RIA Compliance Blog
Last month, the Financial Industry Regulatory Authority (“FINRA”) suspended an Ameriprise registered representative for one year and fined him $50,000 for altering a record in the client relationship management (“CRM”) software that the adviser used in his Ameriprise office. This enforcement case points to the dangers for broker-dealer representatives and registered investment adviser representatives alike, in editing or altering records relating to interactions with clients.
David Tysk was accused of adding new entries to the firm’s ACT! Notes software, and of backdating 54 new entries and changing thirteen prior entries in the CRM system. According to the FINRA allegations, Mr. Tysk took those action to provide documented support for recommendations that a client purchase variable annuities. Mr. Tysk allegedly made these changes after the client complained to Ameriprise, which complaint led to an internal investigation by the firm.
While Mr. Tysk attempted to justify his actions in altering the records as just an attempt to make them more completely and accurately reflect the client interactions, in fact Mr. Tysk was found to have altered them in order to defend against the customer’s complaint and then to have concealed them by failing to inform Ameriprise that he had edited the records after the client’s complaint. Compounding the issue is that Ameriprise, which was named as a Respondent in a FINRA arbitration filed by the customer, failed to produce an exception report to claimant’s counsel until just prior to the scheduled hearing. Ameriprise was also sanctioned for its failure to cooperate in discovery.
As advisers generally know, a recommendation to buy or sale securities or to invest in particular products should be supported by evidence of the suitability of the recommendation. In the case of variable annuities, private placements, alternative investments, and other products that often carry high commissions or present potential conflicts of interest, the best practice is to document in writing at the time of the recommendation or shortly thereafter what conversations were had with the client, the reasons underlying the recommendations, and what material facts relating to the investments, including any conflicts of interest, were disclosed to the client. In many cases, it is considered the better practice is to actually provide a written disclosure to the client, and many issuers of alternative products require a disclosure actually signed by the client. FINRA rules also require heightened disclosures and/or acknowledgements for certain products, as in the case of purchasing a variable annuity to replace an existing one.
But advisers should never post-date their notes. Nor should they try to pass off as contemporaneous notes that were not made at or near the time of the recommendation. That conduct by Tysk was found by FINRA to demonstrate a “troubling lack of integrity.”
In the case of Mr. Tysk, the client invested $1,000,000.00 in a variable annuity based upon Tysks’s recommendation in December 2006. Mr. Tysk caused the client to purchase another $1,000,000.00 in the same variable annuity several months later. This triggered an exception report based upon the client’s age, but Mr. Tysk overrode the exception report, recording as the reason for the recommendation that the client was a high-net worth individual with no current need for cash and no need for the money used to purchase the annuity during his lifetime. Several months later, however, the client complained to the firm, noting in his complaint that he did in fact require access to the funds and did not need to pass on the funds to his heirs.
Mr. Tysk produced copies of his ACTS! Notes in discovery to his client’s counsel, but when the client’s counsel noticed that the notes showed that they had been edited after the date of the client’s complaint, counsel requested to see the edits that were made to the original notes. That process led to the discovery of the allegedly back-dated and edited entries to support Mr. Tysk’s recommendations.
Mr. Tysk has indicated through his counsel that he will appeal the decision to the Securities and Exchange Commission (“SEC”).
Parker MacIntyre provides legal and compliance services to investment advisers, broker-dealers, registered representatives, hedge funds and issuers of securities, among others. Our regulatory practice group assists financial service providers with complex issues that arise in the course of their business, including complying with federal and state laws and rules. Please visit our website for more information.