Continuing Education for Financial Professionals Provides Road Map for Investor Claims To Recover Losses

ach year the Securities Industry/Regulatory Council on Continuing Education publishes a Firm Element Advisory to assist brokerage firms identify current regulatory and sales practice issues. While brokerage firms may include these as topics in their continuing education programs for their employees, lawyers representing investors should find the publications helpful for another purpose: prosecuting securities arbitration and litigation actions.

This year's Firm Element Advisory, published in September and available at www.securitiescep.com, includes a host of topics, many of which having been the subject of major regulatory initiatives that we have witnessed. Let's highlight the ones of most interest to investors and their lawyers:

1. Brokered Certificates of Deposit

Brokered CDs are not typical bank CDs. Securities regulators previously have issued guidance to ensure that brokers properly are trained and that investors are provided risk disclosures. Typically, these products carry a maturity date of more than one year, are callable at the discretion of the issuer and trade in a secondary market. As a result, they may not be suitable for all investors.

2. Hedge Funds

Securities regulators pay a great deal of attention this topic. The National Association of Securities Dealers (NASD) has warned brokerage firms that they must ensure that investors are suitable for hedge funds and that all material risks are disclosed. It is not sufficient for a brokerage firm to claim that a hedge fund is suitable for an investor just because he or she is wealthy.

3. Mutual Funds

We see daily reports of mutual fund companies violating the public trust, so much so that a leading financial paper included a "Scandal Scorecard" in its coverage. The Firm Element Advisory addresses the topics of late trading and market timing.

The advisory also addresses a topic sure to affect many investors: breakpoints and share classes. Many brokerage firms failed to provide breakpoints, or commission discounts, to investors even though they are entitled to them. Accordingly, the NASD issued a special notice to firms requiring them to make investors whole. Further information regarding this rebate program is available at www.nasdr.com.

4. Research Analysts' Conflicts of Interest

News of Wall Street research shenanigans rocked investor confidence. What followed was a historic global settlement among nearly all of Wall Street's major brokerage firms and a reparations fund for investors. Since then, new rules have been enacted in an effort to reduce, or at least shed light upon, the inherently-conflicted relationship between a brokerage firm's research analysts and its investment banking department. The rules also should enable investors to better gauge the bias of a particular research report covering a security.

To remedy the past wrongs, investors should take advantage of the reparations fund (the SEC's "Distribution Fund", details about which are available at www.sec.gov). Additionally, for larger claims or claims not involving the select number of securities covered by the reparations fund, investors should consider securities arbitration as an alternative.

5. Variable Annuities and Life Insurance

Variable annuities are not appropriate for all investors. The Firm Element Advisory cautions that brokers must be trained in the features, risks and suitability of these products for their customers. Variable annuity and life insurance exchanges especially are suspect. Brokers must disclose all material risks in fully informing their customers. Several publications are available on the NASD's website, including, "Variable Annuities: Beyond the Hard Sell," (available at www.nasdr.com/alert_variable_annuities.htm).

In conclusion, lawyers - and brokerage firms — carefully should review the continuing education materials published annually. The lawyers, after all, may have an opportunity to "school" their clients' brokers!

______________________________________________________________________
James J. Eccleston is a securities attorney, representing investors as well as brokers and brokerage firms nationwide in arbitration, litigation and regulatory matters. He is a past co-chair of the Chicago Bar Association's Securities Law Committee, a past chair of its Financial and Investment Services Committee, a registered investment advisor and a licensed securities principal of the National Association of Securities Dealers (NASD). He maintains an informative website at www.FinancialCounsel.com. He is an equity partner with Shaheen, Novoselsky, Staat, Filipowski & Eccleston and can be reached at 312-621-4400.