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December 14 , 2003
By Grant Catton
COMPLIANCE REPORTER
The sales practice violation known as over-concentration is raising eyebrows after appearing in an NASD enforcement action and arbitration claim. Over-concentration is when a registered representative allows or directs a client to invest most of his money in one stock. Over-concentration could start being an issue in more and more arbitrations as clients realize their losses from the tech bubble collapse could have been prevented. These types of cases will definitely increase, said Lawrence Klayman, senior partner at KlaymanToskes in Boca Raton, Fla, who routinely represents investors in sales practice violation cases against broker/dealers.
Peter Gschweng, chief compliance officer at Firstrade in Flushing, N.Y., said that while over-concentration is not a new concept, he could not recall seeing it specifically mentioned in charges against B/Ds. Over-concentration is not something that is easy to regulate, and it is unlikely to receive a lot of attention by itself, said Gschweng. “There’s a little bit of black, a little bit of white, and a whole lot of gray,” he said. Gschweng said, however, that he could see the number of claims alleging over-concentration against firms rising.
Clients who had their money over-concentrated in one technology stock may have lost all of their money when the tech bubble burst, said Klayman. Now, investors are becoming better informed and realizing they may have legitimate claims against their B/Ds. Klayman noted that over-concentration violates modern theories on how to construct investor portfolios and that low-cost hedging strategies are always available, though they are not always used. Klayman’s firm is preparing for the final hearing in an arbitration claim against a former rep of Salomon Smith Barney (now Citigroup Global Markets) with the NASD. Klayman’s client alleges, among other things, that his account was over-concentrated in WorldCom stock.
In an unrelated case, the NASD charged a former registered representative of U.S. Bancorp Piper Jaffray with over-concentrating client accounts in volatile securities, and trading those accounts excessively. The NASD said the rep, Thomas O’Neill, engaged in transactions which were not only excessive in frequency, but put his clients into high concentrations of volatile high-risk stocks. Robert Phillips, senior partner at Phillips & Bohyer in Missoula, Mont., and counsel for O’Neill, said O’Neill plans to accept the NASD settlement without admitting or denying guilt.