Securities Law Prof Blog

FINRA Proposes to Amend Rule Regarding Public Release of Disciplinary Complaints

FINRA has filed with the SEC a proposed rule change amending FINRA Rule 8313 (Release of Disciplinary Complaints, Decisions and Other Information) to make more information about disciplinary proceedings available to the public.  The SEC has put the proposal out for public comment. (Download 34-69178[1])

The proposed rule change generally would establish general standards for the release of disciplinary information to the public that would provide greater information about FINRA's disciplinary actions.  It would also clarify the scope of information subject to Rule 8313.

Rule 8313(a) currently provides that in response to a request FINRA shall release any identified disciplinary complaint or decision to the requesting party.  Absent a specific request for an identified complaint or decision, the rule provides publicity thresholds for the release of information to the public.  Thus, disciplinary information currently available in the FINRA Disciplinary Actions online database is limited by Rule 8313's publicity thresholds.  The proposed amendment would eliminate the publicity thresholds and in their place adopt general standards for the public release of the information and increase access to information about disciplinary actions.  Specifically, proposed Rule 8313(a)(1) would provide that FINRA shall release to the public a copy of, and at FINRA's discretion information with respect to, any disciplinary complaint or disciplinary decision issued by FINRA.  Subject to limited exceptions, FINRA would release the information in unredacted form. (Download 34-69178-ex5[1])

Massachusetts Fines Deutsche Bank Securities $17.5 Million for Conflicts in Marketing CDOs

The Commonwealth of Massachusetts fined Deutsche Bank Securities $17.5 million for conflicts in marketing collateralized debt obligations (CDOs) in a matter settled by a consent order.  According to the allegations, DBSI, which underwrote approximately $32.2 billion of CDOs between 2004-08, failed to disclose conflicts of interest arising from its various roles in proposing the structure for, co-investing in, and serving as the structurer for, a $1.56 billion hybrid CDO.  Specifically, DBSI did not disclose that a proprietary trading group within the firm partnered with a hedge fund to determine how the CDO would be structured and marketed.

2011 Survey Shows 51% Increase in FINRA Fines

Sutherland Asbil & Brennan has released the findings of its annual FINRA Sanctions Survey, a review of FINRA disciplinary actions.  FINRA filed 1488 disciplinary actions in 2011, up from the 1310 cases in 2010.  The number of individuals barred by FINRA increased significantly, from 288 in 2010 to 329 in 2011.  Fines increased from $45 million in 2010 to $68 million in 2011.  The report identifies as top enforcment issues: advertising, short selling, auction rate securities, suitability, and improper form.

Annual Sutherland FINRA Sanctions Survey Shows a 51% Jump in Fines in 2011

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

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.

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.

 

FINRA Enforcement Will Appeal Charles Schwab Victory

As readers of this blog know, last week a FINRA hearing officer refused to enforce FINRA's rules prohibiting broker-dealers from including class action waivers in their customers' agreements, in a big win for Charles Schwab.  FINRA Enforcement announced today it will appeal the decision to FINRA's National Adjudicatory Council.

FINRA Hearing Panel Finds that Federal Arbitration Act Preempts FINRA Arbitration Rule

Charles Schwab amended its customer agreement to prohibit customers from bringing class actions in court.  FINRA brought a disciplinary proceeding charging that the provision violated FINRA's rules that prohibit any provisions in customer agreements that purport to take away customers' rights to bring class actions in court. FINRA announced the outcome of the FINRA hearing panel today: 

The panel concluded that the amended language used in Schwab's customer agreements to prohibit participation in judicial class actions does violate FINRA rules, but that FINRA may not enforce those rules because they are in conflict with the Federal Arbitration Act (FAA).

In the third cause of action, the panel found that Schwab violated FINRA rules by attempting to limit the powers of FINRA arbitrators to consolidate individual claims in arbitration. The panel further concluded that the FAA does not bar enforcement of FINRA's rules regarding the powers of arbitrators, because the FAA does not dictate how an arbitration forum should be governed and operated, or prohibit the consolidation of individual claims. The panel ordered Schwab to take corrective action, including removing violative language, and imposed a fine of $500,000. 

Schwab previously announced that it was removing the language that prohibited consolidation of claims.

 Unless the hearing panel's decision is appealed to FINRA's National Adjudicatory Council (NAC) or is called for review by the NAC, the hearing panel's decision becomes final after 45 days. 

I certainly hope that the NAC reviews the matter, because I believe that the hearing panel's conclusion that the FAA preempts the FINRA rule is wrong.  For my (and co-author Jill Gross's) analysis of the issues presented in this matter, see Investor Protection Meets the Federal Arbitration Act, 1 Stanford J. Complex Litig. 1 (2012), available on SSRN .

 

FINRA Fines ING Affiliates $1.2 Million for Email Retention and Review Violations

FINRA has fined five affiliates of ING $1.2 million for failing to retain or review millions of emails for periods ranging from two months to more than six years.  FINRA also ordered the firms to conduct a comprehensive review of their systems for the capture, retention and review of email, and to subsequently certify that they have established procedures reasonably designed to address and correct the violations.

FINRA found that the firms failed to properly configure hundreds of employee email accounts to ensure that the emails sent to and from those accounts were retained and reviewed at various times between 2004 and 2012. In addition, four of the firms failed to set up systems to retain certain types of emails, such as emails using alternative email addresses, emails sent to distribution lists, emails received as blind carbon copies, encrypted emails and "cloud" email (emails sent through third-party systems). As a result of these failures, emails sent to and from hundreds of employees and associated persons were not retained; and because the emails were not retained, they were not subject to supervisory review.

In addition, four of the firms failed to review millions of emails that the firms' email review software had flagged for supervisory review. At various times between January 2005 and May 2011, nearly six million emails flagged for review went unreviewed by supervisory principals because the email review software was not properly configured.

Massachusetts Securities Division Calls on SEC to Study Use of PDAAs by Investment Advisers

Massachusetts Securities Division filed a letter with the SEC, requesting the SEC to address what the Division  calls a "key investor protection issue:" investment advisers including mandatory pre-dispute arbitration provisions in the advisory contracts (PDAAs).  It urges the SEC to use its authority under Dodd-Frank section 921 to commence a study of investment advisers requiring pre-dispute arbitration, "a practice that appears to be inconsistent with the fiduciary duty that advisers owe their customers."

The Division recently sent 710 state-registered Massachusetts advisers surveys that requested specific information about arbitration.  Responses were voluntary, and the response rate was 50%.  Nearly half of the advisers who responded to the survey reported that they include a PDAA in their advisory contract.

There has never been a study of how many investment advisers require PDAAs, what forum those advisers requiring PDAAs use for resolving the disputes, and what the outcomes are in those disputes.  An SEC study of this issue would provide important information for addressing the question of whether customers of advisory clients receive fairer outcomes in court or in arbitration.  Without information, we can only speculate.

The Securities Division letter to the SEC and the survey results are posted on its website.

FINRA Gives Up Advocating for SRO Responsibilities over Investment Advisers

I missed the story when it appeared, but I ran into Reuters' Suzanne Barlyn at Brooklyn Law School's Conference on the Importance of Compliance today, and she filled me in on the news that FINRA CEO Rick Ketchum has backed away from advocating that FINRA take on SRO responsibilities for investment advisers.  In an interview Ketchum said there was "no sign it can convince lawmakers in Washington to support a change in the way the advisers are regulated anytime soon."  He warns that investors continue to be at risk because the SEC does not have the resources to examine investment advisers on a regular basis. 

So what's the solution?  My understanding is that investment advisers sensibly would prefer one regulator over two and thus resist the idea of any SRO.  Will the SEC be given the resources to expand its examination program over investment advisers?

Reuters, Exclusive: Watchdog backs off over financial adviser regulation

FINRA Seeks Comments on Proposed Rule on Markups and Commissions

FINRA Requests Comment on Proposed FINRA Rules Governing Markups, Commissions and Fees in Regulatory Notice 13-07.  This is part the process to develop a new, consolidated rulebook (the Consolidated FINRA Rulebook).

FINRA is proposing several changes to the proposed rules. These changes include, among other things, amendments to: (1) retain the 5% markup policy in NASD IM-2440-1 (Mark-Up Policy); (2) revise certain of the relevant factors used to determine the reasonableness of markups and commissions; (3) eliminate the requirement to provide commission schedules for equity securities transactions to retail customers; and (4) extend the proposed markup rules to transactions in certain government securities. 

The text of the proposed rules is here.  Deadline for comments is April 1, 2013.

SEC Approves Changes to FINRA Rule on Information & Testimony Requests

The SEC recently approved amendments to FINRA Rule 8210 to:

clarify the scope of FINRA’s authority under Rule 8210 to inspect and  copy the books, records and accounts of member firms, associated persons and persons subject to FINRA’s jurisdiction;
specify the method of service for certain unregistered persons under  the rule; and
authorize service of requests under the rule on attorneys who are representing firms, associated persons or persons subject to FINRA’s jurisdiction.

The text of the amended rule, including Supplementary Material, is available at the FINRA website.  The amendments are effective on February 25, 2013.

Treasury Again Approves Excessive Pay for Execs at Bailed-Out Companies

The Special Inspector General for the TARP Program released a report, Treasury Continues Approving Excessive Pay for Top Executives at Bailed-Out Companies (Download 2013_SIGTARP_Bailout_Pay_Report[1]).  The title essentially says it all, but here are some snippets offering more detail:

SIGTARP found that once again, in 2012, Treasury failed to rein in excessive pay. In 2012, OSM approved pay packages of $3 million or more for 54% of the 69 Top 25 employees at American International Group, Inc. (“AIG”), General Motors Corporation (“GM”), and Ally Financial Inc. (“Ally,” formerly General Motors Acceptance Corporation, Inc.) – 23% of these top executives (16 of 69) received Treasury-approved pay packages of $5 million or more, and 30% (21 of 69) received pay ranging from $3 million to $4.9 million. Treasury seemingly set a floor, awarding 2012 total pay of at least $1 million for all but one person. Even though OSM set guidelines aimed at curbing excessive pay, SIGTARP previously warned that Treasury lacked robust criteria, policies, and procedures to ensure those guidelines are met. Treasury made no meaningful reform to its processes. Absent robust criteria, policies, and procedures to ensure its guidelines were met, OSM’s decisions were largely driven by the pay proposals of the same companies that historically, and again in 2012, proposed excessive pay. With the companies exercising significant leverage, the Acting Special Master rolled back OSM’s application of guidelines aimed at curbing excessive pay.

*    *    *

There are two lessons to be learned from OSM’s 2012 pay-setting process and decisions:

First, guidelines aimed at curbing excessive pay are not effective, absent robust policies, procedures, or criteria to ensure that the guidelines are met. This is the second report by SIGTARP to warn that the Office of the Special Master, after four years, still does not have robust policies, procedures, or criteria to ensure that pay for executives at TARP exceptional assistance companies stays within OSM’s guidelines. ...

*    *    *

Second, while historically the Government has not been involved in pay decisions at private companies, one lesson of this financial crisis is that regulators should take an active role in monitoring and regulating factors that could contribute to another financial crisis, including executive compensation that encourages excessive risk taking....

 

 

FINRA Seeks Temporary Cease and Desist Order Against Westor Capital

FINRA announced  that it has filed for a Temporary Cease-and-Desist Order against Westor Capital Group, Inc. and its President, Chief Compliance Officer and Financial and Operations Principal, Richard Hans Bach, to immediately stop the further misappropriation and misuse of customer funds and securities. In addition, FINRA issued a complaint against Westor and Bach, charging them with failing to allow customers to withdraw account balances and deliver securities, misusing customer securities, failing to maintain physical possession or control of securities, and for operating an unapproved self-clearing business.

 According to FINRA, Westor's primary business is trading in microcap securities through its own accounts held at several different brokerage firms and has ineffective measures to track and reconcile its customers' stock positions, making it possible for Westor and Bach to conceal the improper use of securities, the complaint alleges.

FINRA Proposes Brokerage Firms Provide Link to BrokerCheck on Websites

FINRA has filed with the SEC a proposed rule change to amend FINRA Rule 2267 (Investor Education and Protection) to require that members include a prominent description of and link to FINRA BrokerCheck, as prescribed by FINRA, on their websites, social media pages and any comparable Internet presence and on websites, social media pages and any comparable Internet presence relating to a member’s investment banking or securities business maintained by or on behalf of any person associated with a member.  (Download 34-68700[1])

This proposed change stems from FINRA's review of BrokerCheck, including ways to increase investor use of the information.  Many participants in focus groups conducted by a market research consultant stated that they were unaware of the existence of BrokerCheck.  Currently firms are required to notify customers annually in writing of the BrokerCheck hotline number. 

9,001 Website Names on "Crowdfunding"!

The Wall St. Journal reports that NASAA has found 9,001 website names containing the word "crowdfund."  The association has reviewed about 2000 of these site names and concluded that about 200 warrant a closer watch.  WSJ has reviewed the list and find that many of the names apparently are designed to appeal to certain groups based on gender, race or religion, i.e. "christiancrowdfunds"; others apparently are looking for the investor hoping to get rich, i.e., "getrichcrowdfunding" and "crowdfundingjackpot."

Meanwhile, the SEC has not yet promulgated crowdfunding rules, having missed a January 1 deadline.

WSJ, Crowdfunding Efforts Draw Suspicion

Is there a Role for CFPB in Regulating Retirement Savings Industry?

The Consumer Financial Protection Bureau is considering whether it has the authority to protect retirement savings, reports Bloomberg.  Richard Cordray, bureau director, provided no additional details.  The Bureau's concern is that retirees may fall prey to financial scams as they confront the difficulties of inadequate savings and low investment returns.  The SEC and the Dept of Labor have authority to regulate many types of retirement savings funds, but investor advocates have expressed concern about the vigor of their efforts.  Bloomberg, Retirement Savings Accounts Draw U.S. Consumer Bureau Attention

FINRA Announces Voluntary Telephone Mediation in Small Claims

FINRA announced that it is launching a pilot program offering parties in simplified cases pro bono or reduced-fee telephone mediation. Participation in the pilot program is voluntary and open to cases involving claims of $50,000 or less.

Linda Fienberg, President of FINRA Dispute Resolution, said, "Telephone mediation is a lower-cost alternative, and would benefit dispute resolution forum users in many ways. Besides eliminating the travel and preparation costs typically associated with in-person mediation, telephonic mediation offers greater convenience and flexibility, and is a practical alternative for all parties involved."

 Parties interested in participating in the pilot can notify FINRA, and FINRA staff will notify eligible parties about the pilot program.

 

Mediators would serve on a pro bono basis on cases involving claims of $25,000 or less in damages. Reduced-fee mediation ($50 per hour) would be available on cases with damage claims between $25,000.01 and $50,000. FINRA will not charge any administrative fee for these cases.

FINRA Proposes to Tighten Definition of "Public Arbitrator"

FINRA has filed with the SEC a proposed rule change that would further tighten the definition of a "public arbitrator" to exclude persons associated with a mutual fund or hedge fund from serving as public arbitrators and to require individuals to wait for two years after ending certain affiliations before they may be permitted to serve as public arbitrators. FINRA believes that the proposed changes "would improve investors’ perception about the fairness and neutrality of FINRA’s public arbitrator roster."  FINRA has amended the definition of public arbitrator a number of times since 2004 to exclude from the definition individuals with connections to the securities industry.  In the accompanying release, FINRA states that recently investor representatives have raised concerns that they do not perceive certain arbitrators as public because of their background or experience.  This proposed rule change is in response to those concerns.  Although the public arbitrator definition does not expressly prohibit individuals associated with mutual funds and hedge funds from serving as public arbitrators, FINRA believes that, because of their association with the financial services industry, they should not serve as public arbitrators.  Its current practice is to exclude these individuals from the public roster.

FINRA also proposes to add a two-year "cooling off" period before FINRA permits certain individuals to serve as public arbitrators.  This change would affect, among others, attorneys, accountants and other professionals whose firm derived $50,000 or more in annual revenue in the past two years from professional services rendered to certain financial industry entities relating to any customer disputes concerning investments.  Under the current rule, the individual may begin serving as a public arbitrator as soon as the individual ends the affiliation that was the basis for the exclusion.  FINRA notes that in one instance an individual applied to be a public arbitrator just one month after retiring from a lengthy career at a law firm that represented securities industry clients. (Download 34-68632[1])