BD Law Blog - by Georgia Securities Lawyer Joel Beck

Have you Prepared your 2010 Compliance Plan Yet?

February will be over before we know it.  And I suspect that soon we'll be looking back wondering how 2010 came to an end so quick.  With that in mind, Compliance Officers should make sure that they are preparing their compliance plan for 2010 before its too late.  In addition to ensuring that WSPS remain current and are followed, CCOs and staff need to focus on he firm's annual compliance meeting, continuing education (firm and regulatory elements as needed), AML training, new representative and employee compliance-oriented training, etc.  Plan now, get things on the calendar, and work the plan. 

Firms that need a speaker for their annual compliance meeting or other broker meetings, can contact Joel Beck of The Beck Law Firm, LLC.  As a former NASD enforcement lawyer, and now in private practice, Joel can share with your representatives the "Dumb Things Brokers Do" along with practical, real-world ways to minimize complaints, regulatory actions and arbitration claims, while reinforcing the need to follow the firm's compliance guidelines and policies.  To book Joel for a speaking event, contact him at 678-344-5342 today. 

Georgia Supreme Court recognizes "Holder" claims, and Fiduciary duties

On February 8, 2010, the Supreme Court of Georgia issued its opinion in Holmes e al. v. Grubman et al., a case brought by a group of former WorldCom, Inc. shareholders against Salomon Smith Barney & Co (Citigroup Global Markets, Inc.) and its financial analyst Jack Grubman.  This case was brought in federal court and was later appealed.  During the appeal process, the United States Court of Appeals for the Second Circuit certified three questions to the Supreme Court of Georgia.  The three questions related to 1) whether Georgia common law recognizes holder claims (holder claims relate to advice given to hold onto a security (to refrain from selling it) with such advice based on some type of misrepresentation or omission of material fact), 2) a question relating to adequacy of pleaded fraud under Georgia law based on claims for misrepresentations or omissions of material facts in connection with the purchase of a security, and 3) does a brokerage firm owe a fiduciary duty to account holders of non-discretionary brokerage accounts. 

The Court held that Georgia does recognize holder claims, adding that such a claim requires the"typical fraud context to be one in which the parties knew each other and the alleged misrepresentations occurred through direct communication."   In addition, the Court noted that there must be specific reliance on the defendant's misrepresentation.  The Court also stated that holder claims could be considered in negligent misrepresentation cases (as opposed to fraud cases). 

With respect to the third question, the fiduciary question, the Court agreed with federal precedent that a broker has limited fiduciary duties to customers who have non-discretionary account, with such duties requiring the broker to place trades only after receiving authorization from the client, and the duty to not misrepresent facts that are material to the transaction.  The Court found, however, that the fiduciary duties extend further. finding that "The broker will generally have a heightened duty, even to the holder of a non-discretionary account, when recommending an investment which the holder has previously rejected or as to which the broker has a conflict of interest."

SEC Approves New Money Market Rules

At the end of January, the SEC approved new rules relating to money market funds in response to the recent financial crisis, including the Reserve Primary Fund's breaking the buck in September 2008.

According to the SEC's release, the new rules, which are not yet final and have not been made available to the pubic, will focus on a few areas:

    * Improved liquidity:  the rules will have both daily and weekly liquidity requirements for the funds, with rules regarding maturities as well as restrictions from investing in illiquid securities.

    *Credit quality: the rules will place restrictions on a fund's ability to purchase lower credit quality securities.

    * "Know Your Investor" Procedures: The rules will require fund manager's to hold liquid securities to meet expected or foreseeable redemptions.  That will require funds to identify investors "whose redemption requests may pose risks for funds." 

In addition to these, the rules will cover other areas, including certain required disclosures to publish holdings to the fund's website.  

The rules become effective 60 days after publication in the Federal Register.  Compliance with some rules may be phased in over time. 

AML Again the Subject of Regulatory Action

This week, FINRA announced two recent disciplinary actions against firms related to anti-money laundering (AML) rule violations.  These cases are remarkable for a few things: the scope of the alleged failures, and the size of the sanctions. 

According to the press release, FINRA fined Pension Financial Services, a clearing firm, $450,000.  The allegations were based on alleged failures to "establish and implement an adequate [AML] program to detect and trigger reporting of suspicious transactions," as required by the BSA and FINRA rules.  FINRA also fined Pinnacle Capital Markets $300,000 for the same basic violations.

The press release notes that the issues uncovered at Penson occurred from October 2003 to May 2008.  From the wording of the release, it may be that the deficiencies were caused by the firm's failure to devote sufficient resources to the AML compliance program.  The issues with Pinnacle, occurred from January 2006 t September 2009, involved the firm failing to have procedures to verify the identities of foreign sub-account holders. 

AML has been a regulatory hot-topic since the rules were established.  Firms should by now recognize that this will continue to be a focus of regulatory scrutiny, and that it is in their best interests to evaluate and modify as needed, its AML program to ensure compliance with the rules.  The stakes for failing to do so are increasing.

FINRA Webinar on Social Media Issues

Following up on the last post, FINRA has announced a webinar on "Compliance Considerations for Social Networking Sites."  The live webinar took place today, and is already over (it apparently was originally scheduled for mid-March).  But, it can be accessed online here.  I haven't seen it yet, and therefore can't comment on it, but I can say this:  you can expect, given FINRA's recent Regulatory Notice on supervision of social media use, that this topic will be explored by the regulators and made part of regulatory examinations beginning in the near future.  Forewarned is forearmed.