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.
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.
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.
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.
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.
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.
Companies subject to enforcement actions will get more credit from regulators if the alleged misconduct is an exception in a compliance-driven corporate culture rather than a remedial step after discovery.
In cases where the SEC finds fraud, there often are early warning signs, and inadequate corporate compliance may not have seen them. The SEC believes compliance personnel must be on the lookout for people, who are overly technical in their approach to issues of ethics and professional responsibility, and should be skeptical of explanations that do not make sense, regardless of who provides them. A strong compliance and ethics program must start with proper governance, from the top, involving the board and senior management. Integrating ethical values into a firm’s culture may be accomplished through performance management systems and compensation so proper behavior is encouraged and rewarded.
In sum, the SEC believes compliance is king.
Fresh from convicting numerous individuals, U.S. Attorney for the Southern District of New York Preet Bharara said that his office will focus, in appropriate cases, on holding institutions liable for wrongdoing. He is now warning these institutions to be on the lookout for these actions. Moreover, he said it will take several forms: civil suit, criminal indictment, or something short of a criminal indictment.
Accordingly, the Department of Justice and its prosecutors will be looking to change institutions. Essentially, the DOJ is looking to change the culture.
In an Investment News article written by Mark Schoeff, he reported that the push for a uniform fiduciary standard for broker-dealers and investment advisors has become a bit stagnant. In fact, it was reported that the prospects for such a uniform rules have waned over the years notwithstanding the general consensus that there should be such a standard.
Considering that there does not appear to be a uniform fiduciary duty standard looming in the immediate future, should retail broker-dealers even care any further. I think that the answer is still a resounding yes.
For one, in my experience, arbitration panels still struggle with the fact that broker-dealers are not subject to a fiduciary duty. As such, you may be held to that standard without really knowing it.
Where you do business is also of import. Depending upon the level of control you have over a customer’s account, some jurisdictions may impose a fiduciary duty on you as a matter of law. So where does this leave retail broker-dealers?
For one, you need to stay up on your compliance policies and procedures; promote a culture of compliance from the top down. Second, know where your clients are to be certain that you may not be considered a fiduciary without knowing it.
Although the uniform fiduciary duty appears to be stayed for now, do not lose your vigilance when it comes to your compliance and customer relations. Otherwise, you may be held to be something that you are not.
* photo from freedigitalphotos.net
Two Securities and Exchange Commissioners – the agency’s two newest members – offered contrasting views of the commission’s use of its enforcement powers. http://www.sec.gov/News/Speech/Detail/Speech/13705404038989#.Uo_nqCda-JQ(Stein); http://www.sec.gov/News/Speech/Detail/Speech/1370540400457#.Uo_nvidA-JQ(Piwowar).
Among other issues, one said the agency has delegated too much authority to its enforcement staff, while the other hailed the “incredible work” done by the SEC staff on a daily basis. The anti-Enforcement Commissioner sharply questioned the commission’s delegation of authority in 2009 to the Enforcement Director to issue formal orders of investigation, and noted that, historically, formal orders were approved by the Commission. The other Commissioner stated the Enforcement Division “was passionately working to protect investors,” and using “all of the tools in its toolbox.”
With teamwork like this, much work is sure to be accomplished.
The U.S. Court of Appeals for the Sixth Circuit affirmed a dismissal of investors’ securities claims in the wake of a bank liquidation, but left the door open to a possible “silent fraud” claim under Michigan law. See Dailey v. Medlock, http://www.bloomberglas.com/public/document/Thomas_Dailey_et_al_v_Lisa_Medlock_et_al_2014_BL_9430_6th_Cir_Jan.
A claim for silent fraud under Michigan law requires a plaintiff to establish that the defendant intentionally suppressed material facts to create a false impression. The case arose from a private placement, where the plaintiff signed subscription agreements to purchase the stock. The company subsequently experienced financial and regulatory difficulties, and, in April 2011, failed resulting in a receivership. The court said that the plaintiff may show that some type of false or misleading representation was made, and that there was a legal or equitable duty of disclosure. A silent fraud cause of action requires more than mere silence, and a plaintiff must show that the defendant intentionally suppressed a material fact so as to create a false impression. The court said that the case law “does not suggest that the silent fraud analysis under Michigan law mirrors that of a” Securities Exchange Act of 1934 Rule 10b-5 claim. However, the two causes of action share common elements.
Where there is a duty to disclose, an issue may not remain silent.