In Focus

arassing clients! That's what the NASD alleges against Sigma Financial Corporation and its president. In a strongly worded press release, NASD announced that it has brought an enforcement action for unethical conduct in frivolously pursuing legal action against an elderly couple who had won an arbitration award against the firm.

"This action is the most recent effort by NASD to curb abuses in the arbitration process and ensure compliance by regulated firms… This case is an example of a brokerage firm using the courts to harass and intimidate customers because the firm did not like an arbitration award."

I praise the NASD's efforts. But NASD must address other areas. Two immediately come to mind. First, there is the situation where investors decide to invest through separately managed accounts (third party managers that the brokerage firm selects and monitors). I cautioned state securities regulators at their annual convention to be alert for brokerage firms that attempt to shield themselves from liability by having customers sign agreements indemnifying the brokerage firms. Specifically, brokerage firms, such as Lehman Brothers and Morgan Stanley, have attempted to dismiss or defeat arbitration claims by asserting that these indemnification provisions effectively insulate the brokerage firms even for their own negligence in selecting and monitoring the third party managers that they themselves selected and monitored! Such tactics must end. I understand that the NASD is investigating.

Likewise, recently another firm, Merrill Lynch, filed a counterclaim seeking indemnification based upon a frivolous reading of a trustee certification. Merrill has taken a clause, indemnifying Merrill for following the instructions of trustees, and attempted to interpret that clause as a broad and all-encompassing indemnification of all acts and omissions by Merrill, even for Merrill's making unsuitable recommendations and its negligent selection and monitoring of investment advisers. This too must end!

The regulators will be apprised of this and any other unethical tactics. Investors (and their ethical advisers) who are aware of such abuses should contact me at info@financialcounsel.com.

— James J. Eccleston
FinancialCounsel.com