Brokers and Investment Advisors facing demands for repayment of training fees, retention bonuses, or promissory notes should bite the bullet and retain legal counsel. While their new current employer may be willing to offer unofficial advice or moral support, it is rarely willing to assign its legal department to your defense. No surprise, as its legal department is probably busy sending similar demands out to its former account executives or representatives.
The truth of the matter is that, despite demand letters that inaccurately portray your indebtedness as an unassailable fundamental truth, there are frequently either legal or equitable defenses to your former employer’s demand for money. And even if you owe and should therefore remit some funds, the broker frequently owes less than the total being demanded. Few like to hire attorneys, and even less like to pay for them. But you might actually have a legal right to save yourself some hard-earned cash in the long run—even after paying for that damn lawyer.
Monday, August 30, 2010
Friday, August 20, 2010
THE CALIFORNIA COURT OF APPEALS STRIKES DOWN WAIVERS OF STATUTORY RIGHTS IN MANDATORY ARBITRATION AGREEMENTS
On August 13, 2010, the California Court of Appeals issued a clear message to companies seeking to use mandatory arbitration provisions to force consumers to waive fundamental statutory rights. Specifically, in Fisher v. DCH Temecula Imports LLC, the Court of Appeals held that arbitration provisions that purport to waive unwaivable statutory rights violate public policy and are therefore void.
In Fisher, Plaintiff Fisher brought a class action lawsuit seeking injunctive relief, restitution, rescission and damages arising from—among other things—Defendant DCH’s violation of the California Legal Remedies Act (“CLRA”) in connection with a retail sales contract (“Contract”). DCH filed a petition to stay the lawsuit and compel arbitration (as a single individual rather than a class) under a mandatory arbitration clause contained within the Contract. The arbitration clause contained three important provisions:
In her opposition to the petition to compel arbitration, Fisher contended that she had a right under the CLRA to file a class action lawsuit, and that she could not be required to waive that right through a mandatory arbitration clause. Fisher relied upon two provisions of the CLRA in support of her argument:
The California trial court agreed that the CLRA prohibited Fisher from waiving her right to bring a class action. Accordingly, the court denied DCH’s petition to compel arbitration.
On appeal, DCH argued that Fisher’s anti-waiver argument had no application because the Federal Arbitration Act (“FAA”) preempted California law in the determination of the enforceability of the arbitration clause at issue. The California Court of Appeals dismissed DCH’s assertion, noting that Fisher was entitled to contest the arbitration clause on the basis that it was a private agreement in contravention of public rights under the CLRA. Accordingly, Fisher’s defense to the enforcement of the arbitration clause was a “separate, generally available contract defense not preempted by the FAA.”
The Court of Appeals ultimately affirmed the trial court’s order denying DCH’s petition to compel arbitration. In doing so, the Court relied upon its prior holding in Gutierrez v. Autowest, Inc. In that case, the Court of Appeals made clear that “a mandatory arbitration agreement cannot undercut unwaivable state statutory rights by, for example, eliminating certain statutory remedies or erecting excessive cost barriers.” Relying on Gutierrez, the Court noted that “[t]he arbitration clause at issue here required Fisher to waive an unwaivable statutory right under the CLRA to bring a classwide arbitration or classwide lawsuit, which violates the public policy underlying these rights. This qualifies as a private agreement in contravention of public rights.”
Although companies will certainly argue that Fisher is limited to class action provisions, the better argument is that the analysis provided by the California Court of Appeals applies to any waiver of fundamental statutory rights within a mandatory arbitration provision. Accordingly, the ramifications of this decision will likely spread beyond merely class action waivers. Notably, Missouri courts have handed down similar decisions in recent years, demonstrating a clear emphasis on the protection of individual state statutory rights when consumers are forced to sign boilerplate, pre-dispute arbitration agreements.
In Fisher, Plaintiff Fisher brought a class action lawsuit seeking injunctive relief, restitution, rescission and damages arising from—among other things—Defendant DCH’s violation of the California Legal Remedies Act (“CLRA”) in connection with a retail sales contract (“Contract”). DCH filed a petition to stay the lawsuit and compel arbitration (as a single individual rather than a class) under a mandatory arbitration clause contained within the Contract. The arbitration clause contained three important provisions:
“Either you or we may choose to have any dispute between us decided by arbitration and not in court or by jury trial.”
“If a dispute is arbitrated, you will give up your right to participate as a class representative or class member on any class claim you may have against us including any right to class arbitration or any consolidation of individual arbitration.”
“You expressly waive any right you may have to arbitrate a class action.”
In her opposition to the petition to compel arbitration, Fisher contended that she had a right under the CLRA to file a class action lawsuit, and that she could not be required to waive that right through a mandatory arbitration clause. Fisher relied upon two provisions of the CLRA in support of her argument:
“…any consumer entitled to bring [an individual consumer claim] may…bring an action on behalf of himself and such other consumers to recover damages or obtain other relief.”
“Any waiver by a consumer of the provisions of this title is contrary to public policy and shall be unenforceable and void.”
The California trial court agreed that the CLRA prohibited Fisher from waiving her right to bring a class action. Accordingly, the court denied DCH’s petition to compel arbitration.
On appeal, DCH argued that Fisher’s anti-waiver argument had no application because the Federal Arbitration Act (“FAA”) preempted California law in the determination of the enforceability of the arbitration clause at issue. The California Court of Appeals dismissed DCH’s assertion, noting that Fisher was entitled to contest the arbitration clause on the basis that it was a private agreement in contravention of public rights under the CLRA. Accordingly, Fisher’s defense to the enforcement of the arbitration clause was a “separate, generally available contract defense not preempted by the FAA.”
The Court of Appeals ultimately affirmed the trial court’s order denying DCH’s petition to compel arbitration. In doing so, the Court relied upon its prior holding in Gutierrez v. Autowest, Inc. In that case, the Court of Appeals made clear that “a mandatory arbitration agreement cannot undercut unwaivable state statutory rights by, for example, eliminating certain statutory remedies or erecting excessive cost barriers.” Relying on Gutierrez, the Court noted that “[t]he arbitration clause at issue here required Fisher to waive an unwaivable statutory right under the CLRA to bring a classwide arbitration or classwide lawsuit, which violates the public policy underlying these rights. This qualifies as a private agreement in contravention of public rights.”
Although companies will certainly argue that Fisher is limited to class action provisions, the better argument is that the analysis provided by the California Court of Appeals applies to any waiver of fundamental statutory rights within a mandatory arbitration provision. Accordingly, the ramifications of this decision will likely spread beyond merely class action waivers. Notably, Missouri courts have handed down similar decisions in recent years, demonstrating a clear emphasis on the protection of individual state statutory rights when consumers are forced to sign boilerplate, pre-dispute arbitration agreements.
Wednesday, August 18, 2010
New Broker-Check Disclosure & Dispute Process Begins August 23, 2010
Last month, the Securities and Exchange Commission approved changes to FINRA Rule 8312. The changes will expand the information available in BrokerCheck and codify the dispute process regarding inaccuracies in the disclosed information. The amendments will be implemented in two phases, the first of which goes into effect on Monday, August 23, 2010. This first phase of implementation deals with the changes to historic complaints and the dispute process.
On Monday, all customer complaints will be publicly available in BrokerCheck. This includes any complaints that had previously been deemed “non-reportable” when the Central Registration Depository (CRD) was implemented (i.e. complaints made after August 16, 1999).
Also to be implemented on Monday is FINRA’s new dispute process regarding inaccuracies in BrokerCheck. Under the new dispute process, only an “eligible party” will be able to bring a dispute. FINRA defines an “eligible party” as any current member firm, a CXO of a former member firm, or any person associated with or formerly associated with a member firm that has a BrokerCheck report. In order to file a dispute under the amended rule, an eligible party must (1) submit a BrokerCheck Dispute Form (which will become available on FINRA’s website), (2) identify and explain the inaccuracy, and (3) provide any supporting documents.
The next (and final) implementation of the new amendments regarding the disclosure period and permanently available information will occur on November 6, 2010.
A complete discussion of all the rule changes and commentary on those changes can be accessed here.
On Monday, all customer complaints will be publicly available in BrokerCheck. This includes any complaints that had previously been deemed “non-reportable” when the Central Registration Depository (CRD) was implemented (i.e. complaints made after August 16, 1999).
Also to be implemented on Monday is FINRA’s new dispute process regarding inaccuracies in BrokerCheck. Under the new dispute process, only an “eligible party” will be able to bring a dispute. FINRA defines an “eligible party” as any current member firm, a CXO of a former member firm, or any person associated with or formerly associated with a member firm that has a BrokerCheck report. In order to file a dispute under the amended rule, an eligible party must (1) submit a BrokerCheck Dispute Form (which will become available on FINRA’s website), (2) identify and explain the inaccuracy, and (3) provide any supporting documents.
The next (and final) implementation of the new amendments regarding the disclosure period and permanently available information will occur on November 6, 2010.
A complete discussion of all the rule changes and commentary on those changes can be accessed here.
Monday, August 2, 2010
SEC Claims New Information Disclosure Restriction in Financial Regulation Law will Simply Validate its Current Practices: So What's the Good News?
According to a recent Wall Street Journal article, a 2009 report by the SEC's inspector general revealed that the agency is far stingier then other federal agencies when it comes to responding to the public's requests for information under the Freedom of Information Act (“FOIA”). For example, the SEC fully granted information requests at a measly rate of 10.5% and granted partial responses at a rate of 3%. And yet despite what one must assume were legally valid outright rejections of the remaining 85% of all FOIA requests, the SEC garnered a provision in the new financial regulation overhaul law that empowers them to reject any request implicating documents it has received from members of the financial industry pursuant to SEC surveillance and risk assessments “or other regulatory oversight activities.”
The SEC's response to the uproar over this provision has been both anemic and incomplete - arguing that they didn't really need what they supposedly really needed. According to a recent FOX Business report, an SEC spokesman explained that the provision was tied to the SEC's expanded examination program, and the new provision simply “makes certain that we can obtain documents from registrants for risk assessment and surveillance under similar conditions that already exists by law.” Of course, prohibiting the SEC from using its regulatory authority to comb through a company's records to turn around and disgorge them out of context to the public is hardly outrageous. But the SEC seems unable to provide any justification for the the true source of the uproar; the final clause of the new provision: “or other regulatory...activities.” The final clause has nothing to do with confidential records gathered during examinations of industry participants. And yet it would provide the SEC ample justification to ramp up its FOIA swat-down rate from 85% to 100%.
The SEC receives and generates a lot of information outside of its exam function as a part of its “regulatory oversight activities.” Perhaps new legislation can be drafted to protect a legitimate interest in protecting the industry's confidential information without completely emasculating the right to access provided by the FOIA.
Tuesday, July 27, 2010
SEC APPROVES AMENDMENTS TO FORM ADV, PART 2 TO ENHANCE DISCLOSURE REQUIREMENTS FOR INVESTMENT ADVISERS
On July 21, 2010, the SEC unanimously approved amendments to Form ADV, Part 2, the disclosure document investment advisers are required to provide to clients. ADV Part 2 is a detailed document, explaining investment advisers’ qualifications, investment strategies and business practices.
For more than 30 years, the SEC has required registered investment advisers to deliver this written disclosure statement to clients. In 2000, the SEC proposed a complete overhaul of Form ADV. However, the overhaul did not result in a change to Part 2. Accordingly, in 2008, the SEC proposed additional amendments to ADV Part 2, which they finally approved on July 21st.
SEC Chairman Mary L. Schapiro commented that “[i]n its current form, [ADV Part 2] requires advisers to respond to a series of multiple-choice and fill-in-the-blank questions organized in a ‘check-the-box’ format. But, the format frequently does not correspond well to an adviser's business. And, in some cases, the required disclosure may not describe the adviser's business or conflicts in a way that is truly accessible to the investor.”
The new amendments will require investment advisers to provide a narrative that is “well-suited to serve investors’ needs.” The narrative will include the investment advisers’ conflicts, compensation, business activities and disciplinary history. The amendments will further require that ADV Form 2 be available electronically through the SEC website, thereby providing investors with greater and more easily attainable access to investment adviser disclosures.
Chairman Schapiro expressed the utmost confidence in the new amendments at a recent SEC open meeting, stating that the new changes “will allow clients ready access to information about advisers of a wholly different character and quality than is available under the current regime. It will enable investors to better evaluate their current advisers, or comparison shop for a new adviser that best serves an investor's needs.” Chairman Schapiro even went so far as to predict that the new disclosure requirements “may result in advisers modifying business practices and compensation policies which might pose conflicts, in ways that better serve the interests of clients.”
The amended rules will be effective 60 days after publication in the Federal Register, and investment advisers should begin distributing and publicly posting new ADV Form 2 disclosure in early 2011.
Our attorneys have experience with investment adviser and broker state registration matters, including annual and as-need ADV updates and reviews. If you or your company has concerns about the new amendments to ADV Part 2, please do not hesitate to contact us.
A copy of the SEC press release detailing the ADV Part 2 amendments is available here.
For more than 30 years, the SEC has required registered investment advisers to deliver this written disclosure statement to clients. In 2000, the SEC proposed a complete overhaul of Form ADV. However, the overhaul did not result in a change to Part 2. Accordingly, in 2008, the SEC proposed additional amendments to ADV Part 2, which they finally approved on July 21st.
SEC Chairman Mary L. Schapiro commented that “[i]n its current form, [ADV Part 2] requires advisers to respond to a series of multiple-choice and fill-in-the-blank questions organized in a ‘check-the-box’ format. But, the format frequently does not correspond well to an adviser's business. And, in some cases, the required disclosure may not describe the adviser's business or conflicts in a way that is truly accessible to the investor.”
The new amendments will require investment advisers to provide a narrative that is “well-suited to serve investors’ needs.” The narrative will include the investment advisers’ conflicts, compensation, business activities and disciplinary history. The amendments will further require that ADV Form 2 be available electronically through the SEC website, thereby providing investors with greater and more easily attainable access to investment adviser disclosures.
Chairman Schapiro expressed the utmost confidence in the new amendments at a recent SEC open meeting, stating that the new changes “will allow clients ready access to information about advisers of a wholly different character and quality than is available under the current regime. It will enable investors to better evaluate their current advisers, or comparison shop for a new adviser that best serves an investor's needs.” Chairman Schapiro even went so far as to predict that the new disclosure requirements “may result in advisers modifying business practices and compensation policies which might pose conflicts, in ways that better serve the interests of clients.”
The amended rules will be effective 60 days after publication in the Federal Register, and investment advisers should begin distributing and publicly posting new ADV Form 2 disclosure in early 2011.
Our attorneys have experience with investment adviser and broker state registration matters, including annual and as-need ADV updates and reviews. If you or your company has concerns about the new amendments to ADV Part 2, please do not hesitate to contact us.
A copy of the SEC press release detailing the ADV Part 2 amendments is available here.
The Murky Waters of State Commodity Laws
State commodity laws are notoriously antiquated and hard to follow. For many precious metals dealers, it can be difficult to navigate the applicable state laws in the various states where they do business.
This difficulty arises for several reasons. First, the Model State Commodity Code (“Model Code”) was drafted in the early 1980s, and it has not been updated since its inception to account for changes in technology that affect the way legitimate precious metals dealers do business. Second, the Model Code has only been enacted as it was written by a handful of states, so there is a lack of uniformity from state to state. Third, some states, like Arizona and Montana for example, have adopted substantive provisions of the Model Code, but these provisions have been incorporated into the state securities laws, instead of a separate Chapter or Act. Finally, there are states that have chosen not to regulate commodity transactions at all or that have decided to regulate them using a different approach than that set out in the Model Code.
The Model Code originally was drafted to provide state jurisdiction over generic commodities-themed frauds because the state securities acts were inadequate to address such schemes. As a result, the Model Code devised the concept of a “commodity contract”, which is defined as “a contract for the purchase or sale of commodities, primarily for speculative or investment purposes, and not for use or consumption by the offeree or purchaser.” Therefore, this new concept was intended to provide a better means of jurisdiction over only certain commodity transactions.
Unfortunately, for precious metals dealers, the two most common schemes at the time the Model Code was drafted were centered around the sale of precious metals that were never delivered or promises to store precious metals that were subsequently never purchased. Accordingly, there are stringent provisions defining and regulating the purchase of precious metals. However, the Model Code drafters included an exemption for transactions involving the purchase of precious metals if certain very specific requirements were met. One of those requirements is that delivery must be completed within 28 days, purportedly making it easier for retailers to avoid and regulators to identify unregistered futures contracts.
Essentially, the Model Code should have streamlined the process for determining whether illegal transactions have taken place. But though the Model Code may seem straightforward on its face, the inconsistency in adoption between the states and nuances among those states that have adopted the Model Code has created a veritable trap for unwary precious metals dealers and necessitates the need for experienced counsel who are aware of the these subtle differences.
The attorneys of Cosgrove Law, LLC have a unique knowledge and understanding of state and federal commodity regulations and exemptions, with an emphasis in the area of precious metals. Our firm is a member of the Industry Council for Tangible Assets that has compiled a 500-page, nationally recognized 50 state commodities survey. Our attorneys regularly provide advice to commodity dealers about relevant state and federal regulations and assist in internal review of company procedures. As part of our firm’s compliance services, we are also available to conduct audits or assist in developing an audit program to ensure ongoing compliance.
This difficulty arises for several reasons. First, the Model State Commodity Code (“Model Code”) was drafted in the early 1980s, and it has not been updated since its inception to account for changes in technology that affect the way legitimate precious metals dealers do business. Second, the Model Code has only been enacted as it was written by a handful of states, so there is a lack of uniformity from state to state. Third, some states, like Arizona and Montana for example, have adopted substantive provisions of the Model Code, but these provisions have been incorporated into the state securities laws, instead of a separate Chapter or Act. Finally, there are states that have chosen not to regulate commodity transactions at all or that have decided to regulate them using a different approach than that set out in the Model Code.
The Model Code originally was drafted to provide state jurisdiction over generic commodities-themed frauds because the state securities acts were inadequate to address such schemes. As a result, the Model Code devised the concept of a “commodity contract”, which is defined as “a contract for the purchase or sale of commodities, primarily for speculative or investment purposes, and not for use or consumption by the offeree or purchaser.” Therefore, this new concept was intended to provide a better means of jurisdiction over only certain commodity transactions.
Unfortunately, for precious metals dealers, the two most common schemes at the time the Model Code was drafted were centered around the sale of precious metals that were never delivered or promises to store precious metals that were subsequently never purchased. Accordingly, there are stringent provisions defining and regulating the purchase of precious metals. However, the Model Code drafters included an exemption for transactions involving the purchase of precious metals if certain very specific requirements were met. One of those requirements is that delivery must be completed within 28 days, purportedly making it easier for retailers to avoid and regulators to identify unregistered futures contracts.
Essentially, the Model Code should have streamlined the process for determining whether illegal transactions have taken place. But though the Model Code may seem straightforward on its face, the inconsistency in adoption between the states and nuances among those states that have adopted the Model Code has created a veritable trap for unwary precious metals dealers and necessitates the need for experienced counsel who are aware of the these subtle differences.
The attorneys of Cosgrove Law, LLC have a unique knowledge and understanding of state and federal commodity regulations and exemptions, with an emphasis in the area of precious metals. Our firm is a member of the Industry Council for Tangible Assets that has compiled a 500-page, nationally recognized 50 state commodities survey. Our attorneys regularly provide advice to commodity dealers about relevant state and federal regulations and assist in internal review of company procedures. As part of our firm’s compliance services, we are also available to conduct audits or assist in developing an audit program to ensure ongoing compliance.
Monday, July 26, 2010
SEC Approves New Rules For Investment Adviser’s ADV, Part 2
SEC registered Investment Advisers are required to give each of their customers a copy of Part 2 of their Form ADV, commonly referred to as “the brochure.” According to the SEC, the brochure is supposed to explain the Investment Adviser’s investment strategies and business practices, and yet it may not describe them “in a way that is truly accessible to the investor.” Early last week, amendments to the current format of the brochure were approved by the Commission unanimously. According to the SEC, “these changes are designed to provide clients with greater information about the individuals who will provide them with investment advice.” Since Investment Advisers owe their clients the highest of fiduciary duties when it comes to peoples’ life savings, “greater information” doesn’t seem like a bad idea. For a full copy of the SEC’s press release regarding the amendments, click here.
Two of the more critical amendments require the Investment Adviser to disclose any disciplinary or legal event relevant to the client’s evaluation of the integrity of the Investment Adviser as well as background information regarding information about the specific individuals that will be serving the clients. Currently, certain large national Investment Advisers distribute slick brochures that fail to disclose legions of customer lawsuits and that hype up the background of only high-profile managers who actually have no contact whatsoever with the client or his or her portfolio.
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