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
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.
FINRA to Provide Market Surveillance Services for Two Direct Edge Licensed Stock Exchanges
FINRA and Direct Edge, which is the biggest stock exchange operator in the country, have arrived at an agreement in which the SRO will provide market surveillance services for two licensed stock exchanges. This will give FINRA surveillance of over 90% of U.S. equities trading volume. Already, the agency conducts examination and disciplinary services for Direct Edge.
The agreement will go into effect during this year’s fourth quarter. Richard Ketchum, FINRA’s CEO and Chairman, said that not only does this strengthen the SRO’s ability to make sure that the market is integrity while protecting investors, but also, it will allow the regulator to do a better job of going after possible cross-market abuses. FINRA currently conducts market oversight and surveillance services for NYSE Euronext, Nasdaq, and others.
Ex-Associated Member of Defunct FINRA Member Firm CapWest Securities Inc. Can Enforce Arbitration Pact
The Fourth District of the California Court of Appeal held that third party beneficiaries of agents of a FINRA arbitration agreement can enforce that agreement by compelling arbitration even if the contracting member firm is not allowed to because its membership status with the SRO lapsed. Plaintiff Ronay Family Limited Partnership is suing Robert R. Tweed and Tweed Financial Services, Inc. over securities it bought that were offered by CapWest Securities, Inc. Tweed and his firm served as CapWest registered agents.
When the plaintiff opened an account with CapWest, it signed an agreement that included an arbitration clause with the defendants. However, after Ronay Family Limited Partnership sustained losses, it sued Tweed, his firm, and others, contending that the clause could not be enforced because CapWest had gone defunct and its membership with FINRA cancelled. The trial court agreed with the plaintiff. However, the California Court of Appeal disagreed.
Madoff Feeder Funds Not Required to Arbitrate Claims Against KPMG
The Massachusetts Court of Appeals says that investors in two Bernard Madoff feeder funds don’t have to arbitrate their claims against external auditor KPMG and, instead, they can proceed with their lawsuit. The plaintiffs, limited partners of the Rye Funds, sued fund manager Tremont Partners, its parent company Tremont Capital Management Inc., KPMG, and others after they lost $20 million in the wake of the Madoff Ponzi scam collapse. They are accusing KPMG of negligent misrepresentation, fraudulent inducement, and fraudulent inducement.
KPMG sought to throw out the claims against it, aruing that they were derivative and belonged only to the Rye Funds, which has arbitration agreements with Tremont. The court, however, says that the plaintiffs claims are direct, rather than derivative, and are therefore not subject to the arbitration terms noted in the engagement letter between Tremont and KPMG.
Targeted Examination Letters, FINRA
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FINRA Chief Ketchum Calls for Brokers To Better Inform Investors of Fixed Income, Structured Product Risks, Stockbroker Fraud Blog, May 29, 2013
LPL Financial Ordered to Pay $7.5M FINRA Fine Over E-Mail Failures, Institutional Investor Securities Blog,