BD Law Blog - by Georgia Securities Lawyer Joel Beck

SEC sanctions First Southwest Co. in Auction-rate case

On May 27th, the SEC announced that it has sanctioned First Southwest Company in connection with its participation in certain auction-rate securities auctions.  The action involved First Southwest's role as an underwriter and manager in certain auctions from January 2003 to June 2004.  The SEC has alleged that the company, without adequate disclosure, bid in certain auctions for its own account to prevent auctions from failing, and in other cases, bid, without adequate disclosure, to prevent auctions from being all-hold auctions.  The SEC asserts that these actions could have affected the clearing rate in certain instances, and found that the conduct violated Section 17(a)(2) of the Securities Act. The SEC censured the firm, ordered it to cease and desist from future violations, and fined it $150,000.

FINRA Discusses How to Improve Examination Results

FINRA recently issued guidance to broker-dealers firms on how to improve exam results.  The guidance, which recites their current examination priorities (that we shared with you previously here), then details many common deficiencies found by FINRA examiners during their routine examinations of broker-dealers. 

FINRA's efforts here are good, I think.  By letting firms know what they're seeing, and giving firms a heads-up on items for which they are inspecting, FINRA is attempting to make sure that firms understand the problems they see, as well as offering possible solutions for the issues.  Bottom line, though, it comes down to the firm having a good compliance and supervisory system in place, coupled with adequate resources to do the job.  Compliance folks should ensure they read this article. 

States Propose Rules on Senior Adviser Designations

Jay Fishman, over at Jim Hamilton's World of Securities Regulation posted this week about three state securities commissioners that are proposing or adopting rules relating to the use of "professional designations" when marketing services to seniors by broker-dealer and investment adviser representatives.  The states of Washington, Missouri and Virginia are in the process of adopting or implementing such rules (yeah, I know Virginia is a commonwealth.  No need to email me about that.)  Under the new rules, only those designations awarded by a nationally recognized and accredited institution - through a course of training - will be allowed.  The rules would therefore eliminate many designations that are considered by some to be less than credible, or those that require no training or recurrent training. 

This type of regulation will continue to be at the forefront, as NASAA, the SEC and FINRA have been engaged in exams relating to sales and marketing efforts geared towards seniors, as well as supervision of sales of seniors.  We may expect to see similar rule-making activity by other states in the months to come. A few months ago, I posted about FINRA's online tool for learning about professional designations.  As rule-making efforts continue in this area, compliance folks will want to be sure to check out the designations being used by their reps. 

FINRA Sanctions Firms for OATS and Trade Reporting Violations

FINRA recently announced sanctions against three firms for OATS reporting and supervision violations.  According to FINRA's release, Tradestation Securities, Inc. was fined $750,000 for not reporting 23.5 million reportable order events, E*Trade Securities, LLC was fined $500,000 for failing to report new order reports and route reports, and CIBC World Markets Corp. was fined $350,000 for failing to report to OATS over 28 million orders generated by an affiliate.  FINRA found that none of the three firms had in place adequatee supervsory systems regarding OATS reporting compliance.  Of course, in settling the charges, none of the firms admitted or denied the allegations.  See the press release here.

Separately, I noted in reviewing the Disciplinary Actions reported for May 2008 released by FINRA that several cases reported involved OATS, TRACE and trade reporting violations.  If you remember from an earlier post regarding FINRA's Examination Priorities for 2008, OATS compliance gets put on the list. 

If your firm hasn't reviewed its compliance controls in this area, what are you waiting for?

Amended Options Disclosure Document Approved

On April 30th, the SEC approved an amendment to the Options Disclosure Document (ODD).  Under FINRA Rules (NASD Rule 2860(b)(11), each broker-dealer is required to give a copy of the current ODD to each customer approved to trade options either prior to, or at the time of such approval.  Further, each firm is required to deliver any amendments to the ODD to each customer to whom they delivered a copy of the ODD, and whose account is approved for trading options.   

For more information, see FINRA's May 15, 2008 Information Notice.

FINRA Proposes Revisions to Rulebook

FINRA has proposed revisions to the current NASD and NYSE Rules as part of its consolidated rulebook initiative.  To that end, it has released 4 new Regulatory Notices dealing with rule changes.  FINRA is seeking comments on these proposed changes through June 13th. 

Regulatory Notice 08-23 seeks comments on proposed changes to the financial responsibility rules.

Regulatory Notice 08-24 seeks comments on proposed changes to supervision and supervisory control rules.

Regulatory Notice 08-25 seeks comments on the books and records rules.

Regulatory Notice 08-26 seeks comments on investor education and protection rules.

Some of the proposed rule changes are simply to modify rule numbers and better organize the rules, while some changes are more substantive.  It will take some time to review and digest these, but legal and compliance folks should take a careful look and firms should consider filing their comments with FINRA regarding these proposals. 

Post a comment here on BDLawBlog - What do you think are the most significant changes?

FINRA Launches Podcast on Supervisory Proprietary Trading Accounts

FINRA has debuted a podcast on deteting unauthorized propritary trading.  During the podcast, FINRA staff discuss best practices for protecting proprietary accounts from unauthorized trading by rogue traders, and discuss red flags in this area.  Proprietary accounts are always reviewed by the regulators during the course of routine exams as they can turn regulators onto many potential violations including trading ahead of customer orders, conflicts, disclosures, and more.   At about eight to nine minutes in length, this might be a good investment of your time if you're responsible for supervision or compliance functions related to proprietary trading accounts. 

FINRA Sanctions GunnAllen Financial and Supervisor

FINRA announced today that it settled an examination involving GunnAllen Financial and Kelley McMahon, a supervisor at the firm.  FINRA fined the firm $750,000 for its role in a trade-allocation scheme by its former head trader, Alexis Rivera, as well as for various violations including anti-money laundering compliance, reporting, supervisory issues, and record-keeping issues. 

According to FINRA, the trade-allocation scheme occurred in 2002-2003 and involved Rivera cherry-picking profitable trades and placing them in his wife's brokerage account as opposed to the accounts of firm customers.  In doing so, Rivera received $270,000 in improper profits, FINRA said.  Rivera was barred by FINRA (then NASD) in December 2006.

The notice disclosed that the firm had issues in its investment banking department such as not listing stocks on its restricted and watch lists when appropriate.  Further, the firm was cited for not preserving emails and instant messages, and failing to implement an adequate AML compliance program.  McMahan, Rivera's former supervisor, was suspended in principal capacities for six months, and fined $25,000, jointly and severally with the firm.

At this point, firms should be well aware of the big ticket items such as AML compliance, email preservation, and investment banking disclosures and compliance.  Violations in these areas now command a high price, as we can see here.

FINRA's NAC Reverses Panel, Reduces Bar to $5,000 Fine.

In the case of Carl Martin Trevisan, FINRA's National Adjudicatory Council last week issued a decision eliminating a bar from the industry imposed by a hearing panel, and instead imposed a fine of $5,000 on Trevisan.  The case related to Trevisan's conduct when he was a representative of Citigroup Global Markets in late 20001 and early 2002.  The Complaint, brought by the NASD Enforcement Department (now FINRA) principally alleged that Trevisan falsified customer records, specifcally, by representing that customers requesting mutual fund redemptions were entitled to waivers ofCDSC based on disability, when the customers were not disabled. 

According to the Decision, Trevisan admitted to entering 31 inaccurate disability waivers for 14 customers.  He claimed that he sometimes completed hundreds of mutual fund redemptions in a day, and that he often did these without looking up from the keyboard to the monitor to verify the information he had input.  He conceded that his actions were sloppy, but argued that his actions were not intentional, and not deserving of a bar.  (The hearing panel had barred him for falsification of records and for lying under oath that he had made inadvertent mistakes).

The NAC held that the record was inadequate to support a finding that the broker had engaged "in the deliberate falsification of customer records."  In a first that I've seen, the NAC took official notice of the close location between the tab key and the numbers 1, 2 and 3 on a computer keyboard.

FINRA"s website is currently down.  I'll post a link to the Decision later today, if possible. 

UPDATE:  Here's the link - Trevisan Decision.

SEC Files Charges For Undisclosed Payments Re: Municipal Bonds

The SEC announced that it has filed charges against Larry Langford, the mayor of the city of Birmingham, AL, William Blount, and Blount Parrish & Co., Inc., a Montgomery, AL broker-dealer, and another individual.  The SEC's complaint alleges that at the time that Langford was the president of the county commission, he accepted more than $156,000 in undisclosed cash and benefits over two years. The SEC alleges that these payments were made by Blount and his firm, and were funneled through another individual.  In 2003 and 2004, according to the complaint, Blount Parrish participated in every Jefferson County municipal bond offering    The SEC charged Langford, Blount and Blount Parrish with violations of Section 17(a) of the Securities Act and Section 10(b) of the Exchange Act.  The firm and Blount were also charged with violations of section 15B of the Exchange Act, and MSRB Rules G017 and G-20.  The SEC Press Release  is online, as is the Complaint against the parties.