Investor Lawyers Blog

FINRA Headlines: New ATSs Sweep Letters Issued, SRO to Provide Surveillance for Direct Edge Market Exchanges, Court Says Ex-AP of Defunct Member Firm Can Enforce Arbitration Pact, & Madoff Feeder Funds Are Not Required to Arbitrate Claims Against KPMG

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

FINRA Issues Sweep Letters About Alternative Trading Systems

The Financial Industry Regulatory Authority has put out a new round of sweeps letters asking for more information about its review of alternative trading systems. The SRO’s Trading Examinations Unit is reviewing the off-exchange trading venues.

FINRA wants firms to provide information about how subscriber order flow is identified within the ATS, whether they are tracking the different kinds of order types in use, and where the ATSs orders are routed. Sweep letters let the regulator determine how to better focus its exams and discover what new issues may have arisen.

AIG Drops RMBS Lawsuit Against New York Fed, Fights Bank of America’s $8.5B MBS Settlement

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

American International Group (AIG) and Maiden Lane II dismissing lawsuit against the Federal Reserve Bank of New York regarding the $182.3 billion financial bailout that the insurer received during the 2008 economic crisis. In dispute was whether AIG still had the right to pursue a lawsuit over residential mortgage-backed securities losses and if the company had moved $18 billion of litigation claims to Maiden Lane, which is a New York Fed-created entity.

An AIG spokesperson said that in the wake of a recent ruling by a district judge in California that the company did not assign $7.3 billion of the claims to Maiden Lane, both are dropping their action without prejudice. This means that AIG can now pursue Bank of America (BAC) for these claims, which is what the insurer wants to do.

Bank of America had said that AIG could not sue it over the allegedly fraudulent MBS because the latter transferred that right when the New York Fed bought the instruments in question 2008. However, according to Judge Mariana R. Pfaelzer, even if the New York Fed meant for Maiden Lane II to have these claims, that intention was not made clear.

FINRA Orders Wells Fargo & Banc of America’s Merrill Lynch Ordered to Pay $5.1M for Floating-Rate Bank Loan Funds Sales

Published on: June 4, 2013 | by Shepherd Smith Edwards & Kantas, LLP

The Financial Industry Regulatory Authority Inc. says that Merrill Lynch, Pierce, Fenner & Smith Incorporated (MER) and Wells Fargo Advisors LLC must pay $5.1 million for losses sustained by customers who bought floating-rate bank loan funds.

According to the SRO, brokers at Banc of America and Merrill recommended the purchase of floating-rate bank loan funds to customers who didn’t have investment goals, risks tolerance, or financial conditions that were consistent with the features and risks of these kinds of mutual funds. Instead, these were customers whose risk tolerance levels were conservative and wanted to preserve principal. FINRA says that the sale recommendations were made even though there wasn’t reason to believe that floating-rate bank loan funds would be suitable for these investors.

In regards to the allegations against Wells Fargo, FINRA, in its acceptance, waiver and consent letter, said that brokers there warned about the funds but that the firm failed to act on their worries. The SRO says that the brokers had even confused the funds with bank certificates of deposit and other less risky investments.

Synthetic CDOs Once Are Once Again In Demand Among Investors

Published on: June 4, 2013 | by Shepherd Smith Edwards & Kantas, LLP

Despite the damage attributed to them during the 2008 credit market crisis, synthetic collateralized debt obligations are once again in high demand among investors. The popularity of these risky investments, with their high returns and rock-bottom interest rates, are so high that even after being denounced by investors and a lot of lawmakers back in the day, now Morgan Stanley (MS) and JPMorgan Chase (JPM ) in London are among those seeking to package these instruments.

CDOs allow investors to bet on a basket of companies’ credit worthiness. While the basic version of these instruments pool bonds and give investors an opportunity to put their money in a portion of that pool, synthetic CDOs pool the insurance-like derivatives contracts on the bonds. These latest synthetic CDOs, like their counterparts that existed during the crisis, are cut up into varying levels of returns and risks, with investors wanting the highest returns likely buying portion with the greatest risk.

Granted, synthetic CDOs do somewhat spread the risk. Yet, also can increase the financial harm significantly if companies don’t make their debt payments.

Stock Trader Faces Front Running Charges In Alleged $1.7M Texas Securities Fraud

Published on: June 1, 2013 | by Shepherd Smith Edwards & Kantas, LLP

The SEC has filed Texas securities fraud charges against Daniel Bergin, a Dallas-based Cushing MLP Asset Management LP senior equity trader. Bergin is accused of front running, insider trading, and failing to notify his employer of certain trades.

According to the regulator, Bergin, who was a primary equity trader at the Swank Capital-owned registered investment advisory firm), allegedly made at least $1.7 million in profits in trading securities before making large orders of the same securities for Cushing customers. He purportedly used accounts that were registered in the name of Jacqueline Zaun, his wife, to make the personal trades. The Commission has named her as a relief defendant.

SEC Enforcement Division’s Asset Management Unit Marshall S. Sprung says that Bergin breached clients’ trust by secretly using data about their trades to garner an unfair advantage for himself and make massive profits. (As a Cushing, employee, Bergin had access to information about the trades (and their timing) that the RIA made for clients.

Morgan Stanley Unveils Trade Flow Insights Product to Give Brokers Better Sales Data

Published on: May 30, 2013 | by Shepherd Smith Edwards & Kantas, LLP

Morgan Stanley (MS) has a new trade tool to help brokers better understand who is buying and selling what financial products. Trade Flow Insights was recently rolled out to over 16,000 financial advisers.

The tool provides information on leading sales and purchases that have been executed, in addition to asset allocation. Advisers can even filter data to determine which products were the most popular in the last week or month. Client age, asset class, and household assets are just some of the filter categories.

Not only will Trade Flow Insights let representatives know what products are most in demand, but also it will inform them of which financial instruments their coworkers are most successful with. Some brokers are saying that having this type of insight is beneficial, helping them become aware of current trends while causing them to probe more deeply into the investment options out there before making a buy for an investor.

Former SEC Commissioner Wants SEC Shareholder Proposal Process Revamped

Published on: May 30, 2013 | by Shepherd Smith Edwards & Kantas, LLP

Ex-Securities and Exchange Commissioner Paul Atkins wants the agency to rework its shareholder proposal rule, including the process that the staff employs to determine when issuers can leave the proposals out of their proxy materials. Atkins pointed to the recent increase in shareholder proposals that are pressing companies to reveal their political spending even though the majority of shareholders oppose such resolutions. He spoke against special interest groups using these proposals to push their agendas.

Atkins made his comments during an interview with BNA. Referring to the no-action process that lets SEC staff figure out the major issues that end up on issuers’ proxies for shareholders to vote on, he said that this action was very subjective and doesn’t have much transparency, actual due process, or accountability.

Under the SEC’s 1934 Securities Exchange Act Rule 14a-8, its shareholder proposal rule, the procedures that eligible investors can have their proposals included in the proxy materials of a company are laid out. The rule also lets issuers leave out proposals in certain, limited situations. (Still, issuers have to tell the SEC Division of Corporation of Finance why the proposal is being left out) and the staff can then grant no-action relief.

FINRA Chief Ketchum Calls for Brokers To Better Inform Investors of Fixed Income, Structured Product Risks

Published on: May 29, 2013 | by Shepherd Smith Edwards & Kantas, LLP

Financial Industry Regulatory Authority CEO and Chairman Richard G. Ketchum says that with more investors getting involved in sophisticated investments, broker-dealers must do a more thorough job of informing them of the risks involved in complex financial instruments. Speaking at FINRA’s yearly conference in DC, Ketchum said that now is when brokerage firms should be talking to clients about the possible drawbacks of having concentrated holdings in fixed-income securities that are more speculative or for a longer duration. He also talked about letting clients know that bond funds are not the equivalent of owning fixed securities directly.

Acknowledging that it can be more difficult to train financial advisers on how to make effective disclosures to customers about structured products, Ketchum suggested that using simple language is one way that broker can provide potential investors with more information, rather than just satisfying disclosure requirements. The FINRA chief spoke about how it essential it was to sure that investors have a better comprehension of the risks involved in what they are buying.

Ketchum also scolded financial firms for being more direct when it comes to marketing on their websites than they are with the disclosure and legal sides. He noted that providing investors with disclosures that they don’t fully understand creates more risks for the firms in the long run.

Senate Measure Seeks to Exempt Banks for Having to Register with the SEC As Municipal Advisors & House Bill Looks to Enhance Public Pension Plans’ Disclosures

Published on: May 29, 2013 | by Shepherd Smith Edwards & Kantas, LLP

Many banks are reportedly greeting bipartisan Senate bill S. 710 with satisfaction, as it would exempt them from provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act related to regulating municipal advisers. The bill was introduced by US Senators Patrick Toomey (R-Pa) and Mark Warner (D-VA) last month.

The Dodd-Frank Act established municipal advisers as a new class of regulated individuals that advise local and state governments about financial matters, such as the use of derivatives and bond issuances. Per the law’s Section 975, municipal advisers must register with the Securities and Exchange Commission and the Municipal Securities Rulemaking Board. Critics, however, have called the SEC’s proposed definition of what constitutes a municipal adviser as too broad.

The senators’ legislation makes it clear that banks and those that work for them are not municipal advisers unless they actually take part in municipal adviser activities. It is similar to HR 797, which was proposed by US Representatives Gwen Moore (D-Wis.) and Steve Stivers (R-Ohio) earlier this year.

SEC Charges Ex-LPL Financial Adviser With Defrauding Investors of $2M

Published on: May 28, 2013 | by Shepherd Smith Edwards & Kantas, LLP

Blake Richards, a former LPL Financial LLC adviser, is now facing Securities and Exchange Commission charges for allegedly defrauding investors and misappropriating about $2 million from at least seven customers. Most of the funds that were misappropriated were life insurance proceeds from dead spouses and retirement funds. Last week, the regulator filed an emergency action asking a judge for a temporary restraining order, which was granted. Now, Richard’s assets have been frozen.

Per the SEC, Richards told investors to write checks to BMO Investments and Blake Richards Investments, which he controlled. They expected that he would put their money in variable annuities, fixed income assets, and common stock. Instead, contends the agency, none of these investments were ever executed and Richards allegedly took the money and used it for his personal spending.

The Commission is accusing Richards of violating the antifraud provisions of the Securities Act of 1933, the Securities Exchange Act of 1934, and Rule 10b-5 thereunder. The SEC is also alleging Investment Advisers Act of 1940 and the Advisers Act violations.