BD Law Blog - by Georgia Securities Lawyer Joel Beck

FINRA Expels Provident Asset Management

FINRA announced today that it has expelled Provident Asset Management, a Dallas, TX, broker-dealer affiliated with Provident Royalties, LLC, which has been alleged to have operated a massive ponzi scheme.  The release notes that Provident settled the matter with FINRA without admitting or denying that it violated any rules.  Based on this release, it does not appear that any individuals were also named in the action.  It is possible that the regulator may pursue charges against individuals at a later date. 

FINRA also noted the increased regulatory reviews of broker-dealers involved in private placements.  According to the release, "FINRA is looking at firms' compliance with suitability, supervision and advertising rules, as well as potential instances of fraud. The initiative was undertaken in response to an increase in investor complaints involving private placements and Securities and Exchange Commission actions halting sales of certain private placement offerings."

Court Holds FINRA (f/k/a NASD) is Immune From Suit

This week a federal court judge in New York dismissed a lawsuit by two broker-dealers against NASD (now FINRA) relating to NASD communications with member firms in advance of the merger of NASD and NYSE Regulation.  Investment News journalist Dan Jamieson reported the judge as stating that "SROs and their officers are absolutely immune from private damages suits challenging official conduct performed within the scope of their regulatory functions." 

The plaintiffs argued that the situation at issue was not a regulatory function of the NASD, but was a business governance matter.  That seems like a logical position to take, and it looks to me like my colleague Mark Astarita (author of seclaw.com) agrees as well, although the Court rejected that argument, siding with FINRA that the functions were regulatory in nature.    And I think we both agree that it is interesting, to say the least, that NASD (now FINRA) can claim that it is not a governmental entity when it suits them (such as when investigating firms and stockbrokers and not providing them with protections of the 5th amendment right against self-incrimination), and then claim that it is essentially a quasi-governmental or governmental organization or actor when it is in their interest (when faced with lawsuits and seeking immunity).  

Most of the time the courts don't let you have it both ways.  At some point, such treatment much stop. 

FINRA Details 2010 Exam Priorities

In an annual letter to member firms, the FINRA departments of Member Regulation, Market Regulation and Enforcement outlined some of their 2010 examination priorities, as well as updated firms on other news and events.  The letter is worth a read by all compliance staff and higher level managers, if not all principals.  While many of the items are not new, its a good reminder of what the regulators believe are still the "hot button" items, and what things they'll certainly be reviewing during examinations of broker-dealers. 

Making the 2010 list are: fraud detection ( ensuring adequate procedures and controls for preventing fraud); information barriers (prevention of insider trading and misuse of other information); variable annuities (particularly recommendations to switch from one to another); protection of customer information/ firm's internal IT security; anti-money laundering; business continuity planning; and branch office supervision.  Several other areas focusing on trading issues as well as valuation made the list as well.

Forewarned is forearmed.