FINRA

Securities Roundup: Venecredit Fined $25K for Working with Foreign Finders, Ex-Merrill Lynch/LPL Financial Rep. Faces Fraud Charges, & BrokersXpress Broker is Suspended Over Private Placement-Related Misconduct

Published on: March 5, 2013 | by Shepherd Smith Edwards & Kantas, LLP

Venecredit Fined $25K for Working with Foreign Finders to Generate Retail Investor Business

According to the Financial Industry Regulatory Authority, Venecredit Securities must pay a $25,000 fine for allegedly using foreign finders to get new retail investor business. The financial firm has now been censured for two years.

The SRO says that the foreign finders served as the primary contacts between Venecredit and the clients and had access to account information via the clearing firm’s platform. These finders worked for a foreign brokerage firm that shares directors and officers with Venecredit and its wholly owned entity. FINRA contends that not only did Venecredit fail to create and put into effect proper supervisory measures that would have allowed it to look at customer complaints about the employees at the foreign brokerage firm, but also it failed to keep electronic correspondence from both the foreign traders and the personal email accounts of its registered representatives.

ING Groep NV Broker-Dealers Fined $1.2M by FINRA Over Not Retaining Millions of E-Mails

Published on: February 21, 2013 | by Shepherd Smith Edwards & Kantas, LLP

FINRA is fining Directed Services LLC, ING Investment Advisors LLC, ING Financial Advisers LLC, ING America Equities Inc. and ING Financial Partners Inc. $1.2M for failing to keep or review million of email correspondence between ’04 and ’08. The five broker-dealers are affiliates of ING Groep NV (ING, INGA.AE).

According to ING Groep, the five ING units self-reported the problem to FINRA and that no customers were affected. In the wake of a thorough internal examination, the ING affiliates have taken significant steps to better its supervisory practices and email retention.

Per its findings, FINRA says the broker-dealers violated FINRA rules and federal provisions related to the retention of records when they did not properly configure the email accounts of staff to make sure correspondence was kept and reviewed. Also, because software wasn’t properly configured, close to 6 million emails that were marked for review at a supervisory level were not reviewed.

FINRA Pulls Back on Regulating Registered Investment Advisers

Published on: February 19, 2013 | by Shepherd Smith Edwards & Kantas, LLP

According to Financial Industry Regulatory Authority Chief Executive and Chairman Richard Ketchum, the SRO is pulling back from its bid to regulate Regulating Registered Investment Advisers. This move comes after FINRA spent the last couple of years lobbing to become the main regulator for RIAs.

However, according to Ketchum, in the wake of the current political climate and changes in leadership during the 2012 election, he does not expect that the House of Representative Financial Services Committee will try to revamp the way RIAs are currently regulated, which is via the Securities and Exchange Commission. For advisers that did not want FINRA overseeing them, this is good news.

However, not all of those that were against the SRO taking over RIA regulation are convinced that FINRA has completely given up. Some are worried that the regulator intends to return to the issue at a later date.

Amendments Clarify FINRA’s Right to Look at Firm Records, Books

Published on: February 9, 2013 | by Shepherd Smith Edwards & Kantas, LLP

The Securities and Exchange Commission has approved rule amendments that provide greater clarity about the Financial Industry Regulatory Authority’s right to examine and copy the records and books of its member financial firms and associated persons. Per amended Rule 8210, staff and adjudicators are entitled to copy and inspect “data in the “possession, custody or control” of members and any others that the SRO has jurisdiction over. This amended rule becomes effective on February 25.

The amendments makes clear that the records and books are covered by rule 8210.The phrase “possession, custody or control” was added to including concept of the existing body of case law that defines these three terms they way that they are used in the Federal Rules of Civil Procedure’s Rule 34. The broker-dealer and associated persons relationship is also clarified so it is obvious that all aspects of that affiliation are subject to a Rule 8210 request.

The SEC has also approved amendments to FINRA arbitration codes. This will let arbitrators order member firms and associated persons to serve as witnesses or produce documents without being subject to the subpoena process. Additionally, the amendments added procedures for non-parties to contest subpoenas and for non-parties and parties to oppose arbitrator orders of production.

FINRA News Roudup: FINRA Unveils Telephone Mediation Pilot and Proposes A More Stringent Definition of Public Arbitrator

Published on: January 22, 2013 | by Shepherd Smith Edwards & Kantas, LLP

FINRA Unveils Telephone Mediation Pilot

The Financial Industry Regulatory Authority says it now has a pilot program that allows parties with simplified cases to choose reduced-fee or pro bono phone mediation. Volunteers with arbitration claims involving $50,000 or under are welcome to participate. In cases involving damage claims of $25,000 or under, mediators would work on a pro bono basis. For cases between $25,001 and $50,000, there would be a reduced fee mediation rate of $50/hour. No administrative fees will be charged.

Benefits to this phone mediation pilot include getting rid of in-person mediation preparation and travel costs, as well as more flexibility and convenience. The pilot was launched on January 15.

FINRA To Take Closer Look at High-Frequency and Algorithmic Trading, Will Continue to Monitor Private Placements, Complex Products, and Other Areas

Published on: January 10, 2013 | by Shepherd Smith Edwards & Kantas, LLP

This month, the Financial Industry Regulatory Authority announced that it would be placing “significant resources” into monitoring high-frequency and algorithmic trading. The SRO said that following a number of market disruptions last year, it is worried about the way firms oversee these two systems.

In its yearly examination and regulatory priorities letter, FINRA spoke about how despite the fact that many high-frequency trading strategies are legitimate, others can be employed for purposes that are volatile, which is why the SRO wants to keep surveillance of this a priority and make sure that abusive trading doesn’t happen.

FINRA also said that it wants to take a closer look at alternative trading systems due to disclosure and operational concerns and high volume trading. It is examining firms that run ATS, as well as their affiliates. The SRO wants to figure out whether firms are accurately and consistently representing and disclosing different parts of their ATS operations to subscribers. Sweep letters were sent by FINRA to broker-dealers inquiring about ATSs in August.

Securities Headlines: Credit Suisse & J.P. Morgan to Pay $400M Over RMBS Misstatements, Fox Network’s FOIA Request for AIG Emails Granted, Expedited Discovery Approved in Real Estate ‘Flipper’ Case, & NY Brokerage Owner is Linked to Affinity Scam

Published on: December 13, 2012 | by Shepherd Smith Edwards & Kantas, LLP

Credit Suisse & J.P. Morgan to Pay $400M Over RMBS Misstatements

In SEC v. J.P. Morgan, the financial firm is accused of allegedly misstating information related to approximately 620 subprime mortgage loans’ delinquency status. The loans gave collateral for a $1.8M residential mortgage-backed securities offering that J.P. Morgan (JPM) underwrote six years ago and from which it was paid over $2.7 million in fees while investors lost at least $37 million. Now, the firm has agreed to pay nearly $297M to settle the allegations (without denying or admitting to them). The Commission is also accusing J.P. Morgan-owned Bear Stearns Cos. LLC of failing to disclose from 2005 to 2007 that it kept financial settlements from mortgage loan originators on problem loans that it sold into RMBS trusts.

Also settling RMBS Misstatement allegations with the regulator is Credit Suisse Securities (USA) LLC. In an administrative order, the SEC claims that between 2005 and 2010 the financial firm did not accurately disclose that it would keep cash from claims it settled against mortgage loan originators for issues involving loans that it had sold into RMBS trusts. Credit Suisse also allegedly misled investors about when it intended to buy back loans from trusts if those that borrowed did not make the initial payment. The firm has agreed to settle for $120M and is also not denying or admitting to the allegedly negligent conduct.

Investment Advisor Securities Roundup: Two Firms Settle SEC Claims That They Impeded with Examinations, FINRA Defends SRO Model, IA Allegedly Duped Private Equity Investors, & CDO Misrepresentation Accusations Against GSCP Executive Are Dismissed

Published on: December 10, 2012 | by Shepherd Smith Edwards & Kantas, LLP

Investment advisory firms EM Capital Management and Barthelemy Group have settled SEC administrative charges that they got in the way of Commission staff examinations. Both cases were settled without the parties involved denying or admitting to the allegations.

According to the SEC, Barthelemy Group and Evens Barthelemy allegedly misled examiners by inflating claimed assets under management to make it appear as if the firm qualified for SEC legislation. To settle the claims, Barthelemy has consented to a securities industry bar. He can reapply for admission again in two years. His firm consented to a censure.

As for the proceedings against Em Capital Management and Freeman, they allegedly waited a year and a half to produce the records and books for the firm’s mutual fund advisory business. Both have consented to pay a $20,000 penalty and be censured.

Securities Fraud Roundup: FINRA Examiners See Rise in Brokers Engaging in Improper Activities, SEC Chairman Backs Stronger Enforcement of Civil Penalties Act, & About 800 Investor Fraud Scam Defendants Accounted for Since 2011

Published on: November 26, 2012 | by Shepherd Smith Edwards & Kantas, LLP

According to Financial Industry Regulatory Authority EVP Susan Axelrod, the SRO’s examiners are reporting an increase in how many brokers appear to be taking part in questionable actions outside their firms or improperly selling securities. Speaking at the Securities Industry and Financial Markets Association’s complex products forum, she pressed brokerage firms to make sure its compliance programs will sniff out such violations.

Axelrod also said that FINRA examiners are noticing issues with the firms’ complex product sales, including those involving reverse convertibles and non-traded real estate investment trusts. For example, several firms did not conduct reasonable due diligence before selling non-traded REITs or make sure they were suitable for the investors. As for the reverse convertibles, examiners reportedly discovered an overconcentration of products in certain investor portfolios primarily due to poor recommendations. Failure to detect such problems appeared to have played a factor in this happening. Other problems discovered included inadequate training regarding products, product misrepresentation via sales and advertising, and failure to notify investors well in advance that products’ per-share estimated values had been repriced at figures significantly lower than the offering price.

In other securities news, Securities and Exchange Commission Chairman Mary Schapiro wants Congress to grant the SEC the power to impose penalties that are more reflective of the losses sustained by investors. Right now, the agency can only pursue ill-gotten gains’ disgorgement and impose per-violation penalties. Schapiro said that the Stronger Enforcement of Civil Penalties Act of 2012, which was introduced by Senators Jack Reed and Charles Grassley, would give the Commission the authority it needs to make violators “think twice” about abusing investors’ funds while allowing the regulator to recover significantly more for victims. She expressed her views at the New England Securities Conference last month.

FINRA Provides Guidance As It Opens Up Arbitration Process to Investment Advisers

Published on: November 9, 2012 | by Shepherd Smith Edwards & Kantas, LLP

The Financial Industry Regulatory Authority is now making its arbitration process available to all registered investment advisers. The SRO’s arbitration forum has in the past been for member broker-dealers, but not IA’s, to resolve disagreements. (That said, IAs that are dually registered with FINRA have had to arbitrate via the SRO’s arbitration process if the disagreement pertained to the adviser’s activities as a member of FINRA or as an associated person.) Now, however, FINRA is ready to take arbitration cases against investment advisers as long as the parties involved are both amenable to this.

Some people have expressed concern that opening up FINRA’s arbitration process to these advisers could create problems. For example, seeing as broker-dealers and investment advisers are upheld to different standards under federal law, there has been the worry that FINRA arbitrators might get confused as to which standard applied to a case.

FINRA arbitration lawyer William Shepherd, however, disagrees: “It is true that financial advisors are held to a fiduciary standard by statute, but securities brokers are often held to a ‘common law’ fiduciary standard. For example, brokers are held to a fiduciary standard when they use discretion to invest their clients’ money (either with or without written permission). As well, for decades the FINRA Arbitration Code has allowed cases to be filed for ‘any dispute, claim or controversy.’ Current FINRA arbitrators are savvy enough to make any distinction in the responsibilities of different investment professionals and are likely the most capable persons in existence to decide cases concerning financial advisors.”

FINRA’s decision to open its arbitration process comes during the ongoing discussion about possible self-regulatory oversight for advisers. Bill H.R. 4624 proposes bringing advisers under the supervision of at least one SRO, with FINRA as the potential watchdog. There has, however, been strong opposition to the legislation, and House Financial Services Committee Chairman Spencer Bachus (R-Ala.), who ushered H.R. 4624, has decided not to keep pushing it forward until a committee consensus is reached.

Meantime, FINRA has put out guidance on how investment advisers who are not members of the SRO can use its mediation and arbitration forum to resolve disagreements with employees and members. Per the guidance on disputes between IAs that are firms not regulated by FINRA and investors/investment adviser employees, the SRO will accept disputes by parties seeking this forum as long as the investor and IA turn in a post-dispute agreement to arbitrate, the IA or other parties consent to pay arbitration surcharge fees, and the investor submits a written submission agreement to send the dispute to FINRA Dispute Resolution (the agreement has to be signed by all parties involved in the arbitration and the signatures need to have been written after the events that led to the dispute happened). FINRA mediation services will be offered for investment adviser disagreements on a voluntary basis.

Guidance on Disputes between Investors and Investment Advisers who are not FINRA-regulated firms, FINRA

FINRA Opening Arbitration Process To Investment Advisers, Spokeswoman Says, Bloomberg/BNA, October 29, 2012

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