Securities Law Prof Blog

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

Friday, June 18, 2010

FINRA and Australian Regulator Enter Cooperation Agreement

The Australian Securities and Investments Commission (ASIC) and FINRA entered into a Memorandum of Understanding (MOU) today to promote and support greater cooperation between the two regulators.  The MOU establishes a framework for mutual assistance and the exchange of information between ASIC and FINRA, to help ensure that high standards of market integrity and consumer protection are maintained in both jurisdictions. Among other things, the agreement will help the regulators to investigate possible instances of cross-border market abuse in a timely manner, exchange information on firms under common supervision of both regulators, and allow more robust collaboration on approaches to risk-based supervision of firms

June 18, 2010 in Other Regulatory Action | Permalink | Comments (0) | TrackBack (0)

Thursday, June 17, 2010

No Agreement on Fiduciary Duty Standard in Reform Legislation

Investment News reports that the Conference Committee has reached an impasse on the fiduciary duty standard, with the House digging in and insisting on its provision, which would implement a fiduciary duty for broker-dealers, and the Senate sticking to its provision, which calls for the SEC to conduct a one-year study before rulemaking.  This provision is of intense interest to me, but it is odd that it has become one of the most contentious provisions in the bill.  InvNews, House-Senate negotiators hit impasse on fiduciary standard

June 17, 2010 in News Stories | Permalink | Comments (0) | TrackBack (0)


On June 16, 2010, the United States District Court for the Southern District of California entered a final judgment against Andres Leyva, a former Director of Strategic Marketing Analysis at San Diego-based Qualcomm Incorporated. As alleged in the SEC's complaint, Leyva realized more than $34,000 in illegal profits by trading on the basis of confidential information about Qualcomm's new licensing agreement with Nokia Corporation and the settlement of all litigation between the companies.

According to the SEC's allegations: Qualcomm and Nokia were set to begin trial on July 23, 2008 in a key Delaware case to determine whether Nokia owed Qualcomm substantial royalty revenues when the companies' licensing agreement expired in April 2007. On July 22, 2008, the senior Qualcomm executive leading negotiations with Nokia representatives in Delaware informed Leyva that Nokia had surprised Qualcomm with a significant settlement offer and conveyed the key terms of that offer to Leyva. Approximately two hours later,  Leyva purchased 80 Qualcomm call option contracts priced at $.39 each with a strike price of $50.

After the market closed on July 23, 2008, Qualcomm and Nokia announced their new licensing agreement and a global settlement of all litigation between them. On July 24, 2008, Qualcomm's stock price increased 17 percent to $52.43, and its trading volume increased 394 percent. That same day, Leyva sold the 80 Qualcomm call option contracts for a profit of $34,739.98.

To settle the SEC's charges, Leyva has consented, without admitting or denying the allegations in the first amended complaint, to the final judgment permanently enjoining him from future violations of Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder, to pay $36,109.71, representing the disgorgement of his illegal trading profits and prejudgment interest, and to pay a civil penalty of $34,739.98.

June 17, 2010 in SEC Action | Permalink | Comments (0) | TrackBack (0)

SEC Announces Rules for Erroneous Trades

The SEC today announced that the national securities exchanges and FINRA are filing proposed rules to clarify the process for breaking erroneous trades. The rules would make it clearer when, and at what prices, trades would be broken.  The proposed rules come in response to the market disruption of May 6 and complement last week's SEC approval of a uniform set of stock-by-stock circuit breakers. Those circuit breakers are now being implemented for S&P 500 stocks at every exchange and by FINRA.

The exchanges and FINRA are proposing a series of thresholds for breaking trades when prices diverge from the "reference price," typically the last sale before pricing was disrupted. On May 6, the exchanges only broke trades that were more than 60 percent away from the reference price in a process that was not transparent to market participants.

Under current rules, there is not a clearly defined standard used for breaking erroneous trades. Exchanges may choose the specific percentage threshold away from the reference price where trades are broken. Today's rule proposals set forth clearer standards for breaking trades and curtail the exchanges' discretion to select a different percentage threshold at which they would break trades.

Under the proposed rules for stocks that are subject to single stock circuit breakers, trades would be broken at specified levels.

  • For stocks priced $25 or less, trades would be broken if the trades are at least 10 percent away from the circuit breaker trigger price.
  • For stocks priced more than $25 to $50, trades would be broken if they are 5 percent away from the circuit breaker trigger price.
  • For stocks priced more than $50, the trades would be broken if they are 3 percent away from the circuit breaker trigger price.

Where circuit breakers are not yet applicable, the exchanges and FINRA propose to break trades at specified levels for events involving multiple stocks depending on how many stocks are involved.

  • For events involving between five and 20 stocks, trades would be broken that are at least 10 percent away from the reference price.
  • For events involving more than 20 stocks, trades would be broken that are at least 30 percent away from the reference price.

 As with the circuit breakers, these proposed rules stem from a meeting between the SEC, exchanges and FINRA shortly after the May 6 market disruption.

Last week, the SEC approved rules that require the exchanges and FINRA to pause trading in certain individual stocks if the price moves 10 percent or more in a five-minute period. Under the rules, trading in a stock will pause across U.S. equity markets for a five-minute period in the event that the stock experiences a 10 percent change in price over the preceding five minutes. The pause, which applies to stocks in the S&P 500® Index, will give the markets the opportunity to attract new trading interest in an affected stock, establish a reasonable market price, and resume trading in a fair and orderly fashion. These new rules are in effect on a pilot basis through Dec. 10, 2010.

Today's proposed rules, which also are proposed to be in effect on a pilot basis through Dec. 10, 2010, will be available on the SEC's website as well as the websites of each of the exchanges and FINRA. The Commission intends to promptly publish the proposed rules in the Federal Register for a 21-day public comment period.

June 17, 2010 in SEC Action | Permalink | Comments (0) | TrackBack (0)

SEC Publishes Proposed Rule on Target Date Funds

The SEC published today its proposed rules on INVESTMENT COMPANY ADVERTISING: TARGET DATE RETIREMENT FUND NAMES AND MARKETING.  Here is the summary:

The Securities and Exchange Commission is proposing amendments to rule 482 under the Securities Act of 1933 and rule 34b-1 under the Investment Company Act of 1940 that, if adopted, would require a target date retirement fund that includes the target date in its name to disclose the fund’s asset allocation at the target date immediately adjacent to the first use of the fund’s name in marketing materials. The Commission is also proposing amendments to rule 482 and rule 34b-1 that, if adopted, would require marketing materials for target date retirement funds to include a table, chart, or graph depicting the fund’s asset allocation over time, together with a statement that would highlight the fund’s final asset allocation. In addition, the Commission is proposing to amend rule 482 and rule 34b-1 to require a statement in marketing materials to the effect that a target date retirement fund should not be selected based solely on age or retirement date, is not a guaranteed investment, and the stated asset allocations may be subject to change. Finally, the Commission is proposing amendments to rule 156 under the Securities Act that, if adopted, would provide additional guidance regarding statements in marketing materials for target date retirement funds and other investment companies that could be misleading. The amendments are intended to provide enhanced information to investors concerning target date retirement funds and reduce the potential for investors to be confused or misled regarding these and other investment companies.


June 17, 2010 in SEC Action | Permalink | Comments (0) | TrackBack (0)

Present at the Creation: The History of the SEC's Revolving Door Policy

Yesterday I blogged about Senator Chuck Grassley's concern over the SEC's "revolving door" policy and expressed some personal skepticism that it's the SEC's problem.  Today Dan Ernst (Georgetown) has posted on the Legal History Blog an exchange of correspondence between Justice Frankfurter and James Landis on the "revolving door policy."  For these New Dealers, the problem was as real as it is now.  In response to Landis' argument that restrictions on future employment would impede recruitment of the best attorneys, Justice Frankkfurter expressed a vision of a U.S. civil service  equivalent to the British model, second in importance to none in matters affecting the public.  Fascinating reading.

June 17, 2010 in SEC Action | Permalink | Comments (1) | TrackBack (0)

Wednesday, June 16, 2010

Senator Grassley Asks SEC's Inspector General to Look into "Revolving Door"

Senator Chuck Grassley, the ranking minority member of the Senate Finance Committee, asked the SEC's Inspector General to review the recent departure of a top official in the Division of Trading and Markets to take a job with a high-frequency trading firm.  The Inspector General stated that his office is already investigating allegations that a prominent law firm received favorable treatment for a client because many former SEC staffers worked at the firm.  WSJ, SEC 'Revolving Door' Under Review.

The issue of the "revolving door" is not new and certainly is worthy of attention.  Realistically, however, many motivated and ambitious attorneys go to the SEC because of the experience and opportunities it offers; we don't want working at the SEC to be the equivalent of working at the post office.  Do we have the same concern about prosecutors in the Manhattan D.A.'s office or the Justice Dept. who leave to do defense work at white collar crime firms? 

June 16, 2010 in News Stories | Permalink | Comments (0) | TrackBack (0)

SEC Approves Amendments to Clarify Target Date Retirement Funds

The SEC today voted unanimously to propose rule amendments to help clarify the meaning of a date in a target date fund’s name and enhance the information provided to investors in these funds as they invest for retirement.  Target date funds are designed to make it easier for Americans to invest for retirement and have been marketed as a “set it and forget it” approach to investing. The name of these funds usually includes a date that represents the year in which the investor intends to retire.

The rule changes proposed by the SEC would enable investors to better assess the anticipated investment glide path and risk profile of a target date fund by, for example, requiring graphic depictions of asset allocations in fund advertisements. The rules also would require an asset allocation “tag line” adjacent to a target date fund’s name in an advertisement.

Last month, as a first step to address potential investor misunderstanding of target date funds, the SEC issued an Investor Bulletin jointly with the Department of Labor explaining target date funds and various aspects that an investor should consider before investing in one.

The SEC is seeking public comment on the rule amendments proposed today for a period of 60 days following their publication in the Federal Register.

June 16, 2010 in SEC Action | Permalink | Comments (0) | TrackBack (0)

CEO of Major Mortgage Lender Charged with Misappropriation, TARP Fraud

A grand jury indicted Lee Bentley Farkas, CEO of Taylor Bean & Whitaker Mortgage Corp., which was one of the largest independent home-loan providers, on 16 counts of bank, securities and wire fraud.  The allegations involve the misappropriation of over $1 billion, including efforts to access TARP funds through acquisition of a stake in Colonial Bancorp.  WSJ, Farkas Charged in TARP Fraud Case

The SEC also brought a civil securities fraud action based on the same allegations.  SEC Charges Former Chairman of Major Mortgage Lender With $1.5 Billion Securities Fraud and Related TARP Scheme

June 16, 2010 in SEC Action | Permalink | Comments (0) | TrackBack (0)

More on the SEC's Fort Worth Office and Stanford Fraud

You may recall that the SEC's Inspector General recently released a report on the problems in the Fort Worth office of the SEC involving the Stanford ponzi scheme.  The POGO (Project on Government Oversight) blog has an extensive update on this story as well as other instances where the SEC has appeared to take retaliatory action against whistleblowing personnel or, conversely, failed to discipline personnel for malfeasance.  See SEC Inspector General Uncovers Whistleblower Retaliation at Fort Worth Office

June 16, 2010 in News Stories | Permalink | Comments (0) | TrackBack (0)

How Do Credit Rating Agencies Escape Regulation?

We have known since the collapse of Enron and Worldcom about the flaws of the credit rating system, where the issuers pay the raters for their services.  Sarbanes-Oxley called on the SEC to study the problem, it did so, and the result was mild set of reforms that did not address the basic structural problem.  The subprime mortgage crisis again exposed the flaws in the system, as rating agencies rated investments based on information provided solely by the firm seeking the rating and performed none of its own due diligence.  Yet the latest word from the Conference Committee is that the proposed agency to regulate credit-rating agencies is dead, out of the legislation.  Are we really going to wait for the next financial crisis to see what harm the CRAs can do?  WPost, Panel Gives Wins to Savers, Raters

June 16, 2010 in News Stories | Permalink | Comments (0) | TrackBack (0)

Tuesday, June 15, 2010

Joint CFTC-SEC Advisory Committee Schedules Meeting

The Joint CFTC-SEC Advisory Committee on Emerging Regulatory Issues will hold an Open Meeting on Tuesday, June 22, 2010. The agenda for the meeting includes: (i) committee organizational matters; (ii) testimony by representatives from various exchanges and firms regarding the market events of May 6; (iii) updates from staff; and (iv) discussion of next steps for the Committee.

June 15, 2010 in SEC Action | Permalink | Comments (0) | TrackBack (0)

NASAA Urges Congress to Adopt Fiduciary Duty Standard for Broker-Dealers

NASAA continues its campaign to convince Congress to adopt the House version of the financial reform legislation that calls for the SEC to adopt a fiduciary duty for broker-dealers providing personal advice to retail investors, instead of the Senate version which calls for the SEC to study the issue for a year before undertaking rulemaking. NASAA calls this provision the “single most important investor provision” in the reform package.  I am currently writing an article explaining why this is debating the entirely wrong issue.  I argue that the appropriate standard is professionalism, not fiduciary duty, and that without an explicit federal remedy for negligence, investors' remedies will not be advanced in any meaningful way. 

For a chart from NASAA showing differences in other investor protection provisions in the two bills, see NASAA Urges Lawmakers to Make the Right Choice for Investors.

June 15, 2010 in News Stories | Permalink | Comments (0) | TrackBack (0)

FINRA Assumes Regulatory Functions for NYSE Euronext's Equities and Options Markets

NYSE Euronext and FINRA announced that they have completed the previously announced agreement under which FINRA will assume responsibility for performing the market surveillance and enforcement functions currently conducted by NYSE Regulation. The agreement is effective immediately.  Under the agreement, FINRA will assume regulatory functions for NYSE Euronext's U.S. equities and options markets – the New York Stock Exchange, NYSE Arca and NYSE Amex. FINRA currently provides regulatory services to the NASDAQ Stock Market, NASDAQ Options Market, NASDAQ OMX Philadelphia, NASDAQ OMX Boston, The BATS Exchange and The International Securities Exchange.

June 15, 2010 in Other Regulatory Action | Permalink | Comments (0) | TrackBack (0)

Conference Committee Debates Investor Protection/Executive Compensation Issues Tomorrow

In case you've been wondering what's happening with financial regulatory reform, here is the latest from Barney Frank's office:

Chairman Frank, on behalf of the House conferees, released the House offer on the titles listed below.  The issues will be subject to debate when the House-Senate Conference Committee convenes in room 2128 Rayburn at 11:00 a.m. tomorrow.

 The issues for tomorrow’s offer:

Title 9, subtitles A, B, F, H, I and J of base text: Investor protection/regulatory improvements
Title 9, subtitles E and G of base text: Executive compensation/corporate governance
Title 11 of base text: Fed audit and governance, and emergency liquidity provisions

June 15, 2010 in News Stories | Permalink | Comments (0) | TrackBack (0)

Monday, June 14, 2010

Former Mayer Brown Partner Settles SEC Aiding & Abetting Charges

The SEC announced that on June 11, 2010, a settled final judgment was entered by the U.S. District Court for the Southern District of New York against Joseph P. Collins, a former partner with the law firm Mayer Brown LLP, in the Commission's action alleging that he aided and abetted a financial fraud at his longtime client, Refco Group Ltd. As alleged in the Commission's complaint, Collins substantially assisted Refco Group Ltd. and its corporate successor, Refco Inc. (hereinafter, together Refco), in concealing hundreds of millions of dollars in related party indebtedness and related party transactions. The final judgment against Collins, to which he consented without admitting or denying the Commission's allegations, enjoins him from violating the antifraud provisions of the Securities Exchange Act of 1934.

Collins was convicted of conspiracy, securities fraud, and wire fraud in a related federal criminal prosecution. In January 2010, Collins was sentenced to 7 years in prison.

June 14, 2010 in SEC Action | Permalink | Comments (0) | TrackBack (0)

SEC Signs MOU with Quebec and Ontario Regulators

The SEC, Quebec Autorité des marchés financiers (AMF) and Ontario Securities Commission (OSC) today announced a comprehensive arrangement to facilitate their supervision of regulated entities that operate across the U.S.-Canadian border.  The memorandum of understanding (MOU) is intended to provide a clear mechanism for consultation, cooperation, and exchange of information among the SEC, AMF and OSC in the context of supervision. The MOU sets forth the terms and conditions for the sharing of information about regulated entities, such as broker-dealers and investment advisers, which operate in the U.S., Quebec and Ontario.

The SEC, AMF and OSC have a long history of cooperation particularly in securities enforcement matters. This MOU would extend this cooperation beyond enforcement by setting forth a framework for consultation, cooperation and information-sharing related to the day-to-day supervision and oversight of regulated entities. In response to the recent financial crisis, the Task Force and many other groups, including the G20, have recommended that regulators enhance the supervision of internationally-active regulated entities by working with their foreign counterparts.

This MOU is the first comprehensive supervisory MOU to be signed by the SEC since the start of the financial crisis. The SEC currently has comprehensive supervisory MOUs with the securities regulators in the United Kingdom, Germany and Australia. 

June 14, 2010 in SEC Action | Permalink | Comments (0) | TrackBack (0)

SIFMA Releases Systemic Risk Information Study

The Securities Industry and Financial Markets Association (SIFMA) today released the results of a study intended to assist regulators and policymakers in preparing for expanded systemic risk oversight and enhance their ability to respond to potential future systemic risk events. Produced together with Deloitte & Touche, the Systemic Risk Information Study is based on interviews with 22 organizations, including regulators, commercial and investment banks, insurers, hedge funds, exchanges, and industry utilities. The interviews focused on how the interviewees defined and/or viewed systemic risk, then specifically identified what type of information and data regulators would require from large, interconnected financial institutions to effectively monitor systemic risks.

June 14, 2010 in News Stories | Permalink | Comments (0) | TrackBack (0)

Supreme Court Accepts Cert to Decide Standard of Pleading Materiality in Securities Fraud Class Action

The Supreme Court today granted certiorari to hear a securities fraud class action, Matrixx Initiatives, Inc. v. Siracusano, next term.  The question presented is:

 Can a plaintiff state a claim under Section 10(b) of the Securities Exchange Act and Securities and Exchange Commission Rule 10b-5 based on a pharmaceutical company's alleged failure to disclose the possible link between its cold remedy and the anosmia (loss of sense of smell) reported by some consumers even though the reports are not alleged to be statistically significant?

The decision below, Siracusano v. Matrixx Initiatives Inc., comes from the Ninth Circuit and is reported below at 585 F.3d 1167.  Plaintiffs alleged that the defendant violated Rule 10b-5 by failing to disclose material information about its product, Zicam Cold Remedy, specifically that it can cause a loss of smell in its users.  The trial court found that plaintiffs failed adequately to allege materiality because the number of complaints about the product of which defendants were aware was not "statistically significant."  Reversing the trial court's dismissal of the complaint, the appeals court held that the complaint adequately pled materiality and scienter under the PSLRA.  On the issue of materiality, the 9th Circuit held that the trial court erred in relying on the statistical significance standard, because statistical significance is a question of fact that should be decided by the jury.  Rather, applying the fact-specific inquiry mandated by Basic, the appellate court found that the allegations were sufficient to meet the pleading requirements of PSLRA and Twombly.

June 14, 2010 in Judicial Opinions | Permalink | Comments (0) | TrackBack (0)

Sunday, June 13, 2010

STATS not Illegal under Rhode Island Insurance Law, Judge Rules

A variation on the viatical settlement scam has turned up:  A recent federal district court recently considered the legality of stranger-initiated annuity transactions, or STATs and held that they were not illegal under relevant state insurance law that require that owners of life insurance contracts have an "insurable interest" in the insured.  Essentially the scheme involved recruiting terminally-ill individuals as annuitants in variable annuities, speculative investing in the annuities' portfolios and then, upon the annuitants' death, taking advantage of the death benefits clause that allowed the owner to recover invested premiums, whatever the value of the portfolios. In short, risk-free speculative trading. 

Two life insurance companies sued the attorney who put together the scheme and recruited the annuitants and the annuity brokerage firms (among others), seeking to rescind the transactions on grounds of fraud.  The court, however, rejected plaintiffs' argument that the annuity contracts were life insurance contracts under the state law; they are different instruments, and the requirement of an "insurable interest" did not apply to annuities.  The court did not dismiss the fraud claims, based on conspiracy to exploit a loophole in the annuity product, rejecting defendants' arguments that the insurance companies should have asked more questions about the relationship between the annuitants and the owners.  Western Reserve Life. Assurance Co. of Ohio v. Concreal (LLC, D.R.I. June 2, 2010).

As a result of this decision, several state insurance regulators are considering changes in state insurance law that could restrict or ban STATs.  InvNews, Regulators mull responses to R.I. decision on annuities

June 13, 2010 in Judicial Opinions | Permalink | Comments (0) | TrackBack (0)