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Is the next big Ponzi scheme around the corner? And are firms at a higher risk for selling away activities?



United States Publication May 11, 2020

The two-year Treasury yield hit a record low last week. Unattractive interest rates and a volatile stock market will cause investors to look for larger returns without involvement in the stock market. History teaches us that this combination leaves investors vulnerable to the lure of a Ponzi scheme.

Registered representatives, too, will be looking for alternatives for their customers that can give them the returns that more traditional investments currently cannot provide. Some representatives may also need more cash themselves, as both investors and those in the industry may be feeling the "pinch" from the current economic turmoil. Increased selling away activity is likely to follow.

And finally, with both registered representatives and back offices working remotely, supervision may be more challenging than ever.

Firms would be well-served to review their field supervision operations (and make an internal record of having done so), and might consider the following additional measures:

Send a Field Supervision Alert reminding registered representatives of the following:

  • Their duty to only sell approved products.
  • Their obligations to disclose Outside Business Activities under Rule 3270.
  • That selling away is strictly prohibited by the firm.

Send an investor education reminder to customers that:

  • Investors should review all recommendations and disclosures carefully, including making sure that the firm's name appears on all paperwork associated with the investment.
  • When purchasing an investment from the firm, investors will not be asked to, and must not, write a check or wire money to any person or entity other than the firm.
  • Investors must promptly review their account statements to make sure that all investments they purchased through the firm appear on their account statements.
  • Investors should not purchase any investment they do not understand.
  • If an investment sounds "too good to be true," it probably is.

A robust supervisory structure with written documentation is a firm's best defense to a selling away claim. A few alerts and written updates now may pay big dividends in the future if a defrauded investor seeks to hold the firm liable for the unauthorized activities of its registered representative.

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