Securities Law Prof Blog

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

Thursday, April 25, 2013

FINRA Withdraws Proposed Rule Change to Require Link to BrokerCheck on Broker Websites

FINRA withdrew a proposed rule change to Amend FINRA Rule 2267 (Investor Education and Protection) that would have required members to include a prominent description of and link to FINRA BrokerCheck on their websites, social media pages and any comparable internet presence.  The proposed rule change was published for comment on January 25, 2013, and the SEC received 24 comment letters.  No explanation was given for the withdrawal (Release No. 34-69440; File No. SR-FINRA-2013-002).

April 25, 2013 in Other Regulatory Action | Permalink | Comments (0) | TrackBack (0)

Monday, April 22, 2013

CFPB Releases Report on Senior Designations

On April 18 the Consumer Financial Protection Bureau released its report on Senior Designations for Financial Advisers.  Congress directed that its Office for Older Americans study the issue of "senior designation" titles used by financial advisers and make recommendations.  The Bureau

found that the use of senior designations is extremely confusing for consumers. There are more than 50 different senior designations currently used in today’s marketplace with senior designees recommending or selling a variety of products, such as securities, investment opportunities, financial products, and insurance products like annuities and long-term care insurance.

*    *    *

The recommendations in this report seek to reduce consumer confusion and protect consumers
by improving the: (1) dissemination of information and consumer education around senior
designations; (2) standards for the acquisition of senior designations; (3) standards for senior
designee conduct; and (4) enforcement related to the misuse of senior designations. The Bureau
believes that adoption of these recommendations will help older consumers avoid financial
advisers who would misuse their designations to sell inappropriate investment and financial

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

FINRA Approves Proposed Rule Changes for Submission to SEC

The FINRA Board of Governors approved several proposed rule changes that will be submitted to the SEC for review and approval.

The Board approved a proposal to publicly disseminate 144A transactions in TRACE-eligible securities for those asset types currently subject to dissemination.  FINRA is taking this step after reviewing the comments submitted in response to its September 2012 Regulatory Notice and in light of JOBS Act provisions. FINRA believes that making this information publicly available will help market participants determine the quality of their executions and help firms comply with their regulatory obligations.

FINRA also approved two proposed rule changes related to securities arbitration:

Arbitration Panel Composition
The Board authorized FINRA to file with the SEC proposed amendments to FINRA Rule 12403 to simplify the panel selection rules. Rather than requiring the customer to elect a panel selection method, parties in all customer cases with three arbitrators would have the same selection method. Under this method, all parties would see lists of 10 chair-qualified public arbitrators, 10 public arbitrators and 10 non-public arbitrators. The rules would permit four strikes on each of the public arbitrator lists. However, any party could select an all-public arbitration panel by striking all of the arbitrators on the non-public list. Alternatively, if the parties leave on the non-public list one or more of the same non-public arbitrators, the parties could have a majority public panel—that is two public and one non-public arbitrator.

Discovery Guide Used in Investor Arbitration Proceedings
The Board authorized FINRA to file with the SEC proposed amendments to the Discovery Guide used in customer arbitration proceedings to provide general guidance on e-discovery issues and product cases, and to clarify existing provisions relating to affirmations. Specifically, FINRA would amend the Discovery Guide introduction to:

1.include guidelines for arbitrators to consider when deciding disputes relating to the form of e-discovery;
2.add guidance on product cases to explain, among other matters, that these cases are different from other customer cases and that the Document Production Lists may not provide all of the documents parties usually request in a product case; and
3.clarify that a party may request an affirmation when an opposing party makes a partial production.


April 22, 2013 in Other Regulatory Action, Securities Arbitration | Permalink | Comments (0) | TrackBack (0)

Tuesday, April 16, 2013

FINRA Fines Merrill $1 Million for Best Execution Failures in Non-Convertible Preferred Shares Transactions

FINRA fined Merrill Lynch, Pierce, Fenner & Smith Inc. $1.05 million for failing to provide best execution in certain customer transactions involving non-convertible preferred securities executed on one of its proprietary order management systems (ML BondMarket), and for failing to have an adequate supervisory system and written supervisory procedures in place. Merrill Lynch was also ordered to pay more than $323,000 in restitution, plus interest, to customers who did not receive best execution for their trades in non-convertible preferred securities. Additionally, FINRA has required Merrill Lynch to revise its written supervisory procedures regarding ML BondMarket best execution obligations within 30 business days.

FINRA found that Merrill Lynch had programmed a faulty pricing logic into ML BondMarket that only incorporated quotations published on the primary listing exchange for that non-convertible preferred security. As a result, in instances when there was a better quote on a market other than the primary listing exchange, that quote was not reflected on ML BondMarket. The firm instead executed 12,259 transactions in non-convertible preferred securities with its customers on ML BondMarket at prices that were inferior to the National Best Bid and Offer (NBBO).



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

Monday, April 15, 2013

FINRA Charges JTF with Fraud in February 2012 Sales of AWSR Stock

 FINRA filed a complaint against John Thomas Financial (JTF), of New York, NY, and its Chief Executive Officer, Anastasios "Tommy" Belesis, charging fraud in connection with the sale of America West Resources, Inc. (AWSR) common stock, intimidation of registered representatives, trading ahead, failing to provide best execution for customer orders and various other violations. The complaint also names Michele Misiti, Branch Office Manager; John Ward, trader; Joseph Castellano, Chief Compliance Officer; and Ronald Vincent Cantalupo, Regional Managing Director.

JTF and many of its customers owned AWSR stock as a result of participation in the company's private financings. According to the complaint, on Feb. 23, 2012, the price of AWSR common stock, which at the time was thinly traded on the OTC Bulletin Board, spiked higher, by over approximately 600 percent, opening at 28 cents per share, peaking at $1.80 per share and eventually closing the day at $1.29 per share. On the same day, JTF sold 855,000 shares, the majority of its proprietary position in AWSR, reaping proceeds of more than $1 million.

The complaint alleges that while JTF sold its shares at the height of the price spike, the firm received at least 15 customer orders to sell more than one million shares, yet only entered one of these orders for execution on Feb. 23, 2012. Instead, JTF and Belesis prevented the orders from being executed on the same day they were received and some customer orders were executed the following day or days after at prices grossly inferior to those obtained by the firm while other customer orders were not entered or executed at all. AWSR is now in bankruptcy and the customers' investments are virtually worthless.

In addition, the complaint alleges that JTF and Belesis, through Misiti and Castellano, lied to the firm's registered representatives and customers about the reasons the customer shares could not be sold on Feb. 23, 2012, including that there was a problem with the clearing firm's trading systems, there was insufficient volume on that day to fill the orders, and the shares could not be sold because they were restricted under the Securities Act of 1933.


April 15, 2013 in Other Regulatory Action | Permalink | Comments (0) | TrackBack (0)

Saturday, April 13, 2013

FINRA Board Scheduled to Consider Changes to Customer Arbitration Rules

At its April 18 meeting the FINRA board of governors will consider a proposed rule change to the Customer Code of Arbitration, to make it easier for customers to select a panel consisting of all public arbitrators (in claims over $100,000).  Currently, the default option is a panel consisting of two public and one industry arbitrator, and a customer must make an election to select an all-public panel option.  The proposed rule change, as described on the FINRA website:

The Board will consider proposed amendments to FINRA Rule 12403 (Cases with Three Arbitrators) to simplify the arbitration panel selection rules. Rather than requiring the customer to elect a panel-selection method, parties in all customer cases with three arbitrators would get the same selection method. All parties would see lists of 10 chair-qualified public arbitrators, 10 public arbitrators and 10 non-public arbitrators. The proposed rules permit four strikes on each of the public arbitrator lists. However, any party could select an all-public arbitration panel by striking all of the arbitrators on the non-public list.

When FINRA first proposed giving customers the option of selecting an all-public panel, I applauded the concept, but worried that pro se claimants might lose the option inadvertently by failing to make the election within the prescribed time period.  I suggested that the default should be an all-public option and that customers could elect to include one industry arbitrator.  FINRA was not receptive to my suggestion.

Since adoption of the all-public option, FINRA has stated that customers are electing for an all-public panel more frequently than it had anticipated, so this proposal may be in response to that.  In any event, it is a welcome development, and I hope that the Board of Governors will view the proposal favorably.

The board of governors will also consider amendments to the Discovery Guide relating to e-discovery, described as follows:

The Board will consider proposed amendments to the Discovery Guide used in customer arbitration proceedings to provide general guidance on e-discovery issues and product cases. The guidance, which would appear in the introduction to the Discovery Guide, would emphasize flexibility in the discovery process. FINRA is not proposing to amend the Document Production Lists, which specify documents that are presumptively discoverable in customer cases. The proposed amendments would also clarify existing provisions in the introduction relating to affirmations.


April 13, 2013 in Other Regulatory Action, Securities Arbitration | Permalink | Comments (0) | TrackBack (0)

Thursday, April 11, 2013

FINRA Charges Online Broker with Fraud in Sales of Promissory Notes to Athletes

FINRA filed a Temporary Cease-and-Desist Order (TCDO) to halt further fraudulent activities by Washington, D.C.-based Success Trade Securities, Inc. and its CEO & President, Fuad Ahmed, as well as the misuse of investors' funds and assets. FINRA also issued a complaint against Success Trade Securities and Ahmed charging fraud in the sales of promissory notes issued by the firm's parent company, Success Trade, Inc., in which Ahmed holds a majority ownership interest. FINRA filed the TCDO, to which Ahmed and the company agreed, thus immediately freezing their activities, based on the belief that ongoing customer harm and depletion of investor assets are likely to continue before a formal disciplinary proceeding against Success Trade Securities and Ahmed will be completed.

 Success Trade Securities is an online broker-dealer that operates through Just2Trade and LowTrades.

In its complaint, FINRA alleges that Success Trade Securities, Ahmed and other registered representatives at the firm sold more than $18 million in Success Trade promissory notes to 58 investors, many of whom are current or former NFL and NBA players, while misrepresenting or omitting material facts. Specifically, FINRA's complaint alleges that Ahmed and Success Trade Securities misrepresented that they were raising $5 million through the sale of promissory notes and continued to make this representation, even as the sales exceeded the original offering by more than 300 percent. Most of the notes promised to pay an annual interest rate of 12.5 percent on a monthly basis over three years, with some notes promising to pay interest as high as 26 percent.



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

Sunday, April 7, 2013

SEC Approves FINRA's Tightening of "Public Arbitrator" Definition

The SEC approved a FINRA proposed rule change to amend the definition of "public arbitrator" in its Customer and Industry Codes of Arbitration.  Specifically, the proposed rule change would (a) exclude persons associated with a mutual fund or hedge fund from serving as public arbitrators and (b) require individuals to wait for two years after ending certain affiliations before they may be permitted to serve as public arbitrators.   This amendment is another tightening of the definition of "public arbitrator" to exclude individuals with close ties to the securities industry.  SEC, Release No. 34-69297; File No. SR-FINRA-2013-003, Self-Regulatory Organizations; Financial Industry Regulatory Authority, Inc.; Order Approving Proposed Rule Change to Amend the Customer and Industry Codes of Arbitration Procedure to
Revise the Public Arbitrator Definition
(Apr. 4, 2013)

April 7, 2013 in Other Regulatory Action, SEC Action, Securities Arbitration | Permalink | Comments (0) | TrackBack (0)

Friday, March 22, 2013

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])

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

Thursday, March 14, 2013

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.

March 14, 2013 in Other Regulatory Action | Permalink | Comments (0) | TrackBack (0)

Wednesday, March 13, 2013

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

March 13, 2013 in Other Regulatory 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)

Tuesday, March 5, 2013

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)

Monday, March 4, 2013

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)

Tuesday, February 26, 2013

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.

February 26, 2013 in Other Regulatory Action, Securities Arbitration | Permalink | Comments (0) | TrackBack (0)

Thursday, February 21, 2013

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 .


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

Tuesday, February 19, 2013

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.

February 19, 2013 in Other Regulatory Action | Permalink | Comments (0) | TrackBack (0)

Wednesday, February 13, 2013

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.

February 13, 2013 in Other Regulatory Action | Permalink | Comments (0) | TrackBack (0)

Friday, February 8, 2013

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

February 8, 2013 in News Stories, Other Regulatory Action | Permalink | Comments (0) | TrackBack (0)

Monday, February 4, 2013

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.

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