Securities Law Prof Blog

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

Tuesday, January 29, 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.

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

Monday, January 28, 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....



January 28, 2013 in News Stories, Other Regulatory Action | Permalink | Comments (0) | TrackBack (0)

Wednesday, January 23, 2013

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.

January 23, 2013 in Other Regulatory Action | Permalink | Comments (0) | TrackBack (0)

Tuesday, January 22, 2013

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. 

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

Friday, January 18, 2013

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

January 18, 2013 in News Stories, Other Regulatory Action | Permalink | Comments (0) | TrackBack (0)

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

January 18, 2013 in News Stories, Other Regulatory Action | Permalink | Comments (0) | TrackBack (0)

Wednesday, January 16, 2013

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.

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

Monday, January 14, 2013

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])


January 14, 2013 in Other Regulatory Action, Securities Arbitration | Permalink | Comments (0) | TrackBack (0)

Thursday, January 10, 2013

FINRA Issues Voluntary Interim Form for Funding Portals

 FINRA issued a voluntary Interim Form for Funding Portals designed for prospective crowdfunding portals under the JOBS Act. The Interim Form asks prospective funding portals to provide information including ownership; funding; management; and business model and relationships.

FINRA explains that:

Those intending to become a funding portal may voluntarily submit information regarding their business on the interim form. The information received will help FINRA develop rules specific to crowdfunding portals.

FINRA and the SEC are engaging in an open dialogue about the rules that should apply to funding portals. Once the SEC and FINRA have adopted funding portal rules, FINRA will issue a final funding portal application for FINRA regulation. In applying for membership, crowdfunding portals will not be bound by the responses provided on the Interim Form.



January 10, 2013 in Other Regulatory Action | Permalink | Comments (0) | TrackBack (0)

Tuesday, January 8, 2013

FINRA Year in Review

FINRA posted on its website a review of its 2012 activities.  It identified 

significant accomplishments in detecting fraudulent activity, implementing cross-market surveillance, increased transparency of securities markets and fulfilling its regulatory mandate to protect investors, assessing $68 million in fines, ordering a record $34 million in restitution to harmed customers and taking measures to ensure market integrity.

Richard Ketchum, FINRA's Chairman and CEO, said, "FINRA fulfilled its role as the first line of defense for investors through a comprehensive and aggressive enforcement program, supported by a realigned and more risk-based examination program and the provision, for the first time, of cross-market surveillance programs that more effectively detected electronic manipulative trading. Protecting investors and helping to ensure the integrity of the nation's financial markets is at the heart of what we do every day."

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

Tuesday, December 18, 2012

GAO Reports on Dodd-Frank Rule Making

The GAO released another report on Dodd-Frank rule making and cost benefit analysis, Agencies' Efforts to Analyze and Coordinate Their Rules (GAO-13-101, Dec 18, 2012).  Here is a summary:

Federal agencies conducted the regulatory analyses required by various federal statutes for all 54 regulations issued pursuant to the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) that GAO reviewed. As part of their analyses, the agencies generally considered, but typically did not quantify or monetize, the benefits and costs of these rules. Most of the federal financial regulators, as independent regulatory agencies, are not subject to executive orders that require comprehensive benefit-cost analysis in accordance with guidance issued by the Office of Management and Budget (OMB). Although most financial regulators are not required to follow OMB's guidance, they told GAO that they attempt to follow it in principle or spirit. GAO's review of selected rules found that regulators did not consistently follow key elements of the OMB guidance in their regulatory analyses. For example, while some regulators identified the benefits and costs of their chosen regulatory approach in proposed rules, they did not evaluate their chosen approach compared to the benefits and costs of alternative approaches. GAO previously recommended that regulators more fully incorporate the OMB guidance into their rulemaking policies, and the Office of Comptroller of the Currency and the Securities and Exchange Commission have done so. By not more closely following OMB's guidance, other financial regulators continue to miss an opportunity to improve their analyses.

Federal financial agencies continue to coordinate on rulemakings informally in order to reduce duplication and overlap in regulations and for other purposes, but interagency coordination does not necessarily eliminate the potential for differences in related rules. Agencies coordinated on 19 of the 54 substantive regulations that GAO reviewed. For most of the 19 regulations, the Dodd-Frank Act required the agencies to coordinate, but agencies also voluntarily coordinated with other U.S. and international regulators on some of their rulemakings. According to the regulators, most interagency coordination is informal and conducted at the staff level. GAO's review of selected rules shows that differences between related rules may remain even when coordination occurs. According to regulators, such differences may result from differences in their jurisdictions or the markets. Finally, the Financial Stability Oversight Council (FSOC) has not yet implemented GAO's previous recommendation to work with regulators to establish formal interagency coordination policies.

Most Dodd-Frank Act regulations have not been finalized or in place for sufficient time for their full impacts to materialize. Recognizing these and other limitations, GAO took a multipronged approach to assess the impact of some of the act's provisions and rules, with an initial focus on the act's systemic risk goals. First, GAO developed indicators to monitor changes in certain characteristics of U.S. bank holding companies subject to enhanced prudential regulation under the Dodd-Frank Act (U.S. bank SIFIs). Although the indicators do not identify causal links between their changes and the act--and many other factors can affect SIFIs--some indicators suggest that since 2010 U.S. bank SIFIs, on average, have decreased their leverage and enhanced their liquidity. Second, empirical results of GAO's regression analysis suggest that, to date, the act may have had little effect on U.S. bank SIFIs' funding costs but may have helped improve their safety and soundness. GAO plans to update its analyses in future reports, including adding indicators for other Dodd-Frank Act provisions and regulations.

December 18, 2012 in Other Regulatory Action | Permalink | Comments (0) | TrackBack (0)

Monday, December 17, 2012

Morgan Stanley & Massachusetts Settle Charges Related to Facebook IPO

The Massachusetts Securities Division fined Morgan Stanley $5 Million for investment banking’s allegedly improper influence over analysts in the Facebook IPO.  According to the consent order that Morgan Stanley entered into, the practices violated the undertakings made in the 2003 Analysts Settlement. (Download Dkt-2012-0042-Consent-Order)

December 17, 2012 in Other Regulatory Action, State Securities Law | Permalink | Comments (0) | TrackBack (0)

Thursday, December 13, 2012

FINRA Issues Guidance on Suitability Rule's Definition of "Customer" and "Investment Strategy"

FINRA issued further Guidance on FINRA's Suitability Rule (Regulatory Notice 12-55).  Its revised Rule 2111became effective in July 2012, and FINRA previously issued Regulatory Notice 12-25 to address frequently asked questions.  This most recent Notice addresses two issues:  the scope of the terms "customer" and "investment strategy."  FINRA has also created a suitability web page to consolidate information about the Rule.

December 13, 2012 in Other Regulatory Action | Permalink | Comments (0) | TrackBack (0)

Wednesday, December 12, 2012

SEC Approves FINRA Rule Change on Use of Subpoenas and Orders of Appearance in Arbitration

The SEC has approved a non-controversial FINRA rule change relating to the use of subpoenas and orders of appearance in arbitration proceedings.  Specifically, the rule change amends the Customer and Industry Codes of Arbitration Procedure (1) to provide that when FINRA member firms and/or
employees or associated persons of FINRA members who are parties to an arbitration (collectively, “Member Parties”) seek the appearance of witnesses by, or the production of documents from, FINRA members (and individuals associated with the member) who are not parties to the arbitration (collectively, “Non-Party Members”), FINRA arbitrators shall (unless circumstances dictate otherwise) issue orders for the appearance of witnesses or the production of documents, instead of issuing subpoenas; (2) to add procedures for any non-party (Non-Party Member or otherwise) receiving a subpoena to object to the subpoena; (3) to provide that if an arbitrator issues a subpoena to a Non-Party Member at the request of a Member Party, the Member Party making the request is (unless the panel directs otherwise) responsible for paying the reasonable costs of the appearance of witnesses by or the production of documents from the Non-Party Member; (4) to add procedures for any party to an arbitration to file a motion requesting arbitrators issue an order for the appearance of any employee or associated person of a FINRA member (collectively, “Associated Persons”) or the production of documents from such Associated Persons or members; (5) to add procedures for any party to an arbitration receiving a motion for an order and draft order to object to the order; (6) to add procedures for how the party to the arbitration that requested the order must serve the order (if issued); (7) to add procedures for any Non-Party Member receiving an order to object to the order; and (8) to add procedures for how parties to an arbitration must share documents received in response to an order issued to a Non-Party Member. ( Download 34-68404)

December 12, 2012 in Other Regulatory Action, SEC Action, Securities Arbitration | Permalink | Comments (0) | TrackBack (0)

Monday, December 10, 2012

PCAOB Concerned About Deficiencies in Audits of Internal Controls over Financial Reporting

The Public Company Accounting Oversight Board today released a report summarizing inspection observations related to deficiencies in registered public accounting firms' audits of the internal control over financial reporting (ICFR) at public companies.  The report, "Observations from 2010 Inspections of Domestic Annually Inspected Firms Regarding Deficiencies in Audits of Internal Control over Financial Reporting," provides information about the nature and frequency of deficiencies in firms' audits of internal control over financial reporting detected during the PCAOB's 2010 inspections of eight domestic registered firms that have been inspected every year since the PCAOB inspection program began.

The report is based on PCAOB inspections that examined portions of approximately 300 such audits. It describes the most pervasive deficiencies identified in those audits and also includes information on the potential root causes of the deficiencies.

According to the Executive Summary:

The Board is concerned about the number and significance of deficiencies identified in firms' audits of internal control during the 2010 inspections, which generally involved reviews of the integrated audits of financial statements and internal control ("integrated audits") for issuers' fiscal years ending in 2009. This report describes the most pervasive deficiencies identified in firms' auditing of internal control during the 2010 inspections, and also includes information on the potential root causes of the deficiencies. Although not specifically described in this report, the Board is also concerned that the rate of these deficiencies increased during the Board's 2011 inspections. The Board emphasizes, however, that the findings described in this report should be considered against the broader background that, in many cases, the Inspections staff did not identify significant audit deficiencies in the portions of audits of internal control that were reviewed in 2010 and 2011, an encouraging fact that reflects well on the firms' ability to implement AS No. 5 appropriately when their engagement teams approach the issues properly.

The report is available at PCAOB's website.

December 10, 2012 in Other Regulatory Action | Permalink | Comments (0) | TrackBack (0)

FINRA Proposes to Allow Non-Party Associated Persons to Seek Expungement Relief

FINRA, at its December 2012 Board meeting, discussed several rulemaking items, including:

Expungement for Unnamed Persons in Arbitration Claims

The Board authorized FINRA to file a proposal with the SEC that establishes three different procedures that would permit registered persons who are identified for alleged sales practice violations in an arbitration claim, but are not named as parties in that claim (unnamed persons), to seek expungement relief. The unnamed person could seek relief under Rule 12805 by asking a party to the customer-initiated arbitration in writing to seek expungement on his or her behalf. Alternatively, the registered person could initiate In re proceedings under new Rule 13807 at the conclusion of the underlying customer-initiated arbitration case. Finally, the unnamed person could seek expungement relief at the conclusion of the customer’s case by asking the panel for an expungement based on the record compiled in the underlying case. The proposal incorporates many of the comments and suggestions received on Regulatory Notice 12-18, as well as feedback from several FINRA committees. FINRA believes that these proposals provide unnamed persons with a remedy to seek redress concerning allegations that could impact their livelihoods, yet maintains the protections of FINRA’s expungement rules to ensure the integrity of the CRD records.

 Conflicts of Interest Relating to Recruitment Compensation Practices

The Board authorized FINRA to seek comment in a Regulatory Notice on a proposed rule that would require a member firm that provides, or has agreed to provide, to a registered person enhanced compensation in connection with the transfer of employment (or association) of the registered person from another financial services firm (previous firm), to disclose the details of the enhanced compensation to any former customer of the registered person at the previous firm who is contacted about moving or moves their account to the new firm. The proposal would require such disclosure for one year following the date the registered person associates with the new firm. The proposed rule would not apply to enhanced compensation of less than $50,000 or to customers that meet the definition of an institutional account pursuant to FINRA Rule 4512(c), except any natural person or a natural person advised by a registered investment adviser.

December 10, 2012 in Other Regulatory Action, Securities Arbitration | Permalink | Comments (0) | TrackBack (0)

Friday, December 7, 2012

Massachusetts Goes After Sales of Unregistered Oil& Gas Securities in its State

Investment News reports that Massachusetts filed fraud charges against two oil and gas operations that allegedly sold unregistered securities to Massachusetts investors.  In one case, Prodigy Oil and Gas allegedly sold at least $464,000 in unregistered securities to one investor and employed a cold-caller who had previously been found guilty of fraud.  Fraud charges against Synergy Oil and two of its executives allege the sale of $35,000 in unregistered securities to two investors.  Massachusetts Secretary William Galvin has been an outspoken critic of the crowdfunding exemption contained in the JOBS Act.  Inv News, Crowdfunding takes early hit in Massachusetts

December 7, 2012 in Other Regulatory Action, State Securities Law | Permalink | Comments (0) | TrackBack (0)

Thursday, December 6, 2012

FINRA Issues Guidance on Private Placement Rules

FINRA posted on its website Frequently Asked Questions About Sale of Private Placements under FINRA Rules 5122 and 5123.

December 6, 2012 in Film, Other Regulatory Action | Permalink | Comments (0) | TrackBack (0)

NASAA Gears Up for Internet Fraud In Wake of JOBS Act Crowdfunding

According to the NASAA, "crowdfunding’s presence on the Internet has risen sharply in recent months in anticipation of rules to allow small businesses and entrepreneurs to raise investments online."  NASAA Sees Sharp Spike in Crowdfunding Presence on the Internet

An analysis of Internet domain names by state and Canadian securities regulators found nearly 8,800 domains with “crowdfunding” in their name as of November 30, 2012, up from less than 900 at the beginning of the year. Of these websites, about 2,000 contained content, more than 3,700 had no content and more than 3,000 appeared to be “parked” and serving as placeholders to reserve a domain name for later use or sale. Of the domains with “crowdfunding” in their name, about 6,800 have appeared since April, 2012 when the JOBS Act was signed into law.

The release goes on to say

Anticipating an increase in online fraud stemming in part from passage of the JOBS Act, NASAA created a task force on Internet fraud investigations shortly after the enactment of the JOBS Act to monitor crowdfunding and other Internet offerings. The group is currently coordinating multi-jurisdictional efforts to scan various online offering platforms for fraud, and, where authorized, will coordinate investigations into online or crowdfunded capital formation fraud.

December 6, 2012 in Books, Other Regulatory Action | Permalink | Comments (0) | TrackBack (0)

SEC & FINRA Offer Suggestions on Year-End Investment Considerations

The SEC's Office of Investor Education and Advocacy and FINRA issued an Investor Alert to provide individual investors with a few suggestions for year-end investment planning, including

  • Review your asset allocation
  • consider rebalancing
  • tax considerations
  • check out your investment professiona
  • locate your financial records.

Year-End Investment Considerations for Individual Investors

December 6, 2012 in Other Regulatory Action, SEC Action | Permalink | Comments (0) | TrackBack (0)