FINRA

FINRA Fines Expected to Drop 41% in 2013

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

Even though the number of disciplinary actions from the Financial Industry Regulatory Authority has dropped just slightly this year, fines paid to the SRO are expected to be 41% lower from what was assessed in 2012.

In its Disciplinary and Other FINRA Actions report for the first half of 2013, FINRA said there were $23 million of fines—compare that to the same time period last year when the SRO fined brokerage firms and associated individuals $39 million. The total in fines it would assess for 2012 would reach $78 million. This year’s total is estimated to reach $46 million.

One reason for the decline might be that FINRA had already brought its biggest cases related to the market collapse. A decrease in supersize fines of those over $1 million has also occurred during the year’s first six months. However, in July, the SRO reported fining a financial firm $7.5 million while another had to pay investor restitution of $1.5 million. Supersize fines were also imposed on other broker-dealers.

FINRA Enhances Its Arbitrator Vetting Policy

Published on: August 26, 2013 | by Shepherd Smith Edwards & Kantas, LLP

The Financial Industry Regulatory Authority is refining its new policy for looking into its arbitrators. The move is seen as even more essential in the wake of a court’s decision to dismiss an arbitration ruling that was decided on in part by someone who was indicted during a case against financial firm Goldman Sachs (GS).

Among the steps to be implemented is the use of Google to run searches on arbitrators right before they are appointed to a FINRA arbitration case. The SRO is also preparing to run annual background checks on its 6,500 arbitrators even after being checked when they applied for the arbitrator position.

The industry-funded watchdog’s actions are coming into effect at the same time as lawmakers are upping the pressure to put a stop to broker-dealers making investors arbitrate disputes-an agreement they consent to when they agree to work with the brokerage firm. This causes customers to forfeit their right to go to court over the disagreement. Meantime, consumer groups have been pressing the SEC to place restrictions on the arbitration agreement practice, and a new bill introduced by US Rep. Keith Ellison (D-MN) would modify the Dodd-Frank Wall Street Reform and Consumer Protection Act so that these mandatory agreements are banned.

FINRA NEWS: Goldman Sachs Appeals Vacating of Securities Award, Non-Customers of Brokerage Firm Can’t Compel Arbitration, & Three Governors Named To FINRA Board

Published on: August 21, 2013 | by Shepherd Smith Edwards & Kantas, LLP

Goldman Sachs Wants Third Circuit To Look at Vacated Arbitration Award

Goldman Sachs (GS) wants the U.S. Court of Appeals for the Third Circuit to look at a decision by a lower court to vacate a FINRA securities award issued by a panel member that included arbitrator Demetrio Timban, who was indicted on criminal matters and suspended. The securities case is Goldman Sachs & Co. v. Athena Venture Partners LP and involves an investor accusing the firm of making misrepresentations. The U.S. District Court for the Eastern District of Pennsylvania remanded the award, which favored the financial firm.

The district court said FINRA didn’t give the parties three arbitrators who were qualified and said the respondent’s rights were prejudiced. Judge J. Curtis Joyner said that therefore, a “final and definite award” was not issued. Following the scandal involving Timban, FINRA said it now would perform yearly background checks of arbitrators and other reviews before they are given a case.

Citigroup Must Pay $11M Claimant for Royal Bank of Scotland Investment Losses, Says FINRA Arbitration Panel

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

A FINRA arbitration panel has decided that Citigroup (C) and Edward J. Mulcahy, one of the firm’s ex-branch managers, has to pay $11 million to investor John Fiorilla. Fiorilla is a legal adviser to the Holy See who went to Citigroup because he wanted to de-risk a $16 million stock position in Royal Bank of Scotland (RBS).

According to the claimant, he asked Citigroup to employ derivatives to assist in hedging his position against losses but the firm did not fulfill the request. When the market failed in 2008 his account suffered over $15 million in losses.

Fiorilla is claiming breach of contract, failure to control and supervise, breach of fiduciary duty, gross negligence, negligence, and other violations. His claim against Mulcahy is over an alleged failure to supervise.

Thornes & Associates Inc. Investment Securities’ Head Gets Industry Bar for “Lending” $4.2M of His Clients’ Assets to Friends

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

The Financial Industry Regulatory Authority says that Thornes & Associates Inc. Investment Securities President John Thomas Thornes lent $4.2 million in client assets to two friends. Following the resolution of the FINRA arbitration case, the California broker is barred from the securities industry and his broker-dealer has been suspended, as well was expelled as a member of the SRO.

The friends who received the “loans”-over 50 transactions-allegedly spent the assets on cars, vacation homes, and plane and jet rentals. Over $262,000 is said to have been turned into cashier’s checks and used at an Indian casino.

Per FINRA’s complaint, however, calling the transfer of money a “loan” was not an accurate characterization, and not only were they unsecured and undocumented transactions but also they were never paid back.

FINRA Reports Losses After Squandering Profit From NYSE Payment

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

Last month, the Financial Industry Regulatory Authority put out its yearly report for 2012. According to the results, the self-regulatory organization is hurting. Its operating losses are huge-nearing $90 million for the second year straight. Meantime, its staff has grown 13%, with benefits and compensation rising 41% in the last five years to hit $628.9 million last year. That’s a significant jump from 2007 when the SRO’s compensation and benefits was $446.1 million. Retirement and pension expenses have risen 89% in the last five years.

While observers say that FINRA’s operating losses are not an immediate danger, no one can say for sure. Some are even asking how could a regulator facing potential financial trouble do its job and protect investors? Unlike its last five yearly reports, FINRA’s 2012 report pointedly says that the will keep observing the changing economy and assessing any effect on the organization. If there were to be a huge market collapse, however, FINRA’s equity would take a beating.

The private SRO is the National Association of Securities Dealer’s successor. NASD’s merger with the New York Stock Exchange (NYSE) Regulatory Division is one reason for the increase in FINRA’s compensation. After its merger with the NYSE Regulatory Division, NASD soon changed its name to the Financial Industry Regulatory Authority (FINRA).

Mandatory Securities Arbitration vs. Court? The Debate Rages Past the Quarter-Century Mark

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

Should investors have the option to resolve their securities claims not just in arbitration but also in court? Recently, Senator Al Franken (D-Minn) voiced his opinion that offering investors both options would be fairer. His comment came weeks after SEC Commissioner Luis Aguilar publicly spoke out against mandatory arbitration, noting that letting investors choose between the court system or Financial Industry Regulatory Authority arbitration would give them better protections. Right now, investors have to agree to resolve any disputes that arise with a brokerage firm or investment adviser through arbitration rather than litigation before their working relationship can go forward.

However, as Claimant Investors’ Attorney William Shepherd noted, the debate of whether to go to the court or arbitration is a debate that has going on for some time now: “This dispute began in 1987 when the U.S. Supreme Court first decided that, because arbitration had become ‘fair,’ investors could no longer choose court if an arbitration agreement had been signed.”

Is it fair to let investors choose between having their claims heard in arbitration or by the judicial system? We definitely need a legal process that lets investors get redress efficiently and with the least amount of struggle.

FINRA Delays Audit Trail Plan, Proposes Arbitration Rule Changes, Asks for Firm’s Social Media Use Data, Warns About Cybersecurity Breaches

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

FINRA Wants Broker-Firms to Provide More Data About Social Media Use

The Financial Industry Regulatory Authority has sent target examination letters to broker dealer members regarding their use of social media. The SRO warned that electronic and written communication may be subject to spot checks and it wants to know how the firms are using social media, what platforms they employ, and the names of the people that post on these sites. FINRA is also interested in each firm’s written supervisory procedures about this type of online communication that were in effect between February 4 and May 4, as well as what steps were taken to make sure that compliance was in effect.

SEC Seeks Comments on Proposed FINRA Arbitration Changes

Former Broker Claims He is the Reason FINRA’s Regional Director Resigned, While Ex-JP Morgan Broker Files Arbitration Claim Against His Former Employer

Published on: June 18, 2013 | by Shepherd Smith Edwards & Kantas, LLP

According to former broker David Evansen, he is the reason that Mitchel C. Atkins, the Financial Industry Regulatory Authority Inc.’s District 7 region director, resigned. His claim differs from the SRO’s statement about how Atkins decided to step down “pursue other interests.” Aktins, as FINRA regional director, was in charge of Florida, Atlanta, New Orleans and Dallas, and he worked with the agency for 20 years.

Evansen said that he wrote to FINRA chief executive Richard Ketchum and regulatory operations EVP Susan Axelrod to let them know that Atkins was indicted on both a misdemeanor and felony charge in Louisiana two decades ago. He said that he couldn’t confirm for sure that his letter is why Atkins resigned but he is convinced that it is.

Per Evansen, Atkins purportedly used bingo game earnings for non-charitable purposes, which is illegal in that state. While the felony charge was dropped, Evansen said that Atkins pleaded guilty to the misdemeanor charge. After Atkins complied with his sentence term, which included conditional probation, community service, and other specifics, his record was expunged.

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

Published on: June 5, 2013 | by Shepherd Smith Edwards & Kantas, LLP

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.