Wednesday, April 25, 2007
Morgan Stanley Sex Discrimination Pool
Morgan Stanley set up a $46 million pool to settle a sex-discrimination lawsuit and said it would enact new policies to help women succeed as financial advisers. The settlement, if approved, would be the second big sex-discrimination settlement struck by the bank in recent years. The full story is at the WSJ Law Blog.
Friday, April 20, 2007
Nacchio Convicted of Insider Trading
Joseph Nacchio, former CEO of Qwest Communications International Inc., was found guilty on Thursday of 19 counts of insider trading. The case involved the use, and abandonment, of a 10b5-1 plan. See,SECLaw.com: 10b5-1 Plans Under Attack
Tuesday, April 10, 2007
NASD Issues Investor Margin Alert
The markets must be doing well - retail investor margin loans are up, and that could be a sign of a market top - or more significantly, an impending decline.
Margin loans were a significant factor in investor losses in 1987, and again in late 2001. While there have been a number of changes to margin rules over the decades, the problem is apparently rearing its head again. Do retail investors really have such a problem with short-term memory?
The NASD is trying to make sure that doesn't happen - and today released an Investor Alert - "Investing with Borrowed Funds: No "Margin" for Error" at its web site.
The Alert explains margin risk and provides basic information about margin transactions.
Brokers - make sure that your margin customers understand these risks and review this alert - an educated investor is your best defense from that belated suitability claim.
Investors - read the alert, understand the alert and ask questions if you do not understand it.
The highlighted points for customers:
The firmcan force the sale of securities in your accounts to meet a margin call
The firm can sell your securities without contacting you
The customer is NOT entitled to choose which securities or other assets in the accounts are sold
The firm can increase its margin requirements at any time and is not required to provide you with advance notice
Customers are NOT entitled to an extension of time on a margin call
Customers can lose more money than you deposit in a margin account
The use of margin can significantly enhance profitability of an account, but it also significantly increases risk. If you have questions regarding the use of margin in an account, feel free to email me at astarita@beamlaw.com
Margin loans were a significant factor in investor losses in 1987, and again in late 2001. While there have been a number of changes to margin rules over the decades, the problem is apparently rearing its head again. Do retail investors really have such a problem with short-term memory?
The NASD is trying to make sure that doesn't happen - and today released an Investor Alert - "Investing with Borrowed Funds: No "Margin" for Error" at its web site.
The Alert explains margin risk and provides basic information about margin transactions.
Brokers - make sure that your margin customers understand these risks and review this alert - an educated investor is your best defense from that belated suitability claim.
Investors - read the alert, understand the alert and ask questions if you do not understand it.
The highlighted points for customers:
The firmcan force the sale of securities in your accounts to meet a margin call
The firm can sell your securities without contacting you
The customer is NOT entitled to choose which securities or other assets in the accounts are sold
The firm can increase its margin requirements at any time and is not required to provide you with advance notice
Customers are NOT entitled to an extension of time on a margin call
Customers can lose more money than you deposit in a margin account
The use of margin can significantly enhance profitability of an account, but it also significantly increases risk. If you have questions regarding the use of margin in an account, feel free to email me at astarita@beamlaw.com
Thursday, April 5, 2007
10b5-1 Plans Under Attack
In the past few weeks the media has caught on to the newest regulatory trend - the investigation and review of 10b5-1 plans. These plans, created by the SEC when it adopted Rule 10b5-1 are used by hundreds, if not thousands of executives.
As executive compensation becomes increasingly based on stock options, more and more executives find themselves in an insider trading quagmire when they attempt to sell their securities for reasons having nothing to do with insider trading or their company. Simple investment diversification often mandates such sales.
However, a poorly timed sale can, and has, resulted in an insider trading investigation, as news comes to light in the days, weeks or even months after the sales of stock by insiders.
To help remedy this situation the SEC adopted Rule 10b5-1 and the "10b5-1 Plan" was born. We often assist executives and brokerage firms in the creation and execution of such plans, and a properly adopted plan can provide an excellent defense to an insider trading allegation. Simply put, the plans are detailed, specific plans that are designed to let executives sell off shares at regular intervals, regardless of events inside the company at the time of the sales.
The problem with the plans however is in the execution, and in the fact that some executives attempt to cancel their plan, or accelerate the plan. Of course, modification of the plan mid-stream is counter-productive, and lessens the benefits provided by the plan.
Rumors are circulating that the SEC is making informal inquiries into the creation and operation of 10b5-1 plans at various brokerage firms, and asking for detailed information regarding trades executed under such plans.
The source of that buzz might be the insider trading trial of Joseph Nacchio, the former CEO of Qwest Communications International. According to press reports, Mr. Nacchio entered into a 10b5-1 plan, which provided that he would sell off shares in Qwest at a rate of 11,500 shares a day.
However, Mr. Nacchio stopped the plan two weeks after he entered into it, and then started selling shares at a significantly faster rate. According to the complaint, as reported by the Wall Street Journal, he sold over 49 million dollars of stock
in three weeks. The trial is proceeding, and the prosecution is still putting on its case.
Regardless of the actual facts, the case points out the importance of a well drafted 10b5-1 plan, and the faithful execution of that plan. Alternatively, a change in that plan needs to be drafted with great care.
And if Mr. Nacchio's predicament were not enough motivation, Linda Thompsen, the head of enforcement at the SEC has stated "[w]e're looking at this -- hard," according to the WSJ. The quote continues - "[w]e want to make sure people are not doing here what they were doing with stock options," referring to the mushrooming scandal of executives manipulating the dates they were granted stock options to maximize their profits.
The link in the title is to the WSJ article, but the issue is not simply one for the executives. Brokers who are creating these plans and modifying them, may be opening themselves up for potential regulatory action as the SEC continues its review of the plans, and the operation of those plans.
Call my office to review your plan, before Ms. Thompsen and her group are knocking at your door.
As executive compensation becomes increasingly based on stock options, more and more executives find themselves in an insider trading quagmire when they attempt to sell their securities for reasons having nothing to do with insider trading or their company. Simple investment diversification often mandates such sales.
However, a poorly timed sale can, and has, resulted in an insider trading investigation, as news comes to light in the days, weeks or even months after the sales of stock by insiders.
To help remedy this situation the SEC adopted Rule 10b5-1 and the "10b5-1 Plan" was born. We often assist executives and brokerage firms in the creation and execution of such plans, and a properly adopted plan can provide an excellent defense to an insider trading allegation. Simply put, the plans are detailed, specific plans that are designed to let executives sell off shares at regular intervals, regardless of events inside the company at the time of the sales.
The problem with the plans however is in the execution, and in the fact that some executives attempt to cancel their plan, or accelerate the plan. Of course, modification of the plan mid-stream is counter-productive, and lessens the benefits provided by the plan.
Rumors are circulating that the SEC is making informal inquiries into the creation and operation of 10b5-1 plans at various brokerage firms, and asking for detailed information regarding trades executed under such plans.
The source of that buzz might be the insider trading trial of Joseph Nacchio, the former CEO of Qwest Communications International. According to press reports, Mr. Nacchio entered into a 10b5-1 plan, which provided that he would sell off shares in Qwest at a rate of 11,500 shares a day.
However, Mr. Nacchio stopped the plan two weeks after he entered into it, and then started selling shares at a significantly faster rate. According to the complaint, as reported by the Wall Street Journal, he sold over 49 million dollars of stock
in three weeks. The trial is proceeding, and the prosecution is still putting on its case.
Regardless of the actual facts, the case points out the importance of a well drafted 10b5-1 plan, and the faithful execution of that plan. Alternatively, a change in that plan needs to be drafted with great care.
And if Mr. Nacchio's predicament were not enough motivation, Linda Thompsen, the head of enforcement at the SEC has stated "[w]e're looking at this -- hard," according to the WSJ. The quote continues - "[w]e want to make sure people are not doing here what they were doing with stock options," referring to the mushrooming scandal of executives manipulating the dates they were granted stock options to maximize their profits.
The link in the title is to the WSJ article, but the issue is not simply one for the executives. Brokers who are creating these plans and modifying them, may be opening themselves up for potential regulatory action as the SEC continues its review of the plans, and the operation of those plans.
Call my office to review your plan, before Ms. Thompsen and her group are knocking at your door.
Monday, April 2, 2007
Merrill Lynch Rule Stricken
In another blow for the SEC, and a huge potential problem for fee based brokers, the U.S. Court of Appeals for the D.C. Circuit issued its opinion in Financial Planning Association vs. SEC. In a 2-1 decision the court vacated Rule 202(a)(11)-1 on the basis that the SEC had exceeded its authority under the Investment Advisers Act of 1940 in promulgating the rule.
For the moment fee based accounts and discretionary accounts are still available, but that may all change shortly as the decision becomes final and the SEC decides to appeal.
Long term however, brokerage firms who have not created investment advisor subsidiaries need to start doing so. "Brokers" and "advisers" have different obligations to their clients and individuals who are providing financial advise and receiving a fee for that advise will undoubtedly have to register as advisers, despite their broker-dealer registrations.
A truly unique turn of events, given the relatively lax level of regulation of investment advisers when compared to the multi-level of regulatory morass for the brokerage industry.
The decision is here.
For the moment fee based accounts and discretionary accounts are still available, but that may all change shortly as the decision becomes final and the SEC decides to appeal.
Long term however, brokerage firms who have not created investment advisor subsidiaries need to start doing so. "Brokers" and "advisers" have different obligations to their clients and individuals who are providing financial advise and receiving a fee for that advise will undoubtedly have to register as advisers, despite their broker-dealer registrations.
A truly unique turn of events, given the relatively lax level of regulation of investment advisers when compared to the multi-level of regulatory morass for the brokerage industry.
The decision is here.
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