Wachovia Securities, which recently announced its merger with one of our clients, A.G. Edwards & Sons, agreed to pay a $3 million fine for allowing buy-and-hold customers to sit in wrap fee accounts. A wrap fee account is one where the client pays a flat fee for either no commissions or reduced commissions. Some brokers throw in extra services in exchange for the wrap fee.

Wrap fees have been around for a long time. In the "old days" (i.e. when I first started defending brokerage firms), a broker accused of churning would throw up his/her hands and say "That's it, I'm going to managed money" meaning a wrap fee account. The broker saw this as a way of not being accused of churning the client's account. Of course, a wrap fee is not a cure for all ills.

Wachovia, like other firms before it like Raymond James and UBS, was accused of letting its wrap fee clients just sit there racking up fees but getting nothing for the fee. Further, it appears that "A" share mutual funds, for which a client already paid a sales load (commission), were also being used in a wrap fee account, a definite no-no.

This tension between commission business and wrap fee business creates the issue of "which is cheaper." Sometimes a broker won't know how much activity the client is going to do, so a wrap fee would be inappropriate. Other instances may call for a wrap fee, such as a client investing significant new money, but the long term costs can be high if the strategy is to buy and hold.

Ultimately, the decision comes down to the basic premise of what is best for the customer. That is and has always been the mantra of securities business. Sometimes, for a myriad of reasons both honest and not-so-honest, the securities industry loses sight of the goal - the best interest of the client. In this case, the wrap fee was seen as placing the client and the broker on the same side of the table, with no transaction-based incentive. Most brokers that I know feel this way. Unfortunately, the decision to recommend a wrap as opposed to a transaction-based account is not a simple one. And the regulators don't provide any real guidance on the front end but are more than willing to extract a fine or two when the plan doesn't work out.

That's the view from the The Law Planet, Jupiter, Florida.

The National Association of Securities Dealers ("NASD") has issued warnings to investors regarding the sales of Equity Index Annuities. NASD Investor Information This is interesting because an Equity Index Annuity is treated as a fixed insurance product in Florida and not subject to securities regulation. This allows the unscrupulous insurance salesperson plenty of room for abuse.

Here's the problem with one of the most popular brands of Equity Index Annuities - the annuity values on the account statements are misleading. The only way to get the statement value out of the annuity is to annuitize it over ten years. I have a client who thinks that when she dies, her beneficiaries are going to get the "value" listed on her account statement. In fact, they will only get the value if they take 10 equal payments over 10 years. Hence, the Roach Motel analogy. Your money checks in but doesn't check out.

An Equity Index Annuity is a securities-based product that only requires an insurance license to sell. The performance of the annuity is tied to a market index or blend of market indices. Usually, the annuity's link to the index is capped and/or participates in only a percentage of the index's performance. Further, if the market declines, there usually is no limit on the decline. But there will be a limit if the performance rebounds.

I can barely understand this and I do this for a living. I can only imagine what the inexperienced investor must think. Actually, I know because we have spoken with people who have purchased these hybrid products. They didn't understand them when they purchased the annuity and they could not explain them to me when I asked for a description.

The unfortunate part is that the senior citizens who purchase these products can least afford having their money tied up in this manner. Worse yet, from my view, is that the aggrieved purchaser may have to go to court rather than go to arbitration. And since they are not securities, the attorneys' fee provision of the Florida Blue Sky Law would not apply.

Our advice - if you don't understand it, don't buy it. If you think you've been wronged, do something about it. Don't suffer in silence.

That's the view from The Law Planet, Jupiter, Florida.

Under Florida law, the courts have upheld a qualified privilige on disclosures made on NASD form U-5, the Uniform Termination Notice for Securities Registration. Eaton Vance Distributors, Inc. et al. v. Ulrich, 692 So. 2d 915 (Fla. App. 2nd DCA 1997). However, there are a number of brokerage firms that use a New York "choice of law" provision in their employment contracts. A recent decision was initially thought to be the death knell for defamation actions.

In Rosenberg v. Metropolitan Life Insurance Company et al., 2007 NY Slip Op 2627, the New York Court of Appeal, the state's highest court, ruled that statements made on a Form U-5 are protected by an absolute privilege. The ruling, at first blush, appeared unequivocally devastating to registered representatives wishing to assert U-5 defamation claims employed in New York and/or governed by enforceable New York choice-of-law provisions. Fortunately, however, the Second Circuit Court of Appeals, after it received the Rosenberg case back from the New York Court, identified a very legitimate and glaring hole in the Court of Appeals’ analysis. Op. issued June 14, 2007 at n. 1.

The Court of Appeals recognized that statements in a Form U-5 that are not “material and pertinent to the issues to be resolved” are probably not protected. Specifically, the court recognized that not all statements placed on a broker’s Form U-5 may be absolutely protected:

Consequently, we need not decide if there are circumstances in which statements on a Form U-5 are not absolutely privileged under Rosenberg II. We note, however, that in the context of judicial or quasi-judicial proceedings, statements made by parties, attorneys, and witnesses are absolutely privileged only ‘so long as they are material and pertinent to the issue to be resolved in the proceeding.'

While initially devastating to broker U-5 defamation claims under New York law, the Second Circuit’s latest per curiam decision holds out hope that brokers are not completely without recourse when false language is contained within a Form U-5. Moreover, because U-5 defamation analysis is governed by state law, states such as Florida that reject an absolute privilege in U-5 defamation cases remain unaffected by Rosenberg.

Here at The Law Planet, we continue to receive inquiries from recently-terminated stockbrokers about getting help with the language on a form U-5. Most brokerage firms are savvy enough to realize that getting the broker's input on the language is a major step towards avoiding defamation litigation. Our role as counsel is to make sure that the brokerage firm discharges its regulatory obligation while minimizing the impact on our client's career.

That's the view from The Law Planet, Jupiter, Florida.

There was a study published recently by Dan Solin, a lawyer in New York City, and his co-author Eddie O'Neal, a professor, which conclued that mandatory securities arbitration is unfair. Now, I will admit that I (and others) make a pretty good living in securities arbitration venues of the NASD and NYSE. But I don't understand what all the hand-wringing is about and I certainly don't understand the conclusions that these two gentlemen reached.

Most importantly, I think, they completely discounted the notion that the broker-dealers settle the tough cases and try the cases that they can't settle or think they can win. I don't know Mr. Solin but I don't think he does any defense work (he is a member of PIABA, the Public Investor Arbitration Bar Association), I find it hard to believe that he can simply dismiss this notion as "anecdotal." In my firm's practice, where we represent customers, brokers and broker-dealers, we have seen the vast majority of our cases settle before they go to hearing. It's not just anecdotal, it's a fact.

There are some distinct advantages in arbitration. The strict evidentiary rules don't apply. This allows hearsay, double hearsay, newspaper articles and the like into evidence. An old saw in arbitration is that arbitrators "let everything in" and they will "take it for what it's worth." You won't see a judge do that.

Expert witnesses are another area where arbitration is more lenient. When I first came to Florida, I examined a proposed expert and he admitted that he was not an expert on securities laws, even though he was going to testify in a securities fraud case. His testimony was allowed. In court, he would most likely have been shown the door.

There really isn't a way to study the purported fairness or unfairness of securities arbitration by just looking at numbers. But look at PIABA's name. Notice the word "Arbitration." Trust me, no one is holding a telethon for impoverished securities lawyers.

That's the view from The Law Planet in Jupiter, Florida.