The Securities Litigation Expert Blog

FINRA Focusing on Private Placements

Posted by Jack Duval

Sep 9, 2013 5:54:14 AM

FINRA has been focusing on new private placements this summer, Reuters reports here.  Recent actions are the result of the new rules requiring the filing of private placements offering documents.

Recent changes to industry rules require brokerages to hand over private offering documents to FINRA within 15 days of the first sale. That makes it easier for the regulator to sniff out possible wrongdoing, said J. Bradley Bennett, FINRA's enforcement head, in an interview on Tuesday.

The regulator has received 1,900 offerings since December, 2012, when the rule took effect, Bennett said, who added that FINRA's staff has referred numerous concerns to its enforcement unit for review because of the new trove of information.

The shale bubble has also drawn focus:
Some red flags that can trigger a closer look by FINRA's enforcement team include offerings tied to fields that are the subject of a lot of hype, such as natural gas extraction, said Bennett

See our previous coverage of private placements here, here, and here.
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Topics: FINRA, Investment Advisors, private placements, litigation, investments, SEC, Compliance

Leveraged and Inverse ETFs: Trojan Horses for Long-Term Investors

Posted by Jack Duval

Aug 28, 2013 2:34:25 AM

Accelerant has a new white paper about leveraged and inverse Exchange Traded Funds ("ETFs"), here.  The paper includes the following:

  • Historical background on ETFs;

  • The introduction of leveraged and inverse ETFs;

  • How leveraged and inverse ETFs have been misused;

  • An explanation of the internal rebalancing mechanism of leveraged and inverse ETFs;

  • A review of prospectus language;

  • A literature review, including popular and financial press, academic, and industry sources;

  • FINRA Suitability Rules;

  • RIA Suitability Regulations, including the fiduciary duty;

  • Supervision and compliance implications for both Broker-Dealers and RIA firms.



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Topics: FINRA, RIA, Leveraged and Inverse, Investment Advisors, litigation, Senior Investors, investments, rebalancing; investments; FINRA, '40 Act; Suitability; Supervision; Compliance, SEC, ETF, Compliance, regulation.

3 Dangerous Trends for Senior Investors

Posted by Jack Duval

Jun 6, 2013 2:39:24 AM

After 13 years of volatile markets that have left many retirees with their assets depleted, some of them are taking desperate measures to make ends meet.  Recent articles have highlighted three of these methods:

  • Reverse Mortgages.  Allow a homeowner to monetize their home while living in it. (CNBC)

  • Early IRA Withdrawals.  Allow an IRA holder to make withdrawals before age 59 1/2 or before Required Minimum Distributions start. (Forbes)

  • Pension Loans.  Allow a pensioner to monetize their income stream. (NYT)

None of these are sustainable and they all put the retirees at risk of running out of money.  If utilized, they should be used to fund living expenses and not investments.

Under the FINRA Suitability Rules (2111), "investment strategies" are covered, so a recommendation by a Registered Representative for a client to use one of these strategies would come under the rule.  This is similar to the "Liquified Home Equity" strategy that became common during the housing bubble.  (NTM 04-89)

Compliance and supervisory personnel should monitor accounts for deposits from these strategies and insure that they are not going into securities - a sequence that would almost certainly involve fees and/or penalties from the liquidity source and fees from the subsequent reinvestment.

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Topics: Rule 2111, FINRA, Pension Loans, Investment Advisors, early IRA withdrawals, reverse mortgages, Senior Investors, investments, SEC, Compliance, NTM 04-89, regulation.

FINRA CEO Ketchum Calls for a Uniform Fiduciary Standard for Broker Dealers

Posted by Jack Duval

May 23, 2013 2:48:35 AM

Speaking at the FINRA Annual Conference in Washington, FINRA CEO Richard Ketchum called the SEC out on implementing the uniform fiduciary standard contemplated under Section 913 of the Dodd-Frank Act.  (A1)  Furthermore, if the SEC doesn't act, Ketchum said that FINRA would

"look hard (at issuing) an additional disclosure rule with respect to broker-dealer firms."

Section 913 of the Dodd-Frank Act can be found here.
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Topics: FINRA, Investment Advisors, litigation, SEC, Dodd-Frank Act, fiduciary standard, regulation.

Finra Cracking Down on Unauthorized Discretion

Posted by Jack Duval

Apr 22, 2013 3:23:30 AM

Finra has disciplined 17 registered representatives for taking unauthorized discretion in client's accounts - twice the pace of such actions comparable to the same period last year, Thomson Reuters reports. (TR)

For those of you needed a refresher, Finra Rule 2510 is crystal clear, there can be no taking of discretion without prior written authorization.  (2510)  Importantly, this excludes any kind of verbal understandings as to strategies or transactions.

As my branch office supervisor at Merrill Lynch used to say, "if you make an unauthorized trade, the client has a lifetime put on it."

Compliance and supervisory personelle would be wise to reinforce Rule 2510 with their registered representatives in their continuing education efforts.

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Topics: FINRA, discretion, continuing education, Investment Advisors, litigation, Rule 2510, supervision, SEC, Compliance, education

Risks of Structured Products

Posted by Jack Duval

Mar 22, 2013 2:53:00 AM

This blog post continues our expert analysis of complex investments and their regulation.

While structured products are often marketed with one-page fact sheets, they are usually highly complex.  Some of this complexity can be seen in the multitude of risks that can be found in most structured products.  Some of these risks include:

    • Credit (Issuer)

    • Reference Security

    • Liquidity

    • Maturity

    • Interest Rate

    • Leverage/Embedded Option

    • Concentration

Evaluating these risks is beyond most investors and many securities sales personnel, leading to portfolios which can be much more risky then either intended.

Compliance and supervisory staff should be extra vigilant of portfolios with high concentrations of structured products.  Portfolio risk assessment by supervisory staff and subsequent frank discussions with registered representatives and clients is a must to avoid excessive and unknown risk-taking.

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Topics: FINRA, Investment Advisors, investments, supervision, Structured Products, risk, Complex Investments, Compliance, Complexity

Protecting Senior Investors - Finra Product Focus Areas

Posted by Jack Duval

Mar 19, 2013 6:15:00 AM

This blog post continues our expert analysis of complex investments and their regulation.

Finra has delineated a number of products to focus on regarding sales to senior investors.  (NTM 07-43)  Some of these include:

    • Any products with withdrawal penalties, including: Variable Annuities, Variable Life Settlements, Equity Indexed Annuities, REITs, and Limited Partnerships;

    • Complex Structured Products

    • Home Equity Lines of Credit

    • Early Retirement (Rule 72T Withdrawals)

Compliance officers and supervisors should take note of these as the Baby Boom generation moves into the senior investor category.

Our previous coverage of senior investors can be found here, here, and here.

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Topics: FINRA, NTM 07-43, Investment Advisors, Senior Investors, investments, SEC, Structured Products, Compliance, regulation., Complexity

Goldman Sachs to Make Structured Products Available to Investment Advisors

Posted by Jack Duval

Mar 8, 2013 1:45:07 AM

Goldman Sachs is teaming with CAIS to offer structured products to registered investment advisors.  (GS)  From the press release:

 According to the terms of the agreement, pre-qualified CAIS Member Firms will have access to the Goldman Sachs structured products capabilities. Advisors that use CAIS will benefit from the efficiency of a centralized calendar offering and automated indications of interest. Additionally, all CAIS Member Firms will have direct access to Goldman Sachs’ resources to create customized offerings.

You can find our previous coverage of structured products here, here, and here.
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Topics: Investment Advisors, CAIS, investments, Structured Products, Goldman Sachs

2013 SEC Examination Priorities

Posted by Jack Duval

Feb 22, 2013 1:37:52 AM

The SEC has released it's 2013 Examination Priorities.  (SEC)  The priority list includes:

  • For investment advisers and investment companies — presence exams for newly registered private fund advisers, and payments by advisers and funds to entities that distribute mutual funds

  • For broker-dealers — sales practices and fraud, and compliance with the new market access rule

  • For market oversight — risk-based examinations of securities exchanges and FINRA, and order-type assessment

  • For clearing and settlement — For transfer agent exams, timely turnaround of items and transfers, accurate recordkeeping, and safeguarding of assets. For clearing agencies designated as systemically important, conduct annual examinations as required by the Dodd-Frank Act.

See our coverage of the Finra 2013 exam priorities here.
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Topics: FINRA, examination, Dodd-Frank, Investment Advisors, investments, SEC, Compliance, Dodd-Frank Act, regulation.

Videotaping of Sales to Senior Investors

Posted by Jack Duval

Feb 14, 2013 4:20:14 AM

This is the first of a series of blog posts examining the protection of senior investors.

Videotaping of sales meetings with senior investors is emerging as a best practice in securities and insurance products sales.  A LifeHealthPro article addressed this issue (LHP):

Said Marc Silverman, head of Silverman Financial, “You’d be amazed by how many non-lawsuits there are when you record sessions.”

Burke Christensen, a business and insurance law professor at Eastern Kentucky University, also supported the idea of videotaping client meetings. “The question of competency arises [only] after the client is incompetent. The jury sees the ailing person and assumes they were that way when transaction took place,” he said.

Furthermore, the regulators are mandating some videotaping. In the recent AWC with David Lerner Associates (DLA), Finra required the following:
I. DLA must adopt procedures for the supervision and internal approval by an appropriately qualified registered principal of all seminars. Such procedures must include, but are not limited to, a requirement, effective for three years from the date on which this Offer is accepted, that the firm make and retain (a) an audio record of any seminar with expected attendance of more than 25 individuals; and (b) an audiovisual record of any seminar with expected attendance of more than 50 individuals.

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Topics: FINRA, David Lerner Associates, Investment Advisors, litigation, Senior Investors, investments, videotaping, SEC, Compliance, regulation.

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