Q:
I didn't receive any accounts during an account reassignment after a broker left the firm. My manager said it was because I was on vacation and thus could not call the clients. I suspect that it had little to do with that and more to do with me being out of favor with the manager. If other brokers who were on vacation or not in the office received accounts, what should I do, if anything?
A:
Unless you are a member of a class protected by law or can show discrimination against you, you have no legal recourse and might even hurt your career by complaining formally. Absent a specific written agreement, a firm and its managers have no obligation to supply a broker with clients, whether they be call-ins, walk-ins, leads or reassignments. Historically, a manager's source of power and sway has been the ability to reassign the clients of a retiring or departing broker to the manager's chosen favorites. Nothing in the law or industry custom has changed that, unless the manager engages in actual discrimination in the reassignment process by, for example, excluding women or persons of color. A proper reaction to the slight is to repair your relationship with the manager — or pick luckier times to be out of the office.
Anthony Paduano, Paduano & Weintraub LLP, New York.
Phone: 212-785-9100; email: [email protected].
A:
Your rights in this situation depend on your contract with your company and the internal policies of your company. You may have a legal claim if either your contract or your company's internal policies specifically give you the right to participate in any account reassignments. Absent such explicit terms, your manager probably has discretion to reassign the accounts of a departing broker, as he deems appropriate. You might contact a lawyer, but your best chance of securing a satisfactory outcome may lie in your company's corporate structure, rather than courts or arbitration. If you haven't already done so, have a polite but frank discussion with your manager — and, as appropriate, his supervisors.
Byron Keeling, Holman, Keeling & York, P.C., Houston.
Phone: 713-223-2220; email: [email protected].
Q:
I have reason to believe that a broker who works at the same firm I do is engaging in unethical behavior or perhaps in outright fraud. This person is not only dishonest with his clients but is “churning” their accounts. I keep thinking the compliance department will finally catch up with him, but apparently they haven't. Almost all of this broker's clients are senior citizens. One part of me says it is my duty to report these obvious abuses, but I fear retribution from my manager and my firm. Will I be labeled a trouble maker or a good citizen looking out for the firm and its clients?
A:
Welcome to the whistleblower dilemma: Are the potential costs of reporting abuses, such as being called a snitch or worse, worth the benefits of saving the firm's reputation and a clean conscience? You are certainly not alone — whistle blowers were selected recently as the Time magazine's “Person of the Year.”
Let me assume that you are with a brokerage firm where registered reps are compensated by a percentage of the commissions that are generated by transactions. Let's also assume that you work closely enough with this person to know the facts and that this activity is clearly not in the clients' interest.
The Securities & Exchange Act of 1934 explicitly addresses manipulative, deceptive or fraudulent acts and views churning as such an act. Because of the importance of this issue, most financial firms today have clear statements on ethics and how to implement them.
Some specific steps: (1) Be sure your facts are correct. Remember some seniors love to make a lot of trades. (2) Check your own motives. Be sure this is not driven by a personal issue with another individual. (3) Do some reality testing. Is there anyone in the company you can talk to? It's a great blessing to have a boss you can trust, but, if not, then co-workers or a company hotline. You can even address the situation as a hypothetical one: “What if … ?”
Raymond O. Wicklander Jr., Managing Director, Great Lakes Advisors, an institutional investment firm. 123
North Wacker Dr., Suite 2350, Chicago, IL 60606; Phone: (312) 553-3700; email: [email protected].
A:
While the broker does not have a legal obligation to report the other broker's conduct, he may have a moral obligation to report it to ensure that clients of the firm are not defrauded. Were it not for the activities of whistle blowers, massive frauds of the magnitude of Enron might not have come to light when they did and more innocent people would have been harmed.
But the conscientious broker should not go to his manager, who may himself be aware of the activities and caught in his own ethical trap. Rather, the broker should go to the firm's highest compliance officers. The compliance department's sole purpose is to ensure that the firm and its representatives comply with the letter and spirit of the various laws and regulations covering the industry.
If the broker is concerned about retribution, there are laws that might protect him. First, if the brokerage firm is a publicly traded company, the Sarbanes-Oxley Act contains a specific section, “Whistleblower Protection for Employees of Publicly Traded Companies” (Section 1514A). It expressly prohibits any public corporation from taking any adverse action against an employee who helps uncover fraud. If the brokerage firm is not a public company, many states have whistleblower statutes that prohibit retaliation against employees who complain about fraudulent and unlawful activities that affect members of the public at large.
Erwin J. Shustak, Shustak Jalil & Heller, New York and San Diego. Tel: (619) 696-9500; email: [email protected].
Q:
Why are SEC, NASD, NYSE and other industry rules so vague? Some are so ambiguous that no one could possibly understand them Many industry rules mention excessive activity and “too much commission” without ever quantifying what constitutes too much or excessive. Aren't laws designed to put people on notice as to precisely what conduct will be punished?
A:
It may sound crazy, but rules are kept ambiguous on purpose. Regulators are concerned that, if definite, detailed standards are used, reps would think they are licensed to do everything not specifically prohibited.
Former SEC Division of Enforcement Head Stanley Sporkin was particularly adamant in his opposition to definite standards. He claimed they would serve as a “road map to fraud.” Specifically, Sporkin was concerned that reps would conceive frauds that could not be anticipated by the agency in its rule making. Only broad standards could prevent abuse.
An example? Take the concept of “materiality” under the federal securities laws. While the Supreme Court has said this is an objective standard, in fact it is quite subjective, requiring disclosure of information where there is a substantial likelihood that a reasonable investor would view the information as affecting the total mix of information made available for an investment decision.
It would be easy to make a bright line rule for materiality. For example, the SEC could recommend that information need not be disclosed unless it affects, say, 5 percent of a line of business. Would this allow you to exclude 4 percent of business from each of the 20 lines of business of a company? Would your answer change if 19 of the 20 lines of business contributed only 10 percent of the company's business?
Jerry W. Markham, Professor of Law, Florida International University, and Thomas L. Hazen, Professor of Law, University of North Carolina at Chapel Hill, authors of: Broker Dealer Operations Under Securities and Commodities Law: Financial Responsibilities, Credit Regulation, and Customer Protection, West Group, 2002.
A:
Too much ambiguity in laws allows people to interpret the regulation in such a way that is most convenient for the one interpreting. In this situation, self-interest is often paramount and concern for others is muted.
Too much specificity in a regulation often results in a focus on the letter of the law rather than the spirit. The question of how this regulation is supposed to enhance public interest, the meaning and purpose of the regulation gets lost and people tend to focus on the minimal response required.
Rev. Oliver F. Williams, C.S.C., Director of the Center for Ethics and Religious Values in Business, University of Notre Dame. Phone: (574) 631-6072; email: [email protected].
Welcome to The Ethical Rep. Starting this month, more than thirty prominent securities industry attorneys, experts and law school professors will answer questions you, our readers, send anonymously to us.
Encounter a situation at work with which makes you uncomfortable? Seen someone pushing the envelope? Hesitant to change firms because you're unclear how your clients could be affected? Don't panic. Just ask our experts.
Send your questions to Registered Rep.'s Contributing Editor Ann Therese Palmer who can be reached at:
Mail: Registered Rep., 249 West 17th Street, Third Floor, New York, N.Y. 10011-5300
E-mail: [email protected]
Fax: (913) 514-3890
