Miscellaneous

The Brokerage Industry Responds to FINRA’s Broker Compensation Proposal

Published on: April 19, 2014 | by Shepherd Smith Edwards & Kantas, LLP

A number brokerage firms, including Morgan Stanley Wealth Management, LPL Financial (LPLA), and Stifel Nicolaus (SF) have responded to the Securities and Exchange Commission’s request for comments about FINRA-proposed rule about broker compensation. Proposed rule 2243 would require greater disclosure about the financial incentives that is offered to representatives who change jobs. The information would need to be conveyed to the self-regulatory agency.

Under Rule 2243, clients who go with a broker to a new firm would have to be apprised of any recruiting compensation the representative gets if the amount is $100,000 or greater. This would include bonuses at the front and back ends, signing bonuses, transition assistance, and accelerated payouts. The disclosure would be applicable for one year after the representative begins association or employment with the new broker-dealer.

The rule also would apply if the brokerage firm expects total compensation paid during the representative’s first year of association to result in a $100,000 or 25% increase in compensation from the year prior. Firms also would have to notify FINRA about such a rise in compensation. (The SRO wants to use the data to look for signs of potentially related sales abuses.)

Federal Reserve Passes New Rules for Deutsche Bank, UBS, and Other Foreign Banks

Published on: February 20, 2014 | by Shepherd Smith Edwards & Kantas, LLP

This week, the Federal Reserve passed new rules that could make large foreign banks increase their capital by billions of dollars. Per the regulations, Credit Suisse Group AG (CS), Deutsche Bank AG (DB), UBS AG (UBS), and Barclays PLC (BCS), and other lenders based overseas that have units in the US will have to meet requirements having to do with debt levels and capital, as well as satisfy yearly “stress tests.”

With the new rules, 20 banks will now be required to set up US holding companies. Foreign banks with more than $50 billion in US assets will need to keep up more loss-absorbing capital than what is required by other nations. This could compel them to raise more debt or equity for their units in this country. For example, reports the Wall Street Journal, Citigroup (C) analysts say that Deutsche Bank’s unit that has been running with essentially zero capital. Under the new rules, however, it will have to deal with a shortfall of about $7 billion.

Also, foreign banks with assets greater than $10 billion will have to take the Fed’s yearly stress-test process, which would necessitate stringent review of capital levels and assets. Foreign banks that fail to pass the test could find their business activities in the US restricted. Banks with assets of at least $50 billion would have to satisfy enhanced leveraged ratios (By January 2018), risk-management, and liquidity requirements.

Foreign Banks Soon Expected to Abide by US Rules

Published on: January 27, 2014 | by Shepherd Smith Edwards & Kantas, LLP

The Federal Reserve will soon likely finish the rules that would force big foreign banks to follow the same requirements as their US counterparts are have been abiding by ever since the Dodd-Frank Wall Street Reform and Consumer Protection Act. A number of these overseas banks are reportedly not happy with the crackdown.

Dodd-Frank was written so its rules regarding capital would also be applicable to foreign banks. But when the legislation became active, some of these foreign banks changed their American outfits’ legal status so that portions of the act no longer applied to them. This let them get out of having to put huge quantities of capital into their US units to meet the requirements of the law.

Since Congress made its huge overhaul of the financial system, Deutsche Bank (DB), Barclays, Credit Suisse (CS) and others haven’t had to comply with Dodd-Frank, which was supposed to enhance the financial buffer that banks have to keep up in the event of potential losses. (Because raising more capital may require selling new shares, can may weaken profitability measures.) Also, because certain banks have changed their legal status, it is now impossible for outsiders to obtain a clear understanding of their operations in the US.

The Volcker Rule May Already Be Affecting Financial Markets & The Economy

Published on: December 17, 2013 | by Shepherd Smith Edwards & Kantas, LLP

According to The Wall Street Journal, it’s just been a week since regulators approved the Volcker Rule and already investors and financial institutions are looking for new ways to finance municipal bond investments. The Volcker rule limits how much risk federally insured depository institutions can take, prohibiting proprietary trading, setting up obstacles for banks that take part in market timing, and tightening up on compensation agreements that used to serve as incentive for high-risk trading.

Now, says Forbes, Wall Street and its firms are undoubtedly trying to figure out how to get around the rule via loopholes, exemptions, new ways of interpreting the rule, etc. (One reason for this may be that how much executives are paid is dependent upon the amount they make from speculative trading.) The publication says that banks are worried that the Volcker Rule could cost them billions of dollars.

For example, with tender-option bond transactions, hedge funds, banks, and others employ short-terming borrowings to pay for long-term muni bonds. The intention is to make money off of the difference in interest they pay lenders and what they make on the bonds. While tender-option bonds make up just a small section of the $3.7 trillion muni debt market, it includes debt that has been popular with Eaton Vance (EV), Oppenheimer Funds, and others.

Volcker Rule is Approved by SEC, FDIC, Federal Reserve, CFTC, and OCC

Published on: December 10, 2013 | by Shepherd Smith Edwards & Kantas, LLP

Five regulatory agencies in the US have voted to approve the Volcker Rule. The measure establishes new hurdles for banks that engage in market timing and will limit compensation arrangements that previously provided incentive for high risk trading.

While the Federal Reserve Board and the Federal Deposit Insurance Corporation voted unanimously to approve the Volcker Rule, the Securities and Exchange Commission approved it in a 3-2 vote, the Commodity Futures Trading Commission approved it in a 3-1 vote, and the Office of the Comptroller of the Currency’s sole voting member also said yes. President Barack Obama praised the rule’s finalization. He believes it will improve accountability and create a safer financial system.

Named after ex-Federal Chairman Paul Volcker, the rule sets up guidelines that impose risk-taking limits for banks with federally insured deposits. It mandates that they show the way their hedging strategies are designed to function, as well as set up approval procedures for any diversions from these plans. Per the rule’s preamble, banks have to make sure hedges are geared to mitigate risks upon “inception” and this needs to be “based on analysis” regarding the appropriateness of strategies, hedging instruments, limits, techniques, as well as the correlation between the hedge and underlying risks.

CommonWealth REIT Shareholders Gets New Vote on Whether to Oust Its Board

Published on: November 24, 2013 | by Shepherd Smith Edwards & Kantas, LLP

In the dispute between investors and CommonWealth REIT (CWH) over whether to oust its board, an arbitration panel said that attempts by shareholder to remove trustees were not valid but that a new vote could go forward. Related Cos. and Corvex Management LP, both CommonWealth shareholders, have been trying to get the board of trustees removed because they believe there was mismanagement and conflicts of interest.

They blamed this in part on CommonWealth President Adam Portnoy and his dad (and company founder) Barry owning external management firm REIT Management and Research LLC. The two of them are also on REIT’s board.

Corvex and Related claim that they were able to get support from holders that owned over 70% of the shares to get the trustees taken out. However, CommonWealth not only denies the conflict of interest claims but also contends that per its bylaws the vote was not valid.

Detroit Becomes Largest US City to File Bankruptcy Protection

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

In what is now the country’s largest public bankruptcy, the city of Detroit has filed for Chapter 9 bankruptcy. Michigan Governor Rick Snyder, who filed for the protection along with Emergency Manager Kevyn Orr, said that that there was no other alternative.

Investors who purchased securities issued by the city of Detroit at the recommendation of a financial advisor may have a claim to recover some or all of their losses. Please contact our securities fraud law firm to request your free case assessment.

At a joint news conference held by the two men, Snyder spoke about the need to bring to a halt to the city’s 60-year decline. He noted that 38% of Detroit’s budget is going to debt service, pensions, and other “legacy costs.” He also said 40% of street lights don’t work and, unlike the police response time national average of 11 minutes, the city’s police take nearly an hour to show up.

Detroit’s total liabilities are about $18 billion. Orr has already stopped paying about $2 billion of the city’s debt. His reorganization plan involves reducing $11.5 billion in debt to $2 billion, with retirees and investors getting just 17% of what is due to them.

According to CNN, public employee unions are expected to oppose the filing. They contend that Detroit did not exhibit good faith negotiation and it should not be able to get out of commitments it made to retirees and employees.

Needless to say, city employees and retirees won’t be happy if any of their pension benefits are cut. While the Pension Benefit Guarantee Corp. will usually intervene to offer minimum benefits when employees of a business that has gone bankrupt lose the pensions promised to them, the federal agency isn’t responsible for pensions in the public sector.

Deals are also in the works for the city to potentially pay bond holders Bank of America (BAC) and Merrill Lynch (MER) 75 cents on the dollar—that’s close to $340 million in secured debt, report some sources.

The Wall Street Journal says that per media reports and public filings, while it is not known at this time which of the city’s assets would have to be sold, possible contenders include a Van Gogh painting, the Detroit Zoo, Fort Wayne, or even all its assets.

Orr plans for the bankruptcy to be completed by the “summer or fall” of 2013. The process could cost Detroit hundreds of million dollars in financial and legal expenses.

Detroit’s bankruptcy filing will likely cause reverberations. Bankruptcies could make it harder for towns and cities to raise the funds to construct schools, bridges, and other infrastructures. Individual investor-held municipal bonds could also take a hit.

Chapter 9 Bankruptcy
Per the US Courts website, Chapter 9 bankruptcy protection is for municipalities. It enables them to come up with a plan so they can deal with their debts. It is up to a city or its to decide whether to liquidate its assets.

Detroit files for Chapter 9 bankruptcy protection, My Fox Detroit, July 18, 2013

Detroit’s bankruptcy could spell good-bye for Howdy Doody, CNN, July 19, 2013

More Blog Posts:
UBS, Morgan Stanley, Merrill Lynch, and Other Brokerage Firms Subpoenaed by Massachusetts Securities Regulator in Probe of Complex Investments Sold to Seniors, Stockbroker Fraud Blog, July 8, 2013

New Hampshire Investment Adviser Focus Capital Wealth Management Accused of Elder Financial Fraud to Pay Exchange Traded Fund Victims $2.4M, Stockbroker Fraud Blog, March 14, 2013

The 21st Century Glass-Steagall Act Seeks to Separate Investment and Commercial Banking Again, Institutional Investor Securities Blog, July 12, 2013

Lawmakers Address Securities Bills Regarding Audit Rotation Requirements, Dodd-Frank, M & A Business Broker Registration, & Senior Fraud

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

New Bill Pushes to Modify Registration of Certain Brokers Involved in Mergers & Acquisitions

A newly introduced bill in the US House of Representatives is seeking simplified registration with the Securities and Exchange Commission for brokers that facilitate acquisition and mergers for private companies with yearly earnings below $25 million and annual gross revenues of under $250 million. Currently, these brokers have to register as broker-dealers with the SEC and seek FINRA membership, but many of them don’t know about these requirements. The bill would exempt these broker-dealers from

Having to become a FINRA member, which means they would not be subject to regulation under the SRO. HR 2274 would amend 1934 Securities Exchange Acts Section 15(b). It seeks to lower regulator expenses of sellers and buyers of privately held companies that are smaller and need professional business brokerage services.

SEC Risk Fin Director Wants Public Input About Investor Protection-Related Costs and Benefits

Published on: June 15, 2013 | by Shepherd Smith Edwards & Kantas, LLP

The Securities and Exchange Commission’s Division of Risk, Strategy and Financial Innovation’s director Craig Lewis wants members of the public to be more proactive about offering information regarding investor-protection related benefits and costs during the rulemaking process. At the Pennsylvania Association of Public Employee Retirement Systems’s spring forum, Lewis said that it would help the regulator if it was given if not quantitative data, then qualitative, descriptive, and thorough information so it could better comprehend the possible effect a rule might have on investor protection.

According to the Commission’s recently published guidance on how it performs economic analysis to support rulemaking, there are four basic elements, including:

1) Identifying the justification for why there should be a rulemaking.

Radio Host Dave Ramsey and Financial Advisers Get Into Twitter Fight

Published on: June 14, 2013 | by Shepherd Smith Edwards & Kantas, LLP

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.