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Securities Compliance Sentinel

Analysis of cutting-edge securities industry issues

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.


Posted in Broker-Dealer Regulation, SEC Compliance, SEC Enforcement

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.


Posted in Federal and State Criminal Activities

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.

Should You Even Care About A Uniform Fiduciary Duty

Posted in Arbitration, Broker-Dealer Regulation, Compliance and Supervision, Dodd-Frank, FINRA Compliance, SEC Compliance, Uncategorized

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?buyholdsell.jpg

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