BD Law Blog - by Georgia Securities Lawyer Joel Beck

FINRA Proposes New Suitability and Know Your Customer Rules

FINRA has proposed two new rules for inclusion in the consolidated rulebook.  These two rules, a suitability rule, and a know your customer rule, would replace the current NASD suitability rule and the NYSE KYC rule, respectively.  The text of the new rules, and FINRA's request for comment on them are contained in Regulatory Notice 09-25.  According to the notice, they are receiving comments until June 29th. 

 

FINRA and SEC Amend Rules for Forms U-4

FINRA announced today in Regulatory Notice 09-23 that the SEC has approved proposed changes for Forms U-4 and U-5, as well as rules relating to FINRA's BrokerCheck disclosure system.

There are a few changes to the forms, but it appears that the significant changes are these:

** New questions on the forms will require firms and brokers to report arbitration claims and litigation actions that involve sales practice allegations against a broker, even when the broker is not named as a party to the arbitration or litigation.  While new forms are apparently already on CRD now, the effective date for the new disclosure questions is November 14, 2009.

**  The new threshold for disclosure of reporting settlements of customer complaints will be $15,000, up from $10,000.  The effective date for this change is May 18, 2009.

Compliance and registration folks should thoroughly review this Regulatory Notice for information on when and how updates for Forms U-4 must be filed to respond to the new questions.

Highlights from FINRA Annual Conference (Part I)

As promised, here's some highlights from the FINRA Annual Conference May 7-8, 2009,  in Boston.

Litigation and Enforcement Case Trends - The day of this panel, FINRA announced enforcement actions against additional firms for violations relating to auction-rate securities. In these cases, FINRA Enforcement reps. said that Enforcement has attempted to be creative in fashioning remedies as opposed to just imposing fines.  FINRA reps. also talked about a commitment to customer restitution and are taking that seriously, evidenced by some recent disciplinary actions.  They noted that they'll continue to try to do this in other areas as well.  Also highlighted were cases involving sales to senor citizens, with the panelists noting that firms must be aware of suitability concerns, including "stage of life" needs, as well as with sales practices focused towards early retirement issues.  Panelists also noted the rise in cases involving complex products (such as a recent case against 5/3 Securities for unsuitable variable annuity transactions). 

Back From the FINRA Annual Conference

I'm back from Boston for last week's FINRA Annual Conference.  I attended panel sessions on sustaining a broker-dealer compliance program, litigation and enforcement case trends, identifying and addressing issues surrounding diminished capacity in senior citizens, arbitration case trends, and cyberfraud.  I'll give the highlights from those in future posts.

I also heard Rep. Barney Frank's keynote address on Friday.  In his speech, Rep. Frank, who serves as the Chairman of the House Financial Services Committee, noted that Congress appears to be ready to soon give the SEC authority to regulate hedge funds.  And, regarding regulators, he expects a new systemic risk regulator to be created to cover all financial institutions regardless of their designation as a bank, broker-dealer, etc.  It also seemed as if he advocated the creation of a new entity whose job should be protection of the retail investor, as well as advocating for legislation to deal with how existing regulators work together.  And, he seemed to indicate that some of this legislation may be voted on in June of this year (next month).  Responding to questions from the audience, Rep. Frank opined that the likelihood of a federal regulator for the insurance industry was 50/50 - (but that its unlikely that P&C insurance would be federally regulated at all).  He commented that there was pressure from Europe for a federal regulator, but that the situation is very political and its an uphill charge.  Look for posts later this week with other highlights from the conference. 

SEC Sanctions Royal Alliance Associates, Inc. for Supervision

Last week, the SEC sanctioned brokerage firm Royal Alliance Associates, Inc. based on alleged supervision deficiencies in connection with the firm's supervision of former broker David McMillan.  McMillan, the SEC states, operated a ponzi scheme that defrauded 28 or so investors out of more than $3 Million.  In agreeing to a settlement of this matter, Royal Alliance was censured, ordered to pay disgorgement of $1, and ordered to pay a civil penalty of $500,000.  Royal Alliance is an "independent model" type of firm.  In this model, many brokers operate their own offices, instead of at a larger branch office of the firm, but are still subject to supervision by the brokerage firm. 

In the release from the SEC, the SEC essentially asserts that the firm failed to supervise in a few particular ways:  1) failure to establish procedures for review of operational bank records of satellite offices, 2) failure to have reasonable systems in place to implement procedures for conducting exams of satellite offices and didn't complete all of the exams and review findings, and 3) failure to respond to red flags, such as investigating how a broker was funding the operation of his satellite office when his commissions were declining.  According to the SEC, these deficiencies could have led to the detection of the broker's fraudulent conduct.

Independent model firms should take note of the SEC's findings in this matter and review those against their own procedures and controls.  You can expect that the regulators will be looking at supervision under the standards articulated in this release, and you can also expect that claimant's lawyers will be well aware of this release as well.