By MICHELLE A. SAMAAD

CU Times Senior Staff Reporter

WASHINGTON — Desert Schools Financial Services cited its ownpending lawsuit against a former financial adviser in a recentresponse to proposed changes from the Securities and ExchangeCommission involving protecting the privacy of a consumer'sfinancial information.

Regulation S-P: Privacy of Consumer Financial Information andSafeguarding Personal Information addresses the protocol when afinancial adviser leaves one brokerage firm for another and permitsclient 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 generaldescription of the type of account and products held by theinvestor and contact information, including address, telephonenumber and e-mail address.

In a May 12 letter to SEC, Becky Nilsen, CEO of Desert SchoolsFinancial Services, a subsidiary of $3.1 billion Desert SchoolsFCU, wrote that Gramm-Leach Bliley Act binds financial institutionsto protect personal information. The credit union has a pendinglawsuit in the Superior Court of Arizona against a former financialadviser who sold a client list along with other nonpublicinformation for personal gain, receiving a signing bonus in excessof $300,000, Nilsen wrote.

“The action of this financial adviser caused investor confusionin that the members were unclear from the solicitation about wheretheir accounts were actually held, most were outraged that such asituation could occur and these members definitely feel that theirprivacy was violated,” Nilsen wrote.

Unless there are modifications to the proposed rule, it wouldbecome permissible for a financial adviser assigned to this programto establish a client base at Desert Schools' expense using itsmember's non-public information “and then take it with them to setup 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 toaddress the violation of the contractual provisions which coststime, investor confidence, a great deal of money and damage to thefinancial institutions good name,” Nilsen offered.

Not all broker-dealers subscribe to the protocol in question,Nilsen said. There are differences between institutional investorsand independent financial advisers who own their practice and areaffiliated with a registered broker-dealer. In the independentenvironment, the financial adviser personally solicits and buildshis or her client base, Nilsen told the commission.

In the financial institution environment, the financial adviseris serving the needs of the client through a direct referral fromthe financial institution. In most cases, the financial adviser isan employee of the financial institution or a dual employee for thebroker-dealer and they are bound contractually through the thirdparty networking agreement not to solicit clients, she added. Inthis scenario, they don't have proprietary rights to the accountrelationships “because the relationship was established through theloyalty and trust of the financial institution who made theintroduction.”

“The current proposal would seem to not only encourage butfacilitate a violation of the clients' financial privacy byallowing a financial adviser to take that information with them ifthey leave the program. This is particularly harmful to a financialinstitution like Desert Schools Federal Credit Union since ourfield of membership is limited by our regulator,” Nilsen wrote.

NACUSO has spoken out against SEC's proposed changes sayingwithout an opt-option being given to clients, the amendments maynot be authorized by Gramm-Leach Bliley.

“This proposal is an effort to legitimize an industry practicewith a justification that the investor will likely want to know howto contact the financial adviser who was serving the investor,”wrote Tom Davis, NACUSO president/CEO and Guy Messick, NACUSOgeneral counsel in its May 12 letter to SEC. “While we do not doubtthat many investors will want to be able to contact the financialadviser who serviced their accounts, that purpose can be served bythe financial adviser advising the previous broker-dealer of hisnew contact information and the previous broker-dealer having anobligation to inform investors who ask for the financial adviser 'snew contact information. This method of communication will not bein violation of the Gramm-Leach-Bliley Act.”

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