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Securities Compliance Sentinel

Analysis of cutting-edge securities industry issues

SEC Enforcement Division Shifts Focus to Dormant and Emerging Issues

Posted in SEC Compliance, SEC Enforcement

The SEC’s Enforcement Division will shift resources to some dormant and some new areas of possible noncompliance.

“Old reliables” will include activities surrounding investment advisers, such as the perpetration of fraud and issues surrounding valuation and conflicts of interest.  Other adviser activities the Enforcement Division may focus on are fees and the boards that authorize those fees, as well as internal compliance programs.  Moreover, the Enforcement Division will continue to pursue insider trading and likely devote more resources to developing potential cases that raise market structure issues, including alternative trading systems and high frequency trading.  Further, the SEC’s Enforcement Division will also likely return to areas that it has not pursued as vigorously as it once did because of limited resources, such as accounting fraud and micro-cap stock fraud, as well as pursue some new areas as well, including the market access rule, Securities Exchange Act of 1934 Rule 15c3-5, prohibiting companies from providing customers with unfiltered access to an exchange or alternative trading system and requiring broker-dealers to put in place risk management controls to help prevent erroneous orders and enforce existing credit or capital thresholds.

In sum, the Enforcement Division looks like it will be busy over the next several months.

Are SEC Defense Lawyers the Problem?

Posted in SEC Enforcement

The SEC’s Enforcement Division has expressed concerns to the SEC’s General Counsel about defense lawyers possibly obstructing agency investigations – a practice that could lead to disciplinary proceedings.

The Sarbanes-Oxley Act of 2002 provided the SEC with explicit statutory authority to bring cases against lawyers and others under SEC Rule 102(e).  The SEC’s Enforcement Division is focusing on the conduct of attorneys, who may have primary violations certain aiding and abetting violations.  Same tactics are viewed as obstruction or slowing down an investigation.

This concern of the SEC is quite overblown.  Yes, there are “bad apples.”  However, the vast majority of counsel merely defends their clients.  In some respect, these comments from the SEC are nothing more than sour grapes when it loses cases or cannot find a problem.

Vilar Will Not Hinder U.S. Attorney From Pursuing Global Fraud

Posted in Federal and State Criminal Activities, International Securities Regulation

The U.S. Attorney’s Office for the Southern District of New York has announced that its prosecutors will not be significantly impacted by a recent appellate court decision concluding that Morrison’s proscription against extraterritoriality applies also in the criminal context.

In United States v. Vilar, the United States Court of Appeals for the Second Circuit ruled that the U.S. Supreme Court’s Morrison decision limited the extraterritorial Securities Exchange Act of 1934 Section 10(b) and applied it to criminal as well as civil cases.

The USAO has indicated it will continue its prosecutions since many also effect domestic concerns.

Court Remands Dispute Over Expungement of CRD Data

Posted in Arbitration, Expungement

The U.S. District Court for the Central District of California remanded to a California state court a stockbroker’s lawsuit against the Financial Industry Regulatory Authority for expungement of certain allegedly harmful disclosures from BrokerCheck. Doe v. Fin. Indus. Regulatory Auth., http://www.bloomberglaw.com/public/document/John_Doe_v_Financial_Industry_Regulatory_Authority_Inc_et_al_Dock.

The court found no exclusive federal question jurisdiction over the plaintiff’s cause of action, and that FINRA’s duties under the Securities Exchange Act of 1934 to maintain a system for collecting registration information-including disciplinary action-about registered brokers.  FINRA fulfills this obligation by maintaining a database, publicly available through BrokerCheck, that contains disclosures regarding disciplinary actions or other proceedings against registrants.

In the state court lawsuit, the broker complained that he was harmed by seven BrokerCheck disclosure items that allegedly served no public-policy purpose, and asked the court to use its equitable powers to grant declaratory relief expunging the seven items.  The court agreed with the broker that it lacks jurisdiction over the controversy and explained that FINRA Rule 2080(a) requires a FINRA member or associated person seeking to expunge information from the Central Registration Depository to obtain a court order.  However, the court noted that FINRA Rule 2080 does not provide any substantive standard for determining expungement.  California state law does.  The court also noted that two federal districts courts have considered if there is federal question jurisdiction over a broker’s bid for expungement of CRD disclosures under state law, and both concluded jurisdiction did not exist.

In sum, federal courts appear to be pushing expungement cases to state court.


Posted in SEC Enforcement

SEC staff has been instructed to seek subpoenas for devices such as computer hard drives and cell phones only rarely.

In many cases, there could be unintended consequences, such as exposing authorities to other sensitive materials on a device outside the scope of the investigation.  The SEC claims to be sensitive to this situation.  Typically, the SEC staff returns potentially privileged documents back to defense counsel.  Other times, search terms are agreed on ahead of time to protect privileged documents.

In sum, those under the SEC light need to be cautious about turning over these devices to the government.


Posted in Federal and State Criminal Activities, Insider Trading

New York Attorney General Eric Schneiderman is pushing for better cooperation with the financial industry and federal lawmakers to combat emerging insider-trading threats.  While he commended competition among financial services firms, he also said competition has to be guided by an element of fairness, and regulators need to protect the market.

The NYAG has already launched investigations into emerging types of insider trading like the possibility that select investors may have early access to analyst assessments of publicly traded companies – assessments that have the potential to impact stock prices.  His office will review these arrangements.  The NYAG also lamented on the increased gridlock in Washington, making it difficult to combat insider trading with a combination of state and federal resources.

We will monitor this situation to see if there is, in fact, increased cooperation.


Posted in Securities Exchanges, SROs

One SEC commissioner is pushing for a comprehensive review of the structure and regulatory regime of United States financial markets, including SROs.

The SEC is serious about looking comprehensively at market structure issues, and must be willing to review its existing rules to see their impact on market structure.  One item is the regulatory framework concerning the status of SROs, given the proliferation of dark pools and alternative trading venues.

In short, the SEC will examine market structure to see if changes are necessary.

What Are You Doing About Cyber-Security

Posted in Books and Records, Broker-Dealer Regulation, Compliance and Supervision, Cyber-Security, FINRA Compliance, FINRA Enforcement, SEC Compliance, SEC Enforcement

It was apparently not enough that the SEC and FINRA made cyber-security an exam priority for 2014, but the Department of the Treasury has now focused on this pervasive issue.  In recent comments, Treasury Secretary Lew has urged financial firms to step it up when protecting against cyber-attacks. 

Stories of cyber-attacks are becoming so common that we are almost longing for the days of daily reports of Ponzi schemes falling apart.  In the end, the potential long-term customer-related impact of cyber-attacks will outweigh any other crisis that has befallen Wall Street. robber.jpg

Attacks on the financial sector come from many sources, including state-sponsored groups, cyber criminals, and politically motivated hackers to name a few.  The question each financial firm must ask is what they are doing to prevent cyber-attacks. 

The first place to start is to critically review your IT systems, especially those that are internet facing.  These systems must be audited and tested on a regular basis.  

Proper focus must also be given to internal threats.   

For example, are password protected systems properly restricted?  What is your policy regarding the use of laptops and the information that can be stored on them?

* photo from freedigitalphotos.net


Therapeutic neglect is no longer a solution when it comes to preventing cyber-attacks.  What are you doing to prevent them?  Take action, don’t be a victim.


Posted in Arbitration, Expungement

Expungement relief was granted in a very high percentage of arbitration cases filed by investors against broker-dealers, particularly those that were resolved by settlement or stipulated awards.

FINRA panels granted expungement relief in 60.3 percent of arbitration cases, allowing broker-dealers to remove those customer claims from the records, from 2007 through May 2009.  More recently, between May 18, 2009 through December 31, 2011, the arbitration panels granted expungement relief in 61.9 percent of the cases.  Further, between January 1, 2007 through mid-May 2009, expungement was granted in 89 percent of cases resolved by stipulated awards or settlement.  FINRA recently providing expanded guidance to assist arbitrators in the proper performance of their responsibilities regarding expungement.  FINRA is reviewing its rules and interpretations, and will consider changes to provide clarity as to what actions in connection with conditions on settlements violate conduct rules.

In short, FINRA is under increasing pressure to reduce expungements.


Posted in Accounting Standards, Broker-Dealer Regulation, PCAOB Enforcement

The PCAOB adopted two attestation standards relating to auditors’ examinations and reviews of broker-dealer compliance and examination reports and adopted an auditing standard for the audits of supplemental information that broker-dealers file with the SEC.

The preparation by broker-dealers of compliance or exception reports are new requirements that were added by the SEC when it adopted amendments to Securities Exchange Act of 1934 Rule 17a-5 on July 30, 2013.  The PCAOB’s standards are subject to approval by the SEC.  If approved, the effective dates with the Rule 17a-5 effective dates for fiscal years ending on or after June 1, 2014.  The PCAOB has seen significant compliance problems under the existing standards through its interim inspection program.  The PCAOB plans to adopt conforming rules to reflect the changes relating to broker-dealer audits.

Broker-dealer auditors should be prepared for these changes.