Securities Compliance Sentinel - Analysis of Cutting Edge Securities Industry Issues

Lawyers have often been the brunt of cruel jokes. But now, a recent study reported on by the Bureau of National Affairs shows, lawyers are the target of securities regulators. Why the sudden interest?

For one, cooperation initiatives between regulators and those caught violating securities law convince these people to turn on their lawyer who may have been involved in the offering. After all, clients do not owe their lawyers a fiduciary duty.

Second, lawyers may have malpractice insurance that cover their actions. As such, there is a financial incentive for regulators to target lawyers.

So what can securities lawyers do to protect themselves? Unfortunately, there is no sure fire way to protect yourself as regulators will look in the direction of anyone associated with an offering that results in a securities violation.

The best protection for lawyers is to be vigilant when it comes to client selection. Also, be certain that you are comfortable with the content of the offering to avoid being accused in promulgating a fraudulent statement.

* photo from freedigitalphoto.net

You may remember that I previously wrote about the NFA’s proposals earlier this year to better monitor customer segregated funds after some high profile monitoring failures.  The NFA recently began implementing its proposal to develop a daily segregation confirmation system that would require all depositories holding customer segregated funds, including banks, clearing FCMs, broker-dealers and money market accounts, to file daily reports reflecting the funds held in segregated accounts.  Initially, the NFA intended to manually monitor compliance through direct, view only online access.  However, after discussions with vendors, the NFA determined that it could quickly implement an automated system via a third party vendor.

The NFA will require FCMs to instruct their depositories holding segregated, secured amount and cleared swaps customer collateral to report the balances in the FCM’s accounts to a third party designated by the NFA.  The rule also provides that in order for a depository to be deemed acceptable, it must make the daily reports to the third party designated by the NFA.   

The daily confirmation system is still under implementation, but the first phase, beginning with banks, was implemented on January 1, 2012.  Other categories of depositories will be added in 2013. 

Late last week, one of my colleagues sent me an e-mail where he copied 8 other people, half of them I could not identify if my life depended upon it.  I then heard about the person who had a Twitter account with over 17,000 follwers, and was now being sued by his former employer over ownership of the account-- really, does anyone think the person knows 17,000 people?  Firms and persons working in financial services industries generate trillions of e-mails every year, encompassing the mundane to the critical. 

These firms and their employees also seem to be involved in numerous civil, regulatory and criminal investigations and litigations.  Much of the vast amount of money in legal fees paid to defend these firms and their employees (sums that sometimes greatly exceed the GDP of several developing countries) often relate to e-mail review and production.  General counsels and firm management looking for ways to save money on these bills should, initially, read my article that was published in the New Jersey Law Journal, outlining the "CC" problem and ways of clamping down on this terrible plague afflicting our society, http://www.foxrothschild.com/newspubs/newspubsArticle.aspx?id=4294970187.

Once read, please do your part in stopping this madness because the dollar you save maybe your own!!

My colleague, Josh Horn, has written an amazing article that should be on every compliance officer’s desk.  It details methods for investigating and responding to ponzi schemes. 

In this day and age, we are met with another Ponzi scheme occurring or being uncovered almost every day.  Josh’s article is an exceptional primer since it details the steps for a proper investigation, as well as, disseminating the investigation results to the appropriate authorities.  Further, Josh lays out an approach to avoid litigation, and, if litigation does strike, responding to it.  This article appeared in the September – October 2011 Special Edition for the National Society of Compliance Professionals, in its publication, N.S.C.P. Currents, and may be viewed at www.foxrothschild.com/newspub/newspubArticle. aspx?id=4294970030.

I hope everyone considers it.