Securities Law Prof Blog

Editor: Eric C. Chaffee
Univ. of Toledo College of Law

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Thursday, December 31, 2009

SEC Adopts Custody and Recordkeeping Rules for Investment Advisers

The SEC adopted amendments to the custody and recordkeeping rules under the Investment Advisers Act of 1940 to provide additional safeguards when a registered adviser has custody of client funds or securities.  The final rules require the adviser, among other things: to undergo an annual surprise examination by an independent public accountant to verify client assets; to have the qualified custodian maintaining client funds and securities send account statements directly to the advisory clients; and unless client assets are maintained by an independent custodian (i.e., a custodian that is not the adviser itself or a related person), to obtain, or receive from a related person, a report of the internal controls relating to the custody of those assets from an independent public accountant that is registered with and subject to regular inspection by the Public Company Accounting Oversight Board. Finally, the amended custody rule and forms will provide the Commission and the public with better information about the custodial practices of registered investment advisers.  The rules go into effect 60 days after publication in the Federal Register.

December 31, 2009 in SEC Action | Permalink | Comments (0) | TrackBack (0)

Telecommunications Company Settles FCPA Charges Relating to Asian Business

The SEC charged Alameda, Calif.-based telecommunications company UTStarcom, Inc. with violations of the Foreign Corrupt Practices Act (FCPA) for authorizing millions of dollars in unlawful payments to foreign government officials in Asia.  UTStarcom agreed to settle the SEC's charges and pay a $1.5 million penalty among other remedies. In a related criminal case, the U.S. Department of Justice announced today that UTStarcom agreed to pay an additional $1.5 million fine.

The SEC alleged that UTStarcom's wholly-owned subsidiary in China paid nearly $7 million between 2002 and 2007 for hundreds of overseas trips by employees of Chinese government-controlled telecommunications companies that were customers of UTStarcom, purportedly to provide customer training. In reality, the trips were entirely or primarily for sightseeing.  The SEC further alleges that UTStarcom provided lavish gifts and all-expenses paid executive training programs in the U.S. for existing and potential foreign government customers in China and Thailand. UTStarcom also purported to hire individuals affiliated with foreign government customers to work in the U.S. and provided them with work visas, when in reality the individuals did no work for UTStarcom. According to the SEC's complaint, UTStarcom also made improper payments to sham consultants in China and Mongolia while knowing that they would pay bribes to foreign government officials.

December 31, 2009 in SEC Action | Permalink | Comments (0) | TrackBack (0)

Tuesday, December 29, 2009

SEC Charges Broker with Defrauding Two Florida Municipalities

The SEC today charged Harold H. Jaschke, a Houston-based broker, with engaging in unauthorized and unsuitable trading on behalf of two Florida municipalities, putting them at risk of losing millions of dollars while he reaped commissions of more than $14 million for himself.  According to the agency, Jaschke, while associated with the brokerage firm First Allied Securities, Inc., churned the accounts of the City of Kissimmee, Fla., and the Tohopekaliga Water Authority and lied to both customers about his trading practices on their behalf.

The SEC's complaint, filed in federal court in Orlando, Fla., alleges that Jaschke engaged in a high-risk, short-term trading strategy involving zero-coupon U.S. Treasury bonds that were very sensitive to interest rate changes. According to the SEC's complaint, Jaschke's risky trading strategy involved buying and selling the same bond within a matter of days, and sometimes within the same day. Jaschke exposed the municipalities to greater risks when he leveraged their accounts using repurchase agreements to finance the bond purchases that they otherwise would not have been able to afford. This strategy dramatically increased the risks as Jaschke caused the municipalities to borrow large sums of money to hold larger bond positions.

The SEC alleges that Jaschke knew the municipalities' ordinances prohibited his trading strategy and required that their funds be invested with the paramount consideration to be safety of capital. Jaschke also knew that the municipalities' ordinances prohibited the use of repurchase agreements for investment. According to the SEC's complaint, had the bond market not swung sharply in Jaschke's favor allowing the municipalities to close their accounts with a modest profit, they could have lost approximately $60 million over a two-year period as a result of his misconduct.

The SEC's complaint alleges that Jaschke violated the antifraud provisions of the federal securities laws, Section 17(a) of the Securities Act of 1933 and Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder, and aided and abetted violations of the broker-dealer books and records provisions, Section 17(a) of the Exchange Act and Rule 17a-4(b)(4) thereunder. The SEC's complaint seeks a permanent injunction and disgorgement with prejudgment interest and a financial penalty.

In a related enforcement action, the SEC charged Jeffrey C. Young, First Allied's former vice president of supervision, for failing to reasonably supervise Jaschke, failing to respond adequately to red flags relating to Jaschke, and failing to take reasonable steps to ensure that First Allied's procedures regarding suitability were followed. Young agreed to settle the SEC's enforcement action without admitting or denying the findings. The SEC's order instituting settled administrative proceedings against Young suspends him from acting in a supervisory capacity for nine months and orders him to pay a $25,000 penalty.

December 29, 2009 in SEC Action | Permalink | Comments (0) | TrackBack (0)

Stifel Settles ARS Charges with State Securities Regulators

NASAA today announced that a settlement in principle has been reached between Stifel, Nicolaus & Co., Inc. and state securities regulators to provide relief for the firm’s clients who have had their funds frozen in the auction rate securities (ARS) market.  The settlement with St. Louis-based Stifel, Nicolaus calls for the firm to buy back from its investors more than $100 million in auction rate securities. The settlement is the result of a task force investigation led by the Colorado Division of Securities, the Securities Division of the Indiana Office of the Secretary of State and the Securities Division of the Missouri Office of the Secretary of State.
 
Under the terms of the settlement, Stifel will significantly accelerate the unendorsed repurchase plan it announced in April, and all Stifel investors holding auction rate securities will receive a payout by January 15, 2010. Additionally, Stifel will accelerate its planned 2011 partial repurchase event to December 2010, and make additional payments at that time. As a result of this acceleration and these additional payments, every investor who had $150,000 or less in auction rate securities holdings will be made whole by the end of next year. The payouts to be made in 2010 will be worth up to $41 million and will lead to full buybacks for 80 percent of investors nationwide.

Stifel will also accelerate its final buyback previously scheduled for June 2012 so that all auction rate holders receive a full buyback and are made whole no later than the end of 2011. The average overall account size of investors receiving the accelerated 2011 full repurchase is more than $5 million.

The settlement also requires Stifel to work with a bank affiliate to make its best efforts to offer interim loans on investor-friendly terms, and to hire a securities industry expert to make recommendations on supervision, training, marketing and selling nonconventional products. Stifel will also pay a penalty of $525,000, to be divided among the states, and will be charged with failure to supervise and train its agents in the sale of auction rate securities. Stifel also agreed to reimburse Missouri and Indiana for costs associated with the investigation and make quarterly reports on repurchases and other auction rate securities activity.

December 29, 2009 in Other Regulatory Action | Permalink | Comments (0) | TrackBack (0)

Monday, December 28, 2009

SEC Makes Permanent Investment Advisers Rule on Principal Trades

The SEC adopted as final Rule 206(3)-3T under the Investment Advisers Act of 1940, the interim final temporary rule that establishes an alternative means for investment advisers who are registered with the Commission as broker-dealers to meet the requirements of Section 206(3) of the Investment Advisers Act when they act in a principal capacity in transactions with certain of their advisory clients. As adopted, the only change to the rule is the expiration date. Rule 206(3)-3T will sunset on December 31, 2010.

According to the SEC release, Rule 206(3)-3T was designed to continue to provide the protection of transaction-by-transaction disclosure and consent to advisory clients when investment advisers seek to trade with them on a principal basis, subject to several conditions. Specifically, Rule 206(3)-3(T) permits an adviser, with respect to non-discretionary advisory accounts, to comply with Section 206(3) of the Advisers Act by, among other things, meeting the following conditions:

(i) providing written, prospective disclosure regarding the conflicts arising from principal trades;
(ii) obtaining written, revocable consent from the client prospectively authorizing the adviser to enter into principal transactions;
(iii) making certain disclosures, either orally or in writing, and obtaining the client’s consent before each principal transaction;
(iv) sending to the client confirmation statements disclosing the capacity in which the adviser has acted and disclosing that the adviser informed the client that it may act in a principal capacity and that the client authorized the transaction; and
(v) delivering to the client an annual report itemizing the principal transactions made during the year.

December 28, 2009 in SEC Action | Permalink | Comments (0) | TrackBack (0)

FINRA Proposes Change to Arbitration Rules Regarding Hearing Location

The SEC noticed a proposed rule change (SR-FINRA-2009-073) submitted by FINRA related to the hearing location rules of the Codes of Arbitration Procedure for customer and industry disputes. Publication is expected in the Federal Register during the week of December 28. As FINRA explains in the release,

Currently, Rule 12213(a) of the Customer Code states that generally, the Director of FINRA Dispute Resolution (“Director”) will select the hearing location closest to the customer’s residence at the time of the events giving rise to the dispute. FINRA has determined that its policy concerning selection of a hearing location under the Customer Code may be broader than the rule describes.

Under the current rule in the Customer Code, for example, if a customer in an arbitration proceeding lives in Hoboken, New Jersey, the Director will select the New York City hearing location, because this hearing location is closer to the customer’s residence, Hoboken, than FINRA’s Newark, New Jersey hearing location.  There have been instances, however, in which the Director has granted customers’ requests to select a hearing location in their state of residence at the time of the events. ... Thus, in the example above, if the customer requests the Newark, New Jersey hearing location, the Director generally will grant the request, even though the closest hearing location is the New York City location. The Director typically attempts to honor such requests as a convenience to public customers.

FINRA is proposing, therefore, to amend Rule 12213(a) of the Customer Code to add this criterion for selecting a hearing location. The proposed amendment to the rule would state that the Director will select the hearing location closest to the customer’s residence at the time of the events giving rise to the dispute, unless the hearing location closest to the customer’s residence is in a different state. In that case, the customer may request a hearing location in the customer’s state of residence at the time of the events giving rise to the dispute.

.... FINRA believes the proposal is customer-friendly because it gives customers more control over the arbitration process, by providing them with a choice of hearing locations.

December 28, 2009 in Other Regulatory Action | Permalink | Comments (0) | TrackBack (0)

Ohio Investment Adviser Settles Allegations of Misappropriating Funds from Elderly Clients

Julie M. Jarvis, of Columbus, Ohio, and her financial advisory firm, Crossroads Financial Planning, Inc, have agreed to settle the SEC's pending civil action against them that  alleged that Jarvis misappropriated at least $2.3 million from two elderly clients between June 2000 and March 2009. In a related criminal proceeding, on October 14, 2009, the United States District Court for the Southern District of Ohio sentenced Jarvis to 66 months incarceration based upon her plea of guilty to criminal charges stemming from the same conduct alleged in the Commission's complaint. The Court also ordered her to pay restitution in the amount of $2,663,681.44.

December 28, 2009 in SEC Action | Permalink | Comments (0) | TrackBack (0)

SEC Permanently Disqualifies Former GC of Universal Express

The SEC permanently disqualified Chris G. Gunderson, an attorney and former general counsel for Universal Express, Inc., a Nevada corporation, from appearing or practicing before it pursuant to Rule of Practice 102(e). The Commission found that Gunderson had been permanently enjoined by the United States District Court for the Southern District of New York for issuing and distributing unregistered shares of Universal Express, Inc., in violation of Section 5 of the Securities Act of 1933, and for creating and disseminating materially misleading press releases concerning Universal Express, Inc.'s business operations, in violation of Securities Act Section 17(a) and Section 10(b) and Rule 10b 5 of the Securities Exchange Act of 1934. The Commission further found that it was in the public interest and necessary to preserve the integrity of its registration and disclosure processes to permanently disqualify Gunderson from practice before the Commission. (Rel. 34-61234; File No. 3-12653)

December 28, 2009 in SEC Action | Permalink | Comments (0) | TrackBack (0)

Former CEO and Securities Counsel Settle Financial Fraud Charges

The SEC settled financial fraud charges against Richard E. McDonald, former President, CEO and Chairman of World Health Alternatives, Inc. ("World Health"), a now defunct medical staffing company previously located in Pittsburgh, Pennsylvania. The Commission's complaint alleges that McDonald was the principal architect of a wide-ranging financial fraud at World Health by which McDonald misappropriated approximately $6.4 million for his personal benefit. Other defendants, who also settled charges, are Deanna Seruga, the company's former controller and a CPA, Marc D. Roup, a former CEO of World Health, and Joseph I. Emas, World Health's former outside securities counsel. The settlements are pending final approval by the court.

The complaint alleges that, from at least May 2003 through August 2005, McDonald, along with Seruga and Roup, engaged in a wide array of fraudulent and improper conduct. A key aspect of the fraud involved the manipulation of World Health's accounting entries. McDonald and Seruga repeatedly falsified accounting entries in World Health's financial books and records, understating expenses and liabilities. This made the Company appear more financially sound, and masked McDonald's misappropriation of funds. During the relevant period, every annual and quarterly report that World Health filed with the Commission contained false financial statements.

As alleged in the complaint, McDonald also improperly attempted to issue and register for immediate sale millions of shares of World Health stock by misusing a Form S-8 registration statement. In addition, McDonald also caused World Health to file with the Commission two false post-effective amendments drafted by Emas, World Health's outside securities counsel.

McDonald has consented to the entry of an order permanently enjoining him from violating Sections 5(a), 5(c) and 17(a) of the Securities Act of 1933, Sections 10(b), 13(b)(5) and 16(a) of the Securities Exchange Act of 1934 and Rules 10b-5, 13b2-1, 13b2-2 and 13a-14 thereunder, and aiding and abetting violations of Sections 13(a), 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act and Rules 12b-20, 13a-1, 13a-11 and 13a-13 thereunder. The order will also bar McDonald from serving as an officer or director of a public reporting company. The order finds McDonald liable for disgorgement of approximately $6.4 million plus prejudgment interest. Based on sworn financial statements and other documents and information submitted to the Commission, payment of disgorgement and prejudgment interest will be waived and civil penalties not imposed.

Roup has consented to the entry of an order permanently enjoining him from violating Sections 5(a), 5(c) and 17(a) of the Securities Act, Sections 10(b) and 16(a) of the Exchange Act, and Rules 10b-5 and 13a-14 thereunder, and aiding and abetting violations of Sections 13(a), 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act, and Rules 12b-20, 13a-1, 13a-11, and 13a-13 thereunder. The order will also bar Roup from serving as an officer or director of a public reporting company. Roup will also be ordered to pay disgorgement and prejudgment interest of $5,324,187, and a $120,000 civil penalty. Roup consented to transfer his assets to a court-appointed receiver to satisfy payment of these amounts.

Seruga has consented to the entry of an order permanently enjoining her from violating Section 17(a) of the Securities Act, Sections 10(b) and 13(b)(5) of the Exchange Act, and Rules 10b-5, 13b2-1 and13b2-2 thereunder, and aiding and abetting violations of Section 13(a) of the Exchange Act, and Rules 12b-20, 13a-1 and 13a-13 thereunder. The order finds Seruga liable for disgorgement of $383,662 plus prejudgment interest. Based on sworn financial statements and other documents and information submitted to the Commission, payment of disgorgement and prejudgment interest will be waived and civil penalties not imposed. In addition, Seruga agreed to settle a related administrative proceeding by consenting to the entry of an order suspending her from appearing or practicing before the Commission as an accountant.

Emas has consented to the entry of an order permanently enjoining him from violating Sections 5(a), 5(c), 17(a)(2) and 17(a)(3) of the Securities Act. Emas will also be ordered to pay disgorgement and prejudgment interest of $163,083, and a $15,000 civil penalty. In addition, Emas agreed to settle a related administrative proceeding by consenting to the entry of an order suspending him from appearing or practicing before the Commission as an attorney for two years.

December 28, 2009 in SEC Action | Permalink | Comments (0) | TrackBack (0)

SEC Obtains Emergency Relief In Connection with Alleged Trading on Inside Information

On Dec. 23 the SECobtained an emergency asset freeze against two French men it charged with insider trading the day after they tried to illegally profit from a Paris-based manufacturer’s acquisition of another health care products company located in Chattanooga, Tenn.  The SEC alleges that Nicolas Patrick Benoit Condroyer and Gilles Robert Roger, who reside in Brussels, Belgium, purchased hundreds of "out-of-the-money" call option contracts for stock in Chattem, Inc., which manufactures and markets over-the-counter health care products. Condroyer and Roger purchased the contracts in newly-opened U.S. option brokerage accounts while in possession of material, nonpublic information regarding the impending acquisition of Chattem by Sanofi-Aventis, one of the world's largest health care products companies.  According to the SEC's complaint, when the $1.9 billion acquisition was announced publicly on December 21, Condroyer and Roger immediately sold all of their options for illicit profits of approximately $4.2 million. The SEC filed insider trading charges against them the very next day.

The SEC's enforcement action was filed in federal court in Atlanta. The court order, also obtained on December 22, freezes approximately $4.2 million in assets and prohibits Condroyer and Roger from destroying evidence.

The SEC alleges that Condroyer was in possession of material, nonpublic information regarding the Chattem acquisition by Sanofi while he purchased, from December 7 to 18, more than 1,900 option contracts for Chattem stock that were set to expire on January 15, within weeks of the purchase date. The SEC similarly alleges that on December 17 and 18, Roger purchased 940 contracts for Chattem in an account he opened at the beginning of that week while in possession of material, nonpublic information regarding the acquisition. These contracts also were set to expire on January 15. The SEC further alleges that there have been no transactions in either Condroyer's or Roger's account other than the purchase and sale of Chattem call options.

December 28, 2009 in SEC Action | Permalink | Comments (0) | TrackBack (0)

Tuesday, December 22, 2009

Atlas Mining and Former CEO Settle SEC Fraud Charges

The SEC filed settled charges against Atlas Mining Company, an Idaho mining company, and its former CEO for improperly financing their struggling operations through the illegal distribution of millions of shares of stock to investors.  According to the SEC, William Jacobson caused Atlas Mining to sell millions of shares of stock to the public while evading the disclosure and registration requirements of the federal securities laws. Among other things, the SEC alleges that Jacobson issued stock to family members and companies he controlled, who then resold the stock to the public and funneled the money back to the company. Similarly, the SEC alleges that when a 2003 public offering failed to raise sufficient funds before expiring, Jacobson unlawfully "parked" nearly 10 million shares with various friends, family members and affiliates so they could be sold at a later date. According to the SEC, these improprieties allowed Atlas Mining to raise financing without providing complete and timely information to investors as required by law.

The SEC's complaint charges Jacobson with violations of the antifraud and registration provisions of the federal securities laws, as well as reporting, internal control and certification provisions. Without admitting or denying the Commission's allegations, Jacobson consented to settle the charges and agreed to a permanent injunction against future violations of the federal securities laws, a $50,000 penalty, an order barring him from serving as an officer or director of any issuer for a period of five years, and an order barring him from participating in any offering of penny stock for a period of five years.

In a separate administrative proceeding, Atlas Mining, now known as Applied Minerals, Inc., consented to the entry of a cease-and-desist order barring violations of certain registration and reporting provisions of the federal securities laws.

December 22, 2009 in SEC Action | Permalink | Comments (0) | TrackBack (0)

SEC Settles Fraud Charges Against Texas Investment Adviser Who Used Football Players to Promote Offerings

The SEC filed securities fraud charges against Kurt B. Barton, an Austin, Texas investment adviser, and two businesses he controls for operating a multi-million dollar scam that used former professional football players to promote its offerings.  According to the SEC, Barton and Triton Financial LLC raised more than $8.4 million from approximately 90 investors by selling "investor units" in an affiliate, Triton Insurance, and telling investors that their funds would be used to purchase an insurance company. The SEC alleges that these representations were false and investor proceeds were instead misused to pay day-to-day expenses at Triton and its affiliate.

According to the SEC's complaint, filed in federal court in Austin, Barton and Triton used former football players as well as stockbrokers and other salesmen to promote Triton securities to potential investors. Barton and Triton have consented to court orders freezing their assets. Triton has been registered with the Texas State Securities Board (TSSB) as an investment adviser since June 2006.

Triton was the subject of a March 2009 Sports Illustrated article that prompted the TSSB to examine Triton's business. The article described Triton's use of former Heisman Trophy winners and NFL players to promote its investments to potential investors, including other football players. The article noted one particular mass e-mail, sent by a former NFL quarterback to numerous NFL alumni, that discussed Triton's activities and touted Triton's returns on its investments. According to the SEC's complaint, the defendants provided the TSSB with altered and fabricated documents during the examination that followed the article's publication.

Without admitting or denying the SEC's allegations, the defendants have consented to permanent injunctions against future securities fraud violations. They have also consented to appointment of a receiver and to orders freezing their assets, prohibiting destruction of documents, and requiring that they provide an accounting.

December 22, 2009 in SEC Action | Permalink | Comments (0) | TrackBack (0)

SEC Proposes Amendments to Rule 163

The SEC proposes amendments to Rule 163(c) under the Securities Act of 1933 that would allow a well-known seasoned issuer to authorize an underwriter or dealer to act as its agent or representative in communicating about offerings of the issuer’s securities prior to the filing of a registration statement. The agency believe that the proposed amendments would further facilitate capital formation by well-known seasoned issuers by removing certain impediments to issuer communications with broader groups of potential investors regarding offerings of securities.

December 22, 2009 in SEC Action | Permalink | Comments (0) | TrackBack (0)

Oversight Group Charges SEC Delay in Implementing OIG Recommendations

The Project On Government Oversight (POGO), an independent nonprofit that investigates and exposes government corruption and other misconduct, charged in a Dec. 16, 2009 letter to SEC Chair Schapiro that the agency has been dragging its feet on 224 recommendations (over 60%) made by the Office of Inspector General (OIG) since December 2007.

Documents obtained by POGO through a Freedom Of Information Act request show that hundreds of OIG recommendations have gone unimplemented over the last two years. Specifically, one document shows that the SEC has taken "no action” on 27 of 52 recommendations made by the OIG in its reports of investigation since December 2007, and a second document shows that 197 of the 312 recommendations made in the OIG’s audits since December 2007 are still listed as “pending,” including recommendations from the OIG’s audits on the Madoff case.

December 22, 2009 in News Stories | Permalink | Comments (0) | TrackBack (0)

Monday, December 21, 2009

FINRA Fines Pacific Cornerstone Capital for Private Placement Violations

FINRA announced today that it fined Pacific Cornerstone Capital, Inc. and its former chief executive officer, Terry Roussel, a total of $750,000 for failing to include full and complete information in private placement offering documents and marketing material. FINRA also charged Pacific Cornerstone and Roussel with advertising violations and supervisory failures.  Pacific Cornerstone was fined $700,000 and agreed to make corrective disclosures to investors and to submit advertising and sales literature to FINRA for pre-use review for one year. Roussel was fined $50,000 and suspended in all capacities for 20 business days and in a principal capacity for an additional three months.

 From January 2004 to May 2009, Pacific Cornerstone sold private placements in two affiliated companies using offering documents and accompanying sales literature that contained targets as to when investors would receive the return of their principal investment and the yield on their investment. The offering documents included statements that the affiliated entities targeted returns of principal in two to four years and targeted a yield on a $100,000 investment in excess of 18 percent. FINRA found no reasonable basis for those statements.  Further, Pacific Cornerstone and Roussel continued to use a similar targeted time period for return of capital and rate of return in successive offering documents, although those targets were not supported by prior performance. FINRA also found that the offering documents failed to disclose the complete financial condition of one or both of the companies.

Pacific Cornerstone also offered private placement units of the two affiliated entities, Cornerstone Industrial Properties, LLC and CIP Leveraged Fund Advisors, LLC, to other broker-dealers and investment advisors, which in turn sold the units to the investing public. A total of approximately $50 million worth of units were sold to approximately 950 accredited investors over a period of almost six years. Pacific Cornerstone continued to use the same targeted two-to-four year return of principal and 18 percent rate of return in successive offering documents, despite not having met those targets.

During the same period, Roussel periodically sent letters to the private placement investors to update them on the progress of their investment that painted a positive — but unrealistic — future, without providing required risk disclosures. Roussel's letters also failed to disclose the complete financial picture of the two companies.

In concluding this settlement, the firm and Roussel neither admitted nor denied the charges, but consented to the entry of FINRA's findings.

December 21, 2009 in Other Regulatory Action | Permalink | Comments (0) | TrackBack (0)

SEC Approves Amendments to FINRA Arbitration Rules

On December 18, the SEC approved amendments to the FINRA arbitration rules.  While mostly of a housekeeping nature, the one amendment that could affect investors is a provision that states that customers may be responsible for hearing fees if they file a claim against the broker in response to the broker's claim against them.  As the FINRA notice (09-74) states:

Under the old Code, arbitrators could allocate hearing session fees against any party.
Rule 10332(c)10 of the old Code protected customers from potentially higher forum fees
(now hearing session fees) triggered by amounts sought in industry claims by
prohibiting the arbitrators from assessing forum fees against customers if the industry
claim was dismissed.Moreover, the rule protected customers from higher forum fees by
requiring that the amount of the forum fees be based on the amount awarded to an
industry party and not on the amount of damages requested by the industry claim.
However, Rule 10332(c) also provided that customers could be subject to potential
forum fees based on their own claims for relief in connection with the industry claim.
During the drafting of the Code Revision, FINRA inadvertently omitted from the
corresponding rule in the Customer Code the provision (in old Rule 10332(c)) that
permitted the forumto assess fees against the customer based on the customer’s claim
in an industry dispute. Thus, FINRA has amended Rule 12902(a)(4) to incorporate the
omitted language, which makes it clear to customers that if they file a claim in
connection with a claim filed by a firm, they may be subject to filing fees and hearing
session fees based on their own claim for relief.

December 21, 2009 in Securities Arbitration | Permalink | Comments (0) | TrackBack (0)

Sunday, December 20, 2009

Pan on Financial Regulatory Reform

Four Challenges to Financial Regulatory Reform, by Eric J. Pan, Yeshiva University - Benjamin N. Cardozo School of Law, was recently posted on SSRN.  Here is the abstract:

The recent global financial crisis represented a failure of regulation to the extent that regulatory responses and strategies existed, but were not deployed, to prevent or mitigate the factors that contributed to the crisis. Recognizing the failure of regulation in preventing the recent financial crisis and the need to pursue more effective regulatory strategies, policymakers in the United Kingdom, United States and European Union set forth concurrent proposals for substantial reform of their respective regulatory systems. The reforms emphasized the reorganization of regulatory agencies and expansion of powers of surviving agencies. The proposals, however, differed significantly from each other.
Successful financial regulatory reform must address four challenges. First, how should regulatory systems be structured? Second, should there be a separation of prudential supervision and consumer protection regulation? Third, which entity should be responsible for monitoring and managing systemic risk and what should be its powers? Fourth, how should cross-border financial services and transactions be supervised and regulated?
The paper considers the four challenges to financial regulatory reform and evaluates whether the UK, US and EU reform proposals succeeded in addressing the challenges. Given their weaknesses, the paper concludes that the reform proposals do not go far enough to prevent future regulatory failures.

December 20, 2009 in Law Review Articles | Permalink | Comments (0) | TrackBack (0)

Barnard on SEC Enforcement

Evolutionary Enforcement at the Securities and Exchange Commission, by Jayne W. Barnard, William & Mary Law School, was recently posted on SSRN.  Here is the abstract:

Since the worldwide financial meltdown in the autumn of 2008 and the discovery of Bernard Madoff’s crimes in December, 2008, hundreds of critics and political leaders have heaped abuse upon the SEC Enforcement Division. This article explores the SEC’s response to these critics, primarily through the appointment of new top-level managers and the initiation of an aggressive reorganization of the processes and workflow of the Division. It then sketches out six recommendations for further improving the Enforcement Division: a bounty program to compensate informants who come forward with useful information; creation of a victim services unit; a proposal to develop behavioral, as well as legal and financial, expertise within the Division; a surveillance and monitoring program for defendants demonstrating a recidivist profile; a sanction policy for individuals that is proportionate, progressive, remedial, and real; and regular publication of meaningful data regarding losses from fraud in the securities markets.

December 20, 2009 in Law Review Articles | Permalink | Comments (0) | TrackBack (0)

Yermack on Shareholder Voting

Shareholder Voting and Corporate Governance, by David Yermack, New York University - Stern School of Business, was recently posted on SSRN.  Here is the abstract:

This article reviews recent research into corporate voting and elections. Regulatory reforms have given shareholders more voting power in the election of directors and in executive compensation issues. Shareholders use voting as a channel of communication with boards of directors, and protest voting can lead to significant changes in corporate governance and strategy. Some investors have embraced innovative “empty voting” strategies for decoupling voting rights from cash flow rights, enabling them to mount aggressive programs of shareholder activism. Market-based methods have been used by researchers to establish the value of voting rights and show how this value can vary in different settings.

December 20, 2009 in Law Review Articles | Permalink | Comments (0) | TrackBack (0)

Cohen et alia on Regulation of Structured Products

Have Us Regulators Been Soft on Banks Over Structured Products? Yes, by George M. Cohen, University of Virginia School of Law; David A. Dana, Northwestern University - School of Law; Susan P. Koniak, Boston University School of Law; and Thomas Ross, was recently posted on SSRN.  Here is the abstract:

This article was originally written as a comment on the proposed Interagency Statement on Sound Practices Concerning Elevated Risk Complex Structured Finance Activities, 71 Fed. Reg. 28329 (May 16, 2006). The statement is Interagency Statement is a joint effort of all the federal agencies having a role in the regulation of financial institutions, including the SEC, FDIC, Federal Reserve, OTS, and the Comptroller of the Currency. The comment argues that the proposed Interagency Statement is a mistake and should be withdrawn because in its current form, it can be (and we think will be) read to encourage and condone illegal conduct. The proposed Interagency Statement gives financial institutions too much discretion to determine which “complex structured finance transactions” (CSFT) pose the problem of “elevated risk.” More troubling, the Statement provides a list of transaction characteristics that “may . . . warrant additional scrutiny” without recognizing or emphasizing that all of the characteristics are strongly indicative of potential fraud which in our view invites reckless participation in illegal conduct, either as a primary wrongdoer or as an aider and abetter.

December 20, 2009 in Law Review Articles | Permalink | Comments (0) | TrackBack (0)