BD Law Blog - by Georgia Securities Lawyer Joel Beck

Welcome Investment Advisor Magazine Readers!

BDLawBlog.com is pleased to have been highlighted in this month's issue of Investment Advisor magazine (March edition, page 11)(InvestmentAdvisor.com).  Welcome, new readers, to the blog and to our conversation on legal and compliance issues in the broker-dealer and investment adviser world.  Be sure to sign up for our e-newsletter (on the left-hand side of the screen) to receive periodic emails with information that may interest you, and be sure to check back in from time to time to be sure to not miss anything.

US Supreme Court - Individual Investors Have Cause of Action When Fiduciary Breaches Obligations

Last week, the United States Supreme Court issued a decision in the case of LaRue v. De Wolff, Boberg & Associates, Inc. (No 06-856, 2/20/08)(You can find the slip opinion here). In this case, LaRue sued over a loss of about $150,000 or so caused when his 401(k) plan administrator failed to follow his instructions regarding investing his account.  The trial court granted the defendants judgment on the pleadings, and the court of appeals affirmed.  Last week, the Supreme Court reversed the decision, holding that under the ERISA laws, individual investors may sue a person who is a fiduciary to a plan who breaches those fiduciary duties.  Now, the case goes back to the trial court, as no trial has been conducted, and the parties may also talk about settling the matter since there is now a triable issue.  So what does this mean?  It means that fiduciaries need to take their fiduciary duties seriously.  Beyond that, the debate over who is a fiduciary continues as normal.

SEC Proposes Plain English Disclosure Brochure for Investment Advisers

Last week (Feb 13th) the SEC unveiled a proposal to require investment advisers provide a plain English narrative brochure disclosure to clients, as part of a revision to Part 2 the Form ADV.  This brochure would be distributed by teh SEC sponsored Investment Adviser Public Disclosure website. 

Currently, advisers provide information through a "check the box" type of disclosure system on the Form ADV.  The proposed requirement would require advisers to "provide clear, current and meaningful disclosure in narrative form."  The SEC's press release about this proposal can be found here.  And, if you're interested, the SEC will take public comments on the proposal. 

FINRA's Disciplinary Actions Reported for January

FINRA has published their disciplinary actions for January.  The report contains the typical run of the mill violations including Form U-4 failures to disclose, selling away, participating in undisclosed outside business activities, conversion of funds, etc.  But, two actions caught my eye with regards to supervision.  One of these cases in particular shows the need to respond to red flags and take action when management discovers a problem.

In FINRA Case 2006005565402, a broker-dealer submitted a Letter of Acceptance, Waiver and Consent and was censured and fined $50,000 based upon findings that "it failed to take appropriate and timely action to correct customer IRA adoption agreements after it was discovered that the firm's operations personnel had cut and pasted customers' signatures onto new adoption agreements from outdated ones."  Wow. if I read this correctly, firm management uncovered the situation and failed to respond - or chose to just do nothing.  Either way, the situation doesn't look good when the regulators step in.  Moreover, the damage to the firm's reputation could be significant. 

The other case that caught my eye, perhaps just because of its uniqueness (FINRA Case 2005003511201)involved a registered person (I presume a principal but the notice does not disclose the status) was suspended for 60 days and fined $5,000 after she delegated to a subordinate the responsibility of completing the computer-based Firm Element portion of the firm's continuing education program for other registered representatives.  The notice does not detail whether the regulator pursued action against the subordinate who carried out this directive.   

FINCEN Releases New Numbers on SARs

Yesterday, FINCEN issued its ninth issue of SAR Activity Review, which presents a compilation of information obtained from SAR filings, including those from the securities and futures industry.  The report covers the first six months of 2007.  During that time, the securities and futures industry fled 5,984 SARs, up from 3,913 for the same period in 2006.  Structuring of transactions and money laundering remained the largest reason for filing (48%).  FINCEN noted that the number of SARs filed relating to mortgage loan fraud was up by 35%, and that SARs filed with identify theft as the reason for the filing increased 104% over the same period of 2006.  FINCEN has published the report and exhibits online; you can find them here.

NASAA Calls for Removal of Industry Rep. in Arbitrations

Last week the North American Securities Administrators Association called on FINRA and the SEC to make changes to the securities arbitration system to "improve the fairness" of securities arbitration.  Their starting point for change is to remove the now mandatory industry representative from arbitration cases involving customers.

This call follows a report issued by the Securities Industry Conference on Arbitration on their study on perceptions of fairness of securities arbitration.  NASAA's press release and a link to the SICA report can be found online here.

FINCEN Issues Guidance on Foreign Correspondent Issues

On January 30th, FINCEN (the Financial Crimes Enforcement Network of the Department of the Treasury) issued guidance clarifying the implementing rules of Section 312 of the US Patriot Act.  This guidance, which can be found here, explains that a covered financial institution presenting a negotiable instrument to a foreign financial institution for payment does not establish a correspondent account with the foreign financial institution.  All AML compliance officers should review this new guidance.