I'm a broker and recently quit my firm and moved to another broker-dealer. I am of a certain nationality. I learned that, after I left, my former branch manager met with one of my clients who is of a different race/religion/nationality than me. My former branch manager, in an apparent effort to keep the client from moving with me, told the client that he would put him with a broker in the office of the same nationality as the client. Could this constitute affinity fraud?

While this does seem like an underhanded way to try and keep a client, it doesn't really rise to the level of "affinity fraud". The SEC explains that "affinity fraud" generally refers to investment scams that prey upon members of identifiable groups, such as religious or ethnic communities, the elderly, or professional groups. The fraudsters who promote affinity scams frequently are - or pretend to be - members of the group. These scams exploit the trust and friendship that exist in groups of people who have something in common.

It's important to note that there's a difference between doing something that's just underhanded and doing something that actually violates a law, rule or regulation, attorney Alan Foxman says.

It's important to note that there's a difference between doing something that's just underhanded and doing something that actually violates a law, rule or regulation. Based on the information you provided, I'm not sure this situation rises to the level of a violation since there's no actual fraud involved. While I feel the manager has an obligation to find the customer the best broker, regardless of race, religion or nationality, if the customer specifically asked for a certain type of broker, then the manager's position would likely be that he has a responsibility to honor the customer's wishes.

On the other hand, if the manager took it upon himself to match the client with a broker of similar race, religion or nationality, the manager might open himself and the firm up to potential liability if the broker turns out to be incompetent or simply gives bad investment advice. The customers could argue that they bestowed more than the usual amount of trust and faith in the broker because of the commonality. Consequently, the manager could find that he and his firm are held to a higher standard of care.

I recently left my firm and, while meeting with husband and wife clients of mine, I learned that my former branch manager had called them and asked if they were aware that they were losing money in their account. These clients were invested in short-term, three months to one year, CDs. Their market value had declined by about $5,000 on a $1 million portfolio. All their investments are in FDIC-insured CDs and no single investment was over the FDIC-insured limit. Is this something NASD Regulation would consider investigating?

I can't say whether the FINRA would investigate this matter but you might want to anonymously call your local District Office to see if they'd want to look into it.

On the one hand, the manager's question as to whether the clients were aware they were losing money could be construed as simply a good manager doing his job to make sure the clients are aware of their account's status. It could be argued that he didn't technically lie when he said the account was losing money.

On the other hand, at his comment could be seen as violative of FINRA Rule 2210(d) that requires that communications with customers not be misleading. The rule requires all member communications to be based on principles of fair dealing and good faith. Member firms cannot omit any material facts if under the circumstances the omission would cause the communication to be misleading. A statement made in one context may be misleading even though it could be appropriate in another context.

As the regulators are fond of saying, it's all about the "facts and circumstances."

Alan J. Foxman

Alan J. Foxman

Alan J. Foxman is a partner in the law firm of Dew Foxman & Haugh and a senior consultant with National Compliance Services in Delray Beach, Fla.