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One of the Most Experienced

FINRA Securities Arbitration, Securities Fraud, and Commodities Fraud Attorneys

Attorney Pearce has over decades of first-hand experience with investment disputes in Florida, nationwide, and internationally. We are one of the most experienced FINRA Securities Arbitration Law Firms nationwide and have recovered more than $125 Million on behalf of our clients.

With over 40 Years of Personal Experience

$21,000,000 Final Judgment for Civil Theft
$7,800,000 Stockbroker Option Fraud Settlement
$6,000,000 Stockbroker Bond & Bond Fund Fraud Settlement
$5,800,000 Arbitration Award for Stockbroker Fraud
$4,300,000 Class Action Ponzi Scheme Settlement
$3,500,000 Corporate Trustee Mismanagement Settlement
$3,350,000 Stockbroker Bond & Bond Fund Fraud Settlement
$3,200,000 Arbitration Award for Mortgage-Backed Securities Fraud
$2,700,000 Arbitration Award for Stockbroker Negligence & Aiding Theft
$2,500,000 Stockbroker Bond & Bond Fund Fraud Settlement

The Law Offices of Robert Wayne Pearce P.A., represents clients on all sides of securities, commodities and investment fraud and other issues in a broad range of practice areas in courtroom litigation, arbitration and mediation proceedings. Based out of offices in Boca Raton, Florida, stockbroker fraud attorney Robert Wayne Pearce and his team have handled hundreds of FINRA, AAA and JAMs securities arbitration and mediation cases for satisfied clients located not only in Florida but nationwide and throughout the world.

OVER $125 MILLION RECOVERED FOR CLIENTS Contact Our Lawyers for Nationwide Help

We help Investors, Advisors, StockBrokers, and provide Regulatory Defense

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Meet Our Team

Some attorneys just work to live: we work -- for justice!

The Law Offices of Robert Wayne Pearce has represented investors across the globe and throughout the United States. Our attorneys have recovered over $125 million for his investor clients in all types of stockbroker fraud and stockbroker misconduct cases.

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Tamara Hanseder

Florida Registered Paralegal Working with our firm since 2011
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Monica Duncan

Legal Assistant Working with our firm since 1996
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Diana Cooper

Bookkeeper Mr. Pearce's Bookkeeper since 1996

Hear From Our Clients

At The Law Offices of Robert Wayne Pearce, P.A., we believe the ultimate barometer of our success is surpassing the expectation of our clients.

The following clients have direct knowledge of our firm's processes from the inside and experienced our fierce advocacy.

Hear From Our Clients

  • “Robert Pearce is part of that unusual breed of lawyers that are able to create empathy with clients and thoroughly adopt their cause”

    No half efforts here. He and his group of professionals are outstanding strategists that can execute with precise fervor and unyielding determination. Theirs is a huge wave of facts, research, precedents and preparation, that has impressed me in its thoroughness and creativity, and most importantly with the results. No stone goes unturned and no effort is ever spared. In my book, he and they are those of a very rare kind that one wants to keep for a very long time.

    - Ramon Flores-Esteves -
  • “Just like the song from HAMILTON, it's so nice to have Bob Pearce on your side.”

    Just like the song from HAMILTON, it's so nice to have Bob Pearce on your side. He is the consumate plaintiff's lawyer: smart. dedicated, fully able to try a case but a great negotiator in a mediation. He did a wonderful job for us, fully supporting us through the process and more than holding his own against a large national law firm.

    - Maurice Z. -
  • "Mr. Pearce and his staff exceeded all of our expectations."

    Mr. Pearce and his staff exceeded all of our expectations. We were able to reach a settlement that was of our complete satisfaction, all within a very smooth, professional and efficient process. Mr. Pearce is now not only our lawyer but our family friend. We highly recommend him and his team!

    - Severiano L. -
  • "For the best fighting chance, Robert Pearce is the lawyer you want in your corner."

    This law firm is the real deal. We were so lucky that they took our case as they have so much experience in securities and all the wrongdoing that happens in these investment companies where they mislead you and your money (as in our case) into schemes that are not what you think they are. Mr. Robert Pearce is one of the best lawyers around, a truly professional who will fight for you and will tell you as it is all the time. We could not have gone thru this experience if it was not for all the advice, guidance and support he and all of his staff and associates brought to the game. For the best fighting chance, Robert Pearce is the lawyer you want in your corner.

    - Astrid M. -
  • "He never felt intimidated and his study of the case and perseverance prevailed at all times."

    Attorney Robert Pearce was our lawyer in a case against a Brokerage Firm and I'm witness to his ability and intelligence to deal with lawyers from the most prominent law firm in New York which was the key to recovering much of our losses cheered by their negligence. He never felt intimidated and his study of the case and perseverance prevailed at all times.

    - Jose A. C. -
  • "In the end, Bob and I had the last laugh when the arbitrators awarded me almost 6 million dollars."

    No lawyer except Bob said I had a chance of winning. When UBS Lawyers laughingly offered me zero to settle the dispute, Bob became even more determined to prove everybody wrong. Bob was extremely prepared, and always a step ahead of the opposing attorneys throughout the arbitration. In the end, Bob and I had the last laugh when the arbitrators awarded me almost 6 million dollars.

    - J. Blanco -
  • "Every meeting and phone call was made with dedication and desire to help our family every step of the way."

    Robert's team is excellent. They are very competitive in what they do and they are very responsible. Every meeting and phone call was made with dedication and desire to help our family every step of the way. Their professionalism, responsibility and empathy assured us that we were in good hands. Recommend to everyone.

    - Mayra A. -

Cases & Investigations

J.P. Morgan Sued for Edward Turley and Steven Foote’s Alleged Margin Account Misconduct

J.P. Morgan Securities, LLC (“J.P. Morgan”) employed San Francisco Financial Advisor Edward Turley (“Mr. Turley”) and his former New York City partner, Steven Foote (“Mr. Foote”), and is being sued for their alleged stockbroker fraud and stockbroker misconduct involving a highly speculative trading investment strategy in highly leveraged margin accounts1. We represent a family (the “Claimants”) in the Southwest who built a successful manufacturing business and entrusted their savings to J.P. Morgan and its two financial advisors to manage by investing in “solid companies” and in a “careful” manner. At the outset, it is important for our readers to know that our clients’ allegations have not yet been proven. We are providing information about our clients’ allegations and seeking information from other investors who did business with J.P. Morgan, Mr. Turley, and/or Mr. Foote and had similar investments, a similar investment strategy, and a similar bad experience to help us win our clients’ case. INTRODUCTION This case is about alleged misrepresentations and misleading statements relating to investments and an investment strategy that were not only allegedly unsuitable for the Claimants but allegedly mismanaged by J.P. Morgan investment advisors and stockbrokers, Mr. Foote and Mr. Turley. Mr. Foote represented, in writing, the investment strategy only involved “solid companies with good income producing securities.” Later, Mr. Foote represented, in writing, that Mr. Turley and he would only “carefully add leverage to the accounts to enhance returns.” Notwithstanding the representations, Mr. Foote and Mr. Turley took control of Claimants’ accounts and engaged in a speculative, over-leveraged fixed income investment strategy involving excessive trading of high yield “junk” bonds, foreign bonds, preferred stocks, exchange traded funds (“ETFs”), master limited partnerships (“MLPs”), and foreign currencies. In March 2019, Mr. Foote became too ill to manage Claimants’ accounts, and Mr. Turley took sole control of the portfolio. Thereafter, Mr. Turley recklessly increased the risks (market, over-concentration, interest rate, leverage, commodities, and foreign currency) to which Claimants and their accounts were allegedly exposed. The family’s portfolio became even more over-concentrated in the financial and energy sectors under Mr. Turley’s control. He made a multi-million dollar investment in unregistered Nine Energy Senior Notes rated by S&P B- (speculative) in Claimants’ accounts. Mr. Turley also allegedly turned over the fixed income assets with new investments in “new issue” preferred stocks underwritten by J.P. Morgan, for which he allegedly received “seller concessions” paid at a much higher percentage than regular commissions on other securities transactions. Over the next six months, the margin balances increased by millions of dollars, and the Claimants’ accounts became ticking time bombs ready to explode at any moment. Indeed, they did explode in March 2020 when the market collapsed and Claimants realized substantial losses in their accounts. THE RELEVANT FACTS Our clients live on a ranch in a remote area in northern Texas. They regularly commute by private airplane to work and elsewhere for business and pleasure. One of our clients is a member of the Citation Jet Pilot Owners Association (“CJP”), an organization of many wealthy business people who own Citation jets. This organization holds its meetings throughout the country. It so happened that Mr. Foote and Mr. Turley were also members of the CJP. In the summer of 2016, Mr. Foote successfully solicited our clients at their ranch in Texas to manage their investment portfolio. At that ranch meeting, Mr. Foote described an investment strategy that he and his partner, Mr. Turley, managed for all of their biggest and best clients. According to Mr. Foote, they conservatively managed a fixed-income strategy that included investments in corporate bonds, notes, and preferred stocks. At that meeting and repeatedly thereafter, Mr. Foote told our clients that Mr. Turley and he only invested in “solid companies with good income producing securities.” Mr. Foote boasted that Mr. Turley and he were first in line for the best investment opportunities at J.P. Morgan because of their status at the firm. Our clients were impressed by Mr. Foote and especially by what he told him about Mr. Turley. They appeared to share our clients’ passion for aviation and the CJP and, more importantly, their religious beliefs. They agreed to transfer one-half of the investment portfolio to J.P. Morgan under Mr. Foote and Mr. Turley’s stewardship. The other half was managed by a UBS Financial Services, Inc. (“UBS”) financial advisor. In the beginning, Mr. Foote was the primary manager of the relationship with Claimants. All of the investments in the Claimants’ accounts were either allegedly “solicited” by Mr. Foote or executed by Mr. Foote and Mr. Turley’s use of “de facto” discretion because, on information and belief, none of the Claimants ever executed any documents giving either Mr. Foote, Mr. Turley, or any other person at J.P Morgan written discretionary authority over the Claimants’ accounts. The Claimants did not think this was unusual because they had a special relationship with Mr. Foote, whom they placed their trust and confidence in to manage their accounts as their investment adviser and portfolio manager. By the spring of 2017, Mr. Foote and Mr. Turley had fully invested Claimants’ accounts, so they injected leverage into their speculative investment strategy to make more commissions. Mr. Foote allegedly told our clients they also “carefully” managed a fixed-income strategy that would profit primarily from the difference in the high interest paid on corporate bonds, notes, and preferred stocks and the low margin interest rates. Mr. Foote allegedly assured Claimants that the strategy was safe and was used all of the time by banks and institutional and other wealthy clients to make money when interest rates were low to take advantage of the spread in interest rates. In fact, at that time, Mr. Foote misrepresented, in writing, that “we will keep pursuing solid companies with good income producing securities and we will continue to carefully add leverage to the accounts to enhance returns.” To the contrary, Mr. Foote and Mr. Turley quickly and recklessly ratcheted up the margin balances to over $7.1 million by the end of August 2017. It...

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Securities-Backed Lines of Credit can be More Dangerous Than Margin Accounts!

Securities-Backed Lines of Credit Can Be More Dangerous Than Margin Accounts! Many investors have heard of margin accounts and the horror stories of others who invested on margin and suffered substantial losses. But few investors understand that securities-backed lines of credit (SBL) accounts, which have been aggressively promoted by brokerage firms in the last decade, are just as dangerous as margin accounts. This is largely due to the fact that the equity and bond markets have been on an upward trend since 2009 and few investors (unless you are a Puerto Rico investor) have experienced market slides resulting margin calls due to the insufficient amount of collateral in the SBL accounts. It is only over the last several months of market volatility that investors have begun to feel the wrath of margin calls and understand the high risks associated with investing in SBL accounts. For investors considering your stockbroker’s offer of a line of credit (a loan at a variable or fixed rate of interest) to finance a residence, a boat, or to pay taxes or for your child’s college education, you may want to read a little more about the nature, mechanics, and risks of SBL accounts before you sign the collateral account agreement and pledge away your life savings to the brokerage firm in exchange for the same loan you could have obtained from another bank without all the risk associated with SBL accounts. First, it may be helpful to understand just why SBL accounts have become so popular over the last decade. It should be no surprise that the primary reason for your stockbroker’s offering of an SBL is that both the brokerage firm and he/she make money. Over many years, the source of revenues for brokerage firms have shifted from transaction based commissions to fee based investments, limited partnerships, real estate investment trusts (REITs), structured products, managed accounts, and income earned from lending money to clients in SBL and margin accounts. Many more investors seem to be aware of the danger of borrowing in margin accounts for the purposes of buying and selling securities, so the brokerage firms expanded their banking activities with their banking affiliates to expand the market and their profitability in the lending arena through SBL accounts. The typical sales pitch is that SBL accounts are an easy and inexpensive way access cash by borrowing against the assets in your investment portfolio without having to liquidate any securities you own so that you can continue to profit from your stockbroker’s supposedly successful and infallible investment strategy. Today the SBL lending business is perhaps one of the more profitable divisions at any brokerage firm and banking affiliate offering that product because the brokerage firm retains assets under management and the fees related thereto and the banking affiliate earns interest income from another market it did not otherwise have direct access to. For the benefit of the novice investor, let me explain the basics of just how an SBL account works. An SBL account allows you to borrow money using securities held in your investment accounts as collateral for the loan. Once the account is established and you received the loan proceeds, you can continue to buy and sell securities in that account, so long as the value of the securities in the account exceed the minimum collateral requirements of the banking affiliate, which can change just like the margin requirements at a brokerage firm. Assuming you meet those collateral requirements, you only make monthly interest-only payments and the loan remains outstanding until it is repaid. You can pay down the loan balance at any time, and borrow again and pay it down, and borrow again, so long as the SBL account has sufficient collateral and you make the monthly interest-only payments in your SBL account. In fact, the monthly interest-only payments can be paid by borrowing additional money from the bank to satisfy them until you reach a credit limit or the collateral in your account becomes insufficient at your brokerage firm and its banking affiliate’s discretion. We have heard some stockbrokers describe SBLs as equivalent to home equity lines, but they are not really the same. Yes, they are similar in the sense that the amount of equity in your SBL account, like your equity in your house, is collateral for a loan, but you will not lose your house without notice or a lengthy foreclosure process. On the other hand, you can lose all of your securities in your SBL account if the market goes south and the brokerage firm along with its banking affiliate sell, without prior notice, all of securities serving as collateral in the SBL account. You might ask how can that happen; that is, sell the securities in your SBL account, without notice? Well, when you open up an SBL account, the brokerage firm and its banking affiliate and you will execute a contract, a loan agreement that specifies the maximum amount the bank will agree to lend you in exchange for your agreement to pledge your investment account assets as collateral for the loan. You also agree in that contract that if the value of your securities declines to an amount that is no longer sufficient to secure your line of credit, you must agree to post additional collateral or repay the loan upon demand. Lines of credit are typically demand loans, meaning the banking affiliate can demand repayment in full at any time. Generally, you will receive a “maintenance call” from the brokerage firm and/or its banking affiliate notifying you that you must post additional collateral or repay the loan in 3 to 5 days or, if you are unable to do so, the brokerage firm will liquidate your securities and keep the cash necessary to satisfy the “maintenance call” or, in some cases, use the proceeds to pay off the entire loan. But I want to emphasize, the brokerage firm and its banking affiliate, under the terms of almost all SBL account agreements, are not...

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UBS Puerto Rico Misrepresents Safety of Bond Funds to Investor

The Law Offices of Robert Wayne Pearce, P.A. filed yet another claim against UBS Financial Services Incorporated of Puerto Rico (UBS Puerto Rico). A summary of the allegations the Claimant made against the Puerto Rico based brokerage is below. If you or any family member received similar misrepresentations and/or misleading statements from UBS Puerto Rico and its stockbrokers or found yourself with an account overconcentrated in closed-end bond funds, or if you borrowed monies from UBS Puerto Rico and used your investments as collateral for those loans, we may be able to help you recover your losses. Contact our office for a free consultation about your case. I. INTRODUCTION This arbitration arises out of a series of unsuitable recommendations by UBS Puerto Rico financial advisors that Claimant purchase and hold an excessive concentration of Puerto Rico securities in her individual account and Individual Retirement Account. The Claimant’s investment portfolio was not diversified from not only an asset allocation standpoint but overly concentrated in securities issued in a single geographic area, i.e., Puerto Rico. The Respondent and its representatives continuously disseminated false and misleading information to Claimant about both the nature and risk of both the investment strategy and securities in her accounts. The Respondent and its representatives not only committed fraud but breached their fiduciary duties to Claimant and they were negligent in the advice provided to her. UBS Puerto Rico also negligently failed to supervise its employees. Finally, Respondent has fraudulently concealed this and other misconduct relating to her investments from the Claimant until recently. As a result of Respondent and its representatives’ misconduct, the Claimant suffered substantial damages in an amount to be determined at the final arbitration hearing. II. THE RELEVANT FACTS Claimant is over 62 years of age. She is unmarried and lives alone in San Juan, Puerto Rico. She is a Clinical Psychologist currently earning a modest income.[1] Claimant is also dependent upon income earned on an inheritance from her parents that was deposited in her UBS Puerto Rico brokerage accounts: an individual brokerage account and retirement account. During the relevant period two individuals served as her UBS Puerto Rico stockbrokers. In 2002 and 2003, Claimant inherited what she understood to be bonds and mutual funds from her parents’ UBS PaineWebber accounts when they passed away. Based on her conversations with her stockbrokers, she believed the investments to be safe investments that would generate the income she needed for her support. Claimant was always a passive investor and always listened to her stockbrokers. She did not transact any business in her account on her own. Claimant did not know the true nature, mechanics or risk of the investments that she had inherited and held in her account. She thought she actually owned bonds that would always pay interest until they matured. Neither UBS Puerto Rico nor her UBS Puerto Rico Stockbrokers ever gave her a full explanation of what type of investments she owned in her UBS Puerto Rico accounts. They generally referred to the investments as “fondos de bonos,” i.e., “bond funds.” Claimant did not understand that the investments in her account were closed-end funds and what she actually owned was shares of the closed-end funds (like shares of common stock) that only paid dividends at the manager’s discretion. She did not know that the so-called bond funds were leveraged investments. Nor did she know that they were illiquid and might not be able to be sold when she needed money for her support in some emergency. Claimant did not understand that the so-called bond funds were very risky investments. In October of 2011, Claimant received a document from UBS Puerto Rico requesting that she confirm some account information. She didn’t understand the purpose of the document but saw the words “aggressive/speculative” on the document and immediately called one of her UBS Puerto Rico stockbrokers. Claimant questioned him about the document and why those words appeared. She made it clear she was a “conservative” investor who wanted investments that would not fluctuate in order to preserve her investments. Claimant told him that the investments in her accounts represented almost everything she owned. She reminded him that she could not afford to lose principal in the account that was generating the income she needed for her support. The UBS Puerto Rico stockbroker assured Claimant that he understood what she wanted and that this was a clerical mistake that would be corrected. At that time, Claimant also wanted her UBS Puerto Rico stockbroker’s opinions on every bond and bond fund in her account. She wanted to know if they were indeed “conservative” investments that would not fluctuate in value and continue to provide the income she needed. They reviewed each and every security held in the accounts. They discussed each of the so-called bond funds. The UBS Puerto Rico stockbroker claimed that each of the so-called bond funds had an “excellent track record” and that UBS Puerto Rico management highly recommended them.[2] The UBS Puerto Rico stockbroker also told Claimant that the bonds and so-called bond funds were “protegidos por el gobierno,” i.e., “protected by the government.”[3] The stockbroker told Claimant that the Puerto Rico bonds and the so-called bond funds were exactly what she wanted and needed; i.e., they were suitable investments. Approximately two months later, Claimant received a confirmation that the information on the prior form was changed. She believed the information on the new form was consistent with what she believed her objectives and tolerance for risk to be in connection with her accounts. The key information on the Confirmation was as follows: Investment – Produce Current Income Annual Income – $48,000 Objectives – Net Worth – $350,000 Knowledge of Investments – Very Little Knowledge Risk/Return – Lower Fluctuations Percentage of Investable – More than 80% Objectives – Maintain Capital Assets held at UBS – Risk Profile – Conservative And so, UBS Puerto Rico and the UBS Puerto Rico stockbroker clearly understood Claimant’s low risk tolerance; in UBS Puerto Rico’s own words: the client “seeks to maintain principal, with low risk and volatility to the account overall, even if...

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We are a Nationally Recognized Law Firm

With a Successful Track Record for Recovery of Investment Losses

Attorney Pearce is a well-respected advocate for investors throughout the legal community, known as a fierce litigator and tireless not only in Boca Raton but throughout Florida and across the nation. Read his Investors Rights Blog and discover the breadth of his knowledge that can only be gained from over 40 years of legal experience for yourself. As one of the most experienced FINRA securities arbitration lawyers, Mr. Pearce knows all of the available options for your case and will pursue them vigorously to secure the best possible outcome for you and your stockbroker fraud and stockbroker misconduct case. He has earned a peer rating of AV Preeminent * through the Martindale-Hubbell peer review rating process, the highest available rating through that program.

Mr. Pearce is one of Thomson Reuters Florida Super Lawyers ** for Securities Litigation (Top 5). Read the feature article about him in the Florida 2014 Super Lawyers magazine entitled: “No Excuses – How Robert Wayne Pearce Stared Down Personal Disaster”.

During his more than 40 years of experience practicing securities and commodities law, he has won numerous million-dollar awards and settlements for his clients which has earned him recognition for his success by The Million Dollar Advocates Forum and The Multi-Million Dollar Advocates Forum as one of the Top Trial Lawyers in America TM***. Learn More

By hiring Robert Wayne Pearce, an attorney with over 40 years of experience practicing in the area of securities, commodities and investment fraud on both sides of the table in arbitrations and courtroom litigation, you will clearly see his legal experience and knowledge in action. Having a fierce litigator and tireless advocate of your rights, an attorney who will quickly identify both the strengths and the weaknesses of your case will surely increase the likelihood of winning your case.

Legal Blog

Regulation Best Interest (Reg. BI): Better But Not the Best!

Finally, ten years after the Dodd Frank Wall Street Reform and Consumer Protection Act of 2010 (Dodd-Frank) was enacted to bring about sweeping changes to the securities industry, the best regulation the U.S. Securities & Exchange Commission (“SEC”) could pass, SEC Regulation Best Interest, is now the law governing broker-dealers giving investment advice to retail customers. Although the SEC had the authority to impose a uniform and expansive “Fiduciary Duty” standard throughout the country upon broker-dealers and investment advisors, it yielded to the stock brokerage industry demands and enacted Regulation Best Interest (“Reg. BI”), which is better than the Financial Industry Regulatory Authority (“FINRA”) “Suitability Rule,” but not the best that it could have been done to protect investors. Last month FINRA amended its Suitability Rule to conform with SEC Reg. BI and made it clear that stockbrokers now uniformly have duties related to disclosure, care, conflicts and compliance, which are equivalent to the common law “fiduciary duty” standard when making recommendations to retail customers. See, FINRA Regulatory Notice 20-18. 1 The controversy of the standard of care applicable to stockbrokers in a non-discretionary account relationship with their customers has been ongoing for decades. Broker-dealers have long advocated for two standards: one standard being a non-fiduciary standard governing the non-discretionary account relationship and a fiduciary standard only governing the stockbroker with a discretionary account relationship. On the other hand, the investment advisory firms have been crying foul for years and advocating for a level playing field where stockbrokers and investment advisers alike are both held to the same “fiduciary” standard in their entire relationship with customers. The investment advisory industry recognized the importance of working in the “best interest” of their clients all of the time and the damage that stockbrokers (who are held to a lower standard) do to the reputation of “investment advisers,” especially those stockbrokers palming off the name “advisers” when doing business with the public. Stockbrokers were able to take advantage of the goodwill and trust associated with “investment advisers” but not accountable to their clients as “fiduciaries.” At the very least, the public was confused about the kind of “adviser” they were dealing with and the degree of investment professional duties the “adviser” owed to them. The SEC recognized that although Congress, in enacting Dodd-Frank authorized it to impose a uniform “fiduciary” standard on stockbrokers, it was not going to do so. It made that decision after the Trump administration took control. Are you surprised? The SEC’s public rationale was a bogus cost factor consideration; it reasoned if the standard was elevated broker-dealers would have to increase the transaction costs to investors with non-discretionary accounts to offset the increased compliance costs. The SEC supposedly wanted to avoid destroying the commission-based broker-dealer business model but expand broker-dealer and stockbroker obligations when they give advice to retail investors. The compromise was Reg. BI which I will attempt to summarize below. First, it is important to point out the new regulation only imposes new obligations upon broker-dealers and their associated persons when making recommendations to natural persons or their personal representative, such as trustees, executors, etc., who are retail customers (not institutions). It’s unclear whether an individual’s wholly owned corporation or family limited partnership would reap any benefit from the new “best interest” rule even though those entities would probably be relying on recommendations for “personal, family or household purposes.” Second, Reg. BI only applies to broker-dealers and their stockbrokers when they make recommendations of any securities transaction or investment strategy involving securities (including securities account type recommendations) to a retail customer. Next, in general terms, the “Best Interest” rule imposes four obligations upon broker-dealers and their associated persons: Disclosure: to provide disclosures about the type of relationships they will have with their customer before or at the time of any recommendations (which will probably be buried somewhere in their website or the fine print of the 80-100 page customer agreement and disclosure booklets only made available via the internet when the account is opened). Due Care: to exercise reasonable diligence, care and skill in making the recommendation. Conflicts: to establish, maintain, and enforce written policies and procedures reasonably designed to address conflicts of interest, preferably to avoid or mitigate them and if they cannot be avoided to make sure they are disclosed to the retail customer in a way the customer will understand the conflict and appreciate its impact on the recommendation. Compliance: to establish, maintain, and enforce written policies and procedures reasonably designed to achieve compliance with Reg. BI. It goes without saying that the new SEC rule also requires broker-dealers to comply with new recordkeeping requirements to be sure Reg. BI is being implemented and enforced. To retail investors, the “Due Care” and “Conflict” obligations will hopefully have the greatest impact. This is because up until this point in time, broker-dealers and their stockbrokers would say, if we can match an investment recommendation to a customer’s profile, we have done our job and complied with FINRA Rule 2111 (formerly NASD Rule 2310), end of story. For example, in the past, the recommendation of high fee proprietary structured products might fit the customer’s profile and be a suitable recommendation. However, now that type of investment might not be in the “best interest” of the retail customer, particularly if the risk-reward analysis of another non-proprietary, plain vanilla, and less expensive security is the same. To make it clear that Rule 2111 was no longer the rule when it came to future recommendations to retail customers, FINRA amended its rule (effective June 30, 2020) to state that Rule 2111 no longer applies to recommendations governed by Reg. BI because Reg. BI incorporates and enhances the principles found in Rule 2111. Some writers of blogs for the defense bar have focused only on the Due Care obligation and said nothing has changed from the old suitability rule. If that were true, the SEC and FINRA would have said so and the new rule would be meaningless! Instead FINRA said it “incorporates and enhances the...

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Investing in the Stock Market: Part Four

SHORT SELLING Short selling is relatively complicated compared to conventional buy-and-hold transactions and involves many unique risks and pitfalls. As always, the investor faces high risks for potentially high returns. It is important to understand how the short sale process works before entering a short sale order. WHAT IS SHORT SELLING? When an investor is “long” on a stock, it means that he or she has purchased a stock expecting its price to rise in the future. Conversely, when an investor goes “short,” he or she is expecting a decrease in share price. Short selling entails selling stock that one does not own. More specifically, the seller sells the stock without owning it and promises to deliver it in the future. When a stock is sold short, the brokerage firm will lends it to the account owner. The stock will come from the brokerage firm’s own inventory, from a firm customer, or from another brokerage firm. After the order is entered, the shares are sold and the proceeds are credited to the account. To “close” the position, the same number of shares must be bought or “covered” and returned to the firm. If the price of the stock drops, shares can be bought back at the lower price and a profit is made on the difference. If the price of the stock rises, and shares are bought back at the higher price, a loss will be incurred. In most cases, a short position can be held for as long as the investor desires, but the margin account will incur interest charges, so keeping a short sale open can be costly. However, short sellers can be forced to cover if the brokerage firm wants the borrowed stock back. This is known as being called away, and it occurs because brokerage firms cannot sell what they do not have, so the short seller will either have to come up with new shares to borrow or cover the position. Being called away does not happen often, but it is possible if many investors are short selling a particular security. Since the short seller does not actually own the stock, the lender of the stock is entitled to any dividends or rights declared during the course of the loan. If the stock splits during the course of your short, twice the number of shares is owed but at half the price. WHY SHORT? Generally, the two primary reasons to enter into a short position are to either speculate or to hedge. SPECULATING Speculators watch for opportunities in the stock market to make a quick, big profit, but it is not without risk. Because of the risks involved, speculation has been likened to gambling and is perceived negatively. However, speculation can involve a calculated assessment of stock market risks and can be profitable when the odds appear to be favorable. Speculating is distinguished from hedging because speculators purposefully assume risk, whereas hedgers seek to mitigate or reduce it. Speculators can bring certain benefits to the market, such as increased trading volume and market liquidity. However, an irrational amount of speculation can contribute to an economic bubble and stock market crash. HEDGING The majority of investors employ short sale transactions for hedging. When investors hedge, they are protecting a long position with an offsetting short position, much like a form of insurance. However, hedging can also be expensive, and a basis risk can occur. RESTRICTIONS A number of restrictions govern the size, price and types of stocks traders are able to sell short. For example, penny stock short sales are prohibited, and most short sales must be executed in round lots. The Securities Exchange Commission (SEC) employs restrictions to prevent stock price manipulation. As of January 2005, short sellers are also required to comply with “Regulation SHO,” which modernized the rules overseeing short selling and sought to provide protection against “naked short selling.” For instance, sellers had to show the location and availability of the securities they intended to short. Regulation SHO also created a list of securities displaying high levels of failures to deliver. In July of 2007, the SEC eliminated the uptick, or zero plus tick, rule. This rule required that short sale orders be entered at a higher price than that of the previous trade. The rules intention was to prohibit short sellers from contributing to the downward momentum of a sharply declining stock. The rule has been in existence since the creation of the SEC in 1934. One year later, the SEC put a stop to market manipulations resulting from dispersion of negative rumors about a company. The SEC’s goal was to renew confidence in the wake of the credit crisis. For one month, the SEC did not allow naked short selling on 19 major investment and commercial banks, which included Fannie Mae and Freddie Mac. In September of 2008, the SEC took further action to minimize abuses. One notable action was the halting of short sales in shares of 799 corporations. The ban ended after a bailout plan worth $700 billion was passed in October 2008. WHO SHORTS? Short sellers are often portrayed as pessimists who are rooting for corporate collapse, but they have also been described as studied, disciplined and confident in their decisions. Short sellers are typically: Wealthy sophisticated investors, Hedge funds, Large institutions, and Day traders Short selling involves a great amount dedication to market and company analysis. The very basics that must be understood include: The nature of securities markets, Trading techniques and strategies, Market trends, and The company’s business operations THE TRANSACTION Suppose that after hours of detailed research and analysis, company XYZ is presumed dead in the water. The stock is currently trading at $65, but research and analysis results show it will trade much lower in the coming months. In order to capitalize on the anticipated decline, shares of XYZ stock are shorted. The following is how the transaction would unfold: Step 1: Open a margin account. Recall, a margin account allows one to borrow...

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Investing in the Stock Market: Part One

INTRODUCTION Depending on your investment profile, stocks can form a part of your investment portfolio. Before you start investing in stocks, you need to understand their nature and how they trade. Over the past half century, the general public’s interest in the stock market has grown substantially. What was once a toy of the rich has now become accessible to anyone seeking wealth. This newly developed demand coupled with advances in online trading technology allows anyone with investible cash to own stocks. Notwithstanding their popularity, most people do not fully understand stocks. To make matters worse, people often engage in conversation with others who also do not fully understand stocks. There is a good chance you have heard people make comments such as: “John made a killing in the market, and now he’s got another hot tip …” or “Watch out with stocks–you can lose your shirt in a matter of days!” Much of this misinformation is based on a get-rich-quick mentality. Some people even believe that investing in stock is the magic answer to instant wealth with no risk. The good new is that stocks can (and do) create massive amounts of wealth, but they are not without risks. The only solution to this is education. The key to limiting your risk and protecting your hard-earned capital is to do your homework before you put money in the stock market. DIFFERENT TYPES OF STOCKS There are two main types of stocks: common stock and preferred stock. COMMON STOCK When people refer to stocks they are usually referring to common stock. In fact, the majority of stock is issued in common stock form. Common shares represent an ownership interest in an entity and a claim, in the form of dividends, on a portion of that company’s profits. Although voting structures may vary, investors typically get one vote per share to elect the board members, who oversee management and their decisions. Over the long term, common stocks, by means of capital appreciation, have produced higher returns than almost any other security or investment. However, this higher return comes at a cost since common stocks are subject to a number of risks. For example, if a company goes bankrupt and liquidates, the common stock shareholders’ claims are inferior to bondholders and preferred shareholders. PREFERRED STOCK Preferred stock represents a lesser degree of an ownership interest in a company and usually does not offer the same voting rights as common stock, but this may vary among companies. One notable feature of preferred stock is that investors are usually guaranteed a fixed dividend. This is distinguished from common stock, which has variable dividends that are never guaranteed. An advantage of preferred stock is that in the event of liquidation, preferred stock shareholders are paid before common stock shareholders but only after debt holders’ claims have been satisfied. Preferred stock may also be callable, meaning that the company that issued the shares has the option to purchase or redeem the preferred shares from investors at anytime for any reason – for a premium in some events. Many investors consider preferred stock to be more akin to debt than equity or common stock. One way to categorize preferred stock is to view them as a hybrid of bonds and common stock shares. DIFFERENT CLASSES OF STOCK Common and preferred are the two main types of stock; however, it should be noted that companies oftentimes categorize stock into classes. The most common reason for classifying stock is the issuing company’s desire for the voting power to remain with a certain group. As a result, different classes of shares are given different voting rights. For example, one class of shares would be held by a select group of investors who are given five votes per share, while another class would be held by the majority of investors who are given one vote per share. When there is more than one class of stock outstanding, the classes are traditionally designated as Class A and Class B. For example, Berkshire Hathaway (ticker: BRK) has two classes of stock. The different classes of stock are identified by the letter after the ticker symbol or after the period in the ticker symbol: “BRKa and BRKb” or “BRK.A and BRK.B”. UNDERSTANDING VARIOUS WAYS STOCKS ARE DESCRIBED In addition to the classes a company might establish for its shares, industry experts often group stocks into sub-categories or subclasses. Common subclasses, explained in greater detail below, focus on the company’s market capitalization or size, sector, cyclical performance, and short and long-term growth prospects. Subclasses have their own characteristics and are subject to certain external pressures that can affect their performance at any given time. Each individual stock’s behavior can be subject to a variety of factors as a result of its subclass(es). MARKET CAPITALIZATION If you follow investments news, you have probably heard the terms “large-cap, mid-cap, and small-cap.” These descriptors refer to company market capitalization, which is sometimes shortened to market cap. Market cap is a measure of a company’s size. Specifically, it is the dollar value of the company and is calculated by multiplying the total number of outstanding shares by the current market price. There are no fixed value ranges for large-, mid-, or small-cap companies, but you may find small-cap companies valued at less than $1 billion, mid-cap companies valued between $1 billion and $5 billion, and large-cap companies valued over $5 billion; the numbers could very well be twice those amounts. In addition, micro-cap companies are less capitalized than small-cap companies. Large-cap companies tend to be less vulnerable to volatility or the ups and downs of the economy than small-cap companies because large-cap companies typically have larger financial reserves and can afford to absorb losses and bounce back more quickly from a bad year. However, even the largest and most well-capitalized companies can fail. At the same time, small-cap companies may have greater potential for fast growth in an economic upswing than large-cap companies. Even so, there is no guarantee...

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