Broker-Dealers

Wealth Advisor Institute Calls for Reforms of the U-5 Termination Process For Brokers

Published on: September 2, 2007 | by Shepherd Smith Edwards & Kantas, LLP

The Wealth Advisor Institute wants the way U-5 termination forms are filed to be reformed. The forms are used for reporting information about why a broker has left a firm. A copy of the form then has to be given by the broker to a new employer.

The WAI called on NASD (Now part of FINRA) to make the reforms after the New York State Court of Appeals gave total legal immunity to the information that firms choose to include on U-5 forms. This means that under New York law, brokers cannot obtain monetary damages in rulings involving U-5 defamation cases. An appeals court in California issued a similar ruling regarding U-5 forms two years go.

The WAI says it was appalled by the New York Court’s decision and expressed worries “advisers can end up getting sold out” by their firms.

New York Court Sides with Ameritrade – Redefines “Best Execution”

Published on: August 5, 2007 | by Shepherd Smith Edwards & Kantas, LLP

Justice for investors is simply denied in New York courts and a trend of no justice for investors threatens to spread nationwide as more and more “activist” business-friendly judges are appointed to the federal bench.

The U.S. District Court for the Southern District of New York, known to be friendly to Wall Street, has struck again, this time ruling Ameritrade was not required to route orders to multiple markets to fulfill its duty of “best execution” of trades. This is one of many case filed by investors which was dismissed, with prejudice, in a decision which could affect investors nationwide. (Gurfein v. Ameritrade Inc., S.D.N.Y., No. 04 Civ. 9526 (LLS), 7/17/07

Although language on Ameritrade, Inc.’s Website advertised that it had the capability of distributing customer orders to multiple markets and could thereby seek best execution, the judge decided this did not oblige Ameritrade to route orders to different markets for execution. The judge also found Ameritrade had no duty to the plaintiff to execute the limit order at the “best price” or fulfill the “best execution” regulatory requirement.

Schwab to Distribute $3.5 Billion to Its Shareholders by Buying Back Over 100 Million Shares

Published on: July 11, 2007 | by Shepherd Smith Edwards & Kantas, LLP

After sale if its U.S. Trust subsidiary to Bank of America for $3.3 billion, Charles Schwab Corporation has decided to distribute even more than the proceeds of that sale to its shareholders by buying back shares and paying a special dividend.

Under the plan, San Francisco-based Schwab will pay up to $22.50 per share for 84 million shares of its own stock — 10 percent above the previous closing price. It will guarantee selling stockholders at least $19.50 per share, and also purchase up to 18 million additional shares from its founder. Charles Schwab will himslef receive over $400 million and will maintain his stake at its current level of 18%, which would be valued at over $4.5 billion.

The auction, which covers about 7 percent of Schwab’s outstanding shares has already begun and is to be completed by July 31. In addition to $2.3 billion to buy the stock, in August Schwab will also pay $1.2 billion to shareholders through a $1 per share special dividend.

Follow Up: North Carolina Treasurer Urges Elimination of Brokerage Firms Voting of Client Shares

Published on: July 5, 2007 | by Shepherd Smith Edwards & Kantas, LLP

On June 11, 2007, we published an article entitled “Should Brokerage Firms Continue to Vote Their Clients’ Shares without Permission, Including for Corporate Directors?” State Treasurer Richard Moore of North Carolina has recently answered that question with a resounding “No!”

In a statement, Moore contends that allowing such votes thwarts corporate reform and prevents shareholders of a company from having adequate representation in director elections. Moore is also a board member of NYSE Regulation and called on SEC to approve an NYSE proposal that would change its Rule 452 to eliminate broker voting in all director elections.

Under the NYSE’s current rule, brokers may vote on “routine” proposals if the beneficial owner of the stock has not provided specific voting instructions to the broker at least 10 days before a scheduled meeting. The proposed change would end all voting of customer shares for directors by categorizing all such elections as “non-routine.”

MML Investors Services, NYLIFE Securities, Securities America and Northwestern Mutual Investment Services Fined a Total of $1.2 Million for Mutual Fund Violations

Published on: July 2, 2007 | by Shepherd Smith Edwards & Kantas, LLP

The NASD fined four firms for mutual fund sales violations and for failures to properly supervise such sales. The fine amounts are $473,000 against MML Investors Services, Inc., $354,000 against NYLIFE Securities LLC, $322,000 against Securities America, Inc. and $100,000 against Northwestern Mutual Investment Services.

The violations charged include sales of Class B and Class B shares, causing investors not to receive the benefits of price breaks on Class A shares, failures to properly notify clients of available cost free transfers from one mutual fund to another at the funds’ net asset values and failure to have adequate supervisory systems and procedures to prevent such violations.

In resolving the case, MML and Northwestern must also pay their clients who qualified for, but did not receive, the net asset transfer benefits and pay refunds to those who did not benefit from the price breaks. Including the refunds already paid, it is estimated that thousands of clients of these two firms will receive a total of more than $6.5 million.

NASD and NYSE Seek Guidelines To Supervise Electronic Communications

Published on: June 23, 2007 | by Shepherd Smith Edwards & Kantas, LLP

NASD and NYSE regulators, which will soon merge, jointly released proposed guidance for broker-dealers to establish policies and procedures on electronic communications employees use to conduct business and to “take reasonable steps” to monitor such compliance.

The two securities self-regulatory organizations (SRO’s) stated that brokerage firms should have a supervisory system in place to make sure brokers are complying with all applicable rules when employing all types of electronic communications.

The SRO’s added that, once “reasonable” policies and procedures are in place, the firms would themselves decide what “additional supervisory policies and procedures are required to adequately supervise their business and manage the member’s reputational, financial, and litigation risk.” Unlike SRO rules, SRO “guidelines” do not require approval of the SEC.

News Flash: Brookstreet Securities Closes its Doors

Published on: June 22, 2007 | by Shepherd Smith Edwards & Kantas, LLP

Today was “Black Friday” for Brookstreet Securities, as it closed for business. The firm’s 650 independent contractor brokers have been terminated, says Stanley Brooks, President of the firm. Brookstreet clients are left in limbo, many with huge losses in their accounts.

As reported earlier this week, Brookstreet Securities Corp, based in Irvine, California, told its agents that “disaster” had struck and it was in eminent danger of folding. The e-mail communication (previously posted on this site) claimed this was as a result of mark-downs on collateralized mortgage obligation securities (CMOs) by Fidelity’s National Financial Services (NFS), which cleared trades and maintained accounts for Brookstreet.

Some of Brookstreet’s clients report that their accounts continued to fall in value this week. Yet, if they attempted to do anything NFS told them they must to talk to their (Brookstreet) broker, but their broker was not answering the phone. Meanwhile, Some of these clients’ margin accounts slipped into the “red”, meaning not only have these investors’ funds disappeared but NFS now claims the investors owe it money!

Will Brookstreet Securities Be Wiped Out by a CMO Debacle?

Published on: June 21, 2007 | by Shepherd Smith Edwards & Kantas, LLP

Claims are being filed and steps are being taken toward a class action to assist investors recover their losses after Brookstreet Securities reportedly advised its 500 brokers via E-mail that “disaster” had struck which could soon close the firm! Text of the firm’s internal e-mail is as follows:

“Disaster, the firm may be forced to close…

“Today, the pricing system used by National Financial has reduced values in all Collateralized Mortgage Obligations. Many of those accounts were on margin and have suffered horrendous markdowns and unrealized as well as realized losses.

HSBC Brokerage Ordered by NASD to Pay $250K to Settle Best Execution Charges

Published on: June 11, 2007 | by Shepherd Smith Edwards & Kantas, LLP

HSBC Brokerage, a New York firm which allegedly directed all government securities orders to an affiliated broker-dealer, agreed to pay $250,000 to settle NASD charges it failed to have adequate systems in place to ensure the best execution for its clients.

Allegedly the firm routed orders to affiliate, HSBC Securities (HSI), without taking adequate steps to ensure that its customers could not get better prices through other sources. The NASD said in a news release that “HBI’s inability to provide documentary evidence of its supervisory review for best execution of trades inhibited NASD’s ability to review transactions for best execution.” HBI settled this action without admitting or denying the charges.

Prior to a merger of the two related firms, HBI’s retail brokerage business was primarily located in HSBC bank branches, the NASD said. To support the retail business, HBI operated a trading desk to handle orders placed by brokers.

Should Brokerage Firms Continue to Vote Their Clients Shares Without Permission, Including for Corporate Directors?

Published on: June 11, 2007 | by Shepherd Smith Edwards & Kantas, LLP

Few stockholders realize that when their shares of stock are held at a brokerage firm that firm can vote their shares without a “proxy”. Thus, if an investor owns 100 shares of XYZ stock held at ABC brokerage firm, without the investors permission, ABC firm can cast the investors vote in annual meetings of XYZ, including for XYZ’s directors.

At a recent meeting at the SEC on the long debated issue, Catherine R. Kinney, president and chief executive officer of the New York Stock Exchange, announced that the NYSE has agreed to amend its rules to eliminate broker discretionary voting, but only in the election of directors. There is no proposal to stop brokerage firms from voting their clients’ shares, without permission, on other matters.

A NYSE rule states that brokers may vote on “routine” proposals if the beneficial owner of the stock has not provided specific voting instructions to the broker 10 days before the voting date. “Routine” proposals have been interpreted to include such important votes as election of directors. The proposed change will consider election of directors as “non-routine.” The change was previously proposed but revised to exclude such voting by mutual funds.