The Beck Law Firm, LLC Blog

Review of FINRA Disciplinary Actions - January 2011

FINRA's disciplinary actions reported for January 2011 are online.  This month's disclosures contain many of the typical cases we generally see such as outside business activities, Form U4 issues, suitability, conversion and selling away.  There were also several cases relating to AML (anti-money laundering) rules, taken against both firms and responsible individuals.  

In addition to these "routine" types of actions, a few stood out.  In a case against one firm and its CCO, FINRA censured the firm and ordered it to pay restitution of $218,400, and suspended the CCO for six months as a principal and fined him $5,000, based on findings that the firm failed to have reasonable grounds to believe a private placement was suitable for any customer, and failed to conduct adequate due diligence of the offering.  In another case, a principal of a firm was barred from the industry based on findings that he recommended, sold and approved sales of an offering to customers, without conducting adequate due diligence and without a reasonable basis to believe it was suitable, and without enforcing the firm's procedures relating to the offering.  

The area of due diligence in private offerings remains a big concern for the regulators, in light of many private offerings that have failed recently (Medical Capital and Provident Royalties to name a few).  And, firms that were involved in those issues are being named in arbitration and civil suits as well.  Therefore, if your firm is participating in private offerings, ensuring that appropriate due diligence is completed is critical. 

SEC Staff Study on Investment Advisers and Broker-Dealers

The SEC staff has released its report on investment advisers and broker-dealers as called for in the Dodd-Frank Act.  The study is available here on the SEC's website.  In the study, the SEC staff recommends that the Commission and Congress essentially do two things: 1) impose a uniform fiduciary standard on broker-dealers and RIAs, and 2) harmonize regulations for these two industries.  

Two Commissioners (Casey and Paredes) issued their own statement in connection with the publication of this staff study.  In their statement, the Commissioners argue that the study does not adequately justify the staff's recommendations and note that it does not identify problems to be addressed by the recommendations, or the risks in adopting such recommendations.  The Commissioners assert that they were opposed to the release of the study, and do not believe that this study fulfills the mandate for a study on this issue under Dodd-Frank.  

SEC Commissioner Walter Releases Own Statement on Adviser Examinations

Yesterday I blogged about the SEC's release of a long-awaited report to Congress on options for enhancing examinations of registered investment advisers pursuant to the Dodd-Frank Act (you can find a link to the staff's report at the link above).  In the report, the Commissioners expressed no opinion and made no recommendation, but released the staff report to Congress outlining three possible options for improving and enhancing oversight of RIAs.  With the study, Commissioner Elisse Walter issued her own statement on the study.

Ms. Walter's statement notes that she's disappointed with the result of the study, and felt compelled to issue her own statement.  She writes that she wants Congress to know that the current resource problem at the SEC is severe, it will get worse, and that a solution is needed now.  She explains that the average investment adviser will be examined once every 11 years, and that as such, the SEC cannot fulfill its examination mandate.  She then walks through the resources likely needed to increase the exam frequency and explains that to raise the exam frequency to the average of an SRO such as FINRA, that the SEC's OCIE division (Office of Compliance Inspections and Examinations) would need to add more than 2,000 examiners (the whole SEC currently has about 4,000 full-time employees now).  

Ms. Walter notes that the option of relying on industry funding seems most likely to provide a solution, but explains that all three proposed options have pros and cons.  Nevertheless, she writes that, "Unfortunately, the study’s description and weighing of the alternatives is far from balanced or objective."  She then highlights many benefits of the SRO model that I presume she believed were not sufficiently articulated in the staff study.  Walter makes it clear that she believes that the SRO model has advantages, and has worked well with the SEC's oversight for 70+ years (in the broker-dealer industry).  

Ms. Walter's statement makes it more clear than the staff study that the SEC's resources are severely limited, in her view, preventing the SEC from fulfilling it's role relating to oversight of RIAs as she writes, "We need to address this issue now.  It must not be relegated to another day—as has happened in the past.  For far too long, in the investment advisory area, the Commission has been unable to perform its responsibilities adequately to fulfill its mission as the investor’s advocate, and investment advisory clients have not been adequately protected.  This must change."  

It seems to me that Ms. Walter is certainly a proponent of the SRO model for RIA oversight.  We'll see what, if anything, Congress does.

SEC Staff Releases Report on Examinations of RIAs

  

The SEC, pursuant to Section 914 of the Dodd-Frank Wall Street Reform and Consumer Protection Act, yesterdaypresented its report to Congress entitled "Study on Enhancing Investment Adviser Examinations."

 This report, required by the Dodd-Frank Act, called for the SEC to review its examination program for investment advisers and to report back to Congress with recommendations for enhancing the examination program.  Interestingly, the report does not make a specific recommendation of any particular enhancement for Congress to adopt.  Instead, if offers up three ideas for Congress to consider.  And, the report is that of the staff, with Commission authorization to submit, but the study's views have not been specifically adopted by the Commissioners. 

 Here are some highlights from the report (you can see the full report by clicking on the link above):

*  The SEC staff believes that it will likely not have sufficient capacity in the near or long-tern to conduct effective examinations of RIAs with adequate frequency.

*  The staff notes that between October 2004 to September 2010, the number of RIAs increased 38.5%.  The staff believes that the number of RIAs will continue to increase.

*  During that same period of time, the number of staff from the OCIE department (Office of Compliance, Inspections and Examinations - the group within the SEC that examines RIAs) decreased 3.6%.

*  The number of examinations of RIAs examined over the last six years also decreased, from 1,543 exams in 2004 to 1,083 in 2010 (a decrease of 29.8%). 

The staff recommends that Congress consider these three options:

1)  Impose user fees on SEC registered advisers to fund their examinations.

2) Authorize one or more self-regulatory organizations (such as FINRA) to examine RIAs, subject to SEC oversight.

3)  Authorize FINRA to examine dual registrants (those firms registered both as a broker-dealer and as an RIA) for compliance with the Advisers Act.

 The report now goes to Congress, for it to consider. 

So what do you think?  What option should Congress choose - or what other option would you recommend (or none at all)?  Leave a comment (comments are moderated - see comment policy on the left-side of the screen).  

FINRA Stats for 2010: Member Firms Down, Enforcement Up

I took a quick look at FINRA's statistics page this morning, looking for some stat comparisons for 2010 vs. 2009.  Here's a few statistics that may or may not be significant.

    * Member Firms continued to decrease in 2010.  FINRA shows 4,578 member firms for 2010, a decline     from 4,720 firms in 2009, and from 5,029 in 2006.

    * Investor complaints were down in 2010 compared to 2009, with FINRA receiving 3,208 investor     complaints in 2010 compared for 5,067 for 2009.

     * New Enforcement cases were up in 2010 compared to 2009.  FINRA initiated 1,310 disciplinary actions     in 2010 compared to 1,158 in 2009.

So what do these numbers tell us?  My observations are these:  The broker-dealer form of business is still declining, albeit slowly, and I believe that there are likely more folks starting RIAs than BDs now.  Given the historical regulation of RIAs to BDs that makes sense and is understandable.  However, with possible legislation from Congress that might change RIA regulation, we'll have to watch and see how that effects the numbers of entities in both areas.  Secondly, investor complaints are down due to the market trending up in 2010.  The complaints about losses incurred from the crash have likely been flushed out by now.  Finally, Enforcement cases will be on the rise as regulators seek to prove to the public, and to Congress, that they are enforcing rules and regulations and are not asleep at the switch.  I expect we will continue to see regulators operate with an increased sense of zeal throughout 2011.

When to Engage a Securities Lawyer for a Regulatory Investigation

Lately, I've gotten more than the usual number of calls from brokers thinking that they might need legal help now that regulators have told them that they intend to bring a disciplinary action against the broker.  For whatever reason, the brokers had gone it on their own throughout the course of the regulatory investigation (including written responses, depositions, etc.), thinking that everything would be fine.    Then, wham!, the regulators drop a "Wells" letter on them, informing the broker that they are going to move forward and seek to sanction the broker.  At that point, while counsel can help, sometimes it is too late.  So for today's post, I'll address the question of when is the time to consider engaging counsel in a regulatory examination.

New FINRA Outside Business Activities Rule in Effect - Part II (Supervision)

In my last post, I covered the adoption of FINRA Rule 3270 as the SRO's new rule on outside business activities, replacing the former NASD Rule 3030 and NYSE Rule 346.  I addressed the new features of the rule, and discussed a broker's role regarding disclosure of outside business activities.  But what about the broker-dealer firm itself - what responsibilities does it have?  Let's take a look.