June 17, 2014

Retirees Hurt, Brokers Enriched by $300 Billion 401(k) Rollover Boom

According to Bloomberg.com, as 401(k) rollovers continue to boom, it is the brokers who are profiting while the retirees are sustaining losses. Now, these investors are speaking out.

It was in 2012 that former employees moved $321 billion from 401(K) plans to individual retirement accounts—a 60% rise from the last decade. Now, the IRA is holding about $6.5 million in 401(k)-like accounts.

Even though retirees typically can keep their savings in 401(K) plans, financial firm reps. do reach out to try and persuade them to move their funds to IRAs instead. Internet ads, cold calls, cash incentives, and storefront signs are used to draw retirees in, including the promise of wider investment choices compared to their current plans. In one example of an incentive promised, E*Trade (ETFC) Financial Corp. and Bank of America Corp.’s (BAC) Merrill Lynch offer anyone who rolls over a 401 (K) plan into an IRA up to $600. (However, this can result in additional expenses down the road.)

Bloomberg, which conducted a three-month probe, discovered that ex-employees at big companies, such as AT&T, United Parcel Service Inc., and Hewlett Packard Co., have complained that sales representatives approached them to move retirement funds into unsuitable IRA investments. The investigation included interviews with brokers and retirees and an examination of documents, including confidential arbitration records.

One ex-AT & T administrative assistant who talked to Bloomberg said her account balance has dropped from $390K to $100K since she made such a transfer. Now, she is worried about losing her home.

The woman was a client of Kathleen Tarr, then a Royal Alliance Associates broker. American International Group Inc. (AIG) owns that firm. Tarr visited the offices and homes of AT & T employees, encouraging them roll over their retirement money into high risk commission vehicles.

She and her business partner reportedly made hundreds of thousands of dollars in commission annually. Since then 37 of her clients have filed complaints naming her. Tarr and Royal Alliance maintain that they made the right recommendations to retirees.

In the last couple of years, federal regulators have been cracking down on rollover abuse. In 2013, the US Government Accountability Office discovered that conflict of interest was a reason for IRA growth. Congress’s investigative arm said that financial companies that issue 401(K) plans even misled government investigators that pretended to be employees who were retiring. Representatives from these companies told the individuals that they should move their funds to IRAs that their firms managed.

Municipal bonds and non-traded real estate investment trusts are among the risky investments that retirees got involved in because of such recommendations. When Puerto Rico’s municipal bonds tanked badly last year, retirees who entrusted brokerage firms such as UBS (UBS) to move their funds into an IRA suffered huge losses to their life savings.

As for non-traded REITs, FINRA has already issued an alert warning that these instruments are difficult to cash in, aren’t as diversified as other real estate investments, and can come with commissions and other costs.

Retirees Suffer as $300 Billion 401(k) Rollover Boom Enriches Brokers, Bloomberg, June 17, 2014

Public Non-Traded REITs—Perform a Careful Review Before Investing, FINRA

Government Accountability Office


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Regulator Headlines: SEC Commissioner Stein Wants Updated Capital Rules for Brokerage Firms, FINRA’s BrokerCheck Link Proposal Faces Opposition, & CFTC Appoints New Enforcement Head, Institutional Investor Securities Blog, June 12, 2014

JPMorgan Investment Management’s Shareholders Claim The Firm Charged Excessive Mutual Fund Fees, Institutional Investor Securities Blog, June 13, 2014

June 14, 2013

Radio Host Dave Ramsey and Financial Advisers Get Into Twitter Fight

Dave Ramsey, a well-known radio host, recently got into a twitter war with fee-only financial advisers. The advisers had criticized the radio personality, who is also an author, for telling his readers to expect a 12% investment return and for promoting brokers who are commission-based. Ramsey hosts the popular “The Dave Ramsey Show,” which is a program about money and life.

One adviser, Carl Richards, Tweeted that Ramsey’s advice was “dangerous.” Ramsey responded to his critics also via Twitter, saying that he provides assistance to more people in minutes than all of these advisers ever will.

Another adviser, David Grant, questioned whether the investment professionals that Ramsey recommends on online pay the host for that endorsement. Ramsey did not respond. However, his website does state that local providers that are endorsed do pay a fee for the “local advertising.” All recommended providers, however, have to be Financial Industry Regulatory Authority Inc. members.

Commenting on the Twitter spat, Forbes contributor Tim Maurer said that beneath this social media disagreement is an even bigger problem, which is that the factions in the “financial kingdom” have incentive to work against each other, rather than together, which limits their “collective benefit.” Maurer was also quick to point out that this brawl only includes two of the factions that exist and they aren’t even the most powerful ones.

The financial planner and educator proceeded to offer his take on the industry’s most powerful, with banks, broker-dealers, and insurance companies among the most influential, followed by independent RIAs (Registered Investment Advisory firms). Then, there are FINRA, the SEC, the Certified Financial Planner Board, the Financial Planning Association, the National Association of Personal Financial Advisors, and the financial media.

Maurer talked about how what sells is differentiation, with little impetus to fine commonality. He did, however, suggest that there should some unifying principals that the public could depend on from these different factions if they would be willing.

At Shepherd Smith Edwards and Kantas, LTD, LLP, our securities lawyers are versed and experienced in securities law, arbitration, and the securities industry. We help investors, both individual and institutional clients, recoup their financial losses caused by unsuitable recommendations, misrepresentations, omissions, financial fraud, Ponzi scams, inadequate supervision, failure to execute trades, negligence, breach of promise, margin account abuse, insider trading, registration violations, elder financial fraud, unauthorized trading, and other types of securities fraud.

We know how important it is to choose the right stockbroker fraud law firm, which is why we would like to offer you a free, no obligation, case assessment. Contact us today. We have successfully worked with thousands of clients via FINRA arbitration and the courts.

Dave Ramsey's Online Brawl Shows Problematic Divisions In Finance World
, Forbes, June 4, 2013

Dave Ramsey flames advisers on Twitter, Investment News, June 9, 2013

Dave Ramsey, Twitter

Dave Ramsey


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Muni Bonds Draw Investors But Come With Serious Risks, Stockbroker Fraud Blog, June 11, 2013

As Their Prices Hit a 2-Year Low, Gold ETFs Liquidate En Masse, Institutional Investor Securities Blog, June 10, 2013

AIG Drops RMBS Lawsuit Against New York Fed, Fights Bank of America’s $8.5B MBS Settlement
, Institutional Investor Securities Blog, June 5, 2013

May 30, 2013

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

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.

Still, other advisers are concerned that their trades and strategies will no longer become private. Respecting these concerns, Morgan Stanley has designed Trade Flow Insights so that single-day activity won’t be accessible. Activity surrounding a certain investment will only show up when at least 50 advisers have been involved in at least 4,000 client accounts.

The tool could also be beneficial for newer advisers, who may be able to avail from the experiences and knowledge of their more seasoned counterparts.

Securities Fraud
If you suspect that your investment losses are a result of unsuitable recommendations, unauthorized trading, misrepresentations and omissions, inadequate supervision, breach of duty, failure to execute trades, overconcentration, negligence, registration violations, and margin account abuse, you may have grounds for a securities fraud claim or lawsuit. Contact our securities lawyers today.

Morgan Stanley Gives Advisers a Peek at What Peers Buy, The Wall Street Journal, May 13, 2013


Morgan Stanley rolls out Trade Flow Insights tool, Investment News, May 26, 2013


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May 17, 2013

Number of Banks At Risk of Failing Goes Down

According to The Dealmaker’s Journal, the list of banks in danger of failing has gotten smaller. Bank observers are speculating whether the failures have decreased because of election year politics, the industry is becoming more robust, regulatory agencies have changed leadership, or other factors.

Regulators tend to shut down banks with low capital, and last month alone, data analysis firm Trepp reported a rise in bank failures. That said, the rate of failures has gone down in the last few years. Last year 51 banks failed. By April for this year, 10 banks had failed. However, 651 institutions are still on the Federal Deposit Insurance Corp’s list of problem banks.

Over just the course of a quarter following exams and credit writedowns, there have been banks that have gone from appearing well capitalized to seized. This was especially true 2009 and 2010 when certain bankers were reluctant to admit that credit quality had gone down until regulators forced them to lower the value of their portfolios.

During times when there aren’t many banks with capital ratios at levels that are critically low, the risk of failures become less likely. Granted, this might pose a for healthy banks wanting to buy inexpensive franchises, but also it makes it easier for them to buy a bank that, although beleaguered, is also somewhat stable and may be able to enhance their business.

Our securities fraud lawyers recover the lost funds of individual and institutional investors. Your initial case evaluation with us is free. Contact Shepherd Smith Edwards and Kantas, LTD LLP today.

Bucket of Likely Bank Failures Nearly Empty, American Banker, May 10, 2013

Federal Deposit Insurance Corp.


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, Institutional Investor Securities Blog, May 9, 2013

April 13, 2013

AIG Wants to Stop Former CEO Greenberg From Naming It as a Defendant in Derivatives Lawsuit Against the US

American International Group is asking a federal judge to prevent Maurice Greenberg, its former chief executive, from suing the federal government on its behalf. The insurer had already decided it wasn’t going to file a lawsuit against the federal government over its bailout that took place during the economic crisis.

Greenberg, who has filed a $25 billion securities lawsuit against the US, is pursuing derivative claims for the company. He claims that the bailout’s “onerous” terms cost the insurer’s investors billions.

While AIG isn’t trying to stop Greenberg from suing on his behalf or for other shareholders, the insurance giant has made it clear that suing the government over the rescue isn’t where it wants to focus its energy and resources. In its filing, AIG notes that according to Delaware Law, Greenberg, through Starr Investment, cannot take over the right of the AIG board to make the call on whether/not to sue.

All of AIG’s directors were unanimous in their decision not to have AIG join Greenberg’s securities lawsuit. He, however, claims that they succumbed to government pressure.

In its filing, AIG argues that its decision not to sue makes sense, seeing as the board believes that securities claims that Starr is making on its behalf may not be ‘slam dunk… winner,’ contrary to his claims. The insurer says that its own counsel thinks that chances of the derivatives lawsuit proving to be a success are “low.” They also believe that such litigation would harm AIG’s image, brand, and relationships with regulators, shareholders, customers, and elected officials while negatively impacting its attempts to rebuilding itself and pay back everything it owes the government.

A.I.G. Says It Will Not Join Lawsuit Against Government, New York Times, January 9, 2013

AIG Request to Bar Greenberg Derivative Lawsuit, Scribd


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January 7, 2013

IOSCO Complex Products Report Does Not Get SEC Commissioners’ Approval Votes

The Securities and Exchange Commission has failed to approve the International Organization of Securities Commission’s final report on the suitability requirements for distributing complex financial products. Commissioners Troy Paredes and Daniel Gallagher say they disapprove of its release. They don’t think it accurately portrays relevant law and that the US regulatory regime should not conform to it.

IOSCO believes that the 2008 economic collapse brought up serious concerns about how the increasing complexity of certain financial products has made it harder for clients to see the risks involved.

The report lays out nine principals to make sure there is proper customer protection related to complex financial instruments. Among the principals: intermediaries must implement policies to note the difference between non-retail and retail clients as they relate to financial instruments and execute “reasonable steps” to handle conflicts of interest, while exposing the risks should the client’s interest potentially be compromised; firms have to set up specific internal policies that support suitability requirements; and that intermediaries that recommend certain complex instruments have to take reasonable steps to make sure that their counsel is grounded upon a reasonable assessment that the financial product’s risk-reward profile and structure is aligned with the customer’s knowledge, experience, investment goals, inclination toward risk, and capacity to handle loss.

“In the worldwide race to the bottom to see which countries will protect their investors the least, the SEC is our champion, leading the charge for the United States of America to surely win a medal in this event,” says Shepherd Smith Edwards and Kantas, LTD, LLP founder and stockbroker fraud lawyer William Shepherd.

IOSCO Report on Complex Products Fails to Attract Votes for SEC Approval, Bloomberg/BNA, January 24, 2013


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July 30, 2012

FINRA, SEC Need to Employ Better Oversight Over Investor Education Funds, Says District Court

The U.S. District Court for the Southern District of New York says that the Securities and Exchange Commission is not a doing a good enough job in providing oversight of $55 million in investor education funds and the way that the money is being disbursed. The funds come from the $1.4 Global Research Analyst Settlement that was reached with top investment banks, including Citigroup (C), JPMorgan Chase & Co. (JPM), Goldman Sachs Group Inc. (GS), and others, in 2003, over securities research that had been allegedly flawed and biased. The case is SEC v. Bear Stearns & Co.

Now, Judge William H. Pauley III, who is tasked with supervising how the settlement is implemented, is contending that the SEC should have been raising red flags about the FINRA Investor Education Foundation’s “opaque” project spending and operational expenses. The court is asking the foundation and the SEC to turn in certain information, including detailed accounting of receipts and spending for 2011 and 2010, by the end of August. The foundation also has provided additional details about its operating costs.

The court has said that disbursing the funds has been a challenging process. After the Investor Education Entity, which was created to use the funds, failed to take off, in 2005 the court let the SEC move the $55 million to the foundation under the premise that the regulator would provide oversight while turning in quarterly reports.( As of December 31, 2011 the foundation had given out approximately $44.7 million of the funds through education and grant programs.)

However, in an opinion that issued in 2009, the court questioned why the foundation paid $800,000 in administrative expenses while giving just $6.5 million to grantees. And in this most recent decision, the court is once again asking why, considering the type of projects involved, the foundation seems to spend a “disproportionately high” amount. Pauley pointed to several examples, including a daylong seminar involving 130 attendees in West Virginia that cost $58,000 and a financial fraud conference last November that the foundation co-sponsored in DC that took place at a posh hotel.

The court also said that the quarterly reports that it has received are “bereft” of the details that they should provide, and it is wondering why the eight “primary” states that have been the target of the foundation’s educational activities don’t necessarily appear to be the ones with the “greatest investor education needs.”

FINRA Investor Education Foundation spokesperson George Smaragdis has said that the foundation will give over the information that the court is asking for but that it doesn’t agree with the majority of the court’s statements.


SEC v. Bear Stearns

FINRA Investor Education Foundation

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Continue reading "FINRA, SEC Need to Employ Better Oversight Over Investor Education Funds, Says District Court " »

July 12, 2012

NYSE Proposal for Retail Order Execution Pilot Program Gets SEC Approval

The Securities and Exchange Commission has approved the New York Stock Exchange LLC and NYSE Amex LLC proposal for a pilot program that lets them set up for one year a private trade execution venue for retail investors. The “retail liquidity program” will go up against internalizing brokerage firms for retail order flow while offering price improvements at mere fractions of a penny. (Currently retail brokers send most of their orders through broker dealers that internalize or execute them in over-the-counter markets instead of bilateral exchanges.)

According to NYSE Euronext (NYX), the program will be implemented on the NYSE MKT and NYSE on August 1 and is complimentary to the trade execution options that currently exist for retail investors. The program is for direct use by retail brokerages and market intermediaries that work with retail order flow providers.

In a release issued last week, NYSE Euronext executive vice president Joseph Mecane said that giving improved prices for retail orders in an exchange environment lets individual investors afford new economic incentives while creating greater liquidity, transparency, and competition through the US cash equities marketplace. The program will set up two new market participant classes at NYSE exchange: 1) retail member organizations that will turn in retail orders to the exchanges and 2) retail liquidity providers that will have to give price improvements as interest that is more competitively priced than the exchange’s best protected bid/offer as a tradeoff for specific economic benefits. A NYSE member can qualify as a liquidity provider by obtaining approval as a market maker or supplementary liquidity provider on the exchange, while demonstrating that it can meet retail liquidity provider requirements.

According to the SEC, a lot of commenters were opposed to the NYSE pilot program. One common concern is that segmenting retail orders might get in the way of making sure that non-retail investors get fair access, and, as a result, end up establishing a two-tiered market. There is also worry that the program might cause sub-penny trading to grow.

Yet, despite the opposition, the SEC believes that the proposed rule changes could improve retail investors’ price orders while creating a chance for institutional investors to engage with retail order flow to which they currently don’t have access. The Commission disagrees that the program might create a significant “shift” in the structure of the market. It is convinced that the program will closely replicate existing OTC market trading dynamics and that this will create another competitive venue for the execution of retail order flow.

As part of its July 3 order approving the pilot proposal, the SEC gave NYSE a limited exemption from Rule 612 of Regulation NMS [National Market System] The sub-penny rule doesn’t allow exchanges to display or accept orders or quotations in any NMS stocks in price increments under a penny—unless the orders or quotations in stock are priced at under $1/share.

Over the years, our securities lawyers have helped thousands of individual and institutional investors recoup their losses. To schedule your free case evaluation, contact Shepherd Smith Edwards and Kantas, LTD LLP today.

Read the SEC's Order (PDF)

SEC Approves NYSE Proposal to Set up Pilot Program for Retail Order Execution, Bloomberg/BNA, July 6, 2012


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Should Retail Investors Be Given Greater Access to IPO Information?, Stockbroker Fraud Blog, June 29, 2012

SEC’s Efforts to Reconsider a ’07 Proposal Over Broker-Dealer Financial Requirements Elicits Concerns From Some Market Participants, Stockbroker Fraud Blog, June 20, 2012

Will the JOBS ACT Will Expand Private Offerings But Hurt Public Markets?, Institutional Investor Securities Blog, July 6, 2012

June 29, 2012

Should Retail Investors Be Given Greater Access to IPO Information?

At a Senate Banking Subcommittee hearing last week, the topic of whether retail investors should get more access to IPO information to even out the initial public offering process for both institutional and ordinary investors was discussed. One of the reasons the hearing was called was to look at the issues involving the recent IPO of Facebook (FB), which opened on the Nasdaq a few weeks ago.

There are some who believe that the social networking giant’s underwriters gave favored clients negative material information prior to the offering while leaving other investors out in the cold. Soon after trading began, Facebook shares declined sharply. At the hearing, Securities Subcommittee chairman Sen. Jack Reed (D-RI) spoke about the need to make sure that ordinary investors and sophisticated investors are subject to the same rules, including providing everyone with access to the same disclosures and data (or, at the very least, equivalent versions of both).

Among the witnesses who support giving retail investors more access to information about IPO’s is DePaul University finance professor Ann Sherman. She suggested making issuers publish online at least two Q and A sessions from the IPO road show so that retail investors would be getting the same amount of information as the typical institutional investor that usually attends one such meeting. While she acknowledged that there are reasonable grounds for limiting how much access is given to analyst forecasts that tend to be “speculative,” she said that lawmakers should either make this data available to no one or to everyone.

Meantime, although Class V Group LLC principal and founder Lisa Buyer also said that posting Q & A sessions online would benefit retail investors, she noted that it would be “difficult” to ensure that the information was distributed equally. Both Buyer and Sherman, however, warned against giving retail investors a greater role in IPOs as it relates to the setting of price. Sherman argued that as a group, regular retail investors might not be able to fulfill the same role as institutional ones. She spoke about how any regulatory changes implemented so that greater retail investor participation can take place should consider such differences.

Another topic that came up for discussion was the Jumpstart Our Business Startups Act. Senator Reed expressed worries that the legislation, which was recently enacted, could hurt ordinary investors taking part in IPOs. The statute, which establishes an IPO on-ramp for issuers that satisfy the definition of an emerging growth company, gives the latter temporary exemption from the full disclosures that public companies usually have to give. Reed was concerned that allowing EGCs to turn in confidential draft registration statements with the SEC prior to a public filing created confidentiality until “very late in the process” and that this would hinder the process of making sure investors are getting information.

Securities Fraud
Shepherd Smith Edwards and Kantas represents retail investors that have been defrauded by members of the financial industry. Our securities lawyers work with clients throughout US, and over the years, we have helped thousands recoup their losses.

Retail Investors Need More Access To IPO Information, Some Experts Say, Bloomberg/BNA, June 21, 2012

Jumpstart Our Business Startups Act (PDF)



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SEC’s Efforts to Reconsider a ’07 Proposal Over Broker-Dealer Financial Requirements Elicits Concerns From Some Market Participants, Stockbroker Fraud Blog, June 20, 2012

Investment Advisers and Brokers Should Be Able To Explain in One Page Why an Investment Would Benefit a Retail Client, Says FINRA CEO Richard Ketchum, Stockbroker Fraud Blog, June 14, 2012

FINRA Initiatives Addressing Market Volatility Approved by the SEC, Stockbroker Fraud Blog, June 5, 2012

June 20, 2012

SEC’s Efforts to Reconsider a ’07 Proposal Over Broker-Dealer Financial Requirements Elicits Concerns From Some Market Participants

The Securities and Exchange Commission's efforts to revive a 2007 proposal, which would amend the rules under the 1934 Securities Exchange Act related to customer protection, net capital, notification, and books and records for broker-dealers, has some market participants upset. The proposal, which seeks to deal with areas of concern related to broker-dealer financial requirements and update the financial responsibility rules of these firms, was recently opened up again for comment by the SEC for a 30-day period through June 8, 2012 in the wake of the regulatory developments and economic events that have developed since 2007 and due to the public’s continued interest.

However, as our securities fraud law firm just mentioned, not everyone is welcoming this move with open arms. Earlier this month, BOK Financial Corp. (BOKF) wrote a letter to the SEC arguing that the proposal doesn’t factor in certain significant changes that have taken place since 2007 and that “key justifications” for specific proposed modifications appear to be based more on that time period rather than “current conditions.” Also voicing its disapproval was the National Investment Banking Association, which noted that the proposal fails to include numerical values or statistics that represent the present atmosphere. NIBA also pointed to the “unprecedented changes” that have followed since the proposal was introduced five years ago.

J.P. Morgan Trading Services is also not pleased with the SEC’s decision to revise this 2007 proposal. It is calling on the Commission to use other prudential rules that it believes would do a better job. Meantime, the Securities Industry and Financial Markets Association is warning that certain of the proposed requirements might up the financial osts for industry participants.

The proposal mandates that broker-dealers with the proprietary accounts of other broker-dealers maintain reserve funds to deal with claims stemming from these accounts. It also would prevent broker-dealers from including as part of these funds cash that was placed at affiliated banks, as well as some of the cash that was deposited in banks that are not affiliated.

That said, there are those that support this proposal. In a letter to the SEC, the Public Investors Arbitration Bar Association said that it believes the proposed measures would “marginally increase” broker-dealers’ financial stability while decreasing the risk of public investors that succeed in FINRA arbitration proceedings not being able to collect the damages that they are awarded through these proceedings. PIABA even believes that the proposal should additionally require that all broker-dealers have errors and omissions insurance to cover client claims to make sure that these financial firms are able to pay these arbitration awards.

Some Voice Concern at SEC Bid to Revive 2007 B-D Financial Responsibility Proposal, BNA/Bloomberg, June 18, 2012

Comments on Amendments to Financial Responsibility Rules for Broker-Dealers, SEC


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Continue reading "SEC’s Efforts to Reconsider a ’07 Proposal Over Broker-Dealer Financial Requirements Elicits Concerns From Some Market Participants" »

June 14, 2012

Investment Advisers and Brokers Should Be Able To Explain in One Page Why an Investment Would Benefit a Retail Client, Says FINRA CEO Richard Ketchum

At the Financial Industry Regulatory Authority’s yearly conference, the SRO’s CEO, Richard Ketchum, talked about how investment advisers and brokers that sell complex instruments to retail clients should be able to write on a “single page” the reasons why the product is in the best interest of that investor. Ketchum made his comments less than a month after FINRA fined Citigroup Inc. (C), Wells Fargo & Co. (WFC), UBS AG (UBS), and Morgan Stanley (MS) $9.1 million for their alleged failure to correctly train sales employees about the features of and risks involved with leveraged and inverse exchange-traded funds.

Shepherd Smith Edwards and Kantas, LTD, LLP Founder and FINRA Arbitration lawyer William Shepherd disagrees with this ‘single page’ approach. “Despite its name, one should know that FINRA is a self-regulatory association owned and operated by securities dealers,” he said. “A one page statement as to why an investor is being sold an investment is likely designed to become a disclaimer such as the one found on a toaster or other product. This one-pager could then be used to shift the burden of suitability from the broker to the investor. Retirees who lose their savings can then be told. ‘It is your fault, not ours.’ Beware of securities self-regulators bearing gifts.”

Ketchum also talked about how reps should talk to investors about how a product will likely do in different markets and that investment losses could result. He also suggested that broker-dealers provide more training to brokers about financial products so that they can also better explain any costs involved. Acknowledging that conflicts of interests do exist, Ketchum spoke about the need for brokerage firms to self-assess regarding which is higher priority to it: the best interests of investors or that of their own employees?

Meantime, Securities Industry and Financial Markets Association general counsel and senior managing director Ira Hammerman has spoken in favor of a uniform fiduciary standard” for both investment advisers and brokers. He said it was key that new disclosures articulate in simple English the material risks, conflicts of interest, and possible rewards.

“As for standardizing the breach of fiduciary standard in the securities industry: The goal is to water-down ‘settled law’ regarding fiduciary duty,” said Stockbroker fraud attorney William Shepherd. “Other professionals, including lawyers, have lived with this duty for centuries. Since 1945, investment advisors have existed with the current legal definition of ‘fiduciary duty.’ Wall Street brokers should simply be held to the same standard.”


FINRA Annual Conference 2012

Securities Industry and Financial Markets Association

More Blog Posts
FINRA Initiatives Addressing Market Volatility Approved by the SEC, Institutional Investor Securities Blog, June 5, 2012
FINRA Will Customize Oversight to Investment Adviser Industry if Chosen as Its SRO, Stockbroker Fraud Blog, April 8, 2011

Fiduciary Standard in Securities Industry Doesn't Need New Definition, Stockbroker Fraud Blog, November 26, 2010


Continue reading "Investment Advisers and Brokers Should Be Able To Explain in One Page Why an Investment Would Benefit a Retail Client, Says FINRA CEO Richard Ketchum" »

May 12, 2012

Dire Predictions For Wall Street Reforms: Not Complete Until 2013, Even Longer to Implement, Half May Not Survive

Speaking at the Council on Foreign Relations on May 2, Federal Reserve Governor Daniel K. Tarullo said he did not think that federal agencies would complete their rulemaking duties that are mandated under the Dodd-Frank Wall Street Reform and Consumer Protection Act until next year. He also said that full implementation of these rules would take even more time. Tarullo is in charge of overseeing efforts by the Fed to draft and execute these regulatory reforms.

He said that the process of completing the rules is a complicated one and challenges have inevitably arisen. To finish rulemaking duties sooner would likely have resulted in “inconsistencies and open questions” that would have inevitably led to “another round of changes.” Tarullo also spoke about how the complexities of certain US regulations have posed added challenges. For example, regulatory reforms must conform to the Basel Committee on Banking Supervision's Basel III framework.

Tarullo also said that “instability” from the shadow banking system warrants a need for more regulatory reforms. He warned of new forms of shadow banking that could be lurking on the horizon especially if greater regulation of the large financial firms leads to elements of the shadow banking system going into “largely unregulated markets.”

Tarullo talked about how money market funds could prove especially problematic due to a mix of fixed net asset value, not enough absorption capacity, and the “propensity for institutional investors to run together.” He also said that reform was necessary in the tri-party repo market.

At another gathering this month, ex-Securities and Exchange Commission Chairman Arthur Leavitt voiced his thoughts about the Dodd-Frank Wall Street Reform and Consumer Protection Act and its mandates. Speaking on a panel at the Bloomberg Washington Summit, he said that he believed that less than half of the act would end up being implemented. Leavitt partially attributed this to efforts by Congress to impede the law. He criticized what he considered lawmakers’ efforts to hold back the reform act and cut regulators’ funding.

As an example, Leavitt pointed to the JOBS ACT, which looks to relieve capital formation and relaxes several securities regulations. It is key in undermining regulation. However, he described the JOBS Act as “the most investor-unfriendly bill” in the history of this nation. He also spoke about how because Congressional members have been forced to contend with a lot of pressure to “emasculate principal regulators,” these lawmakers have ended up hurting the Securities and Exchange Commission and the Commodity Futures Trading Commission when it comes to issues that are key to systemic risk.

Stockbroker Fraud
To schedule your free initial consultation with Shepherd Smith Edwards and Kantas, LTD, LLP, contact one of our securities lawyers today.

JOBS ACT (PDF)

Governor Daniel K. Tarullo, Speech at the Board of Governors of the Federal Reserve System

Former SEC Chairman Levitt predicts less than half of Dodd-Frank will be implemented, Bloomberg/BNA, May 2, 2012

More Blog Posts:
SEC Chairman Says Commission Shouldn’t Impose Industry-Wide Bars On Offenders that Committed Misconduct Before Dodd-Frank Statute’s Enactment, Institutional Investor Securities Blog, April 16, 2012

FINRA May Put Forward Another Proposal About Possible SEC Rule Regarding Fiduciary Duty, Institutional Investor Securities Blog, November 28, 2011

AARP, Investment Adviser Association, Among Groups Asking the SEC to Make Brokers Abide by 1940 Investment Advisers Act’s Fiduciary Duty, Stockbroker Fraud Blog, April 14, 2012

March 10, 2012

SIPC Modernization Task Force Recommends Increasing SIPA Protection Level for Failed Brokerage Firm’s Clients from $500K to $1.3M

The SIPC Modernization Task Force, which was created by the Securities Investor Protection Corporation, has made 15 recommendations to update SIPC and Securities Investor Protection Act provisions. Among the 15 recommendations:

• Raising coverage protection for customers of failed brokerage firms from $500K to $1.3M.
• Getting rid of the distinction between protection levels for securities and cash.
• Providing pension fund protections for participants on a pass-through basis.
• Amending the current minimum assessment to whichever is greater—a) the amount established by SIPC Bylaw to not go over 0.2% of the member’s gross revenues from the securities business or b)$1,000.
• When total amount of claims aggregates is $5 million, allowing for direct payment procedures.
• Mandating that SIPC members’ auditors submit audit report copies with SIPC.
• Affirming banks and other custodians’ duty to protect Rule 15c3-3 accounts; reaffirming that the accounts will have to contend with trustee control should the broker-dealer enter liquidation proceedings.
• Granting the same avoidance powers to the SIPA trustee and a trustee dealing with a case under the bankruptcy code.
• Continuing to allow reverse purchase agreement and repurchase related claims to be treated as general creditor claims.

SIPC’s board is now evaluating the recommendations, some of which will require congressional action (ie. rule making).

Meantime, investors of Bernie Madoff have submitted two petitions requesting that the US Supreme Court review the U.S. Court of Appeals for the Second Circuit’s ruling, which upheld Irving Picard’s method of calculating “net equity” under SIPA in which customers are allowed to get back their “net equity.” However, how that amount is calculated is not specified.

Picard is the Madoff trustee and is overseeing the liquidation of the Ponzi mastermind’s brokerage firm, Bernard L. Madoff Investment Securities LLC. Contending that BLMIS created false profits, Picard Is suing “net winners” that allegedly took more money than they deposited into their accounts. The money retrieved would pay back “net losers.”

In a certiorari petition submitted on February 3, lawyers for hundreds of investors contended that the appeals court made a mistake in giving SIPA trustees “unlimited discretion” to determine “net equity” according to whatever circumstances are involved. The investors argued that SIPA defines “net equity” in a manner that mandates that SIPC insurance coverage be issued according to the amount the broker owes to customers. This figure the reflected on the last statement.

A few days later, Massachusetts School of Law Dean Lawrence Vevel, who is also an investor, filed his certiorari petition accusing the Second Circuit of disregarding congressional intent when it upheld in favor of Picard’s approach to “net equity.” He argued that Congress obviously meant to replace client securities even if the securities had never been bought.

The Madoff trustee has refused to pay back claimants according to their final BLMIS accounts. Instead, he has said that customer claims have to be based on the withdrawals and deposits that are noted in BLMIS’ books and records.


Diverse Group of Securities Experts Make Recommendations For Future of Organization, SIPC, February 21, 2012

Madoff Investors Ask High Court to Review Affirmance of Trustee's ‘Net Equity’ Method, Bloomberg BNA, February 22, 2012


More Blog Posts:

Appeals Court affirm SEC Finding that Broker Acted “Willfully” When Keeping IRS Lien Information from FINRA, Stockbroker Fraud Blog, February 24, 2012

FINRA Says Charles Schwab Corp. is Making Customers Waive Right to Pursue Class Action Lawsuits, Stockbroker Fraud Blog, February 8, 2012

Merrill Lynch, Pierce, Fenner & Smith Ordered to Pay $1M FINRA Fine for Not Arbitrating Employee Disputes Over Retention Bonuses, Institutional Investor Securities Blog, January 6, 2012

Continue reading "SIPC Modernization Task Force Recommends Increasing SIPA Protection Level for Failed Brokerage Firm’s Clients from $500K to $1.3M " »

February 29, 2012

FINRA May Surrender Proprietary BrokerCheck Lock

The Financial Industry Regulatory Authority Inc. is thinking of giving up its proprietary lock on BrokerCheck information. This would allow for greater examination of a broker’s disciplinary data, including regulatory and arbitration actions, as well as customer complaints. The SRO is currently seeking public comment on this matter through April 6.

Opening up access to BrokerCheck data would allow commercial users to make the reports, known for being pretty dense, friendlier for users. (Some people have said that the information available is “convoluted” and uses language that can be hard for an investor to comprehend.) This could help investors more easily find information about a broker. Also, vendors might be able to establish comparison data and some complaint data on the firm-level could become accessible.

Up until this point, FINRA has been protective about keeping its disciplinary information confidential. Not only has it prevented the automatic downloading of the BrokerCheck database, but also, this information has only been available through one-off data requests by individuals.

Critics of FINRA’s closed door policy have said these limitations protect the financial industry by keeping embarrassing information about firms and brokers private. While this has allowed financial advisers with numerous complaints against them to keep such secrets quiet, invaluable information, such as whether one broker has received more complaints than another, ends up not becoming known. The SRO, however, maintains that it hasn’t been shielding the industry with its BrokerCheck restrictions.

One reason that FINRA is considering making its BrokerCheck data more easily accessible is because it has been under pressure to merge the database’s search results with the Investment Adviser Public Disclosure database. IAPD data is pubic information and can be downloaded automatically. (Last year, FINRA considered putting the two systems together into one database to be made public but now says it is more practical to keep them separate.)

It wasn’t until recently that FINRA was the only regulator to have an online tool that let investors look into the backgrounds of members of the financial services industry. It was in 2010 that the Securities and Exchange Commission widened the IAPD database to include not just investment advisor firm information, but also data about IA representatives.

Last year, as mandated by Dodd-Frank’s Section 919B, the Commission put out a study and recommendations on how to better investor access to information related to broker-dealer and investment adviser registration. AdvisorOne reports that to improve how investors can better access this type of data, the SEC is recommending that search findings for it and the IAPD databases be unified, zip code and other location indicator-related searches be implemented, and educational content to help investors navigate any unfamiliar term definitions or links be included. Dodd-Frank wants these recommendations implemented soon, and FINRA plans to have this completed by the July deadline.

FINRA to Restructure BrokerCheck, Giving Investors More Power, AdvisorOne, March 2, 2012

Finra may give up lock on BrokerCheck, InvestmentNews, March 1, 2012


More Blog Posts:
Appeals Court affirm SEC Finding that Broker Acted “Willfully” When Keeping IRS Lien Information from FINRA, Stockbroker Fraud Blog, February 24, 2012

FINRA Says Charles Schwab Corp. is Making Customers Waive Right to Pursue Class Action Lawsuits, Stockbroker Fraud Blog, February 8, 2012

Merrill Lynch, Pierce, Fenner & Smith Ordered to Pay $1M FINRA Fine for Not Arbitrating Employee Disputes Over Retention Bonuses, Institutional Investor Securities Blog, January 6, 2012

Continue reading "FINRA May Surrender Proprietary BrokerCheck Lock " »

October 29, 2011

Long Island Rail Road Disability Fraud Leads to 11 People Charged

This week, at least 11 people were charged over a fraud scam that allowed hundreds of Long Island Rail Road workers to falsely claim that they had disabling injuries in order to collect annual pensions. The scam could cost a federal pension agency over $1 billion. Among the defendants are seven ex- railroad workers (including an ex-federal railroad pension agency employee and a former union president) two doctors, and an office manager.

According to prosecutors, employees that took part in the Long Island Rail Road disability fraud claimed they were disabled when in fact they were still able to play golf, ride a bike, or engage in aerobics. The doctors reportedly filed the false claims so they could receive an extra benefit from the Railroad Retirement Board. Per the criminal complaint, Dr. Peter Ajemian recommended that at least 734 employees of LIRR be approved for disability. Dr. Peter Lesniewski recommended that 222 LIRR workers receive disability benefits. A third doctor is believed to have also been involved in the scam but he recently passed away. The doctors allegedly created false illness narratives and medical assessments for hundreds of retirees, receiving $800 - $1200 for each one, in addition to fees for false medical records to support the claims of disability. They also were paid millions in health insurance payments for treatments that were not actually needed.

Approximately $121 million was paid out to LIRR workers, whose disabilities were exaggerated or made up. For example, according to the New York Times, 62-year-old defendant Gregory Noone gets $105,000 in disability and pension payments annually and supposedly is in a lot of pain when he crouches, bends, or grips objects. Yet he manages to play golf and tennis frequently. 55-year-old Steven Gagliano, whose yearly payments are $75,000, took part in a 400-mile bike tour even though he claims to experience back pain that is so severe it is disabling.

The federal government started investigating the scam after the New York Times published a number of articles about LIRR employees abusing federal Railroad Retirement Board pensions in 2008. Per the newspaper, almost all of the railroad company’s career employees were seeking and getting disability payments—that’s three to four times the disability rate of the average railroad company. Also, said the Times, the federal Railroad Retirement Board appears to have been poorly run, with inadequate tests to determine whether disability claims is legitimate. Some railroad officials had even complained that disability benefits were frequently awarded for medical conditions even if a worker’s ability to work hadn’t been impaired. Few claims were turned down.

11 Charged in L.I.R.R. Disability Fraud Plot, NY Times, October 27, 2011

Local Docs Charged in $1B LIRR Disability Scam, Rockville Center, October 27, 2011

US Railroad Retirement Board


More Blog Posts:

“Investor’s Guide to Loss Recovery” Offers Key Information on How to Use Conflict Resolution to Get Your Assets Back, Stockbroker Fraud Blog, September 7, 2011

SEC’s Proxy Access Rule is Rejected by Appeals Court, Stockbroker Fraud Blog, August 5, 2011

No Need for New SRO Overseeing Investment Advisers, Says NASAA Official to Congress, Stockbroker Fraud Blog, April 10, 2011

Continue reading "Long Island Rail Road Disability Fraud Leads to 11 People Charged" »

September 7, 2011

“Investor’s Guide to Loss Recovery” Offers Key Information on How to Use Conflict Resolution to Get Your Assets Back

For many investors seeking to recover their lost assets from a Wall Street financial firm, the process can be daunting and confusing. This is why it is so important that you work with a stockbroker fraud law firm that can take you through process, knows how to successfully navigate the legal system, will protect your rights, and is committed to helping you recoup your losses. That said, any understanding you can acquire about the financial recovery process could only help your case, while also alleviating some of your concerns. The “Investor’s Guide to Loss Recovery” by Louis Straney is a reliable resource containing knowledgeable advice and guidance about the arbitration system, how it operates, and how to make it work in your favor.

The book offers detailed coverage and practical information about:

• Key litigation resources and strategies
• How to file an effective claim, as well as the outcomes you can expect
• Scripts of initial lawyer interviews, mediation, and arbitration
• How to organize the massive amount of documents that will be exchanged between parties
• Interviews with securities attorneys, investors, and experts
• An explanation of how new regulatory reforms are impacting the financial recovery process, as well as the options that are available to victims of financial fraud
• Charts demonstrating the major areas of litigation
• Empirical evidence about the growing awareness of investment misconduct

With over 30 years of experience working on Wall Street as a senior manager and director, Straney is an expert guide. He launched his own securities litigation consulting practice in 2007. In addition to having consulted or testified in over 200 engagements, Straney is the author of "Securities Fraud: Detection, Prevention and Control" and other works. He also is a published contributor whose writing has appeared in a number of publications, including the New York Times and the Public Investor Arbitration Bar Association Law Journal.

Shepherd Smith Edwards & Kantas LTD LLP Founder and Securities Fraud Attorney William Shepherd has this to say about Straney: “I have worked with Lou Straney for many years on cases representing clients who have lost money because of securities fraud and other wronging by those who sold the securities. I have also appeared with him in speaking engagements regarding securities fraud. Although we only met about five years ago, each of us had worked for decades for large Wall Street securities firms. Lou and I have discussed for many hours the steady erosion of character and standards in that industry. In his book, Lou covers this and other subjects. As a non-lawyer, his comprehension of legal issues is surprising. But, as a non-youth, Lou’s incredible level of energy is what amazes me the most.”

Securities Fraud Research and Training

By the Book on Amazon.com


More Blog Posts:

SEC Charges Filed in $22M Ponzi Scam that Targeted Florida Teachers and Retirees, Stockbroker Fraud Blog, August 29, 2011

Stifel, Nicolaus & Co. and Former Executive Faces SEC Charges Over Sale of CDOs to Five Wisconsin School Districts, Stockbroker Fraud Blog, August 10, 2011

Ex-UBS Financial Adviser Pleads Guilty to Defrauding Private Fund Investors, Stockbroker Fraud Blog, July 13, 2011

Continue reading "“Investor’s Guide to Loss Recovery” Offers Key Information on How to Use Conflict Resolution to Get Your Assets Back " »

August 5, 2011

SEC’s Proxy Access Rule is Rejected by Appeals Court

The U.S. Court of Appeals for the District of Columbia Circuit has struck down a Securities and Exchange Commission rule that would have let company shareholders nominate one or two director nominees to their boards. The proxy access rule would have allowed groups with possession of a minimum 3% voting power of a company’s stock for a minimum of three years to nominate board candidates. Companies would have had to include information about these shareholder-nominated director candidates in their proxy materials.

The SEC had approved the regulation last year. It would have gone into effect in November, but the Commission stayed it after the US Chamber of Commerce and the Business Roundtable filed their legal challenge asking for the stay. The Business groups had said the rule was in violation of the Administrative Procedure Act and would “handcuff directors and boards,” exclude the majority of retail shareholders, and worsen the “short-term focus” considered among the main causes of the economic crisis. There were also concerns that the proxy access rule would let hedge funds, union-connected pension funds, corporate raiders, and hedge funds elect directors who would do as they directed.

The Chamber of Commerce and Business Roundtable also accused the SEC of disregarding studies and evidence that revealed the” adverse consequences of proxy access,” attempting to restrict the ability of shareholders to stop special interest groups from starting up expensive election contests, and not giving full consideration to state laws about access to principles about and related to proxy that already exist.

In its July 22 ruling the appeals court agreed with the two parties’ claim that the SEC behaved “arbitrarily and capriciously” when it failed to “adequately consider” how the rule would impact “efficiency, competition, and capital formation.” The court also said that the SEC did not “supported its predictive judgments,” failed to address the problems brought up by commenters, and “contradicted itself.”

Following the court’s decision, US Chamber of Commerce CEO and president Tom Donahue said: praised the court’s ruling, which refused to let “special interest politics” to be infused “into the boardroom.” Shepherd Smith Edwards & Kantas LTD LLP and stockbroker fraud lawyer William Shepherd, however, had this to say about Donahue’s statement: “This is an outrageous statement for the Kings of special interest politics to make! In fact, this story is really about special interest politics in the courtroom.”

While businesses that opposed the proxy access rule feared it would give environmental and labor union groups more power at corporations and that shareholder value would suffer, its supporters had argued that giving shareholders a bigger hand in who got to sit on corporate boards could have prevented the financial crisis.

According to Investment News, there is evidence that unions could use any additional voting influence to advance their interests. It was just several years ago that the California Public Employees’ Retirement System used its shareholder power in Safeway Inc. to try to vote out chief executive Steven Burd. It also pressured the company to resolve a strike under conditions that favored unions. CalPERS's efforts failed both times.

Our securities fraud lawyers are dedicated to protecting investors and helping their recover their losses sustained because of broker misconduct. Contact our stockbroker fraud law firm to request your free consultation.

Related Web Resources:
Striking a blow to SEC, court voids investor rule, Investors.com, July 22, 2011

U.S. Chamber Joins Business Roundtable in Lawsuit Challenging Securities and Exchange Commission, US Chamber of Commerce, September 29, 2010

Read the legal challenge filed by the Business Roundtable and the US Chamber of Commerce (PDF)

Read SEC's Proxy Access Rule (PDF)


More Blog Posts:

SEC to Propose Rule Banning “Felons and Bad Actors” From Involvement in Private Offerings, Institutional Investors Securities Blog, May 29, 2011

SEC Examines Proxy Advisory Firms, Institutional Investors Securities Blog, October 14, 2010

SEC Proposes New Rule to Verify Swap Transactions, Institutional Investors Securities Blog, January 27, 2011

April 10, 2011

No Need for New SRO Overseeing Investment Advisers, Says NASAA Official to Congress

Florida's Office of Financial Regulation’s securities director Frank Widman says Congress should ignore calls for a new SRO to help the Securities and Exchange Commission oversee any investment advisers. Widmann spoke last month at the North American Securities Administrators Association's public policy conference in DC.

Widmann, who previously served as NASAA president said that rather than set up a new SRO for IA’s, Congress should concentrate on making sure that state regulators and the SEC are fully funded so they are able to do their job. Widmann says that unlike the SEC, the federal regulator, and state securities regulators, SROs aren’t sovereign. Widmann says that giving SROs too much independence has proven problematic in the past.

As our stockbroker fraud law firm reported previously, SEC staff recently put out a report recommending that Congress either set up at least one SRO to oversee investment advisers, impose user fees on industry members to support Office of Compliance Inspections and Examination’s probes, or appoint the Financial Industry Regulatory Authority as the SRO for investment advisers. FINRA is already the SRO for broker-dealers.

Also at the NASAA Conference was SEC Commissioner Luis Aguilar, who said that the federal regulator was in the process of putting into place a system to gather and examine data from money market funds. He says funding limitations at the SEC have impeded the system’s implementation. Aguilar called on the financial services industry to “re-dedicate itself to basic principles,” including those of meaningful disclosure, fair dealing, integrity, and good business practices.

Related Web Resources:
NASAA Official Says Congress Should Ignore Calls to Create New SRO, BNA Securities Law Daily, March 29, 2011


Speech by SEC Commissioner Luis Aguilar, SEC, March 28, 2011

North American Securities Administrators Association


More Blog Posts:
FINRA Will Customize Oversight to Investment Adviser Industry if Chosen as Its SRO, Stockbroker Fraud Blog, April 8, 2011

SEC Staff Wants an SRO to Oversee Investment Advisers, Stockbroker Fraud Blog, January 31, 2011

Continue reading "No Need for New SRO Overseeing Investment Advisers, Says NASAA Official to Congress " »

March 24, 2011

Reductions to SEC’s Budget Will Cause Staff Furloughs, Says Schapiro

Securities and Exchange Commission Chairman Schapiro says reducing the agency’s budget to where it was at in 2008 would result in “significant’ staff furloughs. Other likely consequences would be the curtailment of crucial travel, including visits to registered entities, the cessation of technology infrastructure initiatives, and the curtailing of the SEC’s Dodd-Frank enforcement capabilities. House Republicans are the ones pushing for the budget reductions. Schapiro made her case earlier this month while testifying before the Senate Banking Committee’s Securities subcommittee. Our securities fraud law firm will continue to monitor the developments regarding this matter.

Schapiro says that the continuing resolution, which would find the agency at fiscal year 2010 levels, already makes it tough to close deals with top-rank industry experts she has recruited. She also says any steep cuts would impede the SEC's ability to oversee broker-dealers, mutual funds, investment advisers, and other participants in the retail investing market in “anything but the most cursory way.” Schapiro also expressed concern that credit rating agencies would be able to evade serious examination if the SEC’s budget was tightened.

Sen. Michael Crapo (R-Idaho.), a ranking subcommittee member, noted that while underfunding the SEC can make it hard for the agency it to do its job “aggressively” and “effectively,” he believes that in the wake of the financial crisis, it is now more than ever necessary for all levels of government to perform with greater efficiency. Crapo is calling for an “agency-wide examination” of where the SEC’s resources are going and an assessment of whether they can be “better utilized.” For example, is there technology that can compensate for a reduced staff? What about sharing technology costs over Dodd-Frank oversight needs with the Commodity Futures Trading Commission?

Schapiro also said that the SEC has been effectively implementing a 60-day comment period for most Dodd-Frank rulemaking, rather than just 30 days, to allow time for thoughtful feedback. Current SEC rules are also being examined to determine whether any of them are no longer applicable.


Related Web Resources:
Cuts will stifle, SEC chief warns, The Boston Globe, March 11, 2011

Schapiro Says SEC Will Have to Furlough Staff If House Republican Cuts Are Enacted, BNA Securities Daily, March 11, 2011

Continue reading "Reductions to SEC’s Budget Will Cause Staff Furloughs, Says Schapiro" »

March 7, 2011

SROs Immune from Broker-Dealer’s Lawsuit Over Bylaw Changes Related to Creation of FINRA, Says Appeals Court

Recently, the U.S. Court of Appeals for the Second Circuit dismissed Standard Investment Chartered Inc.’s lawsuit against the Financial Industry Regulatory Authority, New York Stock Exchange Group Inc., and NASD over alleged misstatements in a proxy to obtain member approval for bylaw changes that ultimately resulted in the creation of FINRA. In a per curiam decision, the court held that self-regulatory organizations and their officers are immune from lawsuits over bylaw amendments because these are “inextricable” from the SRO’s regulatory roles.

The plaintiff, broker-dealer and former NASD member Standard Investment Chartered Inc., claims that NASD and certain officials issued material misrepresentations in the proxy statement that solicited approval of bylaw amendments so that the merger between NASD and parts of NYSE Regulation Inc. that became FINRA would take place. The broker-dealer contends that the proxy statement misrepresented that $35,000 was the most that the Internal Revenue Service had authorized NASD to pay members over the union.

Last March, the U.S. District Court for the Southern District of New York dismissed Standard Investment Chartered Inc.’s lawsuit, as well as a similar claim submitted by NASD member Benchmark Financial Services Inc. The court said that the union between the SROs was “entitled to absolute immunity” because it was part of their delegated regulatory functions. Standard Investment Chartered appealed the ruling.

Now, the Second Circuit has affirmed the district court’s ruling. The court also noted that NASD can’t change its bylaws without Securities and Exchange Commission approval.

Other defendants in the lawsuit include Securities and Exchange Commission chairman Mary Schapiro, who was NASD’s CEO when the regulatory body merged with NYSE, Pershing LLC Chairman Richard Brueckner, and FINRA senior vice president Howard Schloss.

Related Web Resources:
Appeals Court Upholds Lower Court Ruling on Finra Damage Suits, Bloomberg, February 23, 2011

Court Finds SROs Immune From Lawsuit Over Bylaw Changes to Effect FINRA Creation, BNA - Securities Law Daily, February 23, 2011

Standard Investment Chartered Inc. v. NASD

Continue reading "SROs Immune from Broker-Dealer’s Lawsuit Over Bylaw Changes Related to Creation of FINRA, Says Appeals Court" »