Securities and Exchange Commission

SEC Wants Comments About FINRA’s Proposed Rules About Broker-Dealer Supervision

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

The Securities and Exchange Commission wants comments on a proposed amendment to the Financial Industry Regulatory Authority’s broker-deal supervision rules. The latter wants to change the rules by consolidating some of them, including NASD Rule 3010 and NASD Rule 3012 into its proposed Rules 3110 and 3120 that have to do with supervisory controls and the supervision of supervisory jurisdictions’ office and branch offices. The proposed rule change would eliminate NYSE Rule 342, which is related to supervision, approval, and controls, Rule 401 about business conduct, and Rule 354 regarding control persons, Rule 351e about reporting requirements. The consolidation is taking place because the SEC says some of the rules are duplicative.

FINRA also wants to eliminate proposed Rule 3110.03, which is a provision about the supervision and control of registered principals at one-person OSJs by a designated senior principal on the site. The SRO also is proposing to amend rule 3110.05 so that an Investment Banking and Securities Business member doesn’t have to perform detailed reviews of transaction if the member is using risk-based review system that is designed in a way so it can focus on areas that have the greatest risks of violation.

Meantime, proposed Rule 3110(b)(6)(D) will be changed so that it is clear that the rule doesn’t establish a strict liability to identify and get rid of all conflicts as they relate to an associated person that is supervised by supervisory personnel. There will have to be procedures to make sure that conflicts of interest don’t compromise the supervisory system.

SEC Officers Guidance on Liability and Compliance for Brokerage Firms

Published on: October 11, 2013 | by Shepherd Smith Edwards & Kantas, LLP

The Securities and Exchange Commission has published answers to frequently asked questions as guidance about liability that may come out of the Exchange Act related to the responsibilities of chief compliance officers and other legal and compliance staff at broker-dealers. The advisory was issued so firms could consider which circumstances and facts may result in grounds for supervisory liability.

In the FAQ, the SEC notes that for purposes of the Exchange Act Sections 15(b)(4) and (6), a person is a supervisor depending on the specifics of a case and whether he/she had the required ability, responsibility, or authority to impact the behavior of the employee(s) whose conduct is in question. There are, however, legal personnel and compliance staff who can assume a key role without assuming such supervision.

The Commission said that brokerage firms are responsible for establishing compliance programs that make sure compliance with regulations and laws occurs. Firms may want to include processes to identify incidents of noncompliance, a robust monitoring system, and procedures delineating who is tasked with what responsibility and/or supervisory role. The regulator says that compliance and legal staff do play a key part in broker-dealers efforts to create and put into effect a compliance system that works.

SEC Lifts Ban on General Solicitation

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

Beginning today, September 23, the SEC’s ban on general solicitation is no longer in effect. Those raising funds for corporations can now publish equity offerings on websites for crowdfunding, as well as blog and tweet about them. The move comes in the wake of the Jumpstart Our Business Startups Act, which was passed last year.

That said, even with the lifting of the general solicitation ban, raising funds for companies will likely remain a difficult endeavor. Funds can only be raised from investors that are accredited, and now, the latter will have to show proof that they fulfill the wealth criteria for accreditation by having an income greater than $200K during the last two years or a net worth of $1M (the value one’s primary residence is not included.)

Would-be fundraisers will need to provide extensive disclosure of offerings not just to the Commission, but also to the public, and there will be tight restrictions and the risk of penalty of a yearlong fundraising ban for violations. Also, in order to avail of being able to engage in general solicitation, startups will have to file a Form D with the regulator at least 15 days prior to starting to solicit. An amended Form D will have to be turned in within 30 days after the termination of an offering.

Securities and Exchange Commission Report: Enforcement Division & OCIE Collaborate, Broker-Registration in Private Funds, Conflict Minerals Regulation, Short Sale Rules, and New Commissioner Confirmations

Published on: August 30, 2013 | by Shepherd Smith Edwards & Kantas, LLP

Lawyers Not Happy About Growing Collaboration Between SEC’s Enforcement and OCIE

A number of lawyers have expressed dismay that the collaboration efforts between the Securities and Exchange Commission’s Office of Compliance Inspections and Examinations and its Enforcement Division are increasing. There is concern that examinations are ending up becoming the start of later investigations. For example, examiner interviews with the employees of registrants can later turn into the basis of enforcement actions, and some attorneys say this brings up issues of due process.

Meantime, SEC officials have acknowledged the growing collaboration between these two divisions.

Regulatory Reform: Delay or Destruction?

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

10 Democrats in the US Senate are calling on the Obama Administration to delay a proposal by the Department of Labor involving retirement plan-related investment advice until after the SEC makes a decision over whether to put out its own proposal about retail investment advice. The Commission is looking at whether it should propose a rule that would up the standard for brokers who give this type of advice. The lawmakers are worried that the two rules might conflict and obligate investment advisers and brokers to satisfy two standards.

Meantime, the Labor Department is getting ready to once more propose a rule that would broaden what “fiduciary” means for anyone that gives investment advice about retirement plans. Its previous proposal in 2010 met with resistance from the industry and some members of Congress. Even now there are also Republican lawmakers that want the DOL to wait until after the SEC makes a decision.

Commission Chairman Mary Jo White says she would like the agency to make this decision as “as quickly as we can.” Also, earlier this month she said it would be “premature” to talk about whether the regulator will change or withdraw a recent proposal to amend Regulation D to improve requirement for companies wanting a more relaxed general solicitation arena.

SEC and DOJ Sue Bank of America Over Alleged $850M RMBS Fraud

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

Bank of America (BAC) and two subsidiaries are now facing SEC charges for allegedly bilking investors in an residential mortgage-backed securities offering that led to close to $70M in losses and about $50 million in anticipated losses in the future. The US Department of Justice also has filed its securities lawsuit over the same allegations.

In its securities lawsuit, submitted in U.S. District Court for the Western District of North Carolina, the Securities and Exchange Commission contends that the bank, Bank of America Mortgage Securities (BOAMS) and Banc of America Securities LLC, which is now known as Merrill Lynch, Pierce, Fenner & Smith, conducted the RMBS offering, referred to as the the BOAMS 2008-A and valued at $855 million, in 2008. The securities was sold and offered as “prime securitization suitable for the majority of conservative RMBS investors.

However, according to the regulator, Bank of America misled investors about the risks and the mortgages’ underwriting quality while misrepresenting that the mortgage loans backing the RMBS were underwritten in a manner that conformed with the bank’s guidelines. In truth, claims the SEC, the loans included income statements that were not supported, appraisals that were not eligible, owner occupancy-related misrepresentations, and evidence that mortgage fraud was involved. Also, says the regulator, the ratio for original-combined-loan-to-value and debt-to-income was not calculated properly on a regular basis and, even though materially inaccurate, it was provided to the public.

GAO Wants SEC to Look At Other Criteria for Who Qualifies As An Accredited Investor

Published on: July 31, 2013 | by Shepherd Smith Edwards & Kantas, LLP

The Government Accountability Office is recommending that the SEC look at eight other criteria for who should qualify as an accredited investor for purposes of the 1933 Securities Act Regulation D Rule 506. The criteria is divided into two categories: understanding financial risk and financial resources. The independent, nonpartisan agency that works for Congress put out its recommendations to the regulator on July 18.

Under the 1933 Act, accredited investors can take part in certain private and limited exempt offerings. To qualify as an accredited investor a person needs to have at least $200,000 for each of the last two years or a net worth of $1 million without factoring in his/her main residence. While market participants that were surveyed agreed that net worth was the most essential criterion, they indicated that having an investment advisor and liquid investments could balance capital formation interests and investor protection.

Investor advocates and state securities regulators consider this criteria to be outdated and they are calling for substantive changes. Even SEC Commissioner Elisse Walter told broker-dealers at a recent gathering that the agency “desperately” must modify the definition of an accredited-investor.

Securities Case Over Insuring The $160M in Disgorgement Paid to the SEC Goes Back to Trial Court

Published on: July 6, 2013 | by Shepherd Smith Edwards & Kantas, LLP

New York’s highest court has revived a declaratory judgment action against D & Liability insurers after finding that the Securities and Exchange Commission order mandating that Bear Stearns (BSC) pay $160M in disgorgement failed to establish in a conclusive manner that payment could not be insured. The securities lawsuit is J.P. Morgan Securities, Inc., et al. v. Vigilant Insurance Company, et al.

Claiming that Bear Stearns engaged in market timing mutual fund trades and illegal late trading and for certain clients over a four-year period, the SEC wanted $720M in sanctions from the firm. The financial firm, however, argued that the activities only caused it to make $16.9M in revenues. A settlement was reached ordering Bear Stearns to pay $160M in disgorgement and $90M in penalties, with the firm not having to deny or admit to the Commission’s claims.

A declaratory action followed with a plaintiff in the New York Supreme Court seeking to have D & O insurers pay for $150M of the $160M disgorgement. Citing New York law, the insurers argued that the case should be dismissed, noting that under state law disgorgement is not insurable. A lower court turned down these contentions, denying the motion.

SEC Tells Financial Firms That Settling Without Denying or Admitting to Wrongdoing is No Longer Allowed in Certain Securities Cases

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

Securities and Exchange Commission Chairman Mary Jo White recently announced that defendants in certain securities cases would no longer be allowed to accompany an agreement to settle with the statement that they are doing so but without admitting or denying wrongdoing. Speaking to a columnist with The New York Times, White said that in certain instances, admissions are necessary for there to be public accountability. However, White also did say that most SEC cases still would be settled under the “nether admit nor deny standard,” which provides the accused incentive to settle while compensation to victims sooner.

The new policy was announced to SEC enforcement staff last week in a memo from George Canellos and Andrew Ceresney, the regulator’s enforcement division co-leaders. They went on to say that in cases that warrant such an admission, if the accused were to refuse then a securities lawsuit might be the next step.

Securities cases that require admissions of wrongdoing will have to satisfy certain criteria, such as intentional misconduct that was egregious, wrongdoing that hurt a lot of investors or put them at risk of serious financial harm, or unlawful obstruction of the Commission’s investigation.

“This policy change is long overdue,” said SSEK Founder and Stockbroker Fraud Lawyer William Shepherd. “Over the past decade, the SEC has accommodated the targets it has been investigating far too often. Only rarely is there the requirement of admission of wrongdoing, and almost never for large financial firms and their management. When one is caught with a hand in the cookie jar, it’s time to say ‘I did it and I’m sorry, rather than “I neither admit nor deny it was my hand.”

The change policy comes in the wake of complaints that the SEC has been to lax with its enforcement, especially when it came to pursuing securities fraud cases against large financial institutions involved in the economic crisis, such as JPMorgan Chase (JPM), Bank of America (BAC) and Citigroup (C), which all settled cases against them without denying or admitting guilt. Having to admit wrongdoing potentially could hurt financial firms because plaintiffs in private securities cases and class action fraud litigation may then cite the acknowledgement of culpability, thereby strengthening their claims. This could force banks to have to pay out millions of dollars than if they hadn’t admitted to doing anything wrong.

S.E.C. Has a Message for Firms Not Used to Admitting Guilt, Stockbroker Fraud Law Firm, NY Times, June 22, 2013

Securities and Exchange Commission

More Blog Posts:
Controversial Democratic Appointee Pushes SEC for Less Talk About Investor and Securities Market Protections and More Action, Stockbroker Fraud Blog, April 28, 2013

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.