Securities Law Prof Blog

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

Tuesday, June 18, 2013

Deloitte Agrees to One-Year Suspension from Consulting Work at New York Financial Institutions

Deloitte Financial Advisory Services agreed to a one-year suspension from consulting work at financial institutions regulated by the New York State Dept. of Financial Services because of alleged misconduct during its consulting work at Standard Chartered on anti-money laundering issues.  It also agreed to make a $10 million paymment and to implement a set of reforms designed to address conflicts of interest in the consulting industry.  CUOMO ADMINISTRATION REACHES REFORM AGREEMENT WITH DELOITTE OVER STANDARD CHARTERED CONSULTING FLAWS

According to the press release, in 004, Standard Chartered executed an agreement with the New York State Banking Department and Federal Reserve Bank of New York, which identified several compliance and risk management deficiencies in the anti-money laundering and Bank Secrecy Act controls at Standard Chartered's New York branch. The agreement required Standard Chartered to retain a qualified independent consulting firm to review anti-money laundering issues at the bank. Standard Chartered engaged Deloitte to conduct that review.

DFS’s investigation into Deloitte’s conduct during its consultant work at Standard Chartered found that the company:

■Did not demonstrate the necessary autonomy required of consultants performing regulatory work. Based primarily on Standard Chartered's objection, Deloitte removed a recommendation aimed at rooting out money laundering from its written final report on the matter to the Department. The recommendation discussed how wire messages or “cover payments” on transactions could be manipulated by banks to evade money laundering controls on U.S. dollar clearing activities.

■Violated New York Banking Law § 36.10 by disclosing confidential information of other Deloitte clients to Standard Chartered. A senior Deloitte employee sent emails to Standard Chartered employees containing two reports on anti-money laundering issues at other Deloitte client banks. Both reports contained confidential supervisory information, which Deloitte FAS was legally barred by New York Banking Law § 36.10 from disclosing to third parties.

June 18, 2013 in Other Regulatory Action | Permalink | Comments (0) | TrackBack (0)

FINRA Files Proposed Rule Change to Amend Discovery Guide on E-Discovery Issues

FINRA filed with the SEC a proposed rule change to amend the Discovery Guide (“Guide”) used in customer arbitration proceedings to provide general guidance on electronic discovery (“e-discovery”)issues and product cases and to clarify the existing provision relating to affirmations made when a party does not produce documents specified in the Guide. The proposed rule change fulfills FINRA’s commitment to review the topics of e-discovery and product cases with the Discovery Task Force (“Task Force”) that FINRA established in 2011. FINRA believes that the proposedrevisions to the Guide will reduce the number and limit the scope of disputes involving document production in customer cases, thereby improving the arbitration process for the benefit of public investors, broker-dealer firms, and associated persons.

Public comments are due 45 days after publication in the Federal Register.

June 18, 2013 in Other Regulatory Action, SEC Action | Permalink | Comments (0) | TrackBack (0)

FINRA Files Proposed Rule Change to Simplify Selection of All-Public Arbitrator Panel in Customer Disputes

FINRA has filed with the SEC a proposed rule change to amend FINRA Rule 12403 of the Code of Arbitration Procedure for Customer Disputes (“Customer Code”) to make it easier for parties to select an all-public arbitrator panel in cases with three arbitrators. Comments are due 45 days after publication in the Federal Register.

Under the proposed rule change, FINRA would no longer require a customer to elect a panel selection method.  Instead, parties in all customer cases with three arbitrators would get the same selection method. FINRA would provide all parties with lists of ten chair-qualified public arbitrators, ten public arbitrators, and ten non-public arbitrators. FINRA would permit the parties to strike four arbitrators on the chair-qualified public list and four arbitrators on the public list. However, any party could select an all-public arbitration panel by striking all of the arbitrators on the nonpublic list. (Rel. 34-69762)

In its accompanying Release, FINRA gives statistics since implementation of the All Public Panel Option:

[C]ustomers in approximately three-quarters of eligible cases have chosen the All Public Panel Option. Customers using the Majority Public Panel Option have done so by default 77 percent of the time,
rather than by making an affirmative choice (i.e., these customers did not make an
election in their statement of claim or accompanying documentation, and did not respond
to the follow-up letter FINRA sent).

As of March 31, 2013, customers selecting the All Public Panel Option have chosen to strike all of the non-public arbitrators in 66 percent of the cases during the ranking process. Customers have ranked one or more non-public arbitrators in 34 percent of cases and four or more in 13 percent of cases proceeding under the All Public Panel Option. Industry parties have ranked one or more non-public arbitrators in 97 percent of cases and have ranked four or more non-public arbitrators in 90 percent of cases.

FINRA has been tracking the results of arbitration awards decided by all public panels and majority public panels since implementation of the rule change. For the period February 1, 2011 through March 31, 2013, investors prevailed 49 percent of the time in cases decided by all public panels and 34 percent of the time in cases decided by majority public panels.

June 18, 2013 in Other Regulatory Action, SEC Action | Permalink | Comments (0) | TrackBack (0)

FINRA Targets Firms' Use of Social Media Communications

FINRA has posted on its website a generic "Targeted Examination Letter" relating to Spot-Check of Social Media Communications, requesting that the firm provide information about its use of social media, including: 

An explanation of how the firm is currently using social media (e.g., Facebook, Twitter, LinkedIn, blogs) at the corporate level in the conduct of its business.  
An explanation of how the firm's registered representatives and associated persons generally use social media in the conduct of the firm's business.
An explanation of the measures that your firm has adopted to monitor compliance with the firm's social media policies (e.g., training meetings, annual certification, technology).
A tabular list of your firm's top 20 producing registered representatives (based on commissioned sales) who used social media for business purposes to interact with retail investors and the type of social media used by each individual for business purposes during this time period. 

June 18, 2013 in Other Regulatory Action | Permalink | Comments (0) | TrackBack (0)

Tuesday, June 11, 2013

CFPB Seeks Comments on Survey on Arbitration Clauses in Consumer Financial Contracts

The Consumer Financial Products Bureau is proposing to conduct a nationwide telephone survey of 1,000 credit card holders as part of its Dodd-Frank-mandated study about predispute arbitration clauses in consumer financial contracts.  The proposed survey will explore consumer awareness of dispute resolution terms in credit card agreements.  It is asking for comments (by August 6, 2013) on its proposed survey questionnaire and the initial plan for gathering data.

June 11, 2013 in Other Regulatory Action | Permalink | Comments (0) | TrackBack (0)

FINRA Surveys to Update Series 4, 9 and 10 Exams

FINRA is conducting job analysis surveys to inform updates to the Series 4, 9 and 10 qualification examinations. Through these surveys, FINRA intends to gather information from currently registered individuals regarding their roles, responsibilities and job functions, and to use the information to update the related qualification examinations. FINRA encourages survey recipients to participate to help ensure that qualification examination content accurately measures competence in a particular area.

June 11, 2013 in Other Regulatory Action | Permalink | Comments (0) | TrackBack (0)

Tuesday, June 4, 2013

FINRA Fines Wells Fargo, Banc of America for Unsuitable Sales of Floating-Rate Bank Loan Funds

FINRA fined Wells Fargo and Banc of America a total of $2.15 million and ordered the firms to pay more than $3 million in restitution to customers for losses incurred from unsuitable sales of floating-rate bank loan funds. FINRA ordered Wells Fargo Advisors, LLC, as successor for Wells Fargo Investments, LLC, to pay a fine of $1.25 million and to reimburse approximately $2 million in losses to 239 customers. FINRA ordered Merrill Lynch, Pierce, Fenner & Smith Incorporated, as successor for Banc of America Investment Services, Inc., to pay a fine of $900,000 and to reimburse approximately $1.1 million in losses to 214 customers.

Floating-rate bank loan funds are mutual funds that generally invest in a portfolio of secured senior loans made to entities whose credit quality is rated below investment-grade. The funds are subject to significant credit risks and can also be illiquid.

FINRA found that Wells Fargo and Banc of America brokers recommended concentrated purchases of floating-rate bank loan funds to customers whose risk tolerance, investment objectives, and financial conditions were inconsistent with the risks and features of floating-rate loan funds. The customers were seeking to preserve principal, or had conservative risk tolerances, and brokers made recommendations to purchase floating-rate loan funds without having reasonable grounds to believe that the purchases were suitable for the customers. FINRA also found that the firms failed to train their sales forces regarding the unique risks and characteristics of the funds, and failed to reasonably supervise the sales of floating-rate bank loan funds. 

In concluding the settlement, Wells Fargo and Banc of America neither admitted nor denied the charges, but consented to the entry of FINRA's findings.

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

Wednesday, May 29, 2013

Financial Capability Survey Finds Many Americans Struggle with Finances

The FINRA Investor Education Foundation released the results of America's State-by-State Financial Capability Survey. The survey features a clickable map of the United States and allows the public, policymakers and researchers to delve into and compare the financial capabilities of Americans across all 50 states and the nation as a whole.  

The State-by-State Financial Capability Survey, which surveyed more than 25,000 respondents, was developed in consultation with the U.S. Department of the Treasury, other federal agencies and the President's Advisory Council on Financial Capability.  It found a significant disparity in financial capability across state lines and demographic groups.

The five measures of financial capability used to rank the states measure how well Americans are managing their day-to-day finances and saving for the future. The national averages among survey respondents for these key measures are below.

Fewer than half (41 percent) of Americans surveyed reported spending less than their income.
Over a quarter (26 percent) of Americans reported having unpaid medical bills.
More than half of Americans (56 percent) do not have rainy-day savings to cover three months of unanticipated financial emergencies.
Over a third of Americans (34 percent) reported paying only the minimum credit card payment during the past year.
On a test of five basic financial literacy questions, the national average was 2.88 correct answers.

 "This survey reveals that many Americans continue to struggle to make ends meet, plan ahead and make sound financial decisions—and that financial literacy levels remain low, especially among our youngest workers. No matter how you slice and dice it, this rich, new dataset underscores the need for us to continue to explore innovative ways to build financial capability among consumers," said FINRA Foundation Chairman Richard Ketchum.



May 29, 2013 in Other Regulatory Action | Permalink | Comments (0) | TrackBack (0)

Wednesday, May 22, 2013

Five Broker-Dealers Settle with Massachusetts over Improper Sales of REITs

The Massachusetts Securities Division announced a settlement with five independent broker-dealers for improper sales of REITs that will return over $11 million to Massachusetts investors.  The firms are Ameriprise Financial Services, Commonwealth Financial Services, Lincoln Financial Advisors, Securities America, and Royal Alliance Associates.

May 22, 2013 in Other Regulatory Action | Permalink | Comments (0) | TrackBack (0)

FINRA Will Provide Surveillance Oversight of More than 90% of U.S. Equities Trading Volume

FINRA issued an announcement that Direct Edge®, the third largest stock exchange operator in the U.S., and FINRA have agreed that FINRA will provide market surveillance services on behalf of Direct Edge's two licensed stock exchanges.  Under this agreement, FINRA will have surveillance oversight of more than 90% of U.S. equities trading volume. Direct Edge expects the new arrangement will become operative in the fourth quarter of 2013. Currently, FINRA performs examination and disciplinary services on behalf of Direct Edge. With this agreement, all of Direct Edge's third-party regulatory services will be consolidated with FINRA.

May 22, 2013 in Other Regulatory Action | Permalink | Comments (0) | TrackBack (0)

Tuesday, May 21, 2013

Lew Reiterates Need for Money Market Fund Reform in Senate Testimony

Treasury Secretary Lew testified today before the Senate Banking Committee on the Financial Stability Oversight Council (FSOC) Annual Report to Congress.  His written testimony identified seven areas of risks to U.S. financial stability:

·         First, market participants and regulatory agencies should take steps to reduce vulnerabilities in wholesale funding markets that can lead to destabilizing fire sales. 
·         Second, significant reform in the housing finance system is still needed.
·         Third, government agencies, regulators, and businesses should take action to address operational risks from internal control and technology failures, natural disasters, and cyber-attacks, which can cause major disruptions to the financial system.
·         Fourth, as recent developments with the London Interbank Offered Rate (LIBOR) have demonstrated, reforms are needed to address the reliance on voluntary, self-regulated, and self-reported reference interest rates.
·         Fifth, financial institutions and market participants should be cognizant of interest rate risk, particularly given the historically low interest rate environment of the past few years. 
·         Sixth, long-term fiscal imbalances that have potential economic and financial market impacts should be addressed.
·         Finally, regulators need to continue to keep a close eye on potential threats to U.S. financial stability from adverse developments in the global economy.

With respect to the first risk, Wholesale Funding Markets, the Secretary's written testimony focused on the need for additional reforms related to money market mutual funds:

The Council remains concerned that vulnerabilities in wholesale funding markets could lead to destabilizing fire sales.  Specifically, run-risk vulnerabilities related to money market mutual funds (MMFs), which became apparent during the financial crisis, still remain, despite an initial set of reforms implemented in 2010.  In November 2012, the Council issued proposed recommendations for public comment to implement structural reforms of MMFs to reduce the likelihood of runs.  Council members should also examine whether similar reforms are warranted for other cash management vehicles. 

 The Secretary's testimony noted that:

The Council is also authorized to issue recommendations to a regulatory agency when financial activities and practices are creating risk for U.S. financial markets.  In November 2012, the Council issued for public comment proposed recommendations to the SEC with three alternatives for reform to address the structural vulnerabilities of MMFs.  The Council is currently considering the public comments on the proposed recommendations.  If the SEC moves forward with meaningful structural reforms of MMFs before the Council completes its process, the Council expects that it would not issue a final recommendation to the SEC.  However, if the SEC does not pursue additional reforms that are necessary to address MMFs’ structural vulnerabilities, the Council should use its authorities to take action in this area.

May 21, 2013 in News Stories, Other Regulatory Action | Permalink | Comments (0) | TrackBack (0)

FINRA Fines LPL for Systemic Email Failures & Misstatements to FINRA

FINRA fined LPL Financial LLC (LPL) $7.5 million for 35 separate, significant email system failures, which prevented LPL from accessing hundreds of millions of emails and reviewing tens of millions of other emails. Additionally, LPL made material misstatements to FINRA during its investigation of the firm's email failures. LPL was also ordered to establish a $1.5 million fund to compensate brokerage customer claimants potentially affected by its failure to produce email.

FINRA found that:

As LPL rapidly grew its business, the firm failed to devote sufficient resources to update its email systems, which became increasingly complex and unwieldy for LPL to manage and monitor effectively. The firm was well aware of its email systems failures and the overwhelming complexity of its systems. Consequently, FINRA found that from 2007 to 2013, LPL's email review and retention systems failed at least 35 times, leaving the firm unable to meet its obligations to capture email, supervise its representatives and respond to regulatory requests. Because of LPL's numerous deficiencies in retaining and surveilling emails, it failed to produce all requested email to certain federal and state regulators, and FINRA, and also likely failed to produce all emails to certain private litigants and customers in arbitration proceedings, as required.


FINRA also found that

In addition, LPL made material misstatements to FINRA concerning its failure to supervise 28 million DBA emails. In a January 2012 letter to FINRA, LPL inaccurately stated that the issue had been discovered in June 2011 even though certain LPL personnel had information that would have uncovered the issue as early as 2008. Moreover, the letter stated that there weren't any "red flags" suggesting any issues with DBA email accounts when, in fact, there were numerous red flags related to the supervision of DBA emails that were known to many LPL employees.

In addition, LPL likely failed to provide emails to certain arbitration claimants and private litigants. LPL will notify eligible claimants by letter within 60 days from the date of the settlement and the firm will deposit $1.5 million into a fund to pay customer claimants for its potential discovery failures. Customer claimants who brought arbitrations or litigations against LPL as of Jan. 1, 2007, and which were closed by Dec. 17, 2012, will receive, upon request, emails that the firm failed to provide them. Claimants will also have a choice of whether to accept a standard payment of $3,000 from LPL or have a fund administrator determine the amount, if any, that the claimant should receive depending on the particular facts and circumstances of that individual case. Maximum payment in cases decided by the fund administrator cannot exceed $20,000. If the total payments to claimants exceed $1.5 million, LPL will pay the additional amount.


May 21, 2013 in Other Regulatory Action | Permalink | Comments (0) | TrackBack (0)

Monday, May 20, 2013

NASAA Releases Report on IA Switch

NASAA released a report on the regulatory transfer of more than 2100 investment advisers from federal to state oversight, IA Switch Report, The IA Switch: A Successful Collaboration to Enhance Investor Protection.  According to NASAA, the IA Switch "was one of the most significant achievements in the history of the North American Securities Administrators Association (NASAA)."  The Switch stemmed from Section 410 of the Dodd-Frank Act, which raised the assets under management threshold for state regulation of investment advisers from $25 million to $100 million.

The report documents the work that went into the successful completion of the Switch. It draws from a survey completed by state securities regulators on the effect of the Switch;  detailed interviews with NASAA members who were key players throughout the Switch;  and industry feedback.


May 20, 2013 in Other Regulatory Action | Permalink | Comments (0) | TrackBack (0)

Thursday, May 16, 2013

GAO Releases Testimony on Elder Fraud

The GAO released recent testimony on Federal Government Has Taken Some Steps but Could Do More to Combat Elder Financial Exploitation (GAO-13-626T, May 16, 2013).  Here is what the GAO found:

Older adults are being financially exploited by strangers who inundate them with mail, telephone, or Internet scams; unscrupulous financial services professionals; and untrustworthy in-home caregivers. Local law enforcement authorities in the four states GAO visited indicated that investigating and prosecuting the growing number of cases involving interstate and international mass marketing fraud--such as "grandparent scams," which persuade victims to wire money to bail "grandchildren" out of jail or pay their expenses--is particularly difficult. In addition, older adults, like other consumers, may lack the information needed to make sound decisions when choosing a financial services provider. As a result, they can unknowingly risk financial exploitation by those who use questionable tactics to market unsuitable or illegal financial products. Local officials also noted that it is difficult to prevent exploitation by in-home caregivers, such as home health or personal care aides, individuals older adults must rely on.

The GAO goes on to identify ways that federal agencies could support state and local efforts to combat elder fraud.

May 16, 2013 in Other Regulatory Action | Permalink | Comments (0) | TrackBack (0)

Thursday, May 9, 2013

NASAA Files Amicus Brief in Schwab Class Action Waiver Appeal

Several amicus briefs have been filed in the appeal of FINRA's disciplinary proceeding against Charles Schwab for including in its customer agreement a class action waiver, contrary to FINRA rules.  A FINRA hearing panel ruled that the FINRA rules were unenforceable because they were preempted by the Federal Arbitration Act; the case is now on appeal before FINRA's NAC.  While the docket in the appeal is confidential, NASAA posted its amicus brief on its website.  Professor Jill Gross and I also filed an amicus brief (Download Amicus Brief Final) that is a distillation of our recent law review article, Investor Protection Meets the Federal Arbitration Act, 1 Stanford J. Complex Litigation 1 and also available at

May 9, 2013 in Other Regulatory Action, Securities Arbitration | Permalink | Comments (0) | TrackBack (0)

SEC & FINRA Issue Alert on Pension or Settlement Income Streams

The SEC and FINRA issued an investor alert, Pension or Settlement Income Streams – What You Need to Know Before Buying or Selling Them.  The investor alert informs investors about the risks involved when selling their rights to an income stream or investing in someone else’s income stream.  The alert urges investors considering an investment in pension or settlement income streams to proceed with caution.

The alert explains that

Anyone receiving a monthly pension or regular distributions from a settlement following a personal injury lawsuit may be targeted by salespeople offering an immediate lump sum in exchange for the rights to some or all of the payments the person would otherwise receive in future.  Typically, recipients of a pension or structured settlement will sign over the rights to some or all of their monthly payments to a factoring company in return for a lump-sum amount, which will almost always be significantly lower than the present value of that future income stream.

The investor alert contains a checklist of questions to consider before selling away an income stream.

May 9, 2013 in Other Regulatory Action, SEC Action | Permalink | Comments (0) | TrackBack (0)

Wednesday, May 8, 2013

FINRA Fines 3 Firms for Failing to Establish AML Programs

FINRA announced that it has fined three firms a total of $900,000 for failing to establish and implement adequate anti-money laundering (AML) programs and other supervisory systems to detect suspicious transactions. FINRA also fined and suspended four executives involved.

FINRA imposed the following sanctions:

  • Atlas One Financial Group, LLC – Miami, Florida – fined $350,000; Napoleon Arturo Aponte, former Chief Compliance Officer and AML Compliance Officer, fined $25,000 joint and severally with the firm, and suspended for three months in a principal capacity
  • Firstrade Securities, Inc. – Flushing, New York – fined $300,000
  • World Trade Financial Corporation (WTF) – San Diego, CA – fined $250,000; President and Owner Rodney Michel fined $35,000 and suspended in all capacities except as a financial operations principal for four months; Chief Compliance Officer Frank Brickell fined $40,000 and suspended from association in all capacities for nine months; trade desk supervisor and minority owner Jason Adams fined $5,000 and suspended for three months in a principal capacity


May 8, 2013 in Other Regulatory Action | Permalink | Comments (0) | TrackBack (0)

Monday, May 6, 2013

NASAA Writes SEC About Class Action Waivers

The North American Securities Administrators Association (NASAA) has addressed a letter to SEC Chair White to comment on Charles Schwab's class action waiver that it now includes in its brokerage agreements.  Although the class action waiver violates FINRA Rules, a FINRA hearing panel recently concluded that FINRA could not enforce its rules against Schwab because they were "anti-arbitration" in violation of the Federal Arbitration Act.  The Hearing Panel's decision is currently on appeal before FINRA's internal appellate body.  NASAA reiterates its long standing opposition to mandatory arbitration of customers' disputes and reminds the SEC that "Section 921 [of Dodd-Frank] provides the SEC the authority, by rule, to prohibit or impose limitations on the use of mandatory arbitration clauses in broker-dealer and investment adviser customer contracts."

NASAA concludes by "commend[ing] the SEC for taking several steps over the years to improve the arbitration forum and process, and encourage[ing] the SEC to take further action to ensure that investors who are forced into arbitration receive the fairest forum possible."

May 6, 2013 in Other Regulatory Action, Securities Arbitration | Permalink | Comments (0) | TrackBack (0)

Thursday, May 2, 2013

FINRA Names New VP for Risk & Strategy

FINRA has a new Executive Vice President, Risk and Strategy.  Carlo V. di Florio, currently Director of the SEC's Office of Compliance Inspections and Examinations (OCIE), is joining FINRA and will lead its Office of Risk, Emerging Regulatory Issues, Enterprise Risk Management and Strategy.  According to the FINRA press release, "Di Florio will have overall responsibility for ensuring that FINRA has effective processes for assessing the most significant risks to the investing public and the integrity of our markets, and developing strategic responses to mitigate, manage and monitor those risks and industry trends."

May 2, 2013 in Other Regulatory Action | Permalink | Comments (0) | TrackBack (0)

Tuesday, April 30, 2013

FINRA Names Chief Economist

FINRA announced the appointment of a Chief Economist and Senior Vice President, who will report directly to FINRA CEO Richard Ketchum.  Jonathan S. Sokobin is currently Acting Deputy Director, Research and Analysis in the Office of Financial Research at the U.S. Treasury Department.  The appointment is further demonstration of the importance of cost-benefit analysis in financial regulation.  According to the press release,

The Office of the Chief Economist will work closely with the Office of General Counsel and other departments in developing new rules and analyze the costs and benefits of existing and potential rulemakings. In order to facilitate that effort, the Office will be responsible for gathering and analyzing data on securities firms and markets.


April 30, 2013 in Other Regulatory Action | Permalink | Comments (0) | TrackBack (0)