More On Legal & Compliancefrom The Advisor's Professional Library
- Updating Form ADV and Form U4 When it comes to disclosure on Form ADV, RIAs should assume information would be material to investors. When in doubt, RIAs should disclose information rather than arguing later with securities regulators that it was not material.
- RIAs and Customer Identification Just as RIAs owe a duty to diligently protect their clients privacy and guard against theft, firms also play a vital role in customer identification. Although RIAs are not subject to an anti-money laundering rule, securities regulators expect advisors to address these issues in their policies and procedures.
FINRA ordered Bank of America-Merrill Lynch to pay one of its former financial advisors about $1.5 million in compensatory damages and change his Form U5 last week – an unusual outcome for this type of dispute, says one legal expert. And, given the results, financial advisors (and broker-dealers) can learn a few lessons from this type of conflict.
“This case is interesting in that the respondent, or advisor in this case, actually got something,” said attorney Patrick Burns, who specializes in compliance topics, in an interview with AdvisorOne. “This is somewhat unusual and is over and above the norm in the world of arbitration.”
Reviewing such arbitration entails a fair amount of guess work, explains Burns, who is based in Beverly Hills, Calif. “There are no detailed reasons given for the result of the decision making,” he added.
Despite the speculation involved, the attorney noted, “One would assume that FINRA was quite unhappy with the other side [in this case Merrill] before rendering a judgment, proceedings or a combination of the two.”
Promises, Puerto Rico
The recent FINRA ruling came nearly two years after Merrill Lynch filed its claim against Angel E. Aquino, following his termination from the firm in Puerto Rico. He worked for Merrill in Puerto Rico for about three years, beginning in the fall of 2006. Merrill Lynch had requested nearly $970,000 for the promissory note and more than $500,000 for attorneys’ fees and other associated costs.
(Promissory notes are upfront forgivable loans offered to advisors being recruited by certain broker-dealers. They must be repaid if the advisor resigns or is fired before the loan is forgiven.)
Aquino filed a counterclaim, asking for more than $150 million related to lost commissions, earnings and other compensations; he later reduced the request to about $13 million in compensatory damages. The advisor, who now works in Miami for Morgan Stanley Smith Barney, also requested that his U5 termination record be corrected or expunged.
Before resolving the dispute, six pre-hearing sessions were held in San Juan, Puerto Rico, from February 2010 to April 2011, along with 19 hearing sessions from July 2010 to May 2011.
The FINRA panel ordered that the language in Aquino’s Form U5 be changed to: “Mr. Aquino was terminated not for cause.” This move expunges or clears the following statement: “Mr. Aquino’s employment was terminated on September 21, 2009, for failure to adhere to the firm’s policies and standards regarding employee conduct. The matter did not involve customer accounts.”
Three Legal Lessons
1. Consider U5 action: “In circumstances in which the U5 [remarks] are unfounded, taking action could be helpful,” Burns said. ““It looks like [BofA-Merrill] has complied with that part of the order,” judging from the FINRA website, he added.
2. Proceed carefully on notes: “What jumps out is that, in most cases, things do not turn out this favorably for those being pursued over promissory notes. There are plenty of cases that end up the other way,” the attorney explained.
“However, the promissory-note issue is very tough to win,” Burns said. “You need additional facts that this case seems to have had, which is what sets this case apart from cases involving a rep that does not want to pay back the note.”
Still, most cases do not go in favor of advisors. In June, FINRA ruled that two ex-Morgan Stanley advisors must pay about $4.3 million-plus to their former broker-dealer in a case involving a breach of promissory notes and other agreements.
3. Pick the right lawyer: When asked whether or not this represents a case of David vs. Goliath, Burns said, “It seems like it. I’ve not heard much about the law firms [representing Aquino] in Puerto Rico, but it looks like they did a fine job throughout the process.”
Aquino’s law firms were Munoz Boneta Benitez Peral & Brugueras and Romero Law Offices of Hato Rey, Puerto Rico. BofA-Merrill was represented by Rubin, Fortunate & Harbison of Paoli, Penn.