Investor Lawyers Blog

Volcker Rule is Approved by SEC, FDIC, Federal Reserve, CFTC, and OCC

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

Five regulatory agencies in the US have voted to approve the Volcker Rule. The measure establishes new hurdles for banks that engage in market timing and will limit compensation arrangements that previously provided incentive for high risk trading.

While the Federal Reserve Board and the Federal Deposit Insurance Corporation voted unanimously to approve the Volcker Rule, the Securities and Exchange Commission approved it in a 3-2 vote, the Commodity Futures Trading Commission approved it in a 3-1 vote, and the Office of the Comptroller of the Currency’s sole voting member also said yes. President Barack Obama praised the rule’s finalization. He believes it will improve accountability and create a safer financial system.

Named after ex-Federal Chairman Paul Volcker, the rule sets up guidelines that impose risk-taking limits for banks with federally insured deposits. It mandates that they show the way their hedging strategies are designed to function, as well as set up approval procedures for any diversions from these plans. Per the rule’s preamble, banks have to make sure hedges are geared to mitigate risks upon “inception” and this needs to be “based on analysis” regarding the appropriateness of strategies, hedging instruments, limits, techniques, as well as the correlation between the hedge and underlying risks.

Puerto Rico Reportedly Among Those that Engaged in “Scoop & Toss” Tactic with Municipal Bonds

Published on: December 7, 2013 | by Shepherd Smith Edwards & Kantas, LLP

According to The Wall Street Journal, Puerto Rico has been engaging in a budget-stretching maneuver, known as the “scoop & toss” for some time now. The tactic, which has been employed by financially strapped local governments, including states, municipalities and other entities for years, is now under closer examination.

Scoop and toss consists of selling new long-term debt to raise money to pay off bonds that are maturing. This lengthens the timetable for municipal bonds that are retiring. Such debt sales frequently provide interest rates that are above market. Many bond buyers can find this attractive, especially when the economy is growing slowly and rates on other bonds are low.

Now, however, observers are cautioning that refinancings using the scoop and toss approach is increasing interest costs and letting civic managers ignore structural economic problems. Meantime, the debt buyers end up taking on the risk that the securities could lose their worth. Critics of the scoop and toss describe it as a short-term solution and not a permanent one.

SEC Considers Imposing Proxy Adviser Rules

Published on: December 7, 2013 | by Shepherd Smith Edwards & Kantas, LLP

The US Securities and Exchange Commission is looking at whether proxy advisers have become so influential when it comes to corporate elections that rules should be imposed in them to create greater transparency. At a recent SEC-hosted meeting, brokers, institutional investors, business groups, and unions debated about the role that proxy advisors Glass Lewis & Co. LLC and Institutional Shareholder Services Inc. have played in shareholder voting.

According to Bloomberg, research from non-profit organization Conference Board reports that with the growth in institutional investors’ percent of voting shares going up by over 50% there has been a growing demand for proxy research. However, there is concern by some that proxy advisors have a lot of power over the governance decisions of public companies yet they don’t have to contend with much Commission oversight. Critics think proxy advisors influence shareholders to vote blindly on proxy measures without getting disclosures about possible conflicts. Meantime, supporters of proxy advisors say that they provide an important service—especially to small institutional investors that lack the resources to assess every vote they make.

Mutual funds, pensions, and other mutual funds tend to be proxy advisers’ typical clients. SEC Commissioner Daniel Gallagher attributes proxy advisers’ “outsized role” to policy guidance issued by the agency in 2009 telling investment advisers they could fulfill an obligation to vote in the best interests of shareholders by depending on third party research.

Two Ex-JPMorgan Brokers Alleged Bilked Mentally Impaired Elderly Widow of $300,000

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

The Financial Industry Regulatory Authority is barring ex-JPMorgan Chase Securities, LLC (JPM) brokers Jimmy E. Caballero and Fernando L. Arevalo from the securities industry for allegedly stealing $300,000 from an elderly widow who suffers from diminished mental capacity. Although the bank reportedly was not involved in the misconduct, it has given the money that the two men had converted back to the senior investor

According to the SRO, in 2013 the elderly woman deposited about $300,000 in proceeds from two annuity sales into a bank account Arevalo had set up for her. The funds were then taken out of the account with the use of two cashier’s checks and Caballero purportedly placed the funds into a joint account that was under her name and his name at another bank. That institution asked for clarification and confirmation and Arevalo took the woman to the bank to confirm where the funds had come from. The money was then taken out of that account through checks issued to Arevalo and Caballero. Arevalo is also accused of using the account’s debit card to pay for retail purchase and loans for a car and real estate. The elderly widow had no idea these transactions were being made.

The SRO says the two men did not completely cooperate with its investigation. Without deny or admitting to the FINRA charges, Arevalo and Caballero are settling and consenting to the entry of findings.

SIFMA, ISDA, and IIB Sue CFTC Over Alleged Unlawful Rulemaking Regarding Cross-Border Rules, Swap Regulations

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

The Securities Industry and Financial Markets Association, Institute of International Bankers, and Swaps and Derivatives Association, Inc. are suing the US Commodity Futures Trading Commission over rules that they believe are hurting its members’ businesses, which includes among the biggest broker-dealers in the world. The plaintiffs contend that the agency engaged in unlawful rulemaking involving CFTC Interpretive Guidance and Policy Statements about Compliance With Certain Swap Regulations and other cross-border matters. They want the CTFC’s reach in its overseas rules curtailed.

ISDA, SIFMA, and IIB, whose members include swaps dealers such as Deutsche Bank AG (DB), Goldman Sachs Group Inc. (GS), JPMorgan Chase & Co. (JPM) and many others, want to vacate a number of rules having to due with cross-border application completely. According to Bloomberg.com, at least half the largest banks work with overseas clients in their swaps business. The CFTC approved the overseas swaps guidelines this summer, and last month, two staff opinions came out shedding more light on the breadth of the guidelines.

Now, the plaintiffs are contending that with these rules the CFTC illegally circumvented the Administrative Procedure Act and Commodity Exchange Act by saying its regulations were “guidance,” did not set up cost-benefit analysis even though the law mandated it, performed a rulemaking process that was flawed, and set up rules that contradict international cooperation and could hurt global markets.

Broker-Dealer National Planning to Pay $6.2M FINRA Arbitration Award to Two Minnesota Investors Over REITs

Published on: December 3, 2013 | by Shepherd Smith Edwards & Kantas, LLP

A Financial Industry Regulatory Authority panel says that National Planning Corp. must pay a $6.2 million REIT arbitration award to Minnesota investors Stacy and Ronnie Erickson. The Erickson and trusts on their behalf accused the independent brokerage firm and its ex-brokers Christopher R. Olson of negligence, breach of fiduciary duty, misrepresentations, and industry rule violations involving real estate investment trusts.

According to the FINRA award, which doesn’t name the REITs that the Ericksons invested in, the claimants also invested in real estate investments in Waterway Holdings Group, which Olson and a Preferred Resource Group Inc. employee owned. Olson has since filed for bankruptcy and all claims against him have been halted. (Olson was allowed to resign from NPC after he failed to disclose his external business activities or the involvement of his clients in these undertakings. After he quit he registered with Berthel Fisher & Co. Financial Services Inc.)

The Ericksons say that in addition to becoming the victims of broker fraud, they had to fulfill outstanding loans on mortgages on the real estate investments to avoid foreclosure. They contend that Olson manipulated them into taking on significant debt, paying millions of dollars that they cannot get back, and annuitizing, liquidating, and structuring their investment assets that were for their retirement to pay back the “staggering” debt that resulted from the real estate investment recommendations.

Lawyers, Investor Advocates Want to Know More About SEC Supervision Of FINRA’s Arbitrator Selections

Published on: December 2, 2013 | by Shepherd Smith Edwards & Kantas, LLP

The Public Investors Arbitration Bar Association (PIABA) is working with consumer rights group Public Citizen to get the US Securities and Exchange Commission to release documents about its oversight of the Financial Industry Regulatory Authority’s selection of the arbitrators who preside over disputes between broker-dealers and investors. According to PIABA President Jason Doss, because customers are “forced” into only having securities arbitration as a resolution venue when they sign documents to set up brokerage accounts (in the event of future disputes), they should be allowed to know how FINRA decides who hears the arbitration cases.

PIABA is a lawyers’ group that represents investors with securities arbitration claims. Contending that this is an issue of “transparency,” the attorneys have been trying to gain access to these documents for the last few years.

The group’s efforts started in 2010 with a Freedom of Information Act query to the SEC asking for documents that address how the regulator inspects FINRA’s process for selecting arbitrators and looking into their backgrounds. However, even though FOIA grants the public access to federal agency records, it has exemptions. (The exemption exists to protect sensitive matters, such as customer’s private financial data.)

For Investors, Closed-End Funds Come with Risks

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

If you are an investor who is thinking of backing a closed-end fund, it is important that you understand what this type of fund is and what are its accompanying risks before you decide to invest. While closed-end funds have been known to pay off-their high distribution rate is one of the features that make these products so popular-the losses can be substantial especially if your portfolio can’t handle them.

Closed-End Funds: What Are They?

These funds are a kind of investment company that gets money from investors to purchase securities. Closed-end funds are like mutual funds in that they manage portfolios that include investments, such as stocks, bonds, and even illiquid securities. However, they differ from mutual funds in that in an initial IPO, closed-end funds will offer a set number of shares to be traded on the exchange.

CFTC in Action: Agency Adopts Rules on SIDCOs, Reissues Relief for Contemporaneous Swaps Documentation Requirements, & Its Chair Gensler Praises Swaps Markets

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

CFTC Adopts Systemically Important Designated Clearing Organization Rules

The US Commodity Futures Trading Commission has adopted its final rules regarding systemically important designated clearing organizations. The new SIDCO rules line up CFTC regulations to with the Principles for Financial Market Infrastructures set up by the International Organization of Securities Commissions and the Bank for International Settlements.

Per the rules, SIDCOs can remain Qualifying Central Counterparties (QCCPs) for international bank capital standard purposes. The rules come with substantive requirements having to do with financial resources, governance, system safeguards, special default rules and procedures for shortfalls or losses that are not covered, disclosure requirements, risk management, efficiency, and recovery and wind-down procedures. The rules also tackle the procedures through which derivatives clearing organizations besides SIDCOs can choose to become subject to additional standards so they can also be considered QCCPs.

Texas Securities Fraud: SEC Accuses Two Houston-Based Advisory Firms of Making Thousands of Transactions That Clients Didn’t Know About

Published on: November 27, 2013 | by Shepherd Smith Edwards & Kantas, LLP

According to the SEC, Houston-based advisory firms Tri-Star Advisors and Parallax Investments LLC made thousands of principal transactions through the broker-dealer they are affiliated with but did not disclose that they were doing this to clients even though they are obligated to notify customers/get their permission beforehand. Also facing Texas securities charges over the transactions are three executives: John P. Bott II, who owns Parallex, and Jon C. Vaughan and William T. Payne, who are Tri-Star officials.

The regulator’s orders of administrative proceedings say that Bott made a minimum of 2,000 undisclosed principal transactions without the permission of Parallex clients. Meantime, for each one (executed between 2009 to 2011) its affiliate broker-dealer Tri-Star Financial employed its inventory account to buy bonds backed by mortgages for these clients and moved the bonds into the accounts of clients. Bott received close to half of the $1.9 million in sales credits that Tri-Star Financial received on the transactions.

Vaughan and Payne are also accused of making over 2,000 undisclosed principal transactions during the same timeframe without the permission of their Tri-Star Advisor clients. The same broker dealer provided similar third-party services as it did for Parallex, and Vauhan and Payne got close to half of the $1.9 million in gross sales credits. SEC Enforcement Division’s Asset Management Unit co-chief Marshall S. Sprung says that Tri-Star and Parallex prevented clients from knowing that their advisers could benefit from “running the trades through an affiliated account.”