Q:
Is there any way my employer can find out if I receive W-2 income from other sources, which, by the way, are not from other brokerage firms?
When I called the IRS, I was told there is no way it would disclose that confidential information to a brokerage firm's human resources department. But, I'm still worried. Other than someone leaking the information to my firm, is there any way that my firm can compel anyone to disclose other W-2 income that I'm receiving?
A:
As the questioner was evidently advised by someone at the IRS, absent a waiver from the employee, an employer cannot obtain an employee's tax information or W-2 income information from federal or state tax authorities. Similarly, the secondary employer is not at liberty (without the consent of the employee) to disclose that information to the employee's brokerage firm. Neither NASD nor NYSE rules provide a basis for arguing that registered reps, as a condition of association and membership, have waived their right to financial privacy or authorized the disclosure of that information.
The implication of the question, however, is troubling. It suggests that the questioner may be concealing outside business activities from his broker/dealer. Both the NASD and NYSE impose affirmative obligations upon registered representatives to provide written notice to, and obtain authorization from, their employers to engage in outside securities and/or commodities account activities. Indeed, the NASD requirement extends to all outside business activities. Although the form and content of the notice is up to the individual member, the fact of secondary employment is a required disclosure on Form U4, and the failure to disclose the outside activity would render the registered rep's U4 false.
The intent of this requirement is to advise the b/d of securities-related activities and potential conflicts so that it may, where appropriate, conduct its supervisory responsibilities. The questioner, however, seemingly wants to avoid providing full information to his b/d. Even assuming that the questioner has advised his b/d that his other employment does not implicate b/d activities, the SEC has made clear that the b/d may not meet its supervisory obligations by simply accepting unverified representations.
Thus, while the questioner may have an interest in protecting information about his income, the b/d has a legitimate need for that information and an affirmative obligation to maintain its confidentiality in the absence of employee-related misconduct (for example if the employee is “selling away”).
Accordingly, the b/d can, and should, demand detailed information from the employee regarding the nature of the employee's outside business activities. The questioner may refuse to provide that information or provide false information, and the employer generally will be unable to obtain that information from other sources.
The employer, however, will likely have other options under its employee manual, presumably including termination and notice to the regulators that information in the employee's U4 may be false.
Timothy Carey
Gardner Carton & Douglas
Chicago
312-569-1413
[email protected]
gcd.com
A:
Brokerage firms almost universally have internal policies set forth in their compliance manuals that prohibit outside business activities, unless approved in advance. This is to prevent employees from engaging in activities that may reflect negatively on the reputation of the firm. It is also to prevent “selling away” of securities or other investment products over which the firm has had no input, and for which the firm may be held liable.
Discovery of this kind of activity can be grounds for immediate dismissal, and it doesn't really matter what kind of outside business you are engaging in. Don't deceive yourself into believing that you are insulated if the other income is derived from something far removed from securities. It is a justifiable rationale for termination, no matter what you are doing.
Here's a great example: I recall a broker who sold auto stereo gear both before and during his employment by a notorious boiler room during the early 90's. Let's just say that this firm was not known for ethical practices and fair dealing with customers. After he was the target of numerous customer complaints for cold-call soliciting of pumped-up microcaps, then ignoring client sell orders (in accordance with the firm's “no net sale” policy), the b/d fired him citing his moonlighting at the auto-parts store. This was a situation where the broker was following firm policy, not ignoring it — with the exception of his outside employment — and that's what was given as the reason for his termination.
Either be a full-time broker, or get written firm approval for any outside activities.
Philip Aidikoff
Aidikoff & Uhl
Beverly Hills, Calif.
310-274-0666
[email protected]
securitiesarbitration.com
Q:
Recently at a social event, a co-worker's client told me another local broker (who is a competitor) had made some disparaging remarks about my co-worker. Part of his comments sounded like a definitive, misrepresentation about his past performance.
Do I have an ethical responsibility to notify my co-worker, the NASD and any other regulators?What is the NASD's stance on reporting misrepresentative solicitations and/or disparaging and slanderous remarks about other brokers?
If you are a registered representative with no supervisory responsibility you are not legally obligated — absent some other duty — to report it to either the co-worker, the firm or the NASD. However, if you are a securities principal, you may have such a reporting obligation. Nonetheless, as you correctly note, you may also have ethical considerations concerning this information.
Before deciding on your next step, please consider the following when evaluating your options. If you report this information to your co-worker, your co-worker will most likely seek to address these comments, including contacting the client and/or the other broker. The contact may have ripple effects between the competing brokers and the firms. For example, your co-worker may decide to file an arbitration claim or report it to the NASD. Further, your firm may begin an investigation and report the matter on your colleague's Form U4. Thus, you will be a witness. Similarly, if you report the situation to the NASD without notifying your colleague, the NASD would contact all the parties, including your colleague, and you will be a witness.
Any reporting or legal action will also invariably result in both the broker and the client denying that any conversation occurred. Most clients do not want to become involved in broker disputes and will look for any exit to avoid such participation. The offending broker will also seek cover from a potential lawsuit or an NASD investigation by denying that he or she ever made such comments to any customer.
This strategy is better known as “saving one's own skin,” and the result is you are the person left holding the “bag.” Your motives — however honorable — will be questioned, and someone may accuse you of spreading slander for some perceived advantage over your colleague.
Your question, nonetheless, raises concerns over the NASD's stance on these misleading solicitations and/or disparaging, slanderous remarks made by brokers about other brokers. The NASD frankly ignores the problem, leaving parties to the arbitration process.
In fact, there has been no public NASD attempt to investigate these types of disparaging comment cases. However, the NASD is quick to spring into action if these remarks find their way to a broker's Form U4 or U5 as some form of customer complaint, an allegation of untrustworthiness, fraudulent activity or an internal investigation. The NASD investigates these claims — usually assuming the information contained on the Form U4 or U5 is accurate. Your colleague must then disprove the alleged activity. In other words, the NASD attacks your colleague using the slanderous allegations that you reported. Clearly, the NASD should investigate these situations with a more jaundiced eye to stop these illegal customer solicitation practices. Such a shift in the NASD's position would make these solicitations the exception and not the rule, and a few prosecutions would level the playing field.
In sum, although you may feel a moral obligation to disclose your secret, you must carefully weigh the situation before commenting to either the broker, the firm or the NASD. In the end, you might be better off seeking to convince the client to come forward and report it, thus avoiding personal participation.
Ernest Badway
Saiber Schelesinger Satz & Goldstein
Newark, N.J.
973-622-3333
[email protected]
Saiber.com
Ethical Rep is a monthly feature in which more than 30 prominent securities attorneys, experts and law school professors help Rep. readers deal with work-related ethical quandaries. Have you encountered a situation at work that makes you uncomfortable? Are you confused about how your responsibilities to clients might change as regulations continue to evolve? Drop a line to Rep.'s contributing editor, Ann Therese Palmer, and our group of experts will help you work through the problem.
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