Stockbroker Regulation

What’s in a Title? Washington State Securities Regulators Want to Know

Published on: July 20, 2007 | by Shepherd Smith Edwards & Kantas, LLP

Ever notice how impressive titles are thrown around in the field of investments? Just what, if anything, to these mean. The Washington State Securities Division has proposed that that anyone who uses a professional designation that connotes some type financial planning expertise should fulfill the requirements and register as an investment adviser.

The Washington Department of Financial Instututions “notes the growth in the use of professional designations which state or imply that a person has special expertise, certification or training in financial planning,” as quoted in a release by the North American Securities Administrators Association Inc. (NAASA).

The state therefore plans to clarify its rules to consider a person who uses such a professional designation as holding himself out as a financial planner. It would also prohibit the misleading use of other professional designations. Washington and other states have expressed the need to limit designations regarding advisors to senior citizens. Washington has now expanded its efforts to control the use of designations to protect investors of all ages.

UBS to Pay $23 Million over Charges by NY Attorney General of Abuse in Fee-based Accounts

Published on: July 18, 2007 | by Shepherd Smith Edwards & Kantas, LLP

UBS Financial Services, Inc. will pay $23.3 million to settle charges by New York’s Attorney General of “inappropriately steering” of brokerage customers into fee-based accounts. The NYAG said that under the agreement UBS will pay a $2 million fine and $21.3 million to approximately 3,000 customers it inappropriately placed in its InsightOne program.

According to the NYAG office, UBS charged one 91-year-old InsightOne client more than $35,000 over two years, although only four trades transpired in his account, meaning each trade cost him approximately $8,800. In another example, it says an 82-year-old paid approximately $24,000 in InsightOne fees one year in which only one transaction took place.

“UBS convinced customers to rely on its advice and then abused that trust,” said NYAG Andrew Cuomo. “This major settlement is a win for customers inappropriately pushed into unsuitable brokerage accounts and a warning to the entire industry that customers’ interests must come first.”

Latest in “Race to the Bottom” by Securities Regulators: Relaxed Accounting Procedures for Foreign Issuers

Published on: July 10, 2007 | by Shepherd Smith Edwards & Kantas, LLP

The Securities and Exchange Commission has published a 121-page proposal for dropping the requirement that non-U.S. companies reconcile to the generally accepted accounting principles (GAAP) as required by U.S. firms in financial reports.

The proposal would apply to foreign private issuers that file financial statements to comply with the English language version of IFRS as published by the International Accounting Standards Board. “The Commission has taken a significant step on this important policy matter that was outlined in the ‘Roadmap’ announced in 2005,” said Conrad Hewitt, the SEC chief accountant.

“Along with the Commission’s work relating to internal control reporting and deregistration, this proposal to accept financial statements prepared in accordance with IFRS as published by the IASB without a US GAAP reconciliation represents another significant action to tailor the regulatory environment for foreign companies in the U.S. public capital markets,” said John White, director of the SEC’s Division of Corporation Finance.

Morgan Stanley Fined By State Regulator for Failure to Supervise Mutal Fund Sales

Published on: July 9, 2007 | by Shepherd Smith Edwards & Kantas, LLP

Morgan Stanley & Co. Inc. agreed to pay a $250,000 civil penalty to end claims by Rhode Island Regulators that it failed to supervise sales representatives who engaged in unethical and dishonest practices in the sale of mutual funds and variable annuities.

According to the director of the Rhode Island Department of Business Regulation, the practices in question took place in Morgan Stanley’s Providence office. Morgan Stanley agreed to the penalty and will undertake a comprehensive review of the practices of the two sales representatives involved to ensure that there are no other violations of the securities statutes and rules involving other clients.

The state’s superintendent of securities said the investigation uncovered securities laws violations that occurred over a three-year period and involved a lack of supervision and oversight of the sales representatives. “Morgan Stanley failed to ensure that there were adequate procedures in place reasonably designed to prevent these unlawful practices,” she said.

Follow Up: North Carolina Treasurer Urges Elimination of Brokerage Firms Voting of Client Shares

Published on: July 5, 2007 | by Shepherd Smith Edwards & Kantas, LLP

On June 11, 2007, we published an article entitled “Should Brokerage Firms Continue to Vote Their Clients’ Shares without Permission, Including for Corporate Directors?” State Treasurer Richard Moore of North Carolina has recently answered that question with a resounding “No!”

In a statement, Moore contends that allowing such votes thwarts corporate reform and prevents shareholders of a company from having adequate representation in director elections. Moore is also a board member of NYSE Regulation and called on SEC to approve an NYSE proposal that would change its Rule 452 to eliminate broker voting in all director elections.

Under the NYSE’s current rule, brokers may vote on “routine” proposals if the beneficial owner of the stock has not provided specific voting instructions to the broker at least 10 days before a scheduled meeting. The proposed change would end all voting of customer shares for directors by categorizing all such elections as “non-routine.”

NASD and NYSE Seek Guidelines To Supervise Electronic Communications

Published on: June 23, 2007 | by Shepherd Smith Edwards & Kantas, LLP

NASD and NYSE regulators, which will soon merge, jointly released proposed guidance for broker-dealers to establish policies and procedures on electronic communications employees use to conduct business and to “take reasonable steps” to monitor such compliance.

The two securities self-regulatory organizations (SRO’s) stated that brokerage firms should have a supervisory system in place to make sure brokers are complying with all applicable rules when employing all types of electronic communications.

The SRO’s added that, once “reasonable” policies and procedures are in place, the firms would themselves decide what “additional supervisory policies and procedures are required to adequately supervise their business and manage the member’s reputational, financial, and litigation risk.” Unlike SRO rules, SRO “guidelines” do not require approval of the SEC.

RBC Dain Rauscher Fined $90K for Compliance Program Flaws

Published on: May 21, 2007 | by Shepherd Smith Edwards & Kantas, LLP

The New York Stock Exchange Regulation Inc. announced that RBC Dain Rauscher Inc. consented to be fined $90,000 for failures related to its anti-money laundering compliance program.

According to an exchange press release, the Minneapolis-based firm failed to establish written procedures regarding filing of suspicious activity reports. Additionally, the exchange alleged, the firm did not have an adequate monitoring system to review and document follow-up on exceptions found by the firm’s department, the release stated.

The firm, which neither admitted nor denied the allegations, consented to the fine and a censure, according to the release.

“Pump and Dump”, Annuities, Real Estate, Affinity Fraud and “Free Lunch Seminars” Are Top Scams in 2007 Say State Securities Regulators

Published on: May 21, 2007 | by Shepherd Smith Edwards & Kantas, LLP

The North American Securities Administrators Association released its “Top 10 Traps” likely to ensnare investors, a list that included real estate investment contracts, affinity fraud, foreign exchange trading, and Internet fraud.

Other problematic areas, according to NASAA, include: “free lunch” investment seminars; oil and gas scams; prime bank schemes; private securities offerings; unlicensed professionals and unregistered products; and unsuitable sales.

“The path to safe investing is littered with traps that are likely to catch unwary investors,” Joseph Borg, NASAA’s president and the director of the Alabama Securities Commission, said in the release. “It always pays to remember that any investment that sounds too good to be true usually is.”

Swindlers of Seniors Targeted by Massachusetts’ Head Securities Regulator

Published on: May 16, 2007 | by Shepherd Smith Edwards & Kantas, LLP

William F. Galvin, Head of the Massachusetts Securities Division, declared war against deceptive financial advisers who prey on senior citizens.

Massachusetts became the first state in the nation to adopt regulations governing brokers or advisers who use credentials or professional designations suggesting expertise in advising senior citizens on financial matters.

Effective June 1, the new regulations state that only credentials accredited by a nationally recognized accreditation agency – also approved by the Secretary of the Commonwealth – may be used when offering seniors financial advice.

SEC Orders Morgan Stanley to Pay $7.9 Million for Failing to Provide “Best Execution” on Client Trades

Published on: May 9, 2007 | by Shepherd Smith Edwards & Kantas, LLP

Morgan Stanley & Co. Inc., the world’s second largest securities firm, will pay $7.9 million for its failure to provide best execution to certain retail orders for over-the-counter securities, the Securities and Exchange Commission announced today. Morgan Stanley embedded undisclosed mark-ups and mark-downs on certain retail OTC orders processed by its automated market-making system and delayed the execution of other retail OTC orders, for which Morgan Stanley had an obligation to execute without hesitation.

“By recklessly programming its order execution system to receive amounts that should have gone to retail customers, Morgan Stanley violated its duty of best execution and defrauded its customers,” said Linda Chatman Thomsen, Director of the regulator’s Division of Enforcement. “Best execution is a fundamental duty of a broker- dealer,” Thomsen, added. “Morgan Stanley violated its duty” and committed fraud by setting-up its order-execution system “to receive amounts that should have gone to retail customers.”

The company began overcharging clients after embedding undisclosed fees on some trades when it adopted a new computer system to handle transactions in 2001, the SEC said. The lapses affected more than 1.2 million transactions valued at about $8 billion from 2001 through 2004. A Morgan Stanley trader stumbled onto the problem in December 2004 when unusually high trading in a company’s stock generated a $400,000 profit within a few minutes, the SEC said. The trader alerted his supervisor, and by that afternoon a technician pinpointed the programming “error”.