Yield of Dreams

Another Cautionary Tale of Watch Where You Go

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A court complaint filed yesterday can provide advisors with a valuable lesson to be careful where you end up…CautionTape

A former BEST Direct Securities rep filed the class action complaint against FINRA, seeking injunctive relief from what it called “constitutional violations.” The complaint involves a FINRA rule that requires broker/dealers that hire a certain percentage of brokers from a “Disciplined Firm,” one that had its registration revoked or expelled, to implement supervisory procedures, including taping. The rep used to work for Brewer Financial, which was forced to close after its executives were charged with fraud. After joining BEST, the firm was subject to the supervisory rule and terminated the rep this year “for the sole purpose of avoiding the taping requirements of FINRA Rule 3010(b)(2),” the claim says. It also claims this rep had no involvement with the allegedly fraudulent activity at Brewer. By association, the rep is now “tainted,” and this will interfere with his ability to find a job, said Nicholas Iavarone, attorney with Block & Landsman and co-counsel on the case.

From the complaint:

Whether an individual broker committed any wrongdoing is wholly irrelevant for the purposes of FINRA Rule 3010(b)(2)(H). The mere fact that the individual broker was registered with a “Disciplined Firm” taints the innocent, individual broker.

Let’s step back from this case for just a second and look at the big picture. This case involves a lot of ‘he said, she said’ at this point, and I’m not making a judgment one way or the other, but this can serve as a cautionary tale for advisors who are looking to join a new broker/dealer.

These days, b/ds are imploding left and right for all sorts of reasons, whether it’s a bad private placement or other problematic alternatives, regulatory or disciplinary action against the firm that revokes their membership, or failure to pay arbitration fees. And this is something we’ve written about, blogged about, filmed about, but the tragic tales keep coming out of the wordworks.

No matter which way you look at it, bad firms are happening to good advisors on a daily basis. This complaint, whether it has validity or not, just serves as another reminder of the world in which we live. The lesson is—you better be darn sure you don’t land at a tainted firm, or else you could end up being tainted yourself. Jonathan Henschen of recruiting firm Henschen & Associates likened these reps to the “lepers of the industry.” According to him, this is how some firms perceive them:

Don’t touch them. They’ve got leprosy. These are scary people. They’ve got exposure to these products, and we don’t want to be contaminated by them and have possible litigation roll up to us.

Advisors are going to have to step up their due diligence of the broker/dealers they affiliate with. There are just too many risks in today’s world.

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Casting a gimlet-eye on asset management issues.

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