FINRA

Plan by FINRA and CHX to Re-Allocate Regulatory Tasks Approved by SEC

Published on: September 23, 2010 | by Shepherd Smith Edwards & Kantas, LLP

The Securities and Exchange Commission has approved the Financial Industry Regulatory Authority and Chicago Stock Exchange Inc. proposed agreement to re-allocate certain regulatory duties that deal with firms that belong to the two self-regulatory organizations.

Under the plan, FINRA is to assume specific enforcement and examination functions for common members when the applicable CHX rules and FINRA rules involved are “substantially similar.” Also, with respect to certain federal securities laws and rules and regulations and as specified by the agreement, FINRA is to take regulatory responsibility for common members.

The SEC says the plan will cut down “unnecessary regulatory duplication” when common members are involved. While FINRA will take charge of certain responsibilities that the two SROs would otherwise have both performed, CHX will remain in charge of examination, surveillance, investigation, and enforcement when it comes to trading practices and activities in its marketplace. The latest agreement supercedes the one from 1977. It has no impact on CHX’s operations or its market oversight functions.

However, according to Securities Fraud Attorney William Shepherd, “Considering the abysmal job that these self-regulatory organizations (SRO’S) have done in regulating, for example, the lack of regulation of the Madoff securities firm, perhaps a little duplication would be perfectly acceptable!”

Related Web Resources:
SEC Approves Plan by FINRA, CHX To Re-Allocate Certain Regulatory Duties, BNA Securities Law Daily, September 13, 2010
FINRA

Chicago Stock Exchange

SEC
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Illegal High Frequency Trading: Trillium Brokerage Services LLC and 11 individuals agree to settle FINRA Charges for $2.27M

Published on: September 22, 2010 | by Shepherd Smith Edwards & Kantas, LLP

The Financial Industry Regulatory Authority says that it is fining and censuring Trillium Brokerages LLC and 11 individuals $2.27 million for their involvement in an illegal high frequency trading strategy and supervisory failures. It is the first enforcement action to target this type of improper trading behavior.

FINRA claims that through the traders, Trillium entered a number of layered, non-bona fide market moving orders in more than 46,000 instances to purposely make it appear that there was substantial selling and buying in NASDAQ and NYSE Arca stocks. Because of the high frequency trading, others in the industry submitted orders to execute against those that the Trillium traders had placed. However, after the Trillium traders submitted their orders they would immediately cancel them.

FINRA Market Regulation Executive Vice President Thomas Gira says that Trillium purposely and “improperly baited unsuspecting market participants” into making trades at illegitimate prices and to the advantage of Trillium’s traders. Gira says that FINRA will continue to “aggressively pursue disciplinary action” against those involve in illegal high frequency trading activity that undermines legitimate trades, abusive momentum ignition strategies, and other illegal conduct.

Regarding the FINRA fines, the New York-based broker-dealer has agreed to pay $1 million for using a trading technique involving the placement of a number of nonauthentic orders to make it falsely appear as if there was market activity for specific NASDAQ and NYSE Arca stocks. Trillium also must disgorge $173,000 in illegal profits.

Nine Trillium traders, the brokerage company’s chief compliance officer, and its trading director have agreed to pay a total of $805,500. They have been told to disgorge $292,000. The individuals are temporarily suspended from the securities industry or as principals.

The SEC also is looking into high frequency trading- and “quote stuffing,” which involves the placement and then immediate cancellation of bulk stock orders. The SEC wants to see whether such practices have allowed for improper or fraudulent conduct.

Related Web Resources:
FINRA Investigating Whether Broker-Dealers Providing Adequate Risk Controls to High-Frequency Traders, Institutionalinvestorsecuritiesblog.com, September 19, 2010

FINRA Sanctions Trillium Brokerage Services, LLC, Director of Trading, Chief Compliance Officer, and Nine Traders $2.26 Million for Illicit Equities Trading Strategy, FINRA, September 13, 2010

Trillium Fined by Finra for Illegal Trading Strategy, BusinessWeek, September 13, 2010

FINRA Investigating Whether Broker-Dealers Providing Adequate Risk Controls to High-Frequency Traders

Published on: September 19, 2010 | by Shepherd Smith Edwards & Kantas, LLP

A Financial Industry Regulatory Authority says the SRO is investigating whether broker-dealers failed to put adequate risk-management controls in place for high-frequency traders with access to an exchange or alternative trading system. The probe comes following the flash crash last May that involved the stock markets dropping almost 1,000 points in a matter of minutes before rebounding just as quickly. While lawmakers said that high-frequency trading was to blame, the Commodity Futures Trading Commission and Securities and Exchange Commission disagree.

FINRA says that Chief Executive Officer Richard Ketchum’s concern is whether brokers had full comprehension of how the traders were using algorithms and whether the latter understood the possible consequences during times of serious volatility. Ketchum vowed that if serious cases of brokers failing to “even try to exercise their obligations to run checks on the firms” prior to giving them access are uncovered, then enforcement actions will be taken.

Meantime, the Securities and Exchange Commission is considering a pending rule proposal on unfiltered or naked access arrangements that would allow high-frequency traders to completely bypass risk management controls set up by broker-dealers.

High-Frequency Trading
High-frequency trading depends on computer algorithms (rather than human action) to execute transactions at super fast speed. High-frequency traders are usually institutional investors, such as pension funds or mutual funds. Through broker-dealers, these traders are able to gain direct electronic access to an exchange or ATS. According to recent data, high-frequency trading now makes up over 70% of market volume.

Related Web Resources:
High Frequency Trading and the Roiling Markets, Newsweek, June 1, 2010

High-frequency traders in the cross hairs after stock market’s wild day, LA TImes, May 6, 2010

FINRA

Raymond James Loses Texas Auction Rate Securities Case and is Ordered by FINRA to Pay Couple $925K

Published on: September 4, 2010 | by Shepherd Smith Edwards & Kantas, LLP

Raymond James and Associates Inc. and financial advisor Larry Milton must pay Rex and Sherese Glendenning $925,000, says a Financial Industry Regulatory Authority panel. The Texas securities case involved an auction-rate securities dispute. brokerage firm advisor Milton has been accused of misrepresenting that the ARS the couple invested in was extremely liquid.

The Glendennings opened their Raymond James (NYSE: RJF) account in 2008 right before the ARS market failed. They claim that Milton, who had invested $1.4 million of their funds in an ARS that consisted of sewer revenue bonds, did not tell them that there was an inherent possibility that the securities might fail. Instead, they allege, he lead them to believe that the ARS could be easily sold. You can imagine their dismay when Raymond James refused their request to repurchase the ARS at full value.

The Gleddenings are not the only ones that the broker-dealer has been ordered to compensate. In just the last two months, Raymond James has been ordered to buy back $3.5 million in ARS from investors. A FINRA panel ordered the brokerage firm to repurchase $2.5 million in ARS from investor Greg Merdinger, who claims that not only was he told that auction-rate securities were safe and very liquid (even more than market funds), but also he contends that no one apprised him that there was an illiquidity risk. Raymond James affiliates Raymond James & Associates Inc. and Raymond James Financial Services Inc. were ordered to make the ARS repurchase.

Related Web Stories:
FINRA: Raymond James must pay $925,000 to couple, Reuters, August 25, 2010
Raymond James faces $2.5 million payback ruling, Tampa Biz, July 26, 2010

Related Blog Posts:
Raymond James Ordered to Buy Back $2.5M in ARS by FINRA, https://www.stockbrokerfraudblog.com, July 28, 2010
Raymond James and RBC Capital Markets Fined $1.4 Million in Total Over Improper Stock Lending Activities, https://www.stockbrokerfraudblog.com, June 22, 2009 Continue Reading ›

Raymond James Must Pay $925,000 Over Auction-Rate Securities Dispute

Published on: September 1, 2010 | by Shepherd Smith Edwards & Kantas, LLP

A Financial Industry Regulatory Authority panel says that Raymond James and financial advisor Larry Milton must pay Sherese and Rex Glendenning $925,000 over an auction-rate securities dispute. This is the third time this summer that Raymond James Financial Inc. (NYSE: RFJ) subsidiaries have been involved in an ARS dispute that was decided in FINRA arbitration. Since July 1, independent broker-dealer Raymond James Financial Services Inc. and brokerage firm Raymond James & Associates have been ordered to repurchase $3.5 million in ARS from clients.

The Glendennings set up their account with Raymond James in January 2008 before the market meltdown. Milton placed the couple’s $1.4 million in an ARS that contained sewer revenue bonds while failing to tell them about the risk involved.

The couple contends that Milton’s behavior wrongly gave them the impression that their investment was highly liquid and could be easily sold. However, Raymond James turned down their request to buy the ARS back at full value.

According to the Glendennings’ securities fraud attorney, the timing of the purchase was key to winning the award. The securities that they bought came up for auction for the first time thirty five days after they made the purchase. The auction failed and the couple were never able “ to go to auction.”

At the time of the ARS market crash in February 2008, Raymond James Financial clients held $1.9 billion in auction rate debt—now down to $600 million. To date, none of the securities regulators have sued the firm over ARS sales. Other financial firms, including Oppenheimer & Co. Inc. and Charles Schwab & Co. haven’t been as lucky.

Related Web Resources:
Raymond James pays more auction rate claims, Investment News, August 26, 2010

FINRA rules against Raymond James in auction rate securities case, Tampa Bay Business Journal, August 26, 2010

Stockbroker-Fraud Blog

Zions Direct Inc. to Pay $225K for FINRA Securities Fraud Charges Related to CD Auctions

Published on: August 30, 2010 | by Shepherd Smith Edwards & Kantas, LLP

The Financial Industry Regulatory Authority has ordered Zions Direct Inc., Zions Bancorp’s (ZION) brokerage unit, to pay $225,000 to settle securities fraud allegations that it failed to disclose conflicts of interest in online certificate-of-deposits auctions. According to the SRO, from February 2007 to November 2008, the Utah broker-dealer failed to make public in its online CD auctions that Liquid Asset Management took part in auctions to retail investors.

FINRA contends that if LAM hadn’t been involved some bidders could have had higher yields in some auctions. Instead, they may have received lower yields.

Zions Direct began “generally” disclosing LAM’s involvement in November 2008 but still failed to mention the relationship between Zions-affiliated banks and the customers that took part in the auctions and any potential conflicts of interest. Issuing banks may have benefited from LAM’s involvement because they otherwise might have ended up paying higher yields on the CDs bought through the auctions.

FINRA also contends that the brokerage firm sent “exaggerated” and “misleading” ads to current and potential customers that promised CD yields that were not realistic and published market clearing yields on its Web site without adequately disclosing that the figures did not typically reflect the closing yields of auctions. According to FINRA acting enforcement chief and executive vice president James Shorris, investment firms have to tell prospective clients and customers about material information related to their services and products.

By agreeing to settle the securities fraud case, Zions Direct is not admitting to or denying the charges. It has, however, agreed to an entry of FINRA’s findings.

Related Web Resources:
Zions Fined $225,000 For Insufficient Disclosure In CD Auctions, Wall Street Journal, August 25, 2010
FINRA Fines Zions Direct $225,000 for Failure to Disclose Potential Conflict of Interest in its Online CD Auctions, FINRA, August 25, 2010 Continue Reading ›

Combatting Elder Financial Fraud: SEC, NASAA, & FINRA Update Their Best Practices to Protect Senior Investors

Published on: August 29, 2010 | by Shepherd Smith Edwards & Kantas, LLP

The Financial Industry Regulatory Authority, the Securities and Exchange Commission, and the North American Securities Administrators Association have updated their 2008 report regarding financial firms’ best practices when serving elderly investors. The security regulators remain committed to making sure that seniors are given a “fair market” with responsible sales practices and suitable products. The 2008 report, called “Protecting Senior Investors: Compliance, Supervisory and Other Practices Used by Financial Services Firms in Serving Senior Investors,” gave investment firms steps they could take to improve their procedures and policies when working with senior clients.

The 2010 addendum concentrates on several categories, including:
• Effective communication.
• Better employee training regarding issues that specifically affect seniors.
• Establishing internal processes to deal with issues that arise.
• Surveillance, supervision, and compliance reviews that focus on seniors.
• Making sure investments offered to elderly investors are appropriate for them.

The SEC is also tackling regulatory measures related to financial products that target retirees and seniors. Last month, the SEC put out a staff report suggesting that Congress define life settlements as securities to make sure that investors receive protection under federal securities law. Also, in an attempt to enhance target date fund disclosures, the SEC recently proposed rule amendments.

Regulators report that there are nearly 40 million people in the US that belong to the age 65 and older age group. By 2050 that number is expected to hit 89 million.

It is important that the necessary steps are taken protect seniors from elder financial fraud. With their retirement funds, elderly seniors are at risk of becoming the target of securities fraud. As MetLife (MET) Mature Market Institute notes, elder financial abuse “has been called the ‘crime of the 21st century.” She noted for every dollar lost, the victims often suffer related financial losses resulting from health issues and stress.

Related Web Resources:
Protecting the Elderly From Financial Fraud, Minyanville, June 16, 2010
SEC, NASAA, FINRA Update Best Practices for Serving Seniors, Wealth Manager, August 13, 2010
Read the 2008 Report (PDF)
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HSBC Securities to Pay $375K to Settle FINRA Allegations that It Recommended Unsuitable Collateralized Mortgage Obligations to Retail Clients

Published on: August 25, 2010 | by Shepherd Smith Edwards & Kantas, LLP

HSBC Securities has agreed to pay $375,000 to settle Financial Industry Regulatory Authority charges that it recommended the unsuitable sale of inverse floating rate collateralized mortgage obligation to retail clients. The SRO is also accusing the investment bank HSBC of inadequate supervision of the suitability of the CMO sales and failure to fully explain the risks involved in CMO investments to clients. The investment bank has already reimbursed clients $320,000.

Per FINRA, six HSBC brokers made 43 unsuitable inverse floater sales to “unsophisticated” retail clients. Even though HSBC requires that a supervisor approve all retail clients sales larger than $100,000, 25 of the sales were larger than this amount. 5 resulted in $320,000 in losses for clients. According to FINRA executive vice-president and acting enforcement chief James S. Shorris, the clients’ financial losses could have been prevented.

FINRA contends that HSBC brokers were not given enough training and guidance about the risks involved with CMOs. They also were not specifically told that inverse floaters were only suitable for investors with high-risk profiles.

FINRA also says that HSBC was not in incompliance with a rule requiring brokerage firms to offer specific educational collateral prior to a CMO sale to anyone that is not an institutional investor. FINRA says that not only did HSBC’s registered representatives not know that they were required to offer this material, but also the brochures that were offered did not meet content standards regarding required educational information.

By agreeing to settle, HSBC is not admitting or denying the allegations.
Related Web Resources:
FINRA Fines HSBC $375,000, On Wall Street, August 19, 2010
FINRA fines HSBC for unsuitable sales of CMOs, Banking Business Review, August 20, 2010
FINRA

Collateralized mortgage obligation, SEC Continue Reading ›

Bank of America Merrill Lynch to Settle UIT Sales-Related FINRA Charges for $2.5 Million

Published on: August 22, 2010 | by Shepherd Smith Edwards & Kantas, LLP

Bank of America Merrill Lynch has agreed to settle for $2.5 million Financial Industry Regulatory Authority allegations that it did not provide “sales charge discounts” to clients with eligible unit investment trusts purchases. By agreeing to settle, the broker-dealer is not admitting to or denying the charges. Of the $2.5 million, $2 million is restitution and $500,000 is a fine.

UITs
A unit investment trust is an investment company that holds a fixed portfolio of securities while offering redeemable units from that portfolio. The units have a fixed date for termination. UIT sponsors usually offer sales charge discounts called “rollover and exchange discounts”-usually offered to investors that use redemption or termination proceeds from one unit to buy another-and “breakpoint discounts”-based on the purchase’s dollar amount-to investors.

Since March 2004, FINRA has made it clear that investment firms must have procedures in place to make sure that clients get their UIT discounts. The SRO contends, however, that until May 2008, Merrill Lynch did not provide brokers or their supervisors with such guidance and neglected to tell clients when they were eligible for a UIT discount. This went on between October 2006 and June 2008 and many clients were overcharged for their UIT purchases.

FINRA also accused Merrill Lynch of distributing client presentation that contained sales information about UITs that were “inaccurate and misleading,” causing clients to believe that they were only eligible for a UIT discount if UIT proceeds were used to buy a new UIT from the same sponsor.

Related Web Resources:
BofA Merrill Lynch to Pay $2.5 Million in FINRA Matter, ABC News, August 18, 2010
Merrill Lynch to pay $2.5M in sales charge case, Business Week, August 18, 2010

Other Merrill Lynch Stories on Our Web Site:
Bank of America To Settle SEC Charges Regarding Merrill Lynch Acquisition Proxy-Related Disclosures for $150 Million, StockbrokerFraudBlog, February 15, 2010
Merrill Lynch Must Pay $26 million to States to Resolve Charges of Failure to License Associates, StockbrokerFraudBlog, December 22, 2009 Continue Reading ›

UBS Ordered to Pay Auction-Rate Securities Investor Kajeet Inc. $81 Million

Published on: August 10, 2010 | by Shepherd Smith Edwards & Kantas, LLP

A Financial Industry Regulatory Authority arbitration panel has ordered UBS Financial Services Inc. to pay investor Kajeet Inc. $80.8 million for failed auction-rate securities. The brokerage firm disagrees with the decision and intends to file a motion to have the claim vacated.

Although Kajeet had only invested $8 million in ARS through UBS, the company, which markets cell phones for kids, contends that because its securities were frozen, a “domino effect” resulted and it ultimately lost $110 million. Also, Kajeet was forced to significantly cut its 60-person work team and it lost a key distribution deal with a national retail chain.

UBS had previously resolved ARS-related charges with an agreement that it would pay a $150 million fine and buy back $18.6 billion of the securities. The brokerage firm was one of a number of broker-dealers that agreed to repurchase over $60 billion in ARS from investors because they had allegedly misrepresented the securities as safe investments. When the $330 million ARS market froze in February 2008, UBS had over $35 billion in ARS that were held by some 40,000 customers.