted the representative’s recommendations to purchase oil and gas limited partnerships in accounts she held at the firm causing her to suffer unrealized losses of $15,574.13. The firm paid restitution totaling $195,500 to four of the senior customers.”

Unlike many firms, CosgroveLaw Group, LLC has experience both defending broker-dealers against regulatory actions and representing customers against broker-dealers who act inappropriately with their accounts.  Our attorneys and staff have decades of experience as regulators and in the private securities sector.  This diversity allows us to provide a well-rounded view of each matter and better assist our clients with their legal matters.