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

FINRA - Investor Advocate?

Has anyone noticed the new FINRA advertising campaign - "FINRA - a not for profit resource with nothing for sale" is the tagline. They are doing television ads, radio spots, even sponsored pay per click links on web pages.

The links go to the Investor information section of FINRA's web site, and the opening paragraph claims that FINRA's job "is to protect investors every day by keeping the country’s capital markets fair. As a not-for-profit financial resource, FINRA offers unbiased information on a full range of issues that affect your money and investments."

If one of my clients made that type of misrepresentation, FINRA would be all over them. Sure, FINRA is a not-for-profit organization, but what does that mean? It means nothing to investors, the public, the markets, or to anyone other than the IRS, so touting that is a bit misleading.

FINRA'S "job" is not to protect investors. That may be a benefit of its "job" but its "job" is to regulate the securities industry. FINRA is not an investor advocate, it is an SRO, a -self-regulatory organization.

There are other questions that arise, like why is FINRA spending its members' money on advertising campaigns, but the real problem here is the identity crisis at FINRA. FINRA is a membership organization turned regulator, and it needs to keep its mission in sight, and its role in mind. Fabricating a new role, as an investor advocate, can cause nothing but problems for it, its members, the markets and ultimately consumers.

We have already witnessed the animosity towards the industry in the past several years in the arbitration area, as rule change after rule change tips the scales more and more in favor of the investor.

And we have seen it in public comments by FINRA management. At a recent conference I attended a FINRA executive actually said that when she joined FINRA she was surprised at how many criminals were in the membership. Her word; criminals.

A significant portion of FINRA Staff does in fact treat firms and individuals as if they are criminals, and such treatment can only get worse if management thinks the industry is full of criminals, and if FINRA thinks it is an investor advocate.

What next, guest speaking at PIABA meetings? Oh wait, FINRA already does that.

2nd Circuit Vacates Arbitration Award for Capping Attorneys Fees

Under the Federal Age Discrimination in Employment Act, a successful plaintiff is entitled to an award of attorneys fees. When an NASD arbitration panel denied a successful claimant's request for attorneys fees, a federal judge ordered the panel to do so.

The second time around, the employer's firm argued to the arbitrators that since the plaintiff's attorney was being paid on a contingency, that the fee award should be capped at that contingency.

I attempted to make the same argument to an arbitration panel many years ago, and my research found that such an argument was not supported by the case law. The underlying concept is that the agreement between the attorney and his client has no bearing on the statutory award of reasonable fees to a prevailing party.

The federal courts in New Yorka agree, because when, on the second time around, the arbitrators capped the legal fee at the amount of the contingency, the claimant moved to vacate again. The Second Circuit hedl that although deference is given to the decisions of arbitrators, decisions which are in manifest disregard of the law cannot be sustained. According to the Second Circuit, attorneys fees are mandatory in such a manner. Further, the US Supreme Court has previously held that a contingent fee agreement between a successful plaintiff and his attorney cannot be used as a cap on a statutory award of attorneys fees. BLANCHARD v. BERGERON, 489 U.S. 87 (1989) .

The Second Circuit vacated the award.

Another interesting aspect of the case. Accordig to the Law.com article, in awarding a sum which was the rough equivalent of the contingent fee, the arbitration panel also ordered the claimant's law firm to return the fees the claimant had previously paid. There have been prior court decisions holding that an arbitration panel has no jurisdiction over the attorneys who represent parties before them (as there is no agreement to arbitrate by the attorneys, only their clients have agreed to do so), but the Second Circuit when further.

Porzig's attorney was not before the arbitration panel in any manner other than as Porzig's counsel; Porzig was not before the Panel with respect to his relationship with his attorney; and neither Porzig nor Attorney O'Donnell had agreed to arbitrate a dispute, if in fact there was one, over their fee dispute," Hall wrote for the court in Porzig v. Dresdner Kleinwort, 06 Civ. 1212.

"The Panel here was plainly without jurisdiction to order Porzig's lawyer to pay back to his client the specified contingency fee."

Interesting case, although the decision is not on line, and curiously enough, the NASD ...err, FINRA, does not have either arbitration award online.

It's Official - FINRA is the New Regulatory Organization

Effective today, the regulatory arms of the NASD and the NYSE are merged, and FINRA comes to life. The headline above links to the press release from this morning announcing the change.

Interesting side note - the entire NASD site is now in the domain finra.org, every document has a finra.org URL, and ever page uses the FINRA logo. You gotta admire the determination of the NASD and its web site developers. Unless they did a great deal of planning for a name change years ago, that was an enormous amount of work to get everything changed over to the new name.

Not bad for a quasi-governmental agency.

Now we will see how the merger affects firms and brokers. Lets keep our fingers crossed that the transition is as smooth in real life as it was on the web.

What's In A Name - Complaints About SIRA Leads To Complaints about FINRA

The NASD recently announced that they were changing the name of the new regulatory agency which will arise from the merger of the NASD and NYSE. Originally named SIRA, (Securities Industry Regulatory Authority) the acronym apparently sounds similar to an Arabic word referring to the biographies of the Prophet Muhammad and could be considered offensive to some people.

The new name, Financial Industry Regulatory Authority, or FINRA was just announced. And the Financial Planning Association, which has a particular problem with the NASD and the entire securities regulatory scheme in this country is now objecting, saying that the name implies that the self-regulatory organization will have jurisdiction over more than just the brokerage industry.

Thankfully, the NASD is not going to budge, based on this comment -

I would need a degree in psychology to comment on the level of paranoia in this press release," said NASD spokesman Howard Schloss

referring to the Financial Planning Associations press release announcing its objection to the new name.

Enough already. Get the merger approved.

Mutual Fund Arbitrations - the Next Big Thing?

Mutual funds have almost universally been considered to be the haven of the conservative investor. You invest your money in the fund, presumably with an experienced money manager at the helm, and you watch your money grow. Part of the allure of the funds is that there are no commissions charged, or one commission at the time of the investment.

This of course, is not necessarily true. There are any number of fees that are indirectly charged to the mutual fund investor, through charged by the investment company and the manager to the fund itself - charges that the investor never sees.

Further complicating the issues is that many mutual funds have different classes of shares, an A share, a B share and a C share. Each class of shares are charged different fees and expenses, and are appropriate for different types of investors and different investment objectives. Many investors do not understand the difference, and over the course of time could wind up paying significantly more fees and costs if they are in the wrong class of shares.

While the SEC and Congress address these "hidden" fees, and the problems with the disclosure of those fees, the NASD has been investigating brokerage firms for their conduct in the sales of mutual funds. In particular, the NASD has been focusing on what disclosures are made to the investor regarding the share classes.

The NASD announced today that it has imposed fines against MML Investors Services, NYLIFE Securities, and Securities America, Inc for improper sales of Class B and Class C shares. According to the NASD's press release, which is linked above, the cases involve over 10,000 transactions and over 1,000 households.

Brokers who are selling mutual fund shares should review the funds materials and insure that investors are being placed in the appropriate shares for their investment objectives. Investors need to do the same, and insure that they understand the fees and charges that they are incurring as a result of the particular class of shares in which they invest.

NASD Seeks Comment on New Rule on Member Stock Offerings

Citing unidentified "problems" with private offerings of their own securities by NASD member firms, the NASD is proposing to adopt Rule 2721 - Private Placements of Securities Issued by Members.

The rule will set standards for a PPM and filing of the PPM with the NASD prior to the offering.

The comment period ends July 20, 2007, the link to the notice is in the headline.