Articles Posted in Miscellaneous

SEC Extends Temporary Rule Allowing Principal Trades by Investment Advisers Registered as Broker-Dealers

Published on: January 13, 2011 | by Shepherd Smith Edwards & Kantas, LLP

The US Securities and Exchange Commission has adopted amendments to delay the expiration date of Rule 206(3)-3T under the 1940 Investment Advisers Act. The temporary rule, which was supposed to expire on December 31, 2010, will now stay in effect until December 31, 2012.

Rule 206(3)-3T gives investment advisers that are also broker-dealers who are registered with the SEC another way to satisfy the Advisers Act’s Section 206(3) requirements when they work in a principal capacity with certain advisory clients. Section 206(3) does not allow investment advisers to effect or take part in a transaction for a client while acting either as broker for a person besides the client or as principal for its own account unless the client has been informed of the role that the adviser is playing and has given his or her consent. The SEC says it is completing its study on broker-dealers and investment advisers, per the Dodd-Frank Wall Street Reform and Consumer Protection Act mandate, and it will deliver the report to Congress by January 21.

Under Rule 206(3)-3T, an adviser is allowed to comply with Section 206(3) of the Advisers Act by, among other things:

• Providing written prospective disclosure about principal trade conflicts.
• Getting revocable written consent from the client that prospectively gives the adviser the authority to enter into principal transactions.
• Making certain written or oral disclosures and getting the client’s consent prior to each principal transaction.
• Sending the client confirmation statements that disclose that the adviser notified the client that it could act in a principal capacity and it has the client’s consent.
• Giving the client an annual report that itemizes the principal transactions.

Related Web Resources:

The “New” SEC is Acting Just Like The “Old” SEC by Protecting the Securities Industry from Responsibility for its Actions, Stockbroker Fraud Blog, December 9, 2010

Wall Street and its Friends in Washington Want Congress to “Crawfish” on Financial Industry Regulatory Reforms

Published on: December 30, 2010 | by Shepherd Smith Edwards & Kantas, LLP

The Committee on Capital Markets Regulation, a nonpartisan research group, is urging lawmakers to conduct oversight hearings on the way that financial reform legislation is being implemented. CCMR claims that the rulemaking process of the Commodity Futures Trading Commission, the Securities and Exchange Commission, and other regulators is “seriously flawed,” while “sacrificing quality and fairness for apparent speed, risking lengthy court challenges and poor rules.”

CCMR made its allegations in a letter to outgoing Senate Banking Committee chair Christopher Dodd (D-Conn), ranking member Sen. Richard Shelby (R-Ala.), outgoing House Financial Services Committee head Rep. Barney Frank, and ranking member Rep. Spencer Bachus (R-Ala.). CCMR says it is concerned that the Dodd-Frank Wall Street Reform and Consumer Protection Act requires a virtual full “rewrite” of current regulations for the country’s financial markets and that the specific deadlines are “overly ambitious.”

Now, the SEC has until July 2011 to write about 60 new rules-it wrote less than 10 a year in 2005 and 2006-and the CFTC has to issue almost 40 new rules-it made about 11 rules in the couple of years leading up to the economic meltdown. Also, per Dodd-Frank, the SEC has about 200 days to make a rule final. Before the financial crisis the agency would take 524 days for rule adoption from proposal to finalization. The CFTC has 238 to adopt a new rule. Previously the agency would take about 109 days. Also, whereas before, the public was given approximately over 60 days to comment on new rules, agencies on overage are now allowing about 30 days for comments.

CCMR claims that there are now conflicting rules in the asset-backed securities area and regarding over-the-counter derivatives. Recently, Bachus and House Agriculture Committee chairman-elect Rep. Frank Lucas (R-Okla.) wrote CFTC Chairman Gary Gensler and SEC Chairman Mary Schapiro about the direction and pace that swaps rulemaking was taking.

Per Shepherd Smith Edwards and Kantas Founder and Securities Fraud Lawyer William Shepherd, “No one wants to be told what to do, it is human nature, and government regulations should only occur as a ‘necessary evil.’ The test should be whether the evil regulation is better than the evil non-regulation. This one should be easy to answer! Look back at what just happened after Congress deregulated the financial industry over the past decade: Debacle! With taxpayers having to bail out the perpetrators. A little pain on Wall Street can be endured to prevent this from happening in the future. Perhaps these regulations are not perfect, but the de-regulation now in place has proven disastrous.”

Related Web Resources:
Committee on Capital Markets Regulation

Commodity Futures Trading Commission

Securities and Exchange Commission

US Senate Banking Committee

House Agriculture Committee

Dodd-Frank Wall Street Reform and Consumer Protection Act (PDF)

Institutional Investors Securities Blog
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Actions of Former Ferris, Baker Watts, Inc. General Counsel Accused of Supervising Rogue Broker to be Reviewed by SEC

Published on: December 9, 2010 | by Shepherd Smith Edwards & Kantas, LLP

The Securities and Exchange Commission will be taking a closer look at the actions of ex- Ferris, Baker Watts, Inc. General Counsel Theodore Urban. Urban has been accused of failing to reasonably supervise stockbroker Stephen Glantz, who was involved a stock market manipulating scam with Innotrac Corp. stock.

It is rare for the SEC to examine the actions of a general counsel. However, the agency says it is looking at the case because the proceedings bring up key “legal and policy issues,” such as whether Urban acted reasonably in the manner that he oversaw Glantz and chose to respond to signs of broker misconduct. The case also brings up the questions of whether securities professionals such as Urban should be made to “report up” and if his status as a lawyer and his role as “FWB’s general counsel affect is liability for supervisory failure.”

Earlier this year, Securities & Exchange Commission Administrative Law Judge Brenda Murray ruled that Urban did not inadequately supervise Glantz and that the proceedings against him be dropped. Murray said that per the 1934 Securities Exchange Act, a person cannot be held liable for supervisory deficiencies if appropriate procedures for detecting and stopping the violations were applied, She said that Urban had no reasonable grounds to think that procedures had not been followed.

However, Murray’s decision isn’t final until the SEC enters its final order, and on Tuesday the commission declined Urban’s motion requesting that the SEC affirm Murray’s ruling. Division lawyers have said that Murray’s decision was not consistent with previous SEC precedent, lowers the standards that supervisors at dealers, brokers, and investment advisers must meet, and did not protect the investing public by making Urban accountable to sanctions.

SEC to Review Actions of Bank General Counsel Who Supervised Rogue Broker, Law.com, December 9, 2010

Read the SEC order denying motion for summary affirmance (PDF)

Read the administrative law judge’s ruling (PDF)

Ex-Ferris, Baker Watts, Inc. General Counsel Did Not Fail to Properly Supervise Broker Fraudster, Says SEC Judge, Stockbroker Fraud Blog, September 30, 2010

Compliance with 1934 Securities Exchange Act Reporting Requirements During Annual Broker-Dealer Audits is Key, Say SEC Officials

Published on: November 29, 2010 | by Shepherd Smith Edwards & Kantas, LLP

Securities and Exchange Commission Division of Trading and Markets Robert Cook and Chief Accountant James Kroeker are reminding auditors that it is important that they comply with specific 1934 Securities Exchange Act reporting requirements when performing annual broker-dealer audits. Earlier this month, the two SEC officials sent a letter to American Institute of Certified Public Accountants Stock Brokerage and Investment Banking Expert Panel Chair Stephen Zammitti.

Per Kroeker and Cook, under the 1934 Securities Exchange Act’s Rule 17a-5, broker-dealers must file yearly reports, supplemental reports, and supporting schedules. They also noted that Under Rule 15c3-1, a supporting schedule must include required and actual net capital and, when applicable, computation of the customer reserve requirement, as well as information about possession or control requirements.

The two SEC officials issued the reminder that brokerage firms have to submit an accountant’s report about the supporting schedule from a registered public accounting firm and that the yearly financial report audits must meet accepted auditing standards. Cook and Kroeker also said that even though the Dodd-Frank Act gave the Public Company Accounting Oversight Board the authority to put forth an auditing and attestation standard for broker dealers’ PCAOB-registered auditors, per recent SEC interpretive guideline auditors should keep adhering to AICPA standards until further rulemaking. The two SEC officials emphasized the need for accounting firms to review internal accounting records, the accounting system, and procedures for safeguarding securities and that, per Rule 17a-5, the audit and review’s scope must be enough to provide enough assurance that any “material inadequacies… would be disclosed.”

Related Web Resources:
View the Letter (PDF)

Read the SEC Guidance (PDF)

The 1934 Securities and Exchange Act
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Fiduciary Standard in Securities Industry Doesn’t Need New Definition

Published on: November 26, 2010 | by Shepherd Smith Edwards & Kantas, LLP

Financial Industry Regulatory Authority Chairman and Chief Executive Officer Richard Ketchum says that there should be just one flexible, fiduciary standard for investment advisers and broker-dealers who offer personalized investment advice. Ketchum spoke at a conference earlier this month.

Ketchum noted that seeing as investment advisers and broker-dealers essentially work in the same business, it “doesn’t make sense” to act as if they work in different ones. He supports a flexible fiduciary standard that comes with a “few basic, simple rules.”

As to whether FINRA could play a part in supervising the imposition of a future fiduciary standard on broker-dealers, Ketchum said that if FINRA were to play this role it would do so with a discreet board that would include a minority of investment adviser professionals, as well as members of the public. While investment advisers currently have to comply with a fiduciary standard and are regulated under the 1940 Investment Advisers Act, broker-dealers must be in compliance with other standards, including an obligation to make sure that their recommendations to clients are “suitable” ones.

Securities and Exchange Commission Chairman Mary L. Schapiro has also shown a preference for a uniform fiduciary standard between the two groups. Under the Dodd-Frank Wall Street Reform and Consumer Protection Act, the SEC has until January 21, 2011 to turn in a report to the House Financial Services Committee about this matter. After completing its study, the SEC can write rules to establish a uniform standard of conduct for professionals who give retail clients personalized investment advice. However, the rule cannot be “less stringent” than current investment adviser standards.

Shepherd Smith Edwards & Kantas LTD LLP Founder and Stockbroker Fraud Attorney William Shepherd had this to say about a fiduciary duty: “There is no need for disagreement over what kind of language should be use to define fiduciary duty in the securities industry. The term ‘fiduciary’ comes from the Latin word fides, which means faith, and fiducia, which means trust. English Common law, upon which our legal system was founded, long ago defined a fiduciary duty as a duty of loyalty and care, in which the fiduciary must put the interest of his client before that of himself. Courts all across our nation today recognize this same duty in a variety of relationships. The meaning of ‘fiduciary duty’ has been established for hundreds of years, so why would Wall Street need to have its own special definition? If it ain’t broke, why fix it?”

Related Web Resources:
Fiduciary Standard, More Adviser Oversight Likely -Finra Chief, The Wall Street Journal, November 16, 2010
Investment Advisers Act of 1940
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Final Regulation for Disclosure in Participant-Directed Individual Account Plans Issued by US Department of Labor

Published on: November 19, 2010 | by Shepherd Smith Edwards & Kantas, LLP

The US Department of Labor has put out a final regulation that establishes the fiduciary requirements for disclosure in 401 (k)’s and other participant-directed individual account plans. The final regulation was issued under the Employee Retirement Income Security Act of 1974. The DOL guidance also comes with a final amendment to the regulation that already exists under ERISA § 404(c), 29 C.F.R. § 2550.404c-1.

The disclosure requirements answer a number of questions, including:
• Who is responsible for disclosing information to beneficiaries and participants in individual account plans that are participant-directed?
What information must be disclosed?
• What are the rules when dealing with target date funds, fixed-return investments, annuities, and employer securities?
• What type of disclosure is required?
• When should disclosure of information be made to participants and beneficiaries?
• Who should disclose the information?

Under the final regulation, the plan administrator of an individual account plan must make sure that beneficiaries and participants are made aware of their responsibilities and rights in regards to their investments. They also must receive enough information about the plan, investment alternatives, and fees and expenses so that they can make informed decisions.

Under the final regulation, participants and beneficiaries of “covered individual account plans” must receive disclosure in four categories of information, including:
• General Operational and Identification Information
• General Plan Administrative Expenses
• Individual Expenses
• Investment-Related Information

Plan administrators also have to automatically disclose certain performance benchmarks and data, including the average annual return of the investment over 1, 5, and 10 calendar year periods, as well as provide a statement noting that past performance does not guarantee that the results in the future will be the same. Designated investment alternatives that have a stated or fixed return for the term of the investment must come with a disclosure that includes the term of the investment and the fixed or stated annual return rate.

For more details, contact Shepherd Smith Edwards and Kantas founder and securities fraud attorney William Shepherd.

Employee Retirement Income Security Act — ERISA, US Department of Labor

Stockbroker Fraud Blog

“Flash Crash” – Why is This So Hard to Understand?

Published on: November 9, 2010 | by Shepherd Smith Edwards & Kantas, LLP

“On May 6, 1010, the New York Stock Exchange was intentionally shut down for 90 seconds by those in charge,” recounts Shepherd Smith Edwards and Kantas Founder and Securities Fraud Lawyer William Shepherd. “When this happened there was no market (bid and ask quotes) for many large cap stocks, except on small exchanges and the ‘third market.’ Meanwhile trading programs continued to submit market orders.” Shepherd continued, “Market orders in a ‘thin’ market are always a recipe for disaster. The question people should be asking is: Who decided to stop trading on the NYSE without warning and why? Imagine how much money could have been made by anyone who knew of this shutdown in advance!”

Shepherd’s observations come in the wake of NYSE Euronext chief executive officer Duncan Niederauer’s address to attendees at a recent National Association of Corporate Directors conference. Niederauer acknowledged that there is more that needs to be done to understand the events leading up to the flash crash. He said that while the Commodity Futures Trading Commission and the Securities and Exchange Commission had put out a “very well done” report that explained why markets dropped 4 or 5% that day, the reason why prices for some individual stocks plummeted by almost 100% remain unclear.

The Dow Jones Industrial Average dropped by over 573 points during five minutes of trading that day before taking 90 seconds to reverse and regain 543 points. Although the CFTC and the SEC have determined that the flash crash was started by a mutual fund complex that used computer algorithms to quickly sell $4 billion in futures contracts, Niederauer has said that there is still both information and misinformation. He contends that to bar high-speed electronic trading is impractical despite the fact that the US market structure is “more vulnerable than we thought.” He said the NYSE stands behind a model that comes with market maker obligations that are clearly outlined and that this can be used to determine whether the market maker is “doing a good job.” More market structure rules are expected in January.

Related Web Resources:
Flash crash’ shows need for price discovery and safeguards, NYSE
CFTC And SEC Release “Flash Crash” Report, FuturesMag.com
Read the SEC and CFTC Report (PDF)
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NASAA Recommends Best Practices After Finding Brokers Deficient in Five Areas

Published on: October 26, 2010 | by Shepherd Smith Edwards & Kantas, LLP

The North American Securities Administrators Association says that broker-dealer compliance programs throughout the country tend to exhibit deficiencies in several key areas:

• Registration and licensing • Sales practices • Operations • Supervisions • Books and records
Failure to follow written procedures and policy for supervision, variable product suitability, and advertising sales literature are considered the three most commonly noted problem areas.

NASAA issued its findings based on the 567 deficiencies in these five areas that were discovered by regulators in 30 states during 290 examinations that took place between January 1 and June 30. NASAA president and North Carolina deputy securities administrator David Massey says that the organization is flagging the deficiencies to assist brokers in reducing the risk of regulatory violations.

To remedy the deficiencies, NASAA is offering 10 best practices, including those that involve broker-dealers:

• Updating and enforcing written supervisory procedures.
• Developing standards and criteria that can effectively determine which investments are suitable for each client.
• Documenting “red flags” and resolving these promptly.
• Establishing a “meaningful” audit plan that includes unannounced visits and a follow-up plan.
• Obtaining regulatory approval of sales literature and ads before using them • Setting up procedures that can prevent and detect unauthorized private securitization transactions.
• Ensuring that registered representatives’ outside business activities are reviewed before they take place.
• Effective monitoring of both hard copy and electronic correspondence.
• Acknowledging receipt of complaints and updating of a registered representative’s Form U-4.
• Conducting a thorough investigation of the allegations.

Investors that have lost money because of securities fraud or broker mistakes may be able to recoup their losses with the help of an experienced stockbroker fraud law firm.

Related Web Resources:
State Securities Regulators Offer Series of Compliance Best Practices, NASAA, October 12, 2010
Securities and Exchange Commission
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Amendments to Russian Securities Law Aim to Enhance Transparency and Corporate Disclosure

Published on: October 23, 2010 | by Shepherd Smith Edwards & Kantas, LLP

This month, Russian President Dmitry Medvedev signed into law amendments to his country’s securities legislation. He signed the Federal Law No. 264-FZ to amend provisions of Federal Law No. 39-FZ “On Securities Market.” The State Duma, the Parliament’s lower house, and the Federation Council have all adopted the new amendments, which went into effect on October 7. However, the new amendments, however, are not applicable to non-publicly traded companies that have less than 500 shareholders.

The amendments are geared towards improving corporate disclosure and transparency. The list of who can receive relevant information and those that must disclose data are specified. For example, Russian securities issuers must now disclose financial reports, including those filed in accordance with International Financial Reporting Standard, as well as accounting reports. They must also reveal the identities of primary beneficiaries of controlled entities and controlling shareholders’ identities. Signs of insolvency should be included in disclosed information about beneficiaries and shareholders. Companies must also provide information about board meetings and not just annual general meetings.

Securities Fraud and Institutional Investors
Our stockbroker fraud lawyers work with institutional investors throughout the US to recoup their financial losses sustained because of broker-misconduct, investment adviser errors, or securities fraud. We also represent clients outside the US with securities fraud claims against companies that are based in this country.

Court Orders Southridge Partners Limited Partnership Dispute to Arbitration

Published on: July 6, 2010 | by Shepherd Smith Edwards & Kantas, LLP

The Delaware Chancery Court is dismissing Aris Multi-Strategy Fund LP’s action to obtain access to Southridge Partners LP books and records and sending the case to arbitration. Aris is a Southridge limited partner. According to Chancellor William Chandler III, arbitration for this case is contractually mandated.

Aris is seeking access to Southridge’s records and books. Aris claims that Southridge has not responded to requests for information.

According to the court, because this dispute is one regarding “the partnership,” it is subject to the LP Agreement terms that mandate arbitration. The court also noted that the arbitration provision doesn’t limit the arbitrator from resolving disputes other than those involving the LP Agreement. Also, while parties may ask that an arbitrator limit its authority only to disputes involving the agreement, the arbitrator can say no. This means that the arbitrator is allowed to determine whether to resolve the books and records dispute.

Judge Chandler determined that the Delaware Revised Uniform Limited Partnership Act lets partners contractually agree to enter books and records actions to arbitration. The court also says that Aris’s contention that inspection rights cannot be determined by an arbitrator because the Chancery Court has exclusive jurisdiction is incorrect. It stated that 6 Del. C. §17-109(d) lets a limited partner wave its right to bring actions involving a limited partnership’s internal affairs or organization to the Delaware Courts as long as it agrees to arbitrate its actions.

Related Web Resources:
Aris Multi-Strategy Fund LP v. Southridge Partners LP, Del Court Opinion (PDF)

Delaware Revised Uniform Limited Partnership Act
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