Thursday, December 3, 2020

FINRA Proposes Additional Financial Requirements on Small Firms

While FINRA keeps adding rules on member firms to prevent the hiring of brokers with a misconduct history, it also harms brokers and firms who do not have a significant history of misconduct.

This time around FINRA is hitting firms that it deems to be hiring disciplined brokers financially, by requiring those firms to make deposits to be used to pay arbitration awards to customers. Unfortunately, FINRA has not set forth the criteria for making the determination of which firms will be hit with this burdensome requirement, nor has it said how much of a deposit will be required.

It seems to me that this rule is arbitrary, and designed to financially punish firms that it deems to be bad actors, without defining what constitutes being a bad actor. In addition, this proposed rule sets up an end run of the federal and state bankruptcy laws, essentially preventing firms who are in financial trouble from declaring bankruptcy, since withdrawals from the deposit cannot be made without FINRA approval.

Adopting a rule that gives its own Staff the ability to decide who has to make the deposit, and the amount of that deposit, removes capital from those firms, harms their ability to continue to operate, and in the long run, harms the owners and brokers who are employed at those firms.

FINRA admits that this rule will create a financial hardship on small firms, and states in the rule proposal "FINRA believes that the direct financial impact of a restricted deposit is most likely to change such member firms’ behavior—and therefore protect investors." While protecting investors is obviously an important goal, making it financially impossible for firms to operate, using vague rules and criteria does not protect investors, it harms brokers.

While misconduct by firms or brokers should certainly be addressed this Minority Report type of regulation is an unnecessary burden on small firms. The reality is that FINRA has enormous tools at its disposal to prevent the harm to investors, through its examination and enforcement proceedings and it admits in its rule proposal that it has already taken steps to address potential violations by firms, including

  • Published Regulatory Notice 18-15, which rearticulates the obligation of member firms to implement heightened supervisory procedures tailored to the associated persons with a history of misconduct; 
  • Proposed rule amendments that would require a member firm to conduct with FINRA a materiality consultation before allowing persons with a history of misconduct to become owners, control persons, principals or registered persons of a member firm; authorize the imposition in a disciplinary proceeding of conditions and restrictions on the activities of a respondent member firm or respondent broker that are reasonably necessary for the purpose of preventing customer harm, and require a respondent broker’s member firm to adopt heightened supervisory procedures for such broker, when a disciplinary matter is appealed to the NAC or called for NAC review; require firms that apply to continue associating with a statutorily disqualified person to include in that application an interim plan of heightened supervision that would be effective throughout the application process; and allow the disclosure through FINRA BrokerCheck of the status of a member firm as a “taping firm” under FINRA Rule 3170 (Tape Recording of Registered Persons by Certain Firms);
  • Published Regulatory Notice 18-17, which announced revisions to the FINRASanction Guidelines
  • Raised fees for statutory disqualification applications; and
  • Revised the qualification examination waiver guidelines to permit FINRA to more broadly consider past misconduct when considering examination waiver requests.
FINRA has also quadrupled the filing fees for making a request for expungement to over $3,000 for simply making the request.

All to the benefit of larger firms who will undoubtedly not be subjected to such onerous requirements.

Small firms who are subject to these new financial requirements will need to be prepared to negotiate with FINRA, and to file legal proceedings to address the new requirements, which undoubtedly violate due process.

The rule proposal is online.  

Wednesday, December 2, 2020

Energy Companies Agree to Settle Fraud Charges Stemming From Failed Nuclear Power Plant Expansion

The Securities and Exchange Commission today announced that SCANA Corp. and its subsidiary South Carolina Electric & Gas Co. (SCE&G) have agreed to settle the SEC’s lawsuit charging them with defrauding investors by making false and misleading…

Read the Full Press Release
Have a securities law question? Call Sallah Astarita & Cox at 212-509-6544.

UBS Desperate to Keep Clients

According to an article in AdvisorHub, UBS Orders Fee Waivers, Loan Discounts on Reassigned Accounts, UBS is drastically waiving fees and commissions for accounts of brokers who have left the firm, in a desperate attempt to keep those clients, and their assets.

The fee waiver is causing concern for brokers who are planning on leaving, as well as for the brokers who would normally welcome the reassigned accounts, who will now be working for free on those accounts for at least 6 months - with the additional potential liability.

According to the article, UBS is claiming "enhanced protocols" to retain clients, and admits that the firm will contact clients of advisers who leave, notifying them that their advisory fees will be waived for the next two quarters, annual account fees waived for the year and rates on securities-backed and margin loans reduced to a Libor-plus-50 basis points.

This is not unusual, firms use fee waivers to entice clients to stay for years, but what is unusual is a firm making a blanket offer of this size, to all of a departing broker's clients, without the client requesting same, or deciding to follow the broker.

This "enhanced protocol" follows UBS' drastic move two years ago when it left the Protocol for Broker Recruiting, throwing broker recruiting back to the early days of lawsuits, injunctions and temporary restraining orders. The Protocol was put in place in large part to avoid the costs of such legal maneuvering. Firms were spending tens of thousands of dollars on legal fees, not to mention manpower, in pursuing injunctions on an expedited time frame, and were losing more of those cases than then were wining. Apparently UBS, and Morgan Stanley, who also left the Protocol, were losing too many brokers and clients, withdrew from the Protocol and started suing departing brokers.

Now UBS is offering these significant fee waivers and margin rate reductions to keep clients, which will undoubtedly be matched by the new firm, which ultimately reduces compensation for the broker.

Merrill Lynch also instituted "enhanced protocols" to retain clients from its departing brokers earlier this year.

One would think these firms would enhance their employee relations, treat their registered reps better, before they decide to leave. 

SEC Charges Disbarred New York Attorney and Florida Attorney with Scheme to Create False Opinion Letters

The Securities and Exchange Commission today charged disbarred attorney, Richard J. Rubin, and licensed attorney, Thomas J. Craft, with fraud for their roles in a legal opinion letter scheme to fraudulently facilitate the sale of millions of shares of…

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Have a securities law question? Call Sallah Astarita & Cox at 212-509-6544.

Tuesday, December 1, 2020

SEC Charges Unregistered Investment Adviser with Defrauding Puerto Rico Municipality

The Securities and Exchange Commission today charged an unregistered investment adviser based in Orlando, Florida for defrauding the Municipality of Mayag├╝ez, Puerto Rico and misappropriating $7.1 million of taxpayer funds. According to the SEC’s…

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Have a securities law question? Call Sallah Astarita & Cox at 212-509-6544.

SEC Charges Boiler Rooms Operator with Defrauding Retail Investors

The SEC today charged New York resident Mark Alan Lisser with fraud for operating at least two boiler rooms, on Long Island, New York and in Boca Raton, Florida, through which he raised approximately $2.1 million from at least 71 retail investors and…

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Have a securities law question? Call Sallah Astarita & Cox at 212-509-6544.

SEC Awards Over $6 Million to Joint Whistleblowers

The Securities and Exchange Commission today announced an award of over $6 million to joint whistleblowers whose information and assistance led to the successful enforcement of SEC and related actions.  The whistleblowers’ substantial assistance,…

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Have a securities law question? Call Sallah Astarita & Cox at 212-509-6544.

Wednesday, November 25, 2020

SEC Issues Agenda for Dec. 1 Meeting of the Asset Management Advisory Committee

The Securities and Exchange Commission today released the agenda for the Dec. 1 meeting of the Asset Management Advisory Committee (AMAC).  AMAC was formed to provide the Commission with diverse perspectives on asset management and related…

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Have a securities law question? Call Sallah Astarita & Cox at 212-509-6544.

Tuesday, November 24, 2020

SEC Investor Advisory Committee to Meet Remotely on Dec. 3

The Securities and Exchange Commission's Investor Advisory Committee will hold a public meeting on Dec. 3 by remote means. The meeting will begin at 10 a.m. ET, is open to the public via live webcast, and will be archived on the committee's website…

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Have a securities law question? Call Sallah Astarita & Cox at 212-509-6544.

SEC Proposes Amendments to Modernize Framework for Securities Offerings and Sales to Workers

The Securities and Exchange Commission today announced that it has voted to propose amendments to Securities Act Rule 701, which provides an exemption from registration for the issuance of compensatory securities by non-reporting issuers, and Form S-8,…

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Have a securities law question? Call Sallah Astarita & Cox at 212-509-6544.

SEC Proposes Temporary Rules to Facilitate Measured Participation by Certain "Platform Workers" in Compensatory Offerings Under Rule 701 and Form S-8

The Securities and Exchange Commission today voted to propose rules that, on a temporary basis and subject to percentage limits (no more than 15% of annual compensation), dollar limits (no more than $75,000 in three years) and other conditions, would…

Read the Full Press Release
Have a securities law question? Call Sallah Astarita & Cox at 212-509-6544.

Monday, November 23, 2020

OCIE Risk Alert - Update Your Policies and Procedures!

The SEC's Office of Compliance Inspections and Examinations (“OCIE”) issued a Risk Alert related to Rule 206(4)-7 (the “Compliance Rule”) under the Investment Advisers Act of 1940 (“Advisers Act”).   

Deficiencies related to the Compliance Rule have been among the most common cited by OCIE. Under the Compliance Rule, it is unlawful for an investment adviser registered with the Commission (“adviser”) to provide investment advice unless the adviser has adopted and implemented written policies and procedures reasonably designed to prevent violation of the Advisers Act and the rules thereunder by the adviser or any of its supervised persons. The Compliance Rule requires advisers to consider their fiduciary and regulatory obligations under the Advisers Act and to formalize policies and procedures to address them.

The Alert details common deficiencies, including:

  • OCIE staff observed advisers that did not devote adequate resources, such as information technology, staff and training, to their compliance programs.
  •  CCOs who had numerous other professional responsibilities, either elsewhere with the adviser or with outside firms, and who did not appear to devote sufficient time to fulfilling their responsibilities as CCO.
  • Compliance staff that did not have sufficient resources to implement an effective compliance program. 
  • Advisers that had significantly grown in size or complexity, but had not hired additional compliance staff or added adequate information technology, leading to failures in implementing or tailoring their compliance policies and procedures.
  • Advisers that restricted their CCOs from accessing critical compliance information, such as trading exception reports and investment advisory agreements with key clients. 
  • Advisers where senior management appeared to have limited interaction with their CCOs, which led to CCOs having limited knowledge about the firm’s leadership, strategy, transactions, and business operations. 
  • Instances where CCOs were not consulted by senior management and employees of the adviser regarding matters that had potential compliance implications. 
  • Evidence of annual review. Advisers that claimed to engage in ongoing or annual compliance reviews of their policies and procedures to determine their adequacy and effectiveness of their implementation, but could not provide evidence that one occurred. 
  • Identification of risks. Advisers that claimed to have performed limited annual reviews but failed to identify or review key risk areas applicable to the adviser, such as conflicts and protection of client assets. 
  • Review of significant aspects of adviser’s business. Advisers that failed to review significant areas of their business, such as policies and procedures surrounding the oversight and review of recommended third-party managers, cybersecurity, and the calculation of fees and allocation of expenses.
The full list of examples of deficiencies that OCIE will be looking for in their examinations are contained in the Risk Alert - OCIE Observations: Investment Adviser Compliance Programs

Mark Astarita represents financial advisers across the country. If you have questions regarding this Alert, or your firm's compliance with these issues, contact him at or by phone at 212-509-6544

Friday, November 20, 2020

SEC Whistleblower Awarded $900,000 for Reporting Overseas Misconduct

The SEC confirmed the award in an order, finding

we positively assessed the following facts: (i) Claimant provided significant and timely information that resulted in the significant expansion of the staff’s investigation and resulting Commission charges; (ii) Claimant assisted in the staff’s investigation by submitting additional information that helped expedite the investigation; and (iii) there are important law enforcement interests here in that Claimant identified alleged violations that were occurring overseas, some of which would have been difficult to detect in the absence of Claimant’s information.