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Securities Compliance Sentinel

Analysis of cutting-edge securities industry issues

Changes in SEC Enforcement Function

Posted in Compliance and Supervision, SEC Enforcement, SEC Organization

Adjustments to the SEC’s enforcement function is enabling it to be more aggressive with individuals and corporations when pursuing allegedly violative behavior.

The SEC’s ongoing push to strengthen penalties for wrongdoing attempts to further deter current and future bad actors, stiff monetary penalties and sanctions not only punish alleged violations but send clear signals of the SEC’s intolerance of wrongdoing.  Thus, the focus with the SEC should be on:

  • if circumstances surrounding the case justify expending SEC resources and if the agency should be targeting the alleged violations in the first place;
  • if the SEC’s settlement position is too aggressive, given the context of the assertions of wrongdoing;
  • if the SEC’s legal theory makes sense; and
  • if bringing the case might make bad law.

In sum, there is a very tight rope one walks when dealing with the SEC on these issues.

Tightening the Definition of ‘Public Arbitrator’

Posted in Arbitration, Public Customer Arbitrations

FINRA proposed amendments to the organization’s arbitration code would tighten the definition of “public” arbitrator for FINRA arbitration purposes.

In a release, FINRA said the proposed rule changes would provide that a person who worked in the financial industry “for any duration” during his or her career would always be classified as a non-public arbitrators.  It added that “professionals who represent investors or the financial industry as a significant part of their business would also be classified as non-public, but could become public arbitrators after a cooling off period.”  Further, FINRA indicated that the proposed amendments would “reorganize the definitions” to make it easier to determine the correct arbitrator classification.  The proposed rule change, approved by FINRA’s Board of Governors, will be submitted to the SEC for approval.

This is somewhat shortsighted on FINRA’s part.  Having only non-public arbitrators while placing a “Scarlet A” on others will not result in better arbitrations.

FINRA Bans Settled CRD Expungements

Posted in Arbitration, Expungement, Public Customer Arbitrations

FINRA proposed a rule to bar brokers and their firms from requiring customers to consent to the removal of a dispute from the Central Registration Depository as a condition of settling the disagreement.

In a release, FINRA said the proposal was intended to ensure that the CRD system continues to contain relevant information.  The proposal was approved by FINRA’s board of governors.  It was submitted to the SEC, who signed off on the rule change.  The Rule went into effect on July 30, 2014.

Candidly, this is going to be a disaster for the BDs and brokers.  Many arbitration claims have little or no merit and cause stains on the records of many good people.  Expungements are the only way to even the playing field.

What Do FINRA’s Enforcement Statistics Mean

Posted in Broker-Dealer Regulation, FINRA Compliance, FINRA Enforcement, Registered Representatives, Uncategorized

At the halfway point of the year, the Sutherland Asbill firm has issued its report on FINRA’s fines to date.  That report reflects that, although fines are on a record pace this year, the number of actions by FINRA is behind pace.  So what does this mean? 

The first step is to look at the top enforcement issues to date.  In descending order, the top issues are: 

  1. Books and recordspointing.jpg
  2. Anti-money laundering
  3. Net capital
  4. Unregistered securities
  5. Trade reporting

 Even though these may not be the sexiest issues that FINRA addresses, it tells you something.  FINRA, at least this year, is focusing on technical issues that may have broader market or customer implications, such as books and records, net capital and anti-money laundering.  At the same time, the focus on unregistered securities could mean a heightened focus on Reg D offerings.   

The fact that the fines are larger than last year also reflects that FINRA may be primarily focused on larger cases.  This is not to say that FINRA is not focused on the more garden-variety enforcement actions as it has in the past; just that it is going fishing for bigger fish this year. 

This dubious top five list should serve as an alert to all member firms.  Have you reviewed your rules and procedures on these areas of focus?  If not, you should because you may need to tighten up your procedures.  FINRA appears to be looker for bigger cases; don’t let your firm be among them.

* photo from freedigitalphotos.net

Convicted Inside Trader Cannot Sue Former Counsel

Posted in Insider Trading, Law Firms and Lawyers

The U.S. District Court for the Southern District of New York dismissed a New York law malpractice and fraud claims by convicted inside trader Winifred Jiau against her former attorney.  See Jiau v. Hendon, http://www.bloomberglaw.com/public/document/Jiau_v_Hendon_Docket_No_112cv07335_SDNY_Sept_28_2012_Court_Docket.

Prosecutors contended that in her role as an employee of an expert network company, Jiau obtained inside information about public companies through professional and personal contacts and sold the information to portfolio managers at hedge funds, who traded on the inside data.  A jury convicted Jiau on conspiracy and securities fraud and the defendant then sued her lawyer for malpractice.  The court found no claim.

Although this turned out well for the lawyers, it should remind everyone of the potential dangers in these representations.

Cybersecurity Threats Abound and FINRA Asks Questions

Posted in Cyber-Security, FINRA Compliance, FINRA Enforcement

FINRA has sent targeted sweep letters to almost 20 broker-dealers conerning their approaches to managing cybersecurity risks.  http://www.finra.org/Industry/Regulation/Guidance/TargetedExaminationLetters/P443219; and http://www.sec.gov/News/Testimony/Detail/Testimony/1370540757488#.UvVcWJUo61s.

Among other questions, the survey asks the firms about their approaches to information technology; risk assessment; business continuity plans in case of cyber-attack; organization structures and reporting lines; and processes for sharing and obtaining information about cybersecurity threats.  The survey was prompted by the fact that broker-dealers consistently have indicated that cybersecurity is one of their top five risk concerns.

This is a regulatory priority and firms need to address it.

The SEC Does Not Care About Collateral Impacts With Settlements

Posted in Collateral Consequences, SEC Enforcement

In determining whether to seek admissions in the settlement of an enforcement action, the SEC will not take into account any collateral consequences that might befall the defendant in question.

Recent changes in the “nether admit/nor deny” policy is not about collateral consequences.  Instead, the SEC is determining if admissions are justified based upon the need for accountability.  The SEC will have to try those cases where the defendant refuses to make an admission.  Collateral consequences, including follow-on private securities litigation and other enforcement actions by foreign and domestic authorities, are a main reason that defendants balk at admitting to SEC violations.  Additionally, given that the SEC will have to pick and choose the cases where it wants admissions, it is incumbent upon the SEC to closely monitor how such decisions are reached, and their attendant costs and benefits.

However, it seems that the SEC could achieve accountability without demanding admissions.

Should The SEC Turn Its Attention to Culpability and Harm?

Posted in Compliance and Supervision, SEC Compliance, SEC Enforcement

Enforcement attention on activities involving the most culpable individuals and firms, and the most harm to investors may be the next phase in SEC enforcement.

There is an opportunity cost to its enforcement actions.  It might be the best use of the SEC’s resources not to sue over technical violations and other deficiencies that do not involve scienter.  The SEC should not lose sight of wrongdoing involving pump and dumps, boiler room tactics, and affinity fraud.  Such violations require Commission attention because they result in great harm to their victims and can have drastic consequences for the markets.

Nonetheless, it is likely that this suggestion will fall on deaf ears given recent SEC actions.

So Who Wants To Inherit A Book Of Business

Posted in Financial Industry Trends, Intra-Industry Arbitrations, Raiding/Moving Firms

Brokers like anyone else enjoy making money the old fashioned way  . . . . by inheriting it.  Although everyone wants to inherit business, a recent Investment News article highlighted the pitfalls associated with agreements to acquire the business of a retiring broker. confusion.jpg

Indeed, intra-industry disputes, such as those involving the acquisition of a book of business from a retiring broker, represent approximately 30% of all cases before FINRA.  So what are the pitfalls? 

For one, the acquiring broker may have ongoing financial obligations to the retiring broker that could last for years.  Such provisions may, in turn, restrict the acquiring broker from moving to another firm because the agreement may not be in conformity with the Protocol for Broker Recruiting; an agreement between firms that gives a broker the ability to move client information to another firm without the threat of being sued.   

The transportability of a book of business may ultimately depend if it was truly inherited without any prior connection between those clients and the acquiring broker. If the acquiring broker had worked with the acquired clients before inheriting them, there is a greater chance that the Protocol may insulate the broker who then wants to transfer these clients to a another firm. 

There is one pretty clear takeaway from the Investment News article. If you acquire a book of business from a retiring broker, make sure you have a solid agreement; one that gives you the ability to transfer to another firm while satisfying any financial obligation you may have to the retiring broker.

* photo from freedigitalphotos.net

Will the SEC “Modernize” BDC Rules

Posted in Business Development Companies, SEC Enforcement, Securities Registration

Business development company representatives petitioned the SEC to “modernize” its rules pertaining to such entities.  BDCs are a type of private company that invests in small and mid-sized businesses.

The SEC has long disfavored BDCs, but none of these representatives want the SEC to allow BDCs to operate under rules that apply to traditional public companies, such as the ability to file automatic shelf registration statements, and to release factual and forward-looking business information through free-writing prospectuses, among other things.

In all likelihood, this petition is going nowhere given the SEC’s long standing animosity towards BDCs.