Articles Posted in Securities Industry Regulatory Defense

The North American Securities Administrators Association (NASAA) recently released its Enforcement Report for 2012. A copy can be found here.

Pen finance chartNASAA is an association primarily comprised of state securities regulators. Through the association, its members engage in multi-state enforcement actions and other collaborative activities. NASAA’s Enforcement Section tracks trends in securities fraud and oversees the activities of various Project Groups, including: Internet fraud investigations, oil/gas ventures, Reg D investigations, securities investigation database and enforcement zones.

The Enforcement Report contains a multitude of interesting statistics. According to NASAA:

On October 24, 2012, Susan Axelrod (FINRA’s executive vice president, member regulation sales practice) spoke at PLI’s seminar for broker-dealer regulation and Robert L. Herskovits, Esq.enforcement. Broker-dealers and registered representatives should take note because FINRA’s enforcement agenda was made clear. Issues of concern for FINRA include:

Cyber Security

FINRA has seen an uptick in instances where a customer’s email account has been hacked and the perpetrator sends a phony email to a brokerage firm requesting an outbound wire transfer. Given that NASD Rule 3012 requires diligent supervision concerning the outbound transmittal of funds, FINRA requested that “broker-dealers reassess their policies and procedures for accepting instructions to withdraw or transfer funds via electronic means to ensure that they are adequately designed to protect customer accounts from the risk that customers’ email accounts may be compromised and used to send fraudulent transmittal or withdrawal instructions.” (FINRA Regulatory Notice 12-05). In that Notice, FINRA recommended that firms verify that the email was sent by the customer and adopt policies to identify “red flags” such as transfer requests that are out of the ordinary or to an unfamiliar third-party account.

The Financial Industry Regulatory Authority (FINRA) views its mandate as investor protection and as such, they have given notice that a new suitability rule, Rule 2111, will go into effect on July 9, 2012.

As long as there have been investors and brokers, there have been people who finra-rule-2111-150x150.jpgtake advantage and people who are taken advantage of. This rule codifies a standard that FINRA thinks is best for the investing public by imposing more stringent regulations on securities that a broker recommends to buy/sell, including those within a client’s existing portfolio. Rule 2111 has significant implications for broker-dealers who maintain retail brokerage accounts. The rule by its own terms, carves out institutional accounts: So if you are a broker-dealer that sells to hedge funds, this is not a game changer. But if you are selling to Main Street as opposed to Wall Street, then this is a very significant rule.

The new rule contains three guiding principles. Each recommendation must have:

French investors urged New York’s top court on Wednesday to reinstate their lawsuit over losing $43 million out of $50 million they put into two structured investment vehicles.

The investors claim Barclays Bank, Standard & Poor’s and two management companies were complicit in leaving investors with plummeting securities shortly before the Wall Street collapse. Oddo Asset Management claimed collateral managers Avendis Financial Services Ltd. and Solent Capital Ltd. conspired with Barclays in early 2007 to transfer subprime mortgage-backed securities from Barclays to the two vehicles.

The investors also claimed S&P was complicit by confirming inflated note ratings for Golden Key Ltd. and Mainsail II Ltd.