BD Law Blog - by Georgia Securities Lawyer Joel Beck

SEC, FINRA Launch CCOutreach BD for BD Compliance Officers

Yesterday, the SEC announced  that, in cooperation with FINRA, they are launching an educational forum geared towards BD compliance officers.  According to the release, "the CCOutreach BD program will help broker-dealer chief compliance officers (CCOs) ensure effective communication about compliance risks, maintain effective compliance controls, and foster strong compliance programs within their firms."  The national seminar is currently scheduled for March 2008 in DC; registration details will be forthcoming.

Importantly, the organizers are seeking input from CCOs as to topics to be addressed.  See here to see the possible topics, and ways to communicate your preferences.

FINRA Sanctions Firm for M/F Self-Assessment Reporting

FINRA announced yesterday that it fined Oppenheimer one million dollars for producing "flawed, incomplete  and untimely data" in connection with the mutual fund breakpoint self-assessment a few years ago.  According to the press release, "FINRA found that on two occasions, June 11, 2003, and Nov. 20, 2003, Oppenheimer submitted inaccurate and incomplete data in response to NASD's request to perform a self-assessment of its mutual fund breakpoint discount practices. The firm knowingly, or at a minimum recklessly, submitted flawed data to NASD, failed to notify NASD that the data was flawed, failed to follow up to correct the firm's data and failed to timely submit accurate data to NASD."

In addition to the million dollar fine, Oppenheimer will have to retain an independent consultant to review certain of its procedures for dealing with regulatory requests, and to conduct internal audits covering regulatory responses and provide reports of its findings to FINRA for six quarters.

I think you can recognize the lessons to be learned here.

FINRA unveils small-firm emergency partner program

FINRA earlier this month unveiled a new initiative, the small firm emergency partner program.  Under this program, similar, but geographically separate firms could be "partners" in the case that one firm had to cease business due to a disaster or other business interruption.  The partnering firm,using the same clearing firm, could help service clients while the firm gets back up and running.  Of course, participation in this program is purely voluntarily, but it seems that this could be of help to some firms as they continue to develop their BCP.  FINRA has also rolled out a new podcast regarding this program, click on the link in the post above and follow the link from there.

FINRA Fines UBS for Late Reporting

FINRA today announced that it fined UBS Financial Services $370,000 for late reporting of matters on Forms U-4 and U-5.  Timely reporting has been a somewhat hot - or at least lukewarm - topic over the past several years, and I suspect it will stay that way.

The Curtain Call for "B" Shares?

Investment News had an article  yesterday about the massive decrease of "B" share mutual fund positions.  The article - worth a quick read - highlighted the demise of the share class since the regulatory activity intensified over the past many years.  One commentator predicted the demise of the "B" share within five years, and another pointed to its status as a dinosaur.  We think that most regulatory activity is over with, in this area, unless something egregious occurs, but firms should still ensure that they have adequate procedures in place to prevent the so-called B share abuses.

Are the winds shifting on the regulatory front? Small firms, this one's for you.

On October 11th, Mary Schapiro addressed the audience at FIRNA's Fall Securities Conference in Arizona.  The text of her speech can be found here.  In her speech, she discussed the continuing progress of merging NYSE Regulation and NASD and gave an update on how things are going there.  She also discussed some potential ramifications as they continue to complete the process and create a unified organization.

Importantly, Schapiro noted that FINRA is looking at whether it is possible to take a more principles-based approach to regulation (meaning that conduct is governed by a more broad set of principles as opposed to a rules-based system, where more numerous rules define more precisely what is prohibited).  And, she noted that as they determine how to combine the NYSE and NASD Rules, they are considering whether each rule is needed, and whether such rules might be placed on a tiered approach in recognition of the differences in firms based on size and business models.  She provided examples of the diversity in revenues between firms, as well as the diversity in types of business - full-service firms, M&A boutiques, mutual fund brokers only, etc. 

For the last several years, many (primarily smaller) firms have been increasingly vocal about their belief that smaller firms should not be subject to onerous regulations that really don't apply to their business models, or to have a tiered system of rules and regulations.  Folks, it seems that now might be the time for those who have been vocal (and those who have not) to get involved, get plugged in, and to help shape the things to come.  Remember, it is the people on the court who win or lose the game, not those sitting on their hands in the stands. 

Sometimes You Gotta Fight (or "The Litigation Discount")

Sometimes you just gotta stand up and fight, and here's a recent case I believe stands for that proposition.  FINRA recently announced an Office of Hearing Officers disciplinary decision involving a former UBS broker who claimed that five of his clients were disabled to avoid the clients paying a CDSC (contingent deferred sales charge) to sell out of their "B" share mutual fund positions.  The Decision can be found here.

Now what this broker did was certainly not right.  But, he apparently did it to serve his clients rather than for a benefit or personal gain.  In fact, the hearing panel found that he did not stand to benefit directly or indirectly from his actions, though he knew what he was doing was wrong.  The Hearing Panel found that in making this false representation that his clients were disabled to avoid the CDSC charge, the broker violated NASD Rule 2110, and by causing the firm's books and records to be inaccurate in that respect, also violated Rules 3110 and 2110.

Though the decision does not give details into the settlement demands of NASD (n/k/a FINRA) it does report that Enforcement requested that the panel suspend the broker from the industry for two years, and fine him $5,000 because his conduct was "egregious."  The hearing panel found the misconduct to be serious and worthy of a significant sanction, but not as significant as that sought by Enforcement.  Instead, the hearing panel ordered that the broker be suspended in all capacities for one year, pay a $5,000 fine, and requalify by examination (meaning that he would have to take his Series 7 exam (or whatever he held) over again.

So what's the take-away point on this.  To me, its that smart firms and brokers should recognize that sometimes you gotta stand and fight, even when there is no dispute as to the rule violations.  Sometimes its OK to refuse Enforcement's settlement demands and roll the dice as this broker did and try to come out better on sanctions.  Of course, each case is different and settling vs. litigating should be seriously considered and the costs, risks and rewards of each choice weighed carefully before any decision is made. 

There is No Free Lunch

OK, I've been sitting on this for a bit posting about other things lately.  But, I put this aside in the stack of things to get to, and its time has come.  Last month, the SEC and other regulators, in connection with the seniors summit, issued a press release on the results of their examinations regarding investment seminars.  According to the release, the examinations uncovered "widespread problems" and "perils for older investors."  You can read for yourself and determine the severity of the problem, but the findings by the regulators should be reviewed, particularly if your firm has brokers who use the free lunch or dinner seminars. 

According to the release, during the year-long examination by SEC, FINRA and state securities regulators reviewed 110 firms and branch offices that sponsored sales seminars offering free lunches to lure attendees.  The key findings were:

* 100% of the seminars were sales presentations
* 59% reflected a supervisory problem as many examinations found that firms had poorly supervised the         presentations including not reviewing the presentation or materials.
* 50% had exaggerated or misleading claims
* 23% involved the possibility of unsuitable recommendations

The takeaway is simple.  These types of seminars have been on the regulators' radar for awhile now, and will obviously continue to be there.  Firms should review their procedures in this area and make sure that they are reasonably supervising brokers presenting these seminars and should thoroughly review all materials for them. 

The SEC Speaks - Unofficially, Of Course

Last Friday I attended that Securities Litigation and Regulatory Practice Seminar sponsored by the Institute of Continuing Legal Education inf Georgia.  The program featured panelists discussing current activities in securities enforcement and litigation.  The opening address was presented by Katherine Addleman, the relatively new Regional Director for the SEC here in Atlanta. 

After the usual and customary disclaimer that SEC staff do not speak for the SEC nor the commissioners, Ms. Addleman discussed some troubling trends from recent examinations as well as some enforcement priorities in the Atlanta office.  As to troubling trends, Addleman identified three: 1) financial integrity problems; 2) fraud and abuse regarding senior citizens - With respect to the senior citizen abuse, Addleman noted that these problems are not the old school ponzi schemes or boiler room operations, but oftentimes deal with ore complex plans and advice, including recommendations to liquidate traditional investments and even tap into home equity to invest in unsuitable products.  She also noted that the SEC is looking at seminars aimed towards seniors offering investment advice, and also uneconomical fee arrangements, including wrap fees, that are not appropriate for seniors who trade infrequently; and 3) deception to SEC examiners.  Here, Addleman noted that recent criminal charges have been brought in this area for material false representations to SEC examiners.  She detailed one particular case involving a firm in Memphis where the CCO created a revised code of ethics in response to an SEC examiner's inquiry, and encouraged others at the firm to backdate other documents. 

As to Atlanta enforcement priorities, Addleman noted that the SEC continues to focus on insider trading abuses by investment professionals who come into insider information and trade on that, options backdating, pump & dump schemes, as well as financial accounting fraud, and fraud in connection with small offerings. 

SEC Sanctions Morgan Stanley For Confirmation Violations

In an action announced today, the SEC sanctioned Morgan Stanley & Co. (the successor to Morgan Stanley DW, Inc.) for what the SEC termed as "willful" violations of SEC Rule 10b-10 and MSRB Rule G-15 in connection to disclosures on transaction confirmations from 2000-2006.  Pursuant to the Order  - that Morgan Stanley consented to - the firm is censured and ordered to pay a civil penalty of $7.5 Million.  The firm must also retain an independent consultant to review this area and make recommendations pursuant to specific requirements in the Order.