FINRA Files Series of Consolidated Rules

FINRA has been undertaking the daunting task of combining the rules of the NASD and the NYSE, since the merger of the regulatory functions of the NASD and the NYSE last July. FINRA has said that as new rules are written and approved those rules will become part of the FINRA Consolidated Rulebook, and the NASD and NYSE version of the rule will be deleted from their respective rulebooks.

And the process has started. FINRA has published some of the proposed rules, prior to submitting the proposals to the SEC for approval. The proposed rules all their own comment period, but all of the comment periods expire on June 13, 2008.

The filings are voluminous - it appears to be well over 500 pages of filings.

Here are the rules that are being filed, and links to the filings:

Regulatory Notice 08-23 - Proposed Consolidated FINRA Rules Governing Financial Responsibility. Contains proposed Rules 4110, 4120, 4130, 4140 and 4521 which are new, consolidated rules based in part on existing NASD and NYSE Rules and would govern members' financial responsibility requirements. Proposed FINRA Rules 9557 and 9559 would revise NASD Rules 9557 and 9559, respectively, and would afford members served with a notice under the financial responsibility rules an expedited appeal process. (In addition, FINRA would make conforming revisions to Section 4(g) of Schedule A to the FINRA By-Laws.)

Regulatory Notice 08-24 - Proposed Consolidated FINRA Rules Governing Supervision and Supervisory Controls. The proposed rules would re-write certain provisions of the existing supervision and supervisory control rules in a manner that provides firms with greater flexibility to tailor their supervisory and supervisory control procedures to reflect their business, size and organizational structure.

Regulatory Notice 08-25 - Proposed Consolidated FINRA Rules Governing Books and Records Requirements. Based in large part on the current rules, the proposed rules would rewrite the FINRA books and records provisions regarding preservation of books and records to evidence compliance with federal securities laws and rules, as well as to enable FINRA and the SEC to conduct examinations.

Regulatory Notice 08-26 - Proposed Consolidated FINRA Rule Addressing Investor Education and Protection. This rule is new, and would require member firms, with certain exceptions, to provide customers with FINRA's Web site address and information regarding FINRA's BrokerCheck program at least once every calendar year.

Anyone can submit comments on any of these proposals through the FINRA Submit Comments Page

Cox Blames Other Regulators For Sub Prime Mess

The SEC has been taking a bit of heat for the subprime disaster. That heat is a bit unfair, since the SEC has nothing to do with the oversight of banks and mortgage lenders, and very little to do with the credit markets.

Certainly the SEC takes part of the blame, at least so far as the valuation of those assets fell into the capital computations of brokerage firms, but even then, they are not the regulator that fell down on the job.

Well, Chairman Cox has finally come out and defended his organization. He points out that other regulators were involved, and asleep, well before this mess reached the broker dealers and the SEC's jurisdiction.

From Financial Times:

The regulatory lessons here extend far beyond the SEC,” said Christopher Cox, the SEC chairman, in an interview with the Financial Times. “Subprime only leached into the securities markets after it was already a horrible problem. There was complete breakdown in lending standards, a complete breakdown, one can infer from that fact, in supervisory standards for lending or at least the application of those standards.

“We’ve also found other regulatory gaps, not just statutory regulatory gaps for investment banks, but also for mortgage brokers, and we have discovered a host of perverse incentives in the securitisation process, only a small portion of which are the responsibility of securities regulators.

Politicians who are looking to create more regulations to address a problem that was caused by lack of enforcement of existing regulations should take heed.

Law Professors and the SEC

Race to the Bottom has an interesting article and I learned something new.

The White House announced that Troy Paredes from the University of Washington in St. Louis would be appointed to the Commission to replace Paul Atkins. What I didn't know is that there is a long history of law professors as members of the Commission - including William Douglas, James Landis, Bill Carey and David Ruder.

I guess I never really thought about it, but the inclusion of law professors on the Commission should prove to be a beneficial balance to the regulators who seem to keep popping up there - our present Chairman excluded of course.

The entire article is at http://www.theracetothebottom.org/home/law-professors-and-the-securities-and-exchange-commission.html

UBS Investigated for Tax Fraud

According to Bloomberg.com, the Department of Justice is investigating whether UBSank helped clients evade American taxes.

The article reports that the Justice Department is investigating UBS's conduct in relation to services provided by Swiss-based client advisers to U.S. clients between 2000 and 2007. The SEC is also investigating whether UBS employees in Switzerland who advised U.S. clients failed to register with the agency as required, according to the article.

Ailing UBS sells assets to BlackRock - InvestmentNews

Ailing UBS sells assets to BlackRock: Investment News reports - "Facing more than $37 billion in subprime-related write-downs, UBS AG announced today a preliminary deal with New York-based asset manager BlackRock Inc. to sell off some of its troubled assets"

Restrictive View of 10b-5 Statute of Limitations Prevails

Law.com - Judge Finds Securities Lawsuit Over Zyprexa Is Time-Barred

Judge Jack B. Weinstein, in the federal district court in New York, dismissed a securities class action case against Eli Lilly and Company that challenged the drug manufacturer's alleged misrepresentations about the anti-psychotic drug Zyprexa, holding that the plaintiffs failed to file their suit within the statute of limitations.

Judge Weinstein rules that the plaintiffs The "reasonably should have known" that they sustained damages because of Eli Lilly's purported fraud more than two years before filing the suit.

Federal securities laws claims have a two part statute of limitations - 5 years from the event or 2 years after the discovery of the facts constituting the violation.

While the plaintiff's argued that the two years began to run with the publication of three investigative articles about the drug in The New York Times in December 2006, Judge Weinstein ruled that the time began when when documentation supporting these potential claims first became available to attorneys and institutional investors.

That is a difficult position for individual investors, because despite Reg FD, access to information is not always equal, and the ability to process such information is not always present. Maybe attorneys and institutions knew when seeing the documentation, but that does not mean that investors knew of the fraud at that time.

But this may be a sign of things to come, as the pendulum of justice continues its swing back to corporate America:

The individual unsophisticated investor's lack of awareness is ignored; the law tilts the substantive-procedural balance against such a consumer. It applies the much-debated caveat emptor principle favoring greater and freer commerce by limiting litigation, and requiring dismissal of this case.

Caveat Emptor.