Q:
On a periodic basis, I prepare appraisals of my clients' accounts. Some of my clients have expressed interest in continuing to receive these appraisals, others have told me that they don't review them, and a few have told me that they would prefer not to receive them at all.
So, I've decided to provide my appraisals only to clients who have expressed an interest in receiving them. But I'm worried that in making this decision, I may inadvertently be opening myself up to a problem with the other clients, my managers or some securities regulations. What do you think?
A:
Providing account appraisals is a valuable service, but initially the rep's instincts are correct. In fact, an arbitration panel or a court may construe failure to provide the account appraisal on certain accounts (de spite a client's insistence not to do so) as an indication that the registered rep has something to hide. Therefore, if the rep wishes to provide this service he should prepare appraisals on all client accounts, regardless of whether they are actually delivered to all clients.
Although this might seem like a considerable amount of work, the exercise provides some protection for the registered rep. If a client decides to forego receipt of the appraisals, the rep should then create a record of the appraisal itself, as well as correspondence with the client confirming that he or she does not want to receive the document. If the registered rep also undertakes the appropriate action called for by the appraisal, any claim by the client that the registered rep did not review the account, was unaware of the client's needs, or made recommendations that were unsound or poorly researched would likely fail. It would also protect the rep from claims that he or she was doing something for one client and not for another.
Ultimately, these appraisals are also very useful for the rep as an individual. They provide an adequate basis to make recommendations for both buying and selling securities in any particular client's account. They can serve as a basis for continued discussion with the client, and they can be used to market the rep's skills and services to clients.
In sum, the appraisal is useful both for the rep as well as the client. And if the rep keeps careful records of the appraisals, as well as all correspondence regarding such documents with clients, he or she will likely have a suitable defense if a related regulatory inquiry or civil litigation ever crops up.
Ernest E. Badway
Saiber Schlesinger Satz & Goldstein, LLC
New York City
212-461-2323
[email protected]
A:
To quote Mark Twain, “There are three kinds of lies — lies, damn lies and statistics.” Let's just say that with the latter, he could well have been referring to account summaries. Sending account summaries (or appraisals as you call them) to your clients can be risky business. There are many ways of presenting financial information. If the way you choose to present it is incomplete or misleading in any way, you can expose yourself to potential claims from disgruntled clients, and a possible NASD or NYSE regulatory action.
For example, under NYSE Rule 472 and NASD Conduct Rule 2210, comunications with clients must be fair and balanced, and may not misrepresent or omit any material facts. NYSE Rule 476 and NASD Conduct Rule 2110 require all registered representatives to adhere to just and equitable principles of trade.
Both regulators (now one under FINRA) have brought actions against registered representatives who prepared and issued account statements that overstated, or otherwise misrepresented, the value of their customers' accounts.
In the most recent case, handed down in June 2007, the NYSE found that a particular registered representative violated NYSE Rule 476 (Just and Equitable Principles of Trade) by providing clients with false account statements and/or account summaries that inaccurately reflected the value and activity in their accounts. (Gustavo Flavio Lichtmajer - NYSE Hearing Board Decision 07-050). The sanction imposed by the NYSE was a censure and a bar from the industry.
The NASD has also sanctioned registered representatives for sending account statements to clients that misrepresented the value of their accounts: See Bruce Robert Mitchell, NASD Case No. CLI20050009 (December 2005); and John Sheldon Cotton, NASD Case No. C05040090 (June 2005).
In addition to the issuance of false account summaries, many of these cases involved reprehensible conduct, such as the misappropriation of client funds. The fact remains that the inaccurate information provided to the customers about the value and activity in their accounts served as independent grounds for the NYSE and NASD to find a violation of their rules.
In addition to regulatory actions, if the account summary you issue is inaccurate and the client has suffered losses related to the information on the summary, you may find yourself a respondent in an arbitration proceeding brought by your client. The more information you include on the summary, the greater the chance some of it will be inaccurate in one way or another.
For example, listing the value of an exchange-traded stock or option on a specific date seems relatively benign. But, if you choose to include other securities that are illiquid, or whose values are not easily determined, you may be treading on dangerous ground. This is especially true if you go beyond listing the simple value of a security and decide to represent gains or losses over time (in either dollars or percentages), or if you include comparisons against selected indices or benchmarks. Your decision to choose one time period over another, or one index over another, may be scrutinized by a client's attorney, and you will be pressed to defend your choice and justify its appropriateness.
The fact that you are sending account summaries to clients may also give a client's attorney the ammunition to argue that the firm's monthly account statements are too complex and confusing for the client to understand. Your firm may not appreciate hearing that you believe the summaries prepared by you are more clear-cut and less confusing for the client. In every instance, you should get approval from your supervisors before sending any such summaries to your clients. In fact, this is precisely the kind of “communication” that should be reviewed and approved by management personnel before it is sent to the client.
The bottom line is that although you are trying to provide superior service to your clients, the risk you take when you send your clients account summaries is disproportionate to any benefit you may receive from such a practice.
Cary S. Lapidus
The Law Offices of Cary S. Lapidus
San Francisco
415-296-7101
[email protected]
Encounter a situation at work that makes you uncomfortable? Hesitant to change firms because you're unclear how your clients could be affected?
Don't fret. Send your questions to Registered Rep. Contributing Editor Ann Therese Palmer at [email protected]. Then, look for an answer in a future Ethical Rep column. Anonymity guaranteed.
The Ethical Rep.
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New York, N.Y. 10011-5300
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