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Is Free Advice Worth The Price?
You’ve heard the three great deceptions before: “The check is in the mail,” “I gave at the office.” and “I’m from the government, and I’m here to help you.” Retail brokers who receive a customer complaint or arbitration claim often encounter a different variation “I’m the lawyer from compliance. I’m here to defend us.” Wirehouses ordinarily pay for one attorney (whether from the firm’s legal staff or outside counsel) to defend claims brought against the firm and its registered representatives. Financial professionals must consider whether "free” representation by their employer’s attorney is worth the price.Claimants' attorneys almost always name the broker/dealer and the registered representative as defendants on an arbitration claim. A customer claim may assert that the broker amd the firm were responsible for allegedly fraudulent representations. A firm's failure to properly supervise its sales force also is often alleged. Although the firm and broker may be named in the same complaint, the use of a single attorney to represent both the firm and the representative raises serious practical problems. Ride 1.7 of the American Bar Association's Model Rules of Professional Conduct, which governs lawyers' conduct in most states, bars an attorney from representing multiple clients "if the representation of a client may he materially limited by the lawyer's responsibility to another client." Dual representation cannot continue unless the affected client consents, and then only after a consultation with the legal client that includes "explanation of the implications of the common representation and the advantages and risks involved." A broker must exercise the right to consultation with independent counsel before consenting to joint representation at the firm’s expense. Alter all, the firm alone might be the guilty party in some cases. A claim may be based entirely on the conduct of the firm in generating and distributing misleading sales materials over which the individual broker exercised no control. If counsel for the broker speaks out, arbitrators may enter an award against the firm directing that the broker’s U-4 or U-5 state that the individual salesperson engaged in no misconduct. Such an award may prevent both career-threatening public disclosure, and SRO and state regulatory inquiries that follow the filing of an adverse U-4 A more pressing reason for a broker to retain separate counsel may be the protection of the broker’s own assets. Typically, brokers must maintain their personal accounts at their employer. Brokers sign ordinary customer agreements on those accounts. In doing so. they give their firm the right to claim those assets to recover losses resulting from the employee's violation of SEC or SRO rules. Brokers who rely on “house” counsel to protect their interests may see their assets seized without notice to fund the firm’s settlement payment. The result can be—and has been—a second arbitration to compel a more equitable allocation of liability between the employer and employee. Brokerage firms and their sales forces often share common interests in the outcome of arbitration cases. Dual representation by a single attorney can serve the interests of both parties in some instances, Nonetheless, no broker with assets to lose or a clean compliance record to protect should blithely consent to “free” representation by the firm’s lawyer without first consulting with independent counsel. Reprinted with permission of Registered Representative magazine Copyright ©2000-01 Edward R. Wiest, P.C. This Page
Was Last Modified on 04 December 2002
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