November 29, 2013

How To Verify the Status of a Securities Broker or Investment Adviser

Photo credit: Ahmad Navvavvi via foter
It is important that anyone selecting a securities broker or investment adviser obtains competent, ethical guidance from a properly-licensed professional. I have personally witnessed the devastating effects of failing to properly vet investment professionals, and perhaps you have as well.  As someone whose practice includes securities law, I am frequently asked by clients, (non-securities) lawyers, and friends to investigate the background of a securities broker or investment adviser. I typically perform the check myself (as a personal favor--not as a professional service) and report back with the results. However, this is the sort of research that doesn't actually require a lot of specialized education. As a public service, this post will share the information necessary to enable you to perform a very basic due diligence investigation of a broker or investment adviser on your own.

[Although most of my posts here on The North Carolina Business & Banking Law Blog are intended to be read by professionals, I sometimes explain basic concepts for the general public. This is one of those posts in which my aim is to inform everyone...including the uninitiated.]

Brokers vs. Investment Adviser

Let's begin by being clear about the terminology. People often use the terms "broker" and "investment adviser" interchangeably, but they do not mean the same thing.  At the most basic level, investment advisers provide advice about investments, while brokers handle transactions in securities.  (You can read a bit more about the differences here.)


A "broker" is defined by Section 3(a)(4)(A) of the Securities Exchange Act as "any person engaged in the business of effecting transactions in securities for the account of others." Often, it is easy to determine whether a person or entity is a broker. For instance, one who regularly executes transactions for others on a stock exchange clearly is a broker. (For purposes of this article, I am not going to explain the meaning of the term "dealer" and how it differs from the term "broker." Furthermore, I am not going to address the complex questions around the various service providers whose status as a broker is ambiguous. For purposes of this article, I am referring simply to people and businesses that execute trades in stocks and bonds for other people and businesses.) The individuals who work for a broker are called "associated persons" or "registered representatives."  This is the case whether they are employees or independent contractors. Although associated persons usually do not have to register separately with the Securities and Exchange Commission (SEC), they must be supervised by a registered broker, registered with FINRA, and, usually, licensed by a state securities regulator.

A broker is required to comply with a number of requirements. Brokers register with the SEC through the Central Registration Depository (CRD), operated by the Financial Industry Regulatory Authority (FINRA). A broker must also be a member of at least one self-regulatory organization (SRO): FINRA, a national securities exchange, or both. "Associated persons" of brokers, including salespeople, must also register with a SRO. In addition, each state in which a broker wants to operate may have its own registration requirements. Brokers must also be members of the Securities Investor Protection Corporation (SIPC), an organization that assists investors when their brokerage firms fail.

The best source of information about a registered broker is the FINRA BrokerCheck database, available here. Brokerage firms are required to disclose certain criminal matters, regulatory actions, civil judicial proceedings, and financial matters in which the firm or one of its affiliates has been involved. The information about brokers and brokerage firms available through BrokerCheck comes from the CRD, the securities industry online registration and licensing database. Information on approximately 1.3 million current and former registered brokers is accessible through BrokerCheck.  To check the registration status and background of an individual "associated person" in North Carolina, you must call the Securities Division of the North Carolina Department of the Secretary of State (1-800-688-4507) and ask to speak with a staff employee responsible for "broker-dealer registration."

Investment Advisers

People and companies who are paid to give advice about investing in securities generally must register with either the SEC or the state securities agency where they have their principal place of business. In 2010, the Dodd-Frank Act amended certain provisions of the Investment Advisers Act of 1940 by shifting responsibility over certain mid-sized investment advisers (those that have between $25 million and $100 million of assets under management) to state-level securities regulators.

To find out about an investment adviser, read the adviser's registration form, called a "Form ADV." Form ADV has two parts: Part 1 contains information about the adviser's business and whether the adviser has had problems with regulators or clients. Part 2, which is often called the “brochure,” describes the adviser’s business practices, fees, conflicts of interest, and disciplinary information. Before you hire an investment adviser, always read both parts of the adviser's Form ADV.  Brochures are also sometimes required to be accompanied by a “brochure supplement” that includes information about the specific individuals who actually provide investment advice to the client. (An adviser is required to deliver a brochure supplement to the client before or at the time that the adviser begins to provide investment advice.) You can view an adviser's most recent Form ADV online by visiting the Investment Adviser Public Disclosure (IAPD) website. The IAPD database contains background information on approximately 441,000 current and former investment adviser representatives and 45,700 current and former investment adviser firms. (You can also find information about investment advisers through FINRA's BrokerCheck.)

If an investment adviser provides advice with respect to less than $25 million in assets, it may not be required to register with the SEC. In that case, you should check with your state's securities regulator to obtain information about the adviser. In North Carolina, you must call the Securities Division of the North Carolina Department of the Secretary of State (1-800-688-4507) and ask to speak with a staff member responsible for or "investment adviser registration". The Securities Division staff can tell you if an adviser has a disciplinary record. Unfortunately, there is not currently a more convenient method for these sorts of inquiries.

Further Due Diligence

It is important to recognize that the information identified above is merely intended to tell you whether a broker or investment adviser is properly licensed and has a disciplinary history or a record of formal customer complaints. This may give you an indication of basic competency, but is no guarantee of solid performance. These steps are just the beginning of the inquiry. You should ask for, and check, references, and consult with others, including professionals, familiar with the broker's or investment adviser's work before beginning a financial relationship. A little effort on the front end may save a lot of heartache down the road.

November 28, 2013

Community Bank Outlook

KPMG has released the results of its 2013 Community Banking Outlook Survey, which summarizes the sentiments of more than 105 CEOs and other senior executives of regional and community banks.  This a rich source of information, and I encourage you to read the full report.  Here are the highlights:

Optimistic about Revenue

Two-thirds of respondents predicted an improved overall economic outlook in 2014, and 85 percent expect higher revenues.

Getting a Handle on Regulation

Fifteen percent said that regulatory changes would require the most time, energy, and resources from management (versus 27 percent last year). 

Forty-two percent identified regulatory and legislative pressures as a primary obstacle for growth (down from 47% last year). 

M&A Predictions (Again)

Sixty-five percent expect their bank to be involved in a merger or acquisition over the next year (buy or sell side).

The primary reasons for deals are regulatory reform, geographic expansion, and access to new markets.

Seventy-seven percent of the community bank executives surveyed believe the minimum asset level a community bank must achieve to remain independent is at least $1 billion or more.

Cybersecurity & IT

Forty-six percent of community banking executives said they would increase spending on IT (46 percent)

You can read the full report here.

November 23, 2013

Maintaining Your Professional Reputation Online

"Matt Cordell the worst lawyer in the state of North Carolina.  I don't know how he graduated from law school.  Plus, he's ugly and has no fashion sense."
What would you do if this, or something like it, were written about you and posted on the Internet for all the world to see?  Ignore it?  Respond with an explanation of why the poster was wrong?  Sue the poster?  Threaten the website host with a lawsuit?
As a professional, your reputation is among your most important assets.  Although many of us depend heavily on direct referrals from satisfied customers and other respected professionals, more and more people are turning to the Internet when searching for, or vetting, a professional. 
The Internet has radically decentralized and democratized the flow of information.  Although this affords opportunities for us, it also subjects us to public criticism in more ways than ever before.  Most of the professionals I interact with are smart, diligent people who go to great lengths to provide excellent customer service.  At some point, many of us will find ourselves in a position adverse to a vindictive person, and many of us will eventually make the mistake of agreeing to work with an unreasonable client.  If you haven't yet been the subject of a negative online review, tweet, blog post, or social media post, just wait — it may be coming.  Perhaps you have avoided becoming the subject of negative comments on the Internet so far, but it is unreasonable to believe it could never happen.  

Though there are many things you can do to minimize the risk of a negative online review, it is not a risk that can be eliminated.  If good customer service and ethical conduct alone are not sufficient to avoid all negative online comments, we must ask ourselves two important questions:  
(i)                 What can I do now to prepare for a negative comment about me or my professional services on the Internet; and,
(ii)               What can I do after the fact to minimize the impact to my reputation?

The Best Defense Is Preparation

The most important step you can take right now to address the risk of a future negative online comment is to saturate the Internet with high-visibility, positive information about yourself and your professional services.  You want the negative comment to be a mere needle in a haystack of positive content so that the negative comment is either unlikely to be found or at least outweighed by a mountain of positive publicity.  If you wait until you need positive publicity to begin generating it, you will have already lost.  (Just like your professional network, by the time you need it, it is too late to start building.)  You need to establish a positive professional reputation online now, before you need it to combat a negative comment.

There are a number of ways to establish a positive online reputation, some of which are fairly intuitive and some of which may not be.  The most obvious step is simply to have an online presence.  If there is nothing about you on the Internet and someone makes a negative comment, the first thing everyone searching the Internet will find out about you will be the negative comment.  You don't to create a circumstance in which someone's first impression of you will be the rantings of a bitter or unreasonable person.

Having a webpage, however, is probably not enough to give you the online presence and search engine result ranking you will want to have.  Search engines — especially Google, which accounts for a massive share of all US-based Internet searches — give priority in ranking results to recent information.  Therefore, review sites, blogs, and social media tend to get preferable rankings as compared to static webpages.  Accordingly, a ten-year-old company webpage lacking dynamic, updated content probably will not outrank an online review on a popular customer review website that mentions you by name.  A much more effective way to ensure that your name is associated with positive comments in search results is to consistently generate new content online, preferably using your own website (or blog) as well as other platforms.

Go Ahead…Google Yourself

"Google" yourself.  Then "Bing" yourself.  Go ahead — there is no shame in it.  In fact, in this era, it is almost irresponsible not to do so.  Searching for your own name on the major search engines (i.e., Google and Bing), with and without key terms describing your services or products, is an important part of understanding how customers and potential employers find information about you.  (Be sure to log out of the search engine and clear your cookies before running the search so that your results are not skewed by information the search engines already know about your search preferences.)  Do you appear on the first page of results?  Go through the first five pages.  Is there any negative information?  Is there any outdated information?  Do your competitors show up? 

Now that you know what your search results are like, it will be important to engage some search engine optimization ("SEO") techniques and monitor your online presence.  To monitor yourself online, repeat the exercise of searching for yourself and related terms on a regular basis — perhaps even monthly. 

Next, set up an "alert" using Google Alerts so that newly-created content using your name from all over the Internet will be brought directly to your attention.  If you are not familiar with Google Alerts, do a YouTube search for "Google Alerts" and watch an official video that explains this useful tool.  

You will quickly find tens of thousands of sources of advice on how to optimize your search engine results.  Many of them are outdated or simply wrong.  Some are even harmful.  Search engines are constantly adjusting their algorithms to prioritize the content they deem most relevant to their users and to penalize those who spread unwanted material ("spam").  Right now, the most reliable step you can take to optimize your search engine results is to generate relevant, timely content and distribute it using social media and similar websites.  
There are many more sophisticated SEO strategies that can be effective, but they tend to become outdated fairly quickly, and describing them is beyond the scope of this article.  Focus on the basics first:  Create interesting, useful content; share it with the world on a regular basis using a blog or other website; and share it with your network using social media.  In addition, you can curate content created by colleagues and others to share with your network.  Eventually, you will find that your search results begin to populate with interesting, relevant content that casts you in a favorable light.

When The Negative Comment Arises

For those of us who have long careers ahead of us, it seems almost inevitable that someone, somewhere, someday will post a negative remark about us online.  Our response, if any, should be appropriate to the circumstances.  I am reminded of Bruce Lee's famous remarks about a "mind like water."  Water ripples in proportion to the size and force of the stone thrown into it and then quickly returns to a state of calm.  Your response should be exactly proportional to the harm — no more and no less — and you should promptly return to a state of equilibrium. Of course, this is easier said than done.

Don't Feed The Trolls

Often, the worst thing you can do in response to a negative comment is to acknowledge it.  Some negative comments are nothing more than an attempt to bait you into a response.  Generally, your response will merely draw attention to the comment and give the commenter some credibility.  Therefore, you should ordinarily refrain from responding in the same online forum. 
Genuinely Harmful Comments

Occasionally, a comment could be so harmful to your professional reputation and so prominently featured in search results that it warrants a response.  Remember that you are likely to amplify the perceived harm in your own mind, so, before you conclude that a remark is worthy of a response, confer with some objective, trusted advisors.  If they are in agreement, proceed with an appropriate response.  The extent and form of the response will depend on the forum and the nature of the harmful comment. 

Generally, you are well-advised to communicate directly with the commenter to demand that the false or defamatory comment about you be removed (assuming you can identify the poster from the post).  When an online comment is not clearly false but is nonetheless harmful, and the poster refuses to remove it voluntarily or you cannot identify the poster, you may have success dealing with the provider of the forum. 

Comments on consumer review websites tend to achieve high search rankings and, therefore, high visibility.  Some consumer review websites allow offended parties to challenge negative reviews.  However, most review sites are less than helpful.  Google says that it provides a mechanism to flag inappropriate business reviews, but it "[does] not arbitrate disputes and more often than not, we leave the review up." Yelp, a popular review website, claims it will not remove a negative review unless the review violates the terms of use on its face, such as a review that explicitly states that it relies on secondhand information.  Comments on social media sites such as LinkedIn, Facebook, and Twitter are subject to policies and terms of use, and most provide a mechanism to report and limit offensive behavior.  Usually this process involves simply reporting a malicious or abusive comment to the provider of the social media platform.  LinkedIn's Use Agreement prohibits "unprofessional behavior by posting inappropriate, inaccurate or objectionable content."  It also prohibits the use of LinkedIn to "harass, abuse or harm another person" or post "unlawful, libelous, abusive, obscene, discriminatory or otherwise objectionable content."  The LinkedIn User Agreement further provides that "LinkedIn, in its sole discretion, may…remove content" and "restrict, suspend or close an account."  If you raise an objection with LinkedIn regarding another's comments about you, you will do well to adopt some of the forgoing key terms into your complaint. Facebook allows you to report a post "if you do not like [it]," which is not exactly restrictive.  The criteria Facebook will use in evaluating the reported post, however, are ambiguous.  According to Facebook's Community Standards:
Facebook does not tolerate bullying or harassment. We allow users to speak freely on matters and people of public interest, but take action on all reports of abusive behavior directed at private individuals.

Therefore, though Facebook will allow you to report essentially anything, the post must generally rise to the level of bullying or harassment before Facebook will intervene.  In addition, Facebook allows you to "block" a user, which will prevent the user from being able to tag you in a post.  There appears to be no limit to your ability to use this feature.
Not All Pros Are Professionals
There are a number of reputation management companies in the marketplace now that claim to be able to build or rehabilitate one's online reputation.  Be careful about these companies.  Some of them do no more than "spam" the Internet with hollow blog comments and inane social media posts in a near-blind attempt to flood the Web with mentions of your name.  Search engines such as Google are on to these ham-fisted tactics and may penalize you in search rankings as a result.  For example, a Michigan law firm paid nearly $50,000 to an SEO company to improve its ranking in search results.  In a recent lawsuit against the SEO company, the law firm alleged that not only did the SEO company fail to improve the law firm's search engine ranking, it also actually caused harm.  If you must use a third party to assist you in this area, choose one with experience in your field and with credible references, and be ready to collaborate extensively to ensure that the content published on your behalf is relevant to your audience and reflects your own standards of professionalism. 
Keep Calm And Carry On
Finally, try not to get too distracted by a negative comment.  It is probably nowhere near as monumental as you think it is.  Rather than obsessing about it, focus on all the positive developments in your career and life and how you can enhance those positive items.  Think for a moment about five people whose life and work you admire.  With a little research online, you can probably find plenty of criticism about each and every one of them.  Criticism — even valid criticism — is often a sign you are doing enough right to have garnered attention in the first instance.  Remember, the only people who escape all criticism in this world are those who do nothing, say nothing, and achieve nothing.  

November 22, 2013

More on Elder Financial Abuse

I've written an article about North Carolina's new law designed to further protect older adults from financial exploitation, and it was published in Gray Matters (the official newsletter of the Elder & Special Needs Law Section of the North Carolina Bar Association) this week.  You can read it here or here.

You might also be interested to read the first column in the newsletter, the Chair's Comments, in which Bob Mason and I discuss the effects of the new statute on estate and Medicaid planning.

My friend and law school classmate Mike Anderson has written a more technical piece about the new law for the Estate Planning & Fiduciary Law Section's newsletter, The Will and The Way, focusing on criminal liability and the ability of agencies to obtain a subpoena.  (Mike's practice includes fiduciary litigation.)

If you read the North Carolina Business & Banking Law Blog regularly, you may recall that I first wrote about the new law in August, with related posts in September (addressing federal agency guidance for financial institutions) and October (sharing a PowerPoint presentation from a speech I gave on the topic at a joint seminar of the NC Bankers Association and the NC Credit Union League).

November 15, 2013

Should Financial Institutions and Other Businesses Be Active in Social Media?

Should financial institutions and other businesses be active in social media?
Photo credit:U.S. Army/ / Public Domain Mark 1.0

The promise of social media for business is immense: increased brand awareness and affinity, exponential growth through tacit endorsement ("sharing," "liking" and other forms of "social proof"), and a rich source of customer data.  It's no wonder so many companies are jumping into the Social Web.

Some consumer brands have a fun-loving image that easily lends itself to marketing the brand through social media.  Other businesses, like banks, have a much more staid brand, which means the free-for-all that is social media can be hazardous to the brand if mis-managed. 

The American Banker has compiled its list of the "Seven Biggest Social Media Blunders by Banks," and I must admit, they are perversly entertaining.

The most recent example of a social media disaster was JP Morgan Chase's Twitter Q&A with Vice Chairman Jimmy Lee this week, which used the hashtag #AskJPM.  The idea came following JP Morgan's role in the Twitter IPO, and was designed to capitalized on the relationship with Twitter.  Disgruntled customers, pranksters and political activists soon inundated the Twitterverse with unwelcome questions, comments and criticisms.  JPM cancelled the session abruptly, tweeting, "Bad idea. Back to the drawing board."

In July, Bank of America goofed after an Occupy Wall Street activist Tweeted a picture of himself being chased by police. BofA's Twitter account responded with the following Tweet: "we're here to help."  That led some commenters to remark that it appeared that the bank's Twitter account was being managed by a "robot." 

Barclays was criticized for creating a fictional character, "Dan," on its Facebook page, and then "talking down" to him.  Critics claimed Barclays appeared to take a condescending attitude towards its customers. 

In each of these cases, the root of the problem was a failure to understand the forum and the prevailing sentiments and culture.  There is no mathematical formula for success in social media.  It is more art than science.  Social media is best managed by an individual who is fully engaged in the space, not by a "n00b" (Internet slang for a newbie) or a slow-moving committee.  Identifying an employee to manage social media account who has the sound judgement to responsibly manage the brand as well as the social media savvy to read the mood of the medium can be difficult, but is worth the effort. 

...and this is to say nothing of the legal and compliance risks implicated by social media (but that's another post)!

The lesson is clear: Banks and other businesses need a savvy guide to navigate the minefield of social media.  My advice is to do it right, or don't do it at all.

November 2, 2013

(Yet Another) Update on Email Ethics for North Carolina Lawyers

Photo credit: Prad Prathivi @ Amodica:/ Foter
I have recently written (here and here) about legal ethics issues involved when a lawyer sends an email message to opposing counsel and copies the receiving lawyer's client (e.g., using the "cc" or "reply all" function).  (My first analysis of the State Bar Ethics Committee's opinion on the topic was published in The Business Lawyer in May 2013.)  There has been another development on this issue.  

At a meeting last week (October 25, 2013), the North Carolina State Bar Council adopted a revised opinion on this issue.  The opinion does not appear to have been officially reported yet, but yesterday, Charlotte healthcare lawyer Karen Gledhill reported to the members of the Business Law Section of the North Carolina Bar Association on the State Bar Council's decision.  Consistent with the revised proposal that I have previously described, whether a lawyer may copy a represented party on an email depends upon whether the lawyer can reasonably infer that the recipient's lawyer has consented, based on the facts and circumstances.

Gledhill reports that the State Bar Ethics Committee voted on October 24, 2013, to recommend the Ethics Opinion to the State Bar Council, which adopted the Ethics Opinion on October 25, 2013. She also summarizes (here) the relevant factors used to infer consent, as well as the commonsense guidance provided by the Council (e.g., that it is prudent to obtain explicit consent rather than infer it.)