Broker-Dealers

SEC Judge Slaps Next Financial Group With $125,000 Fine Over Recruiting Practices

Published on: June 18, 2008 | by Shepherd Smith Edwards & Kantas, LLP

Securities and Exchange Commission Administrative Law Judge James T. Kelly is ordering Next Financial Group Inc. to cease and desist from recruiting practices that violate privacy laws. He also has slapped the company with a $125,000 penalty.

Recruiting practices that need to stop included those involving use of clients’ private information. Next has been known to ask recruits to provide their user id and password so that the firm could enter the computer systems of the recruits’ brokerage firms and collect clients’ non-public personal information.

The SEC had originally requested that the judge impose a $325,000 on Next. Judge Kelly, however, acknowledged that there is general confusion within the securities industry about Regulation S-P, which implements stricter privacy laws under the Gramm-Leach-Bliley Act of 2000. However, even Next’s expert witnesses agreed that using the passwords and user ID’s of recruits in this way is not in line with normal industry practices.

SEC Charges North American Clearing, Inc. With Misusing Customer Funds

Published on: June 3, 2008 | by Shepherd Smith Edwards & Kantas, LLP

The U.S. District Court for the Middle District of Florida has granted the Securities and Exchange Commission’s motion for emergency relief, including an asset freeze, to prevent North American Clearing Inc. from misusing customer funds. The general securities and clearing brokerage company is accused of using client funds to finance its daily operations and conceal its financial state.

The SEC says it also obtained an order appointing a receiver over North American Clearing, as well as a temporary restraining order. The SEC had filed securities fraud and other charges against North American, its president Bruce B. Blatman, its director and founder Richard L. Goble, and ex-financial and operations principal Timothy J. Ward on May 27, 2008 one day before the district court granted its requests.

With approximately 40 correspondent brokers, North American Clearing Inc. handles over 10,000 customer accounts. The SEC says that its own actions indicative of the SEC’s dedication to protecting investors.

Ex-Southwest Brokers Found Liable for Concealing Market Timing Trades

Published on: April 30, 2008 | by Shepherd Smith Edwards & Kantas, LLP

The U.S. District Court for the Northern District of Texas says that two ex-Southwest Securities Inc. brokers acted fraudulently when they purposely tried to circumvent policies designed to prevent market timing trades. The Securities and Exchange Commission had brought the case against the two men.

The brokers were aleged to have violated Act’s Section 10(b) and Rule 10b-5.

The court also found one culpable under the act’s antifraud provisions and ordered him to disgorge $56,640.67 in commissions. The court also ordered a $50,000 civil penalty and granted the SEC’s request for injunctive relief.

SEC-Commissioned Report Finds that Investors Have A Hard Time Telling the Difference Between the Roles of Broker-Dealers and Investment Advisers

Published on: February 4, 2008 | by Shepherd Smith Edwards & Kantas, LLP

Investors have a hard time understanding the differences between investment advisers and broker-dealers, as well as distinguishing between the different services and protections that each group offer. This finding was reported last month in an SEC-commissioned study conducted by Nonprofit policy group Rand Corp.

Rand gathered its findings from data that came from six investor focus groups and a survey it conducted of 654 U.S. households.

Included among the findings:

SMH Capital and Two of Its Brokers to Settle FINRA Charges Over Oversight Failures

Published on: January 17, 2008 | by Shepherd Smith Edwards & Kantas, LLP

SMH Capital has agreed to pay $450,000 in fines to settle charges by the Financial Industry Regulatory Authority (FINRA) over the broker dealer’s failure to have supervisory procedures and systems in place to handle its prime brokerage and soft dollar services to hedge funds. The oversight led to a hedge fund manager receiving improper payments in soft dollars worth $325,000.

FINRA says other failures by SMH included producing and giving out hedge fund sales materials that failed to properly “disclose material investment risks to potential hedge fund investors.” SRO is accusing SMH of engaging in an “improper compensation arrangement” with two brokers who supervised hedge funds.

The two SMH brokers, Michael Rosen and Jack Seibal, have agreed to $100,000 fines and a 20-day suspension. SRO says that agreements prohibited the two men from receiving a share of any commission that SMH earned for fund trades. A third unregistered SMH employee agreed to a 10-day suspension and a $15,000 penalty.

Bear, Stearns, Merrill Lynch, Deutsche Bank Securities and UBS Securities Among the 19 Broker-Dealers to Settle SRO Charges Of Overstated Ad Volumes

Published on: January 14, 2008 | by Shepherd Smith Edwards & Kantas, LLP

Last week, the Financial Industry Regulatory Authority (FINRA) announced that 19 broker-dealers agreed to pay fines to settle SRO charges that they “substantially overstated their advertising trade volume to private sector providers.” By agreeing to pay the fines, none of the firms are admitting to or denying the charges.

FINRA says that after comparing each firm’s advertised trade volume in selected securities with executed trade volume for the same issuer, they noticed overstatements that were substantial in at least one of the securities examined.

Broker-dealers that agreed to be fined $200,000:

Broker-Dealers Get New Rule Governing Deferred Variable Annuities Sales

Published on: November 8, 2007 | by Shepherd Smith Edwards & Kantas, LLP

Broker-dealers are getting ready to cope with a new rule governing deferred variable annuities (VAs) sales.

Rule 2821 by the Financial Industry Regulatory Authority Inc. was finally approved by the Securities and Exchange Commission on September 7. The rule has been in the works since 2004. The official regulatory notice, to be issued this week, gives brokerage firms six months to comply. The rule is expected to go into effect in May or June 2008.

Rule 2821 has four provisions regarding the sale of deferred variable annuities and the exchange of variable annuities. The rule places a suitability requirement on products for sales. It also makes it mandatory for principals to look at transactions within seven business days and before a customer’s application is forwarded to an insurance carrier.

SEC and FINRA Announce Plan to Help Broker-Dealer CCO’s with Compliance Controls

Published on: November 7, 2007 | by Shepherd Smith Edwards & Kantas, LLP

The Financial Industry Regulatory Authority (FINRA) and the Securities and Exchange Commission (SEC) have introduced an initiative that will assist broker-dealer chief compliance officers in maintaining compliance controls that work, creating effective communications about compliance risks, and implementing solid compliance programs at brokerage firms.

Regional and national seminars will be designed to focus on increased compliance practices at brokerage firms to increase investor protection. FINRA and SEC said that this new initiative is similar to the SEC’s current CCOutreach Program for investment company chief compliance officers and investment advisers.

A national compliance seminar is tentatively scheduled for March 2008 at the SEC headquarters in Washington D.C. Regional seminars will be held in cities across the United States.

SEC Provides Brokerage Firms with New Loophole to Avoid Breach of Duty to Investors

Published on: September 20, 2007 | by Shepherd Smith Edwards & Kantas, LLP

As discussed in earlier postings, after a court overturned the “Merrill Rule,” which exempted brokerage firms from duties of Investment Advisors Act of 1940, brokerage firms say they will cease “fee based” accounts rather than assume duties to clients mandated my that legislation. However, as predicted, regulators and legislators will instead come to their rescue.

The Securities and Exchange Commission fought hard to exempt brokerage frims from the advisors act, but lost, and is now busily helping Wall Street with new enforcement loop holes. For example, the SEC has now decided to permit non-discretionary advisory accounts to be exempt from certain principal trading restrictions. A principal trade is an order a broker-dealer executes for its own account rather than one it simply executes in the market for its client.

Under the new rule, brokerage firms must first provide written notice and obtain blanket consent from these clients. They are then exempt from breach of fiduciary duty for self-serving actions as they profit on sales of securities to these clients sold from the firms’ inventories.

Broker-Dealer Legacy Financial Shuts Down Operations

Published on: September 18, 2007 | by Shepherd Smith Edwards & Kantas, LLP

Legacy Financial Services Inc., an independent broker-dealer, has closed shop. Last July, the Petaluma, California company sold most of its affiliated registered representatives and their accounts to Multi-Financial Securities Corp.

Some 125 advisers with close to $10 million in gross dealer concession were transferred by Multi-Financial. A number of Legacy executives and Brecek & Young Advisors Inc., which is also a broker-dealer, also acquired advisers. Individual producers were given compensation packages to switch to Multi-Financial.

Legacy Financial is still facing allegations made by the Maryland Securities Division in an “order to show cause” earlier this year that the independent broker-dealer did not properly supervise Joseph Karsner, a formerly affiliated registered representative and insurance agent.