NATIONAL SECURITIES INVESTOR ALERT - LAX SUPERVISION OF INDEPENDENT BROKERS CAN CAUSE LOSSES
Seeking Alpha Analyst Since 2012
Mr. Pearce has tried, arbitrated and mediated numerous disputes involving complex securities, commodities, administrative, contract, commercial, business tort and employment law issues for over 35 years. He has represented hundreds of clients in Federal and state courts (trial and appellate) as well as administrative, arbitration, and mediation proceedings before the U.S. Securities and Exchange Commission (SEC), Commodities Futures Trading Commission ("CFTC"), Florida Office Financial Regulation (FlaOFR), Florida Division of Securities & Investor Protection ("FDS"), Financial Industry Regulatory Authority (FINRA), National Association of Securities Dealers regulation, Inc. ("NASD"), New York Stock Exchange, Inc. ("NYSE") and/or National Futures Association ("NFA"). Mr. Pearce is a Florida Circuit Court Civil Mediator and a respected mediator in the FINRA Mediation Program. He also acts as a private judge or arbitrator in mini-trials and arbitration proceedings, respectively. Mr. Pearce has also served as a Federal Court-appointed Receiver- an attorney who is called upon by Federal and state regulators (SEC, CFTC and FlaOFR) to take over companies engulfed in legal problems. Areas of Practice • Courtroom Litigation, Arbitration and Mediation Proceedings Involving • Securities and Commodities Law • Business & Commercial Law • Federal, State and Industry Enforcement Actions • Employment Law A Brokerage Employees Only • Trust / Estate / Guardianship Law • Probate & Estate Administration Education • Hofstra University School of Law, Hempstead, New York J.D. - 1979 • Hofstra University School of Business, Hempstead, New York M.B.A. - 1979 • Florida Tech B.S. – 1973 Professional Associations and Memberships • American Association for Justice • Florida Justice Association • Broward County Bar Association • Broward County Justice Association • Palm Beach County Bar Association • Palm Beach County Justice Association • Public Investor Arbitration Bar Association • South Palm Beach County Bar Association Past Employment Positions • Lerner & Pearce, P.A., January 1, 1990 - December 31, 1999 • Lerner, Harris, Pearce, P.A., March 1, 1983 - December 31, 1989 • U.S. Securities & Exchange Commission, May 1, 1980 - February 28, 1983
National Securities Corp. is a subsidiary of the National Holdings Corp. It is a mid-size independent broker-dealer whose business model is akin to a franchise operation. National Securities is headquartered in New York City and reportedly has over 500 registered representatives across the United States operating in one or two person offices. Its growth in recent years can largely be attributed to layoffs at the major wire houses due to the most recent financial market meltdown. Most of the National Securities registered representatives' gross production of revenues is less than $300,000 per year. Its branch offices are largely comprised of small producers earning commissions at higher pay out rates than the major full-service brokerage firms, a recipe for disaster when it comes to protecting investors' rights.
Independent broker-dealers are notorious for their lax supervisory practices and procedures. The business model of these franchise type operations is to open many offices nationwide for steady growth of fixed monthly revenues without the costs attendant to a full-service branch office with on-site manager, compliance officer and operation personnel. The registered representatives of these independent broker-dealers generally operate as separately incorporated businesses. They are not employees of the broker-dealer and therefore not controlled in the same manner as full-service brokerage firm representatives. The registered representatives control their structure and costs to maximize profits and often leave the protection of investors' rights and interests as their lowest priority.
The typical supervisory organization of independent broker-dealer operations is to have other independent contractors operate Offices of Supervisory Jurisdiction (OSJs) to monitor the registered representatives from geographically remote offices and then report to the main franchisor's compliance office at national headquarters. The supervisors at the OSJs are not employees of the franchisor and often run their own brokerage, insurance and other businesses. They are not devoted full-time supervisors of the smaller branch offices. Consequently, OSJ managers cannot and do not supervise the day-to-day operations of the registered representatives of these independent broker-dealers.
Generally, there is no immediate review of new accounts opened, securities transactions, business records, cash or securities receipts and deliveries, correspondence and business activities unrelated to the securities brokerage operation at these independent brokerage firms. The lax supervision leaves investors who have transferred their accounts to the smaller independent broker-dealer vulnerable to sales of securities that have not been reviewed or authorized by anyone other than the sales representative earning a commission. There may be no one onsite to detect forgeries of clients' signatures on documents, the placement of inaccurate information about a client's investment objectives and financial condition to document the suitability of a particular investment recommendation. Oftentimes there is no daily review of sales literature and client correspondence to protect against misrepresentations and misleading statements being made to investors. In fact, it is not unusual for there to be only one compliance audit visit per year at many of these offices. These Independent brokerage business operations are worrisome to the North American Securities Administrators Association (NASAA), which has documented more instances of sales abuse and consequently investor losses at these firms.
The most important of investors' rights is the right to be informed! This Investors' Rights blog post is by the Law Offices of Robert Wayne Pearce, P.A., located in Boca Raton, Florida. Please see our Instablog profile (left column) for ways to contact us and get answers to any of your questions about this blog post and/or any related matter.
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