Investor Lawyers Blog

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.

NASAA President Pushes for State Regulation of “Reg A Plus” and for Private Lawsuits Over Small Offerings

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

State Securities Regulators and others are battling over how the US Securities and Exchange Commission should create a $50 million offering cap for exempt offerings under regulation A. The Jumpstart Our Business Startups Act had ordered the SEC to establish the new exemption but gave no deadline. Referred to by SEC staff as “Reg A Plus,” the agency’s Division of Corporation Finance rulemaking team has been working on the measure.

In a letter, the North American Securities Administrators Association urged the regulator to refuse to succumb to some commenters’ requests that state securities regulators not be included when it comes to the new exempt offerings. NASAA believes that state regulator oversight is key to making sure that these offerings are part of a successful public marketplace.

The letter, written by NASAA President A. Health Abshure, was in response to comments calling on the Commission to define what is a “qualified purchaser” under the 1933 Securities Act so that new offerings (or at least part of them) would be exempt from state blue sky registration. Abshure believes that limited state oversight for the new exemption would make it easier for scammers to use this exemption. He also says that making the securities freely tradable could increase the chances of financial fraud and abuse, which is why state regulation is so important.

Investor in Goldman Sachs Special Opportunities Fund 2006 to Get $2.5M FINRA Arbitration Award For Allegedly Unsuitable Investment

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

A Financial Industry Regulatory Authority Panel is ordering Goldman Sachs & Co. (GS) to pay about $2.5M to Tracy Landow for recommending that she invest in the Goldman Sachs Special Opportunities Fund 2006, which she is now contending was an investment that was not appropriate for her. Landow filed her arbitration claim against the unit and her broker a couple of years ago, claiming that unauthorized trades were made. She also alleged misrepresentation and failure to supervise.

The FINRA arbitration panel determined that Goldman liable, ordering the financial firm to compensate the claimant with $1.6M in damages plus about $1M in interest and additional fees. Broker John D. Blondel, Jr., however, was not found responsible. The panel determined that he did not play a part in the alleged investment sales-related violation, theft, forgery, misappropriation, or fund conversion and he was not accountable for the private equity fund and the transactions that resulted. It is recommending that his name be expunged from the case.

Meantime, Landow’s interest in the fund will go back to the financial firm within 30 days from the award date.

Berthel Fisher, VSR Financial Services, & Cetera Financial Modify the Way They Sell Nontraded REITs and Other Alternative Instruments

Published on: May 24, 2013 | by Shepherd Smith Edwards & Kantas, LLP

Investment News is reporting that in the wake of pressure from regulators, Berthel Fisher & Co. Financial Services Inc., Cetera Financial Group Inc. and VSR Financial Services Inc., are modifying the way they sell specific alternative investments, including nontraded real estate investment trusts, by revising current policy or including no procedures and guidelines. According to executives at the three brokerage firms, they want add liquid alternative choices to their platforms while staying mindful of the issues that regulators recently addressed.

These types of financial instruments are in demand due to their higher yields, especially as traditional investment interest rates for retirees stay low due to the Federal Reserve’s policy. According to VSR chairman Don Beary, Following recent FINRA’s ‘senior sweep,’ his brokerage firm is now more careful about what senior citizens can invest in. VRS’s registered representatives have just been notified about the new illiquid alternative investment sale guidelines, which include a 35% of illiquid investment limit for older clients’ accounts-down from 40-50% previously. Also, for clients in the 70 to 75 age group, they will be allowed to possess no more than 25% of illiquid investments in their portfolio. Clients in the 75 to 84 age group have a 15% limit, while customers older than that will not be allowed to make own any illiquid investments.

Meantime, Centera hasn’t modified customer allocations percentages , but it has enhanced its representative training requirements for representatives that sell illiquid investments and brought in more employees to conduct product due diligence.

SEC Securities Policy Roundup: Neither Admit, Nor Deny Policy, Pursuit of Injunctions for Misconduct, and SRO Oversight Get Closer Scrutiny

Published on: May 24, 2013 | by Shepherd Smith Edwards & Kantas, LLP

New SEC Chairman Reviews “Neither Admit, Nor Deny Wrongdoing” Policy

Securities and Exchange Commission Chairman Mary Jo White is taking a closer look at the agency’s practice of letting defendants that settle cases with it not have to admit to or deny the allegations. Critics of the policy have been vocal about how they believe that this lets violators get out of having to be accountable for any wrongdoing while not doing much to prevent them from repeating such actions again. Currently, the U.S. Court of Appeals for the Second Circuit is trying to determine whether a district court acted properly when it turned down the $285M securities settlement reached between Citigroup (C) and the SEC over the financial firm’s involvement in a 2007 collateralized debt obligation.

Testifying in front of Congress in her new role as SEC Chairman for the first time, White spoke about how despite her decision to review the practice, she does believes the policy has saved agency resources while giving investors’ their money back much quickly than if wrongdoing had to be proven.

FINRA Orders LPL Financial to Pay $7.5M Over Allegedly Inadequate Supervision of E-Mails

Published on: May 23, 2013 | by Shepherd Smith Edwards & Kantas, LLP

In what is being called the SRO’s largest fine to date over e-mail violations, the Financial Industry Regulatory Authority announced that it is fining LPL Financial LLC $7.5 million over 35 key e-mail system failures. The financial firm also has to set up a $1.5 million fund to compensate customers that may have been impacted. That is a total of $9 million.

According to FINRA, the e-mail and retention issues took place between 2007 and 2013, with LPL’s systems failing a minimum of 35 times. The brokerage firm allegedly did not fulfill its duty to supervise representatives, capture email, and answer regulator requests.

For more than four years, LPL purportedly did not supervise 28 million business emails that involved thousands of independent contractor representatives. The broker-dealer also is accused of making misstatements to the SRO during the latter’s investigation into the matter (email systems failures made it impossible for the firm to give over certain documents).

Ameriprise Financial, Securities America, & Three Other Brokerage Firms Reach $9.6M Non-Traded REIT Securities Settlement with Massachusetts Financial Regulator

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

Secretary of the Commonwealth of Massachusetts William Galvin announced today that the state has reached a $9.6M securities settlement with five independent brokerage dealers-Ameriprise Financial Services Inc. (AMP), Commonwealth Financial Network, Lincoln Financial Advisors Corp., Royal Alliance Associates Inc., & Securities America Inc.-over the allegedly inappropriate sale of nontraded real estate investment trusts to investors. $8.6M of this is restitution to them.

Galvin says that the investigation, which was triggered by complaints from customers, led to the discovery of a “pattern of impropriety” in the sale of these securities by independent broker-dealers where supervision has been hard to “maintain.” As part of the nontraded REIT settlement, Ameriprise will pay $2.6 in restitution and a $400K fine, Securities America will pay $778K in restitution and a $150K fine, Royal Alliance will pay $59K in restitution and a $25K fine, Commonwealth Financial Network will pay a $2.1M restitution and a $300K fine, and Lincoln Financial will pay a $504K restitution and a $100K fine.

The non-traded REIT agreement with these independent brokerage firms comes just three months after Galvin settled a similar securities fraud case with LPL Financial Holdings Inc. accusing that financial firm of inadequately supervising their brokers tasked with selling the financial instruments. LPL Financial agreed to pay $2.5M in restitution and a $500K administrative fee over seven nontraded REITs that were sold.

LPL Financial Ordered to Pay $7.5M FINRA Fine Over E-Mail Failures

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

The Financial Industry Regulatory Authority says that LPL Financial LLC must pay a $7.5 million fine for inadequately supervising more than 28 million business emails between 2007 and 2013. This is the largest fine the SRO has ever imposed over an e-mail case.

According to FINRA, LPL’s systems for overseeing and storing e-mails failed a minimum of 35 times. It contends that the firm did not succeed in fulfilling its duty to retain e-mails, supervise its representatives, and properly respond to requests by regulators. The SRO attributes these problems to the brokerage firm’s failure to put enough resources toward updating its e-mail system as its business grew quickly.

Among the e-mail failures: