Securities Law Prof Blog

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

Friday, March 8, 2013

SEC Proposes Rules to Improve Systems Compliance and Integrity

The SEC unanimously proposed new rules to require certain key market participants to have comprehensive policies and procedures in place surrounding their technological systems. The SEC’s proposed Regulation SCI would replace voluntary compliance programs with enforceable rules designed to better insulate the markets from vulnerabilities posed by systems technology issues.

Self-regulatory organizations, certain alternative trading systems, plan processors, and certain exempt clearing agencies would be required to carefully design, develop, test, maintain, and surveil systems that are integral to their operations. The proposed rules would require them to ensure their core technology meets certain standards, conduct business continuity testing, and provide certain notifications in the event of systems disruptions and other events.

The SEC will seek public comment for 60 days after publication in the Federal Register.

March 8, 2013 in SEC Action | Permalink | Comments (0) | TrackBack (0)

Thursday, March 7, 2013

FINRA Bars Broker for Selling Investments in Casino to NFL Football Players

FINRA has barred Florida broker Jeffrey Rubin from the securities industry for making unsuitable recommendations to his customer, an NFL player, to invest in illiquid, high-risk securities issued in connection with a now-bankrupt casino in Alabama. As a result, the customer lost approximately $3 million. Based on Rubin's referrals, 30 other NFL players also invested in the casino project and lost approximately $40 million. Rubin also failed to obtain the required approval from his employers to participate in the securities transactions involving the casino. 

Rubin operated a Florida-based company, Pro Sports Financial, which provided financial-related "concierge" services to professional athletes for an annual fee. Between March 2006 and June 2008, while he was registered as a broker at Lincoln Financial Advisors Corporation and Alterna Capital Corporation, Rubin recommended that one of his NFL clients invest a total of $3.5 million, the majority of his liquid net worth, in four high-risk securities. Rubin recommended and facilitated the largest investment, $2 million, in the Alabama casino project without informing his employer member firm or receiving the firm's approval of this activity.

Rubin referred other investors to the casino project while employed by Alterna Capital Corporation and International Assets Advisory, LLC without the firms' knowledge or approval. FINRA found that from approximately January 2008 through March 2011, 30 additional clients of Rubin's concierge firm, all NFL players, invested approximately $40 million in the casino project. Rubin received a 4 percent ownership stake and $500,000 from the project promoter for these referrals.

In settling this matter, Rubin neither admitted nor denied the charges, but consented to the entry of FINRA's findings

March 7, 2013 in Other Regulatory Action | Permalink | Comments (0) | TrackBack (0)

SEC Charges California Attorney with Selling Rule 144 Opinions for a Business

The SEC charged a California-based lawyer who, according to its complaint, has made a business out of selling rule 144 opinions to enable sales of unregistered securities through his website.  While SEC actions against  attorneys for writing fraudulent opinion letters are not, unfortunately, unusual, the allegations in this case, if true, are egregious.

The SEC alleges that Brian Reiss set up to promote his legal opinion letter business and advertise “volume discount” rates while noting “penny stocks not a problem.”  Reiss steered potential customers to his website by making bids on search terms through Google’s AdWords, and then relied on a computer-generated template to draft his opinion letters within minutes absent any true analysis of the facts behind each stock offering.  The letters from Reiss ultimately made false and misleading statements and facilitated the sale of securities in violation of the registration provisions of the federal securities laws.

According to the SEC’s complaint, Reiss began issuing the fraudulent legal opinion letters in 2008.  He advertised a $285 rate for each letter and a “volume discount” rate of $195 per letter.  The SEC alleges that the false and misleading statements that Reiss made in opinion letters induced transfer agents for several public companies to remove the restrictive legends from the stock certificates and permit the sale of free-trading shares to the public. 

The SEC seeks to bar Reiss from participating in the offering of any penny stock pursuant to Section 20(g) of the Securities Act.  The SEC also seeks permanent injunctions – including an injunction prohibiting Reiss from providing legal services in connection with an unregistered offer or sale of securities.


March 7, 2013 in SEC Action | Permalink | Comments (0) | TrackBack (0)

Tuesday, March 5, 2013

SEC's Insider Trading Case Against Cuban Set for Trial

A Texas federal district court judge denied Mark Cuban's motion to dismiss the SEC's charges of insider trading against him, saying that the SEC could present its case to a jury.  The allegations stem from Cuban's sale, in 2004, of his stake in  The SEC alleges that he sold his shares after learning the company would issue new shares in a PIPES offering, in violation of a duty he owed to the corporation to refrain from trading on the information.  Cuban has mounted a vigorous defense.  A trial is set for June.

WSJ, SEC Case Against Mavericks Owner Cuban to Proceed .

March 5, 2013 in News Stories | Permalink | Comments (0) | TrackBack (0)

NASAA Takes on JOBS Act and Seeks Investor Protection Measures

NASAA today unveiled its advocacy agenda calling for affirmative Congressional action to promote investor confidence.  NASAA actively will seek legislation in four specific areas, including legislation to:

  • authorize the SEC’s Office of Compliance Inspections and Examinations to collect user fees from the investment advisers it examines;
  • permit reasonable civil recovery for fraud associated with crowdfunding and other small offerings;
  • strengthen investor protection provisions weakened by the JOBS Act to minimize the Act’s enormous potential for abuse; and
  • empower state regulators to curtail the use of mandatory pre-dispute arbitration clauses in contracts between state-registered investment advisers and their clients.

NASAA also is calling on Congress to investigate opaque market activities, including those of “dark pools,” hedge funds and high-frequency traders.

March 5, 2013 in News Stories, Other Regulatory Action | Permalink | Comments (0) | TrackBack (0)

Will the SEC Ever Propose a "Uniform Standard of Conduct" for Investment Advice Providers to Retail Investors?

Last week the SEC released its long-awaited Request for Data and Other Information (rel. 34-69013), in connection with its ongoing study on whether to propose rules for establishing standards of conduct for broker-dealers and investment advisers that provide personalized investment advice to retail investors.  (This project is sometimes described as proposing a “uniform fiduciary” standard of conduct, but as discussed below, this is a misnomer.)  Dodd-Frank Section 913 gives the SEC the authority to harmonize the regulation of investment advice providers and establish a standard of conduct for those who provide advice to retail customers.  The debate is a contentious one that predates Dodd-Frank, as broker-dealers and investment advisers compete fiercely for retail investors’ business and assert that their regulatory model best protects their customers.  The SEC staff study required by Dodd-Frank was released in January 2011, with two Commissioners opposing its release because of insufficient empirical evidence supporting the need for change.  In July 2011 the D.C. Circuit tossed the SEC’s proxy access rule for insufficient empirical analysis.  Since then the SEC committed itself to gathering more data before even putting a proposed rule out for public comment. Indeed, the SEC makes clear throughout the release that it has not yet determined whether to exercise its authority under Dodd-Frank section 913 to adopt standards of conduct for broker-dealers and investment advisers that provide personalized investment advice to retail customers. 

The SEC, in particular, seeks quantitative data and economic analysis to bolster the cost-benefit analysis that will surely be subject to exacting judicial review in a subsequent rule challenge.  This emphasis on cost-benefit analysis, however, should not deter retail investors and their advocates from submitting comments.  The SEC welcomes their contributions and acknowledges that retail investors are not likely to have significant empirical and quantitative information.

In addition to setting forth long lists of the types of information that the SEC is looking for, the SEC sets forth a “possible uniform fiduciary standard” that commenters are to assume, only for purposes of quantifying costs and benefits, that the SEC plans to adopt.  This hypothetical standard should come as no surprise to those who have followed this debate. 

The release states that any proposed standard of conduct “would be designed to accommodate different business models and fee structures.”  Indeed, the Dodd-Frank Act restricts the SEC’s flexibility to develop a true uniform fiduciary standard in several respects. Thus, commenters should assume that:
• Broker-dealers may continue to receive commissions (indeed, Dodd-Frank expressly so provides).
• Broker-dealers and investment advisers would not generally owe continuing duties to retail customers after providing advice; rather, “the question of whether a broker-dealer or investment adviser might have a continuing duty, as well as the nature and scope of such duty, would depend on the contractual or other arrangement or understanding between the retail customer and the broker-dealer or investment adviser.”  (Dodd-Frank expressly states that broker-dealers do not have a continuing duty of care or loyalty to the customer after providing personalized investment advice.) 
• Broker-dealers may continue to offer and recommend only proprietary or a limited range of products (again, Dodd-Frank specifically so provides).

In addition, the SEC states that commenters should assume that broker-dealers would continue to be permitted to engage in principal trades and that the antifraud provision of the Investment Advisers Act (section 206(4)) would not apply to broker-dealers (although Dodd-Frank gives the SEC the authority to extend both these regulations to broker-dealers).

The SEC’s assumed “uniform fiduciary standard” would be comprised of two elements: a duty of loyalty and a duty of care.  With respect to the duty of loyalty, commenters should make the following assumptions:
• Required disclosure of all material conflicts of interest;
• Disclosure of the firm’s fees and services (including limitations on scope) and conflicts of interest in the form of a general relationship guide similar to Form ADV Part 2A, to be delivered at the time the customer relationship is entered into;
• Oral or written disclosure of any additional conflicts at the time the advice is provided;
• Prohibition on the use of sales contests (trips and prizes).

The SEC makes clear that conflicts of interest arising from principal trades would be treated the same as other conflicts of interest and would not incorporate the transaction-by-transaction disclosure and consent requirements of section 206(3) of the Investment Advisers Act.

With respect to the duty of care, the assumed standard of conduct would specify certain well-recognized minimum professional obligations for both broker-dealers and investment advisers:
• Suitability obligations, i.e., the investment advice provider must have a reasonable basis to believe that its recommendation about a security or an investment strategy is suitable for at least some customers and that it is suitable for the specific retail customer in light of that customer’s financial needs, objectives and circumstances (the FINRA suitability obligation);
• Product-specific requirements, i.e., specific disclosure, due diligence or suitability requirements for certain products, such as penny stock, options, mutual fund share classes;
• Duty of best execution;
• Fair and reasonable compensation.

The SEC also identifies in the release certain fiduciary principles currently applicable to investment advisers that commenters should assume would be extended to broker-dealers:
• Allocation of investment opportunities.  Firms would be required to disclose how it allocates investment opportunities among their customers and between customers and their own proprietary account (e.g., methods of allocating shares in IPOs)
• Aggregation of orders.  A firm may aggregate orders on behalf of two or more customers so long as the firm does not favor one customer over another.  It must make appropriate disclosures about its bundling practices.

The release goes on to identify several alternative approaches to the assumed “uniform fiduciary standard” and requests information about the relative costs and benefits of these alternatives  One alternative is an essentially “disclosure-only” approach  Another approach, proposed by SIFMA, would adopt a  standard of conduct that did not extend to broker-dealers the existing precedent on fiduciary duty under the Advisers Act.  The release also suggests other alternatives, including following models set by regulators in other countries. 

Finally, the SEC also requests information on potential areas for further regulatory harmonization of the obligations of broker-dealers and investment advisers. These include advertising and other communications to the public, supervision, licensing and registration of firms, licensing and continuing education requirements for associated persons, books and records, and the use of finders and solicitors.

To state the obvious: This request for data and information requests a lot of information, and there are many interested parties who are eager to win over the SEC to their point of view.  Hence, we can expect voluminous reports with quantitative and qualitative data and other economic analysis about the costs and benefits of the various formulations of standards of conduct.  It is unlikely that the SEC will be proposing a rule any time soon – if ever.  I personally am increasingly doubtful that the game is worth the candle.

March 5, 2013 in SEC Action | Permalink | Comments (0) | TrackBack (0)

Monday, March 4, 2013

SEC Charges Advisers to RAHFCO Hedge Funds with Fraud

The SEC recently filed charges relating to the fraudulent offer and sale of limited partnership interests in two hedge funds -- RAHFCO Funds LP and RAHFCO Growth Fund LP (collectively "RAHFCO Hedge Funds"). The Commission charged RAHFCO Management Group, LLC ("RAHFCO Management"), general partner of RAHFCO Hedge Funds; its principal, Randal Kent Hansen; Hudson Capital Partners Corporation (HCP), the sub-adviser/portfolio manager of RAHFCO Hedge Funds; and Vincent Puma, the principal of HCP, with securities fraud, for engaging in a fraudulent scheme that defrauded investors out of more than $10 million.

The Commission's complaint alleges that the RAHFCO Hedge Funds raised approximately $23.5 million from over 100 investors nationwide between 2007 and the funds' collapse in about May 2011. Additionally, the complaint alleges that the primary function of the Defendants' scheme was to convince investors to invest in fraudulent pooled investments that purportedly traded in options and futures on the S&P 500 Index and in equities, then the Defendants siphoned off the invested funds for the Defendants' own purposes.

The Commission's complaint seeks permanent injunctions, third-tier civil penalties, disgorgement plus prejudgment interest, and other relief against all of the defendants.

March 4, 2013 in SEC Action | Permalink | Comments (0) | TrackBack (0)

Steven Rattner on the JOBS Act: Bad Law!

Law professors have written thoughtful criticisms warning about the dangers created by the JOBS Act ever since its enactment, and so far as I know, nobody outside the academy has listened.  So I am interested to see if Steven Rattner's op-ed in today's New York Times will get more attention.  Entitled "A Sneaky Way to Deregulate," he aptly describes the legislation as having "little to do with employment; it’s a hodgepodge of provisions that together constitute the greatest loosening of securities regulation in modern history." And he doesn't think that's a good thing!

 He describes the "crowdfunding" provisions -- which allow start-up businesses to solicit funds from unsophisticated investors -- as "pure folly. Buy a lottery ticket instead. Your chance of winning is likely to be higher."

He finds other provisions "less terrifying but still problematic," including the provision that allows private equity and hedge funds to advertise.  Since the successful funds have no trouble raising capital without advertising, he wagers that the funds that will resort to advertising are firms that sophisticated institutional investors wouldn't consider investing in.

Rattner concludes that the jobs created by the JOBS Act may be for lawyers "to clean up the mess that it will create."

March 4, 2013 in News Stories | Permalink | Comments (0) | TrackBack (0)

SEC Issues Alert on Investment Adviser's Custody Rule

The SEC  issued a Risk Alert on Significant Deficiencies Involving Adviser Custody and Safety of Client Assets.  It reports that the SEC's National Examination Program (NEP) "has observed widespread and varied non-compliance with elements of the custody rule," which is designed to protect advisory clients from the misuse or misappropriation of their funds and securities.  According to the Alert,

The custody-related deficiencies NEP staff observed can be grouped into four categories: failure by an adviser to recognize that it has “custody” as defined under the custody rule; failures to comply with the rule’s “surprise exam” requirement; failures to comply with the “qualified custodian” requirements; and failures to comply with the audit approach for pooled investment vehicles.


March 4, 2013 in SEC Action | Permalink | Comments (0) | TrackBack (0)

FINRA Fines Ameriprise $750,000 for Failing to Supervise Transmittal of Customers' Funds

FINRA fined Ameriprise Financial Services, Inc. and its affiliated clearing firm, American Enterprise Investment Services Inc. (AEIS), $750,000 for failing to have reasonable supervisory systems in place to monitor wire transfer requests and the transmittal of customer funds to third-party accounts.  This action stems from a February 2011 disciplinary action in which FINRA barred a former Ameriprise registered representative for converting approximately $790,000 from two customers over a four-year period by forging their signatures on wire transfer requests and disbursing the funds to bank accounts she controlled.

FINRA found that Ameriprise and AEIS failed to establish, maintain and enforce supervisory systems designed to review and monitor the transmittal of funds from customer accounts to third-party accounts.  Ameriprise and AEIS neither admitted nor denied the charges, but consented to the entry of FINRA's findings.


March 4, 2013 in Other Regulatory Action | Permalink | Comments (0) | TrackBack (0)