The Securities Litigation Expert Blog

UBS Hit with $34 Million in Fines over Puerto Rico Funds

Posted by Jack Duval

Sep 29, 2015 4:29:00 PM


FINRA and the SEC just announced a $34 million fine against UBS for its Puerto Rico funds.  You can find the announcement here.

For the full AWC, see this.

We will have more analysis later.


For information about Puerto Rico municipal bonds expert Jack Duval, click here.

For my previous coverage of the Puerto Rico municipal bond crisis, see this.


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Topics: municipal bond crisis, FINRA, closed-end funds, Puerto Rico, UBS, SEC, securities litigation

SEC Defining Risk as Complex Investments

Posted by Jack Duval

Jun 4, 2014 8:14:00 AM

 It has been widely reported that the SEC has put together a group dedicated to looking into how private equity and hedge funds “value their assets, disclose their fees, and communicate with investors.”[1] What has not been so widely reported is why this new group is necessary.

I believe the SEC is responding to investment complexity with specialized examination groups.  This is straight out of the SEC playbook going back to 2010, when it underwent a complete reorganization.  (See our previous coverage of this here.)


To understand why this is happening now, we have to go back to the passage of the Dodd-Frank Act in 2010, which removed registration exemptions for private equity and hedge funds.  Previously, these funds were covered under the so-called “15 client exemption” which allowed private fund advisers to count each fund as a client and thereby bypass the purview of the SEC.[2]

In testimony to the U.S. House Committee on Financial Services, SEC Chair Mary Jo White provided insight about the SEC’s private fund examination efforts.  Some of the more salient points she made include:[3]

  • Since Dodd-Frank has passed, approximately 1,800 advisers to hedge funds and private equity funds have registered with the SEC for the first time;
  • Staff is currently conducting “focused, risk-based” exams on this pool of new registrants;
  • So far, some of the problem areas that have arisen are as follows: “misallocating fees and expenses; charging improper fees to portfolio companies or the funds they manage; disclosing fee monitoring inadequately; and using bogus service providers to charge false fees in order to kick back part of the fee to the adviser.”

Focusing on Complex Businesses and Complex Investment Strategies

While the SEC has not publicly defined how it is using its “risk-based exams” it appears it is using complexity as a key determinant of risk.  The result is that the SEC is focusing on funds that have complex businesses and complex investment strategies.[4]

The Complexity of Regulating Complex Investments

How complex is this task?  One indicator is the amount of staff required to carry out the examinations.  As part of the fiscal 2015 budget request, the SEC is looking for funding to add 316 examination staff to its Office of Compliance Inspections and Examinations.[5] This would increase the current 450 examination staff by over 70 percent.[6]

To put the size and scope of their mandate in perspective, the SEC has so far only examined about nine percent of RIA firms.[7] Their goal is to have examined 25 percent of these newly registered advisers by the end of 2014.[8]

As the evolutionary speed of investments continues to increase and change the landscape, the SEC will have to match it with the speed of change in its organizational structure.  This will require great flexibility, creativity, and managerial savvy.


The Accelerant roster of securities experts with complex investment backgrounds includes:  Steve Pomerantz, Ph.D.Tom Boczar, Esq., CFATom Brakke, CFAGerry Guild, CFA, and John Duval, Sr.

To see all of Accelerant's complex securities experts, visit our website here.

[1]                 Reuters. “Exclusive: SEC forms squad to examine private funds – sources”; Available at June 4, 2014.

[2]        “SEC Adopts Dodd-Frank Act Amendments to Investment Advisers Act”; Available at ; Accessed June 4, 2014.

[3]        “Testimony on ‘Oversight of the SEC’s Agenda, Operations and FY 2015 Budget Request’”; Available at - .U34-vlhdWht; Accessed June 4, 2014.

[4]                 PE HUB. “Some PE firms chosen for early SEC exams based on risk: Buyouts;” Available at; Accessed June 4, 2014.

[5]                 See Supra note 1.

[6]                 Id.

[7]                 Id.

[8]                 Id.

Get Updates on Complex Investments
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Topics: SEC, Complex Investments, hedge funds, private equity

FINRA Issues Regulatory Notice 13-31 Suitability

Posted by Jack Duval

Oct 23, 2013 7:36:07 AM

FINRA has issued RN 13-31 to highlight effective practices for member firms when complying with Suitability Rule 2111.  (RN 13-31)

A number of highlights are worth noting, including:

  •  The manner in which the firm supervises explicit hold recommendations, including the method of documentation the firm uses when documentation occurs, as well as the information the firm considers in conducting the review...

  • Transaction red flags such as: those that appear to deviate from the firm’s internal suitability guidelines for a particular security; a long-term investment for an investor with a short-term horizon; a speculative investment or strategy held in the account of an investor with a conservative investment objective; and the same security held in the account or strategy implemented for...

The RN also emphasized compliance with the reasonable-basis component of Rule 2111:
As referenced above, reasonable-basis suitability requires a firm or associated person to perform reasonable diligence to understand the nature of a recommended security or investment strategy involving a security, as well as its potential risks and rewards, and to determine whether the recommendation is suitable for at least some investors based on that understanding. FINRA observed during examinations that many firms have in place a new product vetting process that assists them in executing reasonable diligence obligations. While many large firms have extensive frameworks for assessing products, even smaller firms established investment committees to vet complex or risky products to determine whether the product met the reasonable-basis suitability standard for retail customers, and if so, the type of customer profile for which the product would be suitable if recommended.

A firm’s vetting of new products does not, standing alone, satisfy the need for associated persons to understand the securities and investment strategies they recommend to customers.  In this regard, some firms post due diligence on products (and accompanying documents) to an internal website that associated persons can access when recommending a product. Such information includes audited financial statements, notes of interviews with key individuals of the product sponsor or issuer, and other information relevant to understanding the product and its features. Some firms use the vetting process to aid in product-focused training of their associated persons, supervisors and compliance staff.

Compliance with the reasonable-basis suitability requirement will be an important issue in the next securities litigation cycle.  Chief Compliance Officers are right to focus on this issue before the next cycle is upon them.
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Topics: reasonable basis suitability, FINRA, RN 13-31, litigation, investments, supervision, Due Diligence, SEC, Compliance, regulation.

FINRA Moves Closer to Fiduciary Standard with Conflicts Report

Posted by Jack Duval

Oct 22, 2013 10:54:25 AM

According to a release by FINRA CEO Richard G. Ketchum, the regulator is stepping up it's focus on conflicts of interest at Broker-Dealer firms.  (Release)  This increase in focus is significant because it takes a step closer to a fiduciary standard for Registered Representatives.  The full, 44 page report can be found here.

Some areas for BD focus include:

  • identifying and managing conflicts on an ongoing basis through an enterprise-level approach that is scaled to the size and complexity of a firm's business and that starts with a "tone from the top" that carries through to the organization's structures, policies, processes, training and culture;

  • establishing new product review processes that include perspectives independent from the business proposing products, that identify potential conflicts raised by new products, that restrict distribution of products that may pose conflicts that cannot be effectively mitigated and that periodically re-assesses products through post-launch reviews;

  • making independent decisions in the wealth management business about the products they offer without pressure to favor proprietary products or products for which the firm has revenue-sharing agreements;

  • minimizing conflicts in compensation structures between customer and broker or firm interests where possible and including heightened supervision when conflicts remain; for example, around thresholds in a firm's compensation structure;

  • mitigating conflicts of interest through disclosures and other information that enables customers to understand the factors that may affect a product's financial outcome—such as the use of scenarios and graphics for a particular product; and

  • including "best-interest-of-the-customer" standards in codes of conduct that apply to brokers' personalized recommendations to retail customers in order to maintain and increase investor trust.

Broker-Dealer compliance departments will need to establish a framework of policies and procedures to address actual and potential conflicts of interest.


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Topics: FINRA, Richard G. Ketchum, litigation, Conflicts of Interest, investments, report, SEC, Compliance, Dodd-Frank Act, regulation.

Accelerant Publishes New White Paper: "Suitability Obligations When Using Specialists"

Posted by Jack Duval

Oct 16, 2013 4:10:45 AM

The white paper can be found here.

From the introduction:

The specialist system has existed in the brokerage world since the 1980’s, however, it has not received a great deal of regulatory or expert commentary. This is remarkable since the use of specialists is common throughout the industry, particularly in the sales of complex products.

This paper explores the suitability obligations of Registered Representatives and product specialists when jointly making recommendations to clients. The origin and evolution of the specialist system is examined along with the functions typical of specialists. The industry distinction between “inside” and “outside” specialists is described, and selling agreements between Broker-Dealers (“BDs”) and outside specialists are examined as well.

Most importantly, a critical potential dilemma is explored in regards to suitability: what happens if the Registered Representative knows the client, the product specialist knows the product, but neither knows both?

The answer, in short, is that the Registered Representative has ultimate responsibility for the suitability of all recommendations to the client. However, if the Registered Representative involves a specialist in the recommendation at any time, then both must know the client and the investment well enough to make a suitability determination. If either fails in this regard, then the recommendation cannot be said to be suitable.

The paper is co-authored by John Duval, Sr. and Jack Duval.



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Topics: FINRA, registered representative, broker dealer, litigation, white paper, suitability, supervision, Accelerant, SEC, specialists, Jack Duval, John Duval Sr., Compliance, regulation.

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

Accelerant Launches Mock and Shadow Securities Arbitration Panel Product

Posted by Jack Duval

Sep 5, 2013 7:29:00 AM

Accelerant provides litigators the ability to present their case to a mock arbitration panel before the actual hearing, as well as the opportunity to have a shadow arbitration panel read daily transcripts or view video testimony to provide real-time insights into trial dynamics.  We have assembled a stable of securities arbitrators from multiple pools across the country and can supplement with candidates from specific locations, if requested.

Mock Arbitration Panels

  • Matched to actual panel composition by demographics and background;

  • Day-long presentation of one or both sides of the case, including: witness testimony; documentary evidence; and exhibits;

  • Immediate feedback through question and answer sessions; perceived areas of concern; and suggestions on how to clarify and strengthen your case.

Shadow Arbitration Panels

  • Matched to actual panel composition by demographics and background;

  • Review of daily transcripts, video testimony, and actual exhibits;

  • Feedback through daily interviews and written summaries;

  • Insight into witness credibility, effectiveness and clarity of arguments and evidence, and arbitrator reactions.

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Topics: FINRA, securities, litigation, arbitration, AAA, SEC, JAMS, Products, Accelerant Products

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.

Arbitrator Analyzer™ Product Simplifies FINRA Rank and Strike List Review

Posted by Jack Duval

Jun 17, 2013 9:32:35 AM

Accelerant has just released it's newest product, the Arbitration Analyzer.

The Arbitrator Analyzer™ is a tool that enables attorneys to quickly and efficiently review, analyze, evaluate, and drill down on FINRA arbitrators and their publicly available awards.



    • Elegant and simple visual display of arbitrator data;

    • Dynamic, real time filtering by various factors, including: age, number of publicly available awards, and total amount of awards;

    • “At-a-glance” understanding of Rank and Strike list composition;

    • Instant drill down into individual awards;

    • Fast turn around times.

Arbitrator Analyzer from Accelerant LLC on Vimeo.



$700 for basic workup.

Custom analyses available.

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Topics: FINRA, securities, Data Analysis, Rank and Strike List, data analytics, litigation, arbitration, analytics, SEC, Accelerant Products, Law Firm Analytics, Arbitrator Analyzer, product;, Predictive Analytics

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.

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