Securities Law Prof Blog

FINRA Expels Meeting Street Brokerage for Market Manipulation

FINRA announced today that it expelled Meeting Street Brokerage, LLC of Palm City, FL from the securities industry for market manipulation of Relay Capital Corporation stock — as well as for violations of Regulation T, Anti-Money Laundering (AML) rules, instant message retention requirements, registration requirements and net capital requirements.  In addition, FINRA barred Meeting Street broker Lisa A. Esposito for participating in the manipulation and for violating Regulation T. FINRA sanctioned her husband, Vincent A. Esposito, the firm's owner, principal and AML Compliance Officer, for those same violations and for violations of his AML obligations. Vincent Esposito was suspended from associating with a securities firm in any capacity for 90 days, suspended from associating with a securities firm in a principal capacity for two years and fined $15,000.

 FINRA found that in 2005, Meeting Street and the Espositos participated in a manipulative scheme designed to increase and/or maintain artificially the price and volume of a Pink Sheet-traded stock issued by Relay Capital. Relay Capital was first incorporated in Canada in 2002 as First Canadian American Credit Services, later relocating to Nevada and changing its name to Galloway Oil and Gas, Inc. Relay Capital currently reports that it is in the business of marketing pre-paid financial services.  In its investigation, FINRA found that Meeting Street and the Espositos participated in the manipulation of Relay Capital stock by:

placing approximately 100 matched orders for the firm's customers — i.e., prearranged orders for the purchase and/or sale of the stock for the purpose of creating the false appearance of high trading volume and inflating or maintaining the stock's price;

transferring free shares of the stock to customers who had purchased or agreed to purchase additional shares of the stock;

continually allowing customers to purchase the stock without sufficient funds to do so and without a good faith belief that they would pay for their purchases before selling the stock; and

effecting nearly 100 purchases for customers in which the cost to buy the stock was met by the sale of the same stock. 

FINRA also found that Meeting Street and the Espositos effected certain agency cross trades between customers at prices in excess of the price at which Relay Capital stock traded on the date of the transactions. FINRA further found that a consulting company owned and controlled by Lisa Esposito received over 1.2 million shares of Relay Capital stock as payment for consulting services and that Meeting Street generated $289,000 in commissions in 2005 for placing Relay Capital stock trades.

FINRA also found that Meeting Street and the Espositos committed numerous violations of Regulation T, many of which were in furtherance of the manipulation, and that Meeting Street and Vincent Esposito, the firm's AML Compliance Officer, violated their AML obligations by failing, in several instances between 2005 and 2007, to investigate and report suspicious activity.

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

FINRA Proposes Rule Change on Communications about Variable Annuities

The SEC noticed a proposed rule change (SR-FINRA-2009-070) submitted by FINRA pursuant to Rule 19b-4 under the Securities Exchange Act of 1934 related to communications with the public about variable life insurance and variable annuities. Publication is expected in the Federal Register during the week of December 7. (Rel. 34-61107)

NY AG Announces Another Guilty Plea in Pay-to-Play Kickback Scheme

New York Attorney General Cuomo today announced a felony guilty plea by Elliott Broidy, a founder and Chairman of Markstone Capital Group LLC, for his involvement in a pay-to-play kickback scheme at the Office of the New York State Comptroller (“OSC”).  Broidy acknowledged paying nearly one million dollars in gifts for the benefit of OSC officials to obtain a $250 million investment from the New York State Common Retirement Fund (“CRF”) in Markstone Capital Partners, L.P. (the “Markstone Fund”). Broidy pleaded guilty to a felony charge of rewarding official misconduct and will cooperate in the Attorney General’s ongoing investigation. Broidy will also forfeit $18 million in connection with his plea.

Today's announcement arises from a two-year, ongoing investigation into corruption involving the OSC and the CRF. The charges to date allege a complex criminal scheme involving numerous individuals operating at the highest political and governmental levels under former Comptroller Alan Hevesi.

Markstone is a private equity firm headquartered in Los Angeles, California with an office in Israel. The Markstone Fund focuses on corporate buyout investments in privately held companies in Israel. Broidy resigned from his management role in Markstone on December 1, 2009. Broidy was also a trustee of the Los Angeles Fire and Police Pension fund from 2002 until he resigned in May 2009.

In his allocution to the Court, Broidy acknowledged making a series of payments to help induce and then increase the CRF’s investment in the Markstone Fund. The CRF ultimately committed $250 million to the Markstone Fund and paid over $18 million in management fees to Markstone. Broidy acknowledged that he had an agreement or understanding with certain high-ranking OSC officials: in exchange for certain benefits from Broidy, the OSC officials would exercise their judgment or discretion to benefit Markstone.

FINRA Fines Terra Nova Financial for Improper Soft Dollar Payments

FINRA fined Terra Nova Financial, LLC, of Chicago, $400,000 for making more than $1 million in improper soft dollar payments to or on behalf of five hedge fund managers, without following its own policies to ensure the payments were proper.  Terra Nova was also charged with failing to properly supervise its soft dollar program, failing to implement adequate supervisory procedures and failing to retain its business-related electronic instant messages. Terra Nova also failed to timely respond to FINRA's requests for productions of various documents, including emails and instant messages, thus delaying FINRA's investigation.

 As part of the settlement, Terra Nova is required to retain an independent consultant to review and enhance its policies, systems and procedures relating to its soft dollar operations.

 FINRA found that starting in 2004, Terra Nova set up soft dollar accounts for eight hedge funds to encourage the funds to execute trades with the firm. Terra Nova collected a portion of the commissions generated by the funds' trading in separate soft dollar accounts and from those accounts paid invoices from the fund managers or third parties for various services. Federal securities laws allow advisors to use soft dollars to pay for research or brokerage-related expenses. But advisors may only use soft dollars to pay for personal expenses or other non-research or non-brokerage related expenses if those types of payments were previously disclosed to investors and if they are made in accordance with the terms of the fund's organizing documents.   

FINRA found that in 2004 and 2005, Terra Nova made numerous improper soft dollar payments to or on behalf of five hedge fund advisors totaling more than $1 million. Some payments (for estate planning fees, administrative staff and accounting expenses) were not allowed by the fund documents. Other payments made directly to the funds' managers were improper because Terra Nova did not receive written authorization from a third party evidencing that the payments were appropriate, as required by fund documents that the firm had or should have obtained under its own policies.

NY AG and AES Agree on Climate Change Disclosures

New York Attorney General Andrew M. Cuomo today announced an agreement that requires the AES Corporation (AES) - a global energy company operating in 29 countries with annual revenues exceeding $16 billion - to disclose timely and relevant information to investors about financial risks associated with the production of global warming pollution. Today’s agreement with AES follows the landmark settlements Cuomo reached last year with two other major energy companies, Dynegy, Inc. and Xcel Energy, to protect investors by ensuring disclosure of potential financial risks for carbon-intensive companies from new and upcoming regulatory efforts related to climate change.

Under the Attorney General’s agreement, AES must disclose material risks associated with climate change in its annual summary report on the company’s performance (Form 10K) to the Securities and Exchange Commission (SEC). These required disclosures include an analysis of material financial risks from climate change related to:

Present and probable future climate change regulation and legislation
Climate-change related litigation
Physical impacts of climate change

Through the agreement, AES has committed to a broad array of additional climate change disclosures including:

Current carbon emissions
Projected increases in carbon emissions from planned coal-fired power plants
Company strategies for reducing, offsetting, limiting, or otherwise managing its global warming pollution emissions and expected global warming emissions reductions from these actions
Corporate governance actions related to climate change, including if environmental performance is incorporated into officer compensation.

New regulatory efforts to reduce global warming pollution, including New York’s regulation of carbon emissions from power plants, as well as pending federal actions, can impact a carbon-intensive company’s financial outlook through the costs incurred to comply. Potential investors must be aware of such material risks in order to make an informed investment decision.

AES generates and distributes energy in 29 countries and reported revenues of $16.1 billion in 2008. The company has a worldwide total power generation capacity of approximately 43,000 megawatts and an international distribution network serving more than 11 million people.

In the U.S., AES operates 17 power facilities, the majority of which are fueled by coal, with a total generation capacity of almost 12,000 megawatts. The company’s U.S. plants emitted a reported 42 million tons of carbon dioxide in 2006, placing AES among the top 20 of the largest emitters of global warming pollution by energy companies in the country.

In New York state, the company operates four coal-fired power plants generating more than 1,200 megawatts under the name AES Eastern Energy: AES Cayuga (Lansing, Tompkins County), AES Greenridge (Dresden, Yates County), AES Somerset (Barker, Niagara County) and AES Westover (Johnson City, Broome County).

In September 2007, Attorney General Cuomo subpoenaed five major energy companies for information on whether disclosures to investors in filings with the SEC adequately described their financial risks related to emissions of global warming pollution. The subpoenas were issued under New York State’s Martin Act, a 1921 state securities law that grants the Attorney General broad powers to access the financial records of businesses. The Attorney General reached agreements with Xcel and Dynegy in 2008. Cuomo’s inquiry into the disclosures of the remaining companies subpoenaed in 2007 - Dominion Resources and Peabody Energy - is ongoing.

The Attorney General noted that AES cooperated fully with his office’s inquiry.

Wells Fargo Settles ARS Charges with State Securities Regulators

NASAA today announced another settlement (in principle) with a securities firm over its sales of auction rate securities (ARS).  Wells Fargo Investments LLC agreed to return approximately $1.3 billion to the firm's clients who have had their funds frozen in the ARS market.  The settlement requires Wells Fargo Investments to extend offers to repurchase ARS from all customers nationwide by approximately February 18, 2010.  Wells Fargo Investments is a brokerage unit of San Francisco-based Wells Fargo & Company.

The settlement is the result of an investigation led by the Securities Division of the Washington State Department of Financial Institutions into allegations that Wells Fargo misled clients by falsely assuring them that ARS securities were a safe, liquid alternative to cash, certificates of deposit or money market funds. The ARS markets froze in February 2008, triggering complaints from investors who could not withdraw money from their accounts. At the time of the market failures, customers of Wells Fargo Investments nationwide held an estimated $2.95 billion in ARS.

Under the terms of the settlement, Wells Fargo agreed to buy back at par value by approximately April 18, 2010 all auction rate securities purchased through its brokerage unit by investors before February 13, 2008. The settlement agreement also calls for Wells Fargo to:

• Fully reimburse certain investors who sold their auction rate securities at a discount after the market failed;
• Consent to a special, public arbitration procedure to resolve claims of consequential damages suffered by investors covered by the settlement as a result of their inability to access their funds; and
• Pay to the states monetary penalties of $1.9 million. 

 

FINRA Fines MetLife for Supervisory Failures over Brokers' Email

FINRA announced today that it has fined MetLife Securities, Inc., and three of its affiliates a total of $1.2 million for failing to establish an adequate supervisory system for the review of brokers' email correspondence with the public. The fine also resolves charges of failing to establish adequate supervisory procedures relating to broker participation in outside business activities and private securities transactions.  Those failures allowed two MetLife Securities brokers to engage in undisclosed outside business activities and private securities transactions without detection by the firm, costing some firm customers millions of dollars.

The three MetLife Securities affiliates are New England Securities Corp., Walnut Street Securities, Inc. and Tower Square Securities, Inc. All are headquartered in New York.

 From March 1999 to December 2006, MetLife Securities and its affiliate broker-dealers had in place written supervisory procedures mandating that all securities-related emails of brokers be reviewed by a supervisor. However, the firms did not have a system in place that enabled supervisors to directly monitor the email communications of brokers. Instead, the firms relied on the brokers themselves to forward their emails to supervisors for review. To monitor compliance with the email-forwarding requirement, the firms encouraged — but did not require — managers to inspect brokers' computers for any emails that had not been forwarded as required. But brokers were able to delete their emails from their assigned computers, thus rendering spot-checks unreliable.

 The firms also conducted annual branch audits, which were likewise ineffective because they did not allow for timely detection of email-forwarding failures. Moreover, the method employed by the auditors to identify email-forwarding deficiencies (prior to July 2005) was itself flawed, consisting mainly of a review of hard-copy files for any correspondence (including emails) that had not been forwarded. Brokers were therefore able to withhold emails without detection by the firm and conceal evidence or "red flags" of misconduct contained in their emails.

 FINRA also found that the firms' inability to ensure compliance with the email-forwarding requirement meant they could not adequately enforce their own supervisory procedures relating to outside business activities and private securities transactions.

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

 

SEC Approves Major Expansion of BrokerCheck Disclosure

FINRA announced that the SEC has approved  a major expansion of its BrokerCheck service — to make records of final regulatory actions against brokers permanently available to the public, regardless of whether they continue to be employed in the securities industry. Under current rules, a broker's record generally becomes unavailable to the public two years after he or she leaves the securities industry and is therefore no longer under FINRA's jurisdiction.  Disclosure records for former brokers will be available on BrokerCheck beginning November 30.

"It is possible that a (former broker) could become a financial planner or work in another related field where his securities record would help members of the public decide if they should accept his financial advice or rely on his advice or expertise," the SEC said in its order approving the BrokerCheck expansion. It added that providing information on final regulatory actions against former brokers "will help members of the public to protect themselves from unscrupulous people and thus….should help prevent fraudulent and manipulative acts and practices, and protect investors and the public interest."

 BrokerCheck is a free online service through which investors can instantly see the employment, qualifications and disciplinary history of more than 650,000 brokers under FINRA's jurisdiction. FINRA estimates there are more than 15,000 individuals who have left the securities industry after being the subject of a final regulatory action and whose disciplinary history is not currently available on BrokerCheck.

 Records for those individuals will become available on November 30 and will include any final sanction (such as bars, suspensions and fines) imposed by the SEC, the Commodity Futures Trading Commission, any federal banking agency, the National Credit Union Administration, any other federal regulatory agency, any state regulatory agency, any foreign financial regulatory authority or any self-regulatory organization (such as FINRA). Those individuals' records generally will also disclose administrative information such as employment and registration history, the individual's most recently submitted comments and the dates and names of qualification examinations passed by the individual.

 

Obama Administration Creates New Interagency Financial Fraud Enforcement Task Force

The Obama Administration announced today the creation of an interagency Financial Fraud Enforcement Task Force to strengthen efforts to combat financial crime. The Department of Justice will lead the task force and the Department of Treasury, HUD and the SEC will serve on the steering committee. The task force's leadership, along with representatives from a broad range of federal agencies, regulatory authorities and inspectors general, will work with state and local partners to investigate and prosecute significant financial crimes, ensure just and effective punishment for those who perpetrate financial crimes, address discrimination in the lending and financial markets and recover proceeds for victims.

The task force replaces the Corporate Fraud Task Force established in 2002

NASAA Expresses Concern over Proposed Expansion of FINRA Authority over Investment Advisers

Earlier today I blogged on the proposed Investor Protection Act that the House Financial Services Committee passed earlier this week.  Here is NASAA's statement on the bill and, in particular, whether FINRA should regulate investment advisers:

NASAA appreciates the Committee’s efforts to strengthen investor protection. While we continue to have concerns over certain aspects of the Investor Protection Act that will not serve investors, we look forward to working with the Committee in its efforts to strengthen the financial services regulatory framework and provide the best possible protections for American investors.

State securities regulators also appreciate Chairman Frank's concern over the far-reaching consequences of an amendment introduced by Ranking Member Spencer Bachus to provide the SEC with the authority to empower FINRA to enforce the fiduciary duty provisions in the Investment Advisers Act against not only broker-dealer members but also any affiliated investment advisory firm or any associated person. The amendment would give FINRA sweeping rule-making authority without any meaningful analysis or study of its implications. NASAA remains opposed to any effort to expand the jurisdiction and authority of private, membership organizations into an area that is more appropriately the province of government.

FINRA and AMF Sign Agreement to Improve Cooperation in Financial Markets

FINRA and the Autorité des marchés financiers (AMF) signed on 19 October 2009 a memorandum of understanding (MoU) on information-sharing with a view to strengthening and improving cooperation in the surveillance and supervision of the markets under their jurisdictions.  The memorandum establishes a formal basis for cooperation among FINRA and the AMF in order to more effectively conduct their oversight of regulated markets and financial firms.

 The MoU has two main aims:  organize the transmission of information between authorities regarding market surveillance and investigations into market abuse and facilitate the sharing of information on trading by firms coming within the two authorities' respective jurisdictions.
 

FINRA Fines Scottrade for Inadequate AML Program

FINRA announced that it fined Scottrade $600,000 for failing to establish and implement an adequate anti-money laundering (AML) program to detect and trigger reporting of suspicious transactions, as required by the Bank Secrecy Act and FINRA rules.  FINRA requires brokerage firms to establish and implement anti-money laundering policies, procedures and internal controls reasonably designed to detect and cause the reporting of any suspicious transactions that could be related to possible violations of laws or regulations - regardless of whether those transactions are associated with suspicious movement of funds into or out of accounts.

Specifically, FINRA found that between April 2003 and April 2008, Scottrade failed to establish and implement an adequate AML program tailored to its business model, which primarily consists of providing an on-line platform for customers trading in securities. In 2003, Scottrade handled about 49,000 customer trades per day, and its volume grew to about 150,000 daily trades in 2007. Among the risks inherent to Scottrade's brokerage model and the firm's substantial trading volume are an increased risk of identity theft, account intrusions and the use of customer accounts to launder money using securities or other financial instruments, or to violate securities laws.

FINRA has advised firms that in designing their AML program, they should consider factors such as their size, location, business activities, the types of accounts they maintain and the types of transactions in which their customers engage. FINRA also has instructed on-line firms such as Scottrade to consider conducting computerized surveillance of account activity to detect suspicious transactions.

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

New York AG Posts Letter regarding Waiver of BofA Attorney-Client Privilege

The New York Attorney General has posted on its website the Oct. 12 letter from Cleary Gottlieb, written on behalf of Bank of America, in which the Bank agrees to waive the attorney-client privilege or the attorney work product doctrine with respect to certain subjects connected to the Bank of America-Merrill Lynch merger.  It will also produce privileged information to federal regulators and to Congress.  It expects to be able to effect the waiver by October 16.

FINRA Fines Citigroup for Failure to Supervise Complex Trading Strategies

FINRA announced that it has fined Citigroup Global Markets Inc. $600,000 and censured the firm for failing to supervise complex trading strategies designed in part to minimize potential tax liabilities. The firm also failed to report to an exchange trades executed under these strategies and to adequately monitor Bloomberg messages.  Specifically, Citigroup failed to supervise and control trading activities by lacking procedures designed to detect and prevent improper trades between the firm and certain counterparties, and among entities within the firm.

In settling this matter, Citigroup neither admitted nor denied the charges, but consented to the entry of FINRA's findings. In determining the appropriate sanction, FINRA noted that Citigroup discovered and self-reported the violations giving rise to this matter; that the firm hired a law firm to conduct a review of these trades and to assist in remedial efforts; and that the firm and its outside counsel provided substantial assistance to FINRA staff during the investigation

Two More Guilty Pleas in New York's Pay-to-Play Kickback Investigation

New York Attorney General Andrew M. Cuomo today announced two guilty pleas in the ongoing investigation relating to the New York State Common Retirement Fund (“CRF”). Raymond Harding, the former chair of the Liberal Party, and Saul Meyer, a founding partner of a Dallas-based firm that advises public pension systems across the nation, both pled guilty to felony securities fraud charges for their involvement in pay-to-play kickback schemes at the New York State Office of the Comptroller and the CRF.

NASAA President Testifies on Investor Protection

In testimony before the U.S. House Financial Services Committee, NASAA President and Texas Securities Commissioner Denise Voigt Crawford outlined the key elements of meaningful financial services regulatory reform.  Crawford’s testimony focused on three proposals in the Investor Protection Act that she identified as important to individual investors: the establishment of a fiduciary duty for broker-dealers who provide investment advice, restricting mandatory pre-dispute arbitration and removing some of the hurdles facing private plaintiffs who seek damages for securities fraud.

NASAA Issues Statement on FINRA's Expansion of Arbitration Pilot Program

The following is a statement by North American Securities Administrators Association (NASAA) President and Texas Securities Commissioner Denise Voigt Crawford regarding the expansion of the Financial Industry Regulatory Authority (FINRA) pilot program to allow certain investors making arbitration claims to choose a panel made up of three public arbitrators instead of the current system, which requires the inclusion of a mandatory industry representative on arbitration panels:

“Regardless of the scope of FINRA’s pilot program on the composition of arbitration panels, a greater issue remains – the mandatory ‘take-it-or-leave it’ clause in brokerage contracts, which forces all investors to agree to mandatory, industry-run arbitration administered by FINRA, the securities industry self-regulatory organization.

“The only chance of recovery for most investors who fall victim to Wall Street wrongdoing is through a single securities arbitration forum controlled by the securities industry. NASAA believes that the securities arbitration system should be truly voluntary and that Congress should end mandatory securities arbitration.”
 
 

FINRA Expands Pilot Arbitration Program Giving Investors Choice of No Industry Arbitrator

FINRA announced the expansion of its two-year pilot program that gives investors who are filing eligible claims the opportunity to select an arbitration panel composed of three public arbitrators instead of two public and one non-public.  In its second year, the pilot will expand from 11 to 14 broker-dealers, and the number of eligible cases will increase from 276 to 411, a rise of nearly 50 percent. Only the investor filing the claim can elect to participate in the program and the firms cannot choose which cases are eligible.

 Each participating firm has agreed to commit a specific number of cases to the pilot. Cases enter the pilot on a first-come, first-served basis at the sole discretion of the claimant, who is typically a retail brokerage customer. The program began on October 6, 2008, and will conclude on October 5, 2010.  The three new firms contributing cases to the pilot program are: Chase Investment Services, with 10 cases; Oppenheimer & Co, with 15 cases; and Raymond James Financial Services/Raymond James & Associates, with 10 cases. Of the 11 firms already participating, five are increasing the number of pilot cases from 40 to 60: Citigroup Global Markets, Merrill Lynch, Morgan Stanley Smith Barney, UBS Financial Services and Wells Fargo Advisors.

 Other participating firms are Ameriprise Financial Services, with 18 cases; Charles Schwab, with 10 cases; Edward Jones, with 18 cases; Fidelity Brokerage Services, with 10 cases; LPL Financial, with 10 cases; and TD Ameritrade with 10 cases.

 The pilot program will be evaluated by a number of criteria, including the percentage of investors who opt in and, of those, the percentage who actually select an all-public panel. Currently, about half of the investors in the pilot choose to have a non-public arbitrator on their hearing panel.  FINRA also will compare the results of pilot and non-pilot cases, including the percentage of cases that settle before award and how quickly they settle, the length of hearings and the use of expert witnesses. FINRA also is conducting participant surveys.

 So far, investors have filed 474 eligible cases. With the initial year of the pilot nearly concluded, 51 percent of the eligible investors have opted into the pilot, resulting in 244 cases.  Investors who choose to have their claim heard under the pilot program — and the firm named in the claim — receive the same three lists of potential arbitrators that parties in non-pilot disputes receive: lists of eight chair-qualified public arbitrators, eight public arbitrators and eight non-public arbitrators. Investors participating in the pilot may choose either an all-public three-member panel or a majority public panel with one non-public arbitrator.

 To date, in the 225 pilot cases where ranking lists have been returned, investors have ranked one or more non-public arbitrators half the time and struck all eight non-public arbitrators in the other half. Thus, investors are choosing to have a non-public arbitrator in 50 percent of the pilot cases.

FINRA Warns of ARS Phishing Scam

FINRA today issued an Investor Alert called Beware of Auction Rate Securities Settlement "Phishing" Scam, which warns the public about a scam using fake FINRA emails that promise compensation from auction rate securities (ARS) settlements in exchange for personal information. The fake emails are made to appear as if they originated from FINRA and use language from a recent FINRA press release announcing ARS settlements. They state that the email recipient is due $1.5 million regardless of the amount of their ARS investment or loss. The email then "phishes" for personal information by asking for the investor's occupation, address and phone number.

While FINRA, along with the Securities and Exchange Commission and state securities regulators, has announced final settlements with numerous brokerage firms relating to the sale of ARS, FINRA does not contact investors directly to advise them of the settlements. Instead, brokerage firms contact eligible investors, generally via letter, with an offer to repurchase ARS that the firm sold to them
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Ketchum on Retail Sales Practices

Excerpt from Rick Ketchum, Chairman & CEO, FINRA, Fordham University Ethics and Regulatory Conference, October 2, 2009:

Retail Sales Responses

I'd like to turn now to the retail side of our markets, where there's more direct interaction with individual investors.

 For entirely too long, this segment of U.S. markets has been marked by a struggle with regulators, as retail firms have pushed the proverbial envelope with regulators to see what products they can sell, what incentives they can offer, and what information needs to be disclosed. While they are seeking to comply with the letter of the laws, it seems that some are looking to evade the spirit of the laws.

 There is a clear need for a shift in culture at these retail firms—focused on serving customers' long-term interests, providing greater transparency about the risks and rewards of financial products, and living up to a higher standard of professional responsibility.

 There is also a clear need for a shift in regulation, and let me offer a specific example. Individual investors interface with both investment advisers and broker-dealers. These are distinct entities, but the everyday reality is, as the Rand Institute said in a study last year, that "trends in the financial service market since the early 1990s have blurred the boundaries between them."

 Indeed, most investors cannot distinguish between the investment advisory service they receive and their brokerage service. But broker-dealers are regulated one way—they operate under a standard of selling their clients "suitable" products. Investment advisers are regulated another way—they must meet a fiduciary standard that puts their clients' interests before their own.

This distinction is far from an ideal regulatory arrangement, and we agree with the Obama Administration's view that a fiduciary standard should be established for broker-dealers when they are offering investment advice. Simply put, broker-dealers should always ask whether certain products or services are in the customer's best interest.