Sharing Investor Information Hits Home, Desert Schools Financial Tells SEC
CU Times Senior Staff Reporter
WASHINGTON -- Desert Schools Financial Services cited its own pending lawsuit against a former financial adviser in a recent response to proposed changes from the Securities and Exchange Commission involving protecting the privacy of a consumer's financial information.
Regulation S-P: Privacy of Consumer Financial Information and Safeguarding Personal Information addresses the protocol when a financial adviser leaves one brokerage firm for another and permits client information to be given to that adviser's new broker-dealer. NACUSO reports that the proposal would permit the financial adviser 's new broker-dealer to have the investor's name, a general description of the type of account and products held by the investor and contact information, including address, telephone number and e-mail address.
In a May 12 letter to SEC, Becky Nilsen, CEO of Desert Schools Financial Services, a subsidiary of $3.1 billion Desert Schools FCU, wrote that Gramm-Leach Bliley Act binds financial institutions to protect personal information. The credit union has a pending lawsuit in the Superior Court of Arizona against a former financial adviser who sold a client list along with other nonpublic information for personal gain, receiving a signing bonus in excess of $300,000, Nilsen wrote.
"The action of this financial adviser caused investor confusion in that the members were unclear from the solicitation about where their accounts were actually held, most were outraged that such a situation could occur and these members definitely feel that their privacy was violated," Nilsen wrote.
Unless there are modifications to the proposed rule, it would become permissible for a financial adviser assigned to this program to establish a client base at Desert Schools' expense using its member's non-public information "and then take it with them to set up their own independent practice or sell it to the highest bidder" under the current proposal, Nilsen wrote.
"The only remedy would be to file an action with the courts to address the violation of the contractual provisions which costs time, investor confidence, a great deal of money and damage to the financial institutions good name," Nilsen offered.
Not all broker-dealers subscribe to the protocol in question, Nilsen said. There are differences between institutional investors and independent financial advisers who own their practice and are affiliated with a registered broker-dealer. In the independent environment, the financial adviser personally solicits and builds his or her client base, Nilsen told the commission.
In the financial institution environment, the financial adviser is serving the needs of the client through a direct referral from the financial institution. In most cases, the financial adviser is an employee of the financial institution or a dual employee for the broker-dealer and they are bound contractually through the third party networking agreement not to solicit clients, she added. In this scenario, they don't have proprietary rights to the account relationships "because the relationship was established through the loyalty and trust of the financial institution who made the introduction."
"The current proposal would seem to not only encourage but facilitate a violation of the clients' financial privacy by allowing a financial adviser to take that information with them if they leave the program. This is particularly harmful to a financial institution like Desert Schools Federal Credit Union since our field of membership is limited by our regulator," Nilsen wrote.
NACUSO has spoken out against SEC's proposed changes saying without an opt-option being given to clients, the amendments may not be authorized by Gramm-Leach Bliley.
"This proposal is an effort to legitimize an industry practice with a justification that the investor will likely want to know how to contact the financial adviser who was serving the investor," wrote Tom Davis, NACUSO president/CEO and Guy Messick, NACUSO general counsel in its May 12 letter to SEC. "While we do not doubt that many investors will want to be able to contact the financial adviser who serviced their accounts, that purpose can be served by the financial adviser advising the previous broker-dealer of his new contact information and the previous broker-dealer having an obligation to inform investors who ask for the financial adviser 's new contact information. This method of communication will not be in violation of the Gramm-Leach-Bliley Act."