Securities Law Archives

March 11, 2009

New Finra Rule 2140: Interference With Customer Accounts

Written by David Welch, Esq.

About two weeks ago, on March 3, 2009, the Securities and Exchange Commission approved FINRA’s proposal to adopt NASD Interpretive Material 2110-7 as a stand-alone FINRA rule which will be renumbered as “FINRA Rule 2140.” Securities and Exchange Commission Release No. 34-59495 (March 3, 2009); File No. SR-FINRA-2008-052.

The new Rule, which codifies a long-standing FINRA policy, provides that it "shall be inconsistent with just and equitable principles of trade…to interfere with a customer’s request to transfer his or her account in connection with the change in employment of the customer’s registered representative[.]

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March 16, 2009

Regulatory Notice 09-16, "Explained Decision" Rule

Article Written by David Welch, Esq.

Effective April 13, 2009: The Securities and Exchange Commission Approved Amendments to Require FINRA Arbitrators to Provide an Explained Decision upon a Joint Request From the Parties.

FINRA has announced that the new rule (outlined in an earlier post here) will become effective on April 13, 2009. Under the new rule, FINRA will require arbitrators to provide an explained decision upon a request from both parties.

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March 17, 2009

U.S. Working on Comprehensive Framework for Regulatory Reform

Article written by Christine Lazaro, Esq.

At the G-20 Finance Ministers and Central Bank Governors meeting on March 14, 2009, U.S. Treasury Secretary Timothy Geithner announced that the United States would soon release a comprehensive framework for regulatory reform.

Geithner stated:

“We have committed to broad principles to guide the reform of the financial system:
First, all institutions that are important to the stability of the financial system should come within a much stronger framework of oversight, with clearer rules of the game that are enforced more evenly and consistently across countries.

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March 18, 2009

Recent Fines and Penalties

Written by David Welch, Esq.

On March 9th, the SEC charged Locke Capital Management with falsely creating a billion dollar client in order to establish credibility and lure investors. See news release, here.

On March 11, the SEC announced that it fined Merrill $ 7 million for failure to protect confidential “Squawk Box” information. See news release here.

And lastly, on March 17th, FINRA released that it fined Citigroup $2 million for Range of Trade violations, including, failure to monitor trading systems at the opening of a Quadruple Witch Expiration Friday. See news release, here. Quadruple Witch Friday happens 4 times a year when 4 different types of derivative instruments expire. In theory, this causes more volatility on that day and throughout the week in which the day falls. This Friday, March 20, 2009, is a Quadruple Witch Expiration Friday.

March 19, 2009

Quadruple Witch Friday

Written by David Welch, Esq.

The Quadruple Witch is a term used to describe the occurrence, which happens only 4 times a year, of 4 different types of derivative instruments expiring in a single day. The 4 derivative instruments are (1) Stock Index Futures, (2) Stock Index Options, (3) Stock Options, and (4) Single Stock Futures.

In the US market, Stock Index Options and Stock Options expire every month, while Single Stock Futures and Stock Index Futures expire four times per year in March, June, September, and December. The combined expiration of these four derivative instruments creates the “Quadruple Witching."

The Quadruple Witch day can be slightly more volatile as options holders begin to exercise their options contracts and roll forward to contracts with later expiration dates. This Friday is a Quadruple Witch day and thus, according to theory, this week could be more volatile than usual.

Citigroup was recently in the news related to a violation occurring on a Quadruple Witch day (See previous post, here).

According to FINRA, who fined Citigroup $2 million:

Continue reading "Quadruple Witch Friday " »

March 20, 2009

SEC Charges Brokers and Hedge Fund Advisers in Alleged Bribery Scheme

Written by Christine Lazaro, Esq.

On March 12th, the Securities and Exchange Commission filed a suit against two brokers, David Harrison Baker ("Baker") and Daniel Schreiber ("Schreiber"), and the broker-dealer with which Schreiber was associated, Granite Financial Group, LLC ("Granite"), and Brian Travis ("Travis") and Nicholas Peter Vulpis, Jr. ("Vulpis"), two employees of a hedge fund investment adviser. Suit was filed in the U.S. District Court for the Southern District of New York, and alleged that Travis and Vulpis solicited bribes in exchange for routing hedge fund trades, and the associated commissions, to Baker, Schreiber and Granite.

The complaint alleges that Travis and Vulpis received at least $312,000 in personal benefits such as international air travel (including for family members), hotel arrangements, fully-paid vacations, daily car service, computer equipment, and monthly rent payments for a personal residence; and that Baker, Schreiber and Granite received a total of approximately $10,702,105 in commissions from trades that Travis and Vulpis directed to them.

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March 25, 2009

Naked Shorting – Market Manipulation or Scapegoat?

Written by David Welch, Esq.

A lot has been said lately about naked short selling and its potential for market manipulation. Short selling, aka, "covered" short selling, occurs when a trader sells a borrowed stock with the intent to buy it back elsewhere at a lower price and pocket the difference. A short sale is considered “naked” if the trader has not made arrangements to borrow (or "cover") the stock before he sells it. Naked short sales that are never “covered” sometimes result in a “failure to deliver” and it is this practice that has produced divided factions regarding ethics and the need for greater regulation.

Those against naked short sales claim that the practice can be used to manipulate the market because more shares can be sold short than actually exist, which in turn:

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March 31, 2009

The SEC: Brokers and Advisers Should Expect Consolidated Oversight and Unannounced Audits

Written by David Welch, Esq.

Last week, before the Senate Banking Committee, SEC Chairman Mary Schapiro made it clear that she intends to consolidate oversight of financial services firms and subject them to stricter regulatory controls. Currently, FINRA and the SEC share supervision of broker-dealers and investment advisers. Investment advisers are required to abide by a “fiduciary duty” standard and brokers are held to a standard of “suitability.” Arguments regarding which standard is more stringent aside, Schapiro views the inconsistency as an encumbrance on regulatory oversight and implied that a uniform standard is on the horizon.

Schapiro and FINRA CEO, Richard Ketchum, explained that enforcement of the uniform standard will be consolidated under the purview of FINRA, for brokers and advisers alike. In his testimony before the banking committee, Ketchum stated:

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April 13, 2009

The Securities and Exchange Commission Considers Five Variations of the Uptick-rule

Written by David Welch, Esq.

The SEC met this past Wednesday and voted to review whether short sale price restrictions or circuit breaker restrictions should be implemented, and whether such measures will provide market stability and restore investor confidence. Reinstating some version of the uptick rule, irrespective of its precise details and actual impact on short selling, may in and of itself restore investor confidence. That is, even if short selling does not actually contribute to market volatility, and even if the uptick rule does not actually prevent short selling, just the knowledge that an uptick rule exists may encourage an otherwise apprehensive investor to ease back into the stock market.

"Clearly, the practice of short selling has both strong supporters and detractors. Today, we begin what will be a very deliberative process to determine what is in the best interests of investors,” SEC Commissioner, Mary Schapiro said.

Although many blame short-sales for causing a snowball effect on stocks already under pressure, Schapiro said there is no "specific empirical evidence" that the absence of the uptick rule fueled the recent descent in the market.

In fact, the SEC repealed the uptick rule, which had been active since the Depression, in 2007 when a test by the SEC (which removed the uptick rule for one-third of the stocks in the Russell 3000 index) found it could be eliminated without causing significant harm. Skeptics of the 2007-test point out that the rule wasn’t tested during a volatile or downward pressurized market.

The five possible uptick rules the SEC voted to consider are as follows:

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June 10, 2009

Uptick Rule Comment Period Expires in Nine Days

The Securities and Exchange Commission's public comment period on the uptick rule concludes June 19. In sum, the outstanding questions is whether short sale price restrictions or circuit breaker restrictions should be imposed on the market.

Comments can be submitted here.

Comments submitted thus far express a wide range of opinions. For example, one writer suggested that reinstating the uptick rule is necessary for "national security."

Not to go unnoticed, of course, is Jim Cramer and his continuing campaign for a reinstating the uptick rule. It appears from the SEC's website that Cramer petitioned over 5,000 people to submit a template letter urging the SEC to instate a "price test" rule. Cramer's letter can be viewed here.

September 2, 2009

CFTC and SEC to Hold Joint Meetings on Regulation Harmonization

Written by Christine Lazaro, Esq.

The Commodity Futures Trading Commission (CFTC) and the Securities and Exchange Commission (SEC) are holding joint meetings to seek input from the public on harmonization of market regulation. The first meeting is being held at the CFTC on September 2nd, and the second meeting will be held at the SEC on September 3rd.

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September 29, 2009

In Dorozhko, the Second Circuit Maintains Section 10(b)’s Flexibility

Written by Arpan Parmar*

The Second Circuit Court of Appeals issued an opinion vacating and remanding a district court opinion that denied the Securities and Exchange Commission’s (“SEC”) motion for a preliminary injunction against an alleged computer hacker and insider trader on July 22, 2009, SEC v. Dorozhko, Docket No. 08-0201-cv. This case represents an important win for the SEC in an age where technology often outpaces securities law.

In early October 2007, the defendant, Oleksandr Dorozhko opened an online trading account with Interactive Brokers LLC (“Interactive Brokers”) and deposited $42,500 into that account. That same month, IMS Health, Inc. (“IMS”), was scheduled to announce its third-quarter earnings during an analyst conference call scheduled for October 17, 2007 at 5 p.m. IMS had hired Thomson Financial, Inc. (“Thomson”) to provide investor relations and web-hosting services, which included managing the online release of IMS’s earning reports. Prior to the open of the securities markets on October 17th, an anonymous computer hacker attempted to gain access to IMS’s earnings report from Thomson’s secure server. At 2:15 p.m., minutes after Thomson actually received the IMS data, that hacker successfully located and downloaded the IMS data from Thomson’s secure server. Beginning at 2:52 p.m., Dorozhko, who had not previously used his Interactive Brokers account to trade, purchased $41,670.90 worth of IMS put options that would expire on October 25th and 30th, 2007.

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October 20, 2009

Changes at FINRA in the wake of Madoff and Stanford

Written by Arpan Parmar*

In April 2009, FINRA’s Board of Governors established a Special Review Committee to conduct an internal review of FINRA’s examination program as it relates to FINRA member firms associated with R. Allen Stanford and Bernard L. Madoff. The Committee consisted of four FINRA public governors: Ellyn L. Brown, Brown & Associates; Harvey J. Goldschmid, Dwight Professor of Law at Columbia University; Joel Seligman, President of the University of Rochester; and, Committee Chair, Charles A. Bowsher. The Board asked the Committee to recommend changes in the examination program to improve member oversight, fraud detection capability and FINRA’s monitoring of compliance with examination program policies. In September 2009, the Committee provided a report of their findings.

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October 21, 2009

Two Recently Settled SEC Actions Involving “Short Selling in Connection with a Public Offering.”

The SEC recently settled two actions for selling short within the five days prior to an offering. The two proceedings, In the Matter of First New York Securities LLC, (Oct. 20, 2009) and In the Matter of Perceptive Advisors LLC, (Oct. 20, 2009), involved alleged violations of Rule 105 of Regulation M. Rule 105 prohibits the cover of a short sale with securities obtained from an offering if the short sale occurs during the five business days before the pricing of the offering. In the case involving New York Securities, the firm was alleged to have violated Rule 105 on two separate occasions, once in September 2005 and again in January 2007. Overall, according to the SEC, the firm made profits of approximately $40,000. Perceptive Advisors was alleged to have violated Rule 105 on five different occasions resulting in profits of around $245,000.

Each firm settled with the SEC and agreed to pay disgorgement of profits as well as a civil penalty. New York Securities’ penalty was about $20,000 and Perceptive Advisors agreed to pay a penalty of $125,000. Each firm also consented to the settlements without admitting or denying any of the allegations.

The SEC’s Order for each proceeding can be read here (New York Securities) and here (Perceptive Advisors).

For more on what constitutes a violation of Rule 105 read here.

November 20, 2009

Proposed "Restoring American Financial Stability Act of 2009"

A bill proposed by Senator Christopher Dodd would require brokers to register as advisers with the Securities and Exchange Commission. This means that brokers would be subjected to the Investment Advisers Act of 1940, requiring them to act as a fiduciary to their clients.

The Dodd bill differs from the proposed Investor Protection Act approved Oct. 28 by the House Financial Services Committee in that the House bill would require the SEC to write regulations defining the fiduciary standard for advisers. The Senate bill, however, extends the fiduciary duty to broker-dealers by eliminating the broker-dealer exclusion from the Investment Advisers Act. The current exemption spares brokers from registering as advisers if the advice they provide to clients is “solely incidental” to selling products.

Under the Dodd’s proposed legislation, an Office of the Investor Advocate would also be created within the Securities and Exchange Commission.

The new office would report yearly to Congress on the twenty most pertinent issues facing investors. The report would also include data indicating the length of time that each issue has remained on the list and what actions were taken by the SEC or FINRA, if any, to resolve the problem(s).

An Investor Advocate would appointed to lead the Office and would have the power to employ independent counsel, research staff, and other services that Investor Advocate feels necessary.

The draft bill can be found here.

August 26, 2010

SEC Seeks Comments on the Dodd-Frank Wall Street Reform and Consumer Protection Act

Written by Nancy Campanozzi, Esq.

On July 27, 2010, the Securities and Exchange Commission (SEC) published a request for public comment on a study the SEC is required to conduct regarding the obligations of brokers/dealers, and investment advisers to retail customers as part of the Dodd-Frank Wall Street Reform and Consumer Protection Act that President Obama signed into law on July 21, 2010. [Release No. 34-62577; IA-3058; File No. 4-606]

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November 11, 2010

A (Dodd-)Frank Primer of Some Imminent Regulatory Reforms

Written by Edward Pekarek, Esq. and Christine Goodrich*

President Obama signed into law the DODD-FRANK WALL STREET REFORM AND CONSUMER PROTECTION ACT (“Dodd-Frank”) on July 21, 2010, signifying the most extensive regulatory reform for Wall Street since the INVESTMENT ADVISORS ACT OF 1940. Title IX of Dodd-Frank contains a host of investor protection provisions that portend for increased enforcement and regulatory activities by the SEC. Rather than reforming various controversial areas of the financial services industry regulatory schemes, Dodd-Frank instead directs the SEC to undertake various studies within a specified time period and determine whether further rulemaking and/or legislation is appropriate based upon those many studies.[1] Dodd-Frank is expected to double the SEC budget over the next five years and expand the organization through increased enforcement powers and personnel.[2]

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October 19, 2011

Pace Law Wins FINRA/St. John's National Securities Moot Court Competition

winners group photo_NYSBA.jpg

WHITE PLAINS -- Two teams represented Pace Law School last weekend in a "triathlon" that had nothing to do with swimming, cycling or running--and emerged victorious. One of Pace's teams won the third annual FINRA / St. John's Securities Dispute Resolution Triathlon. Held in the shadow of the new World Trade Center "Freedom Tower" at St. John's University's Manhattan campus, the national competition field featured 24 teams from 17 schools, hailing from as far west as Texas and as far south as Florida.

The two-day event, sponsored by the Financial Industry Regulatory Authority (FINRA) features three individual rounds of competition in negotiation, mediation and arbitration, the primary areas of dispute resolution. The Pace team, comprised of Pace Investor Rights Clinic (PIRC) students, 3Ls David Haimi, Kristen Mogavero and Genavieve Shingle, went home with the championship trophy and an individual event medal. The victorious Pace team prevailed as the winner of the arbitration round, and were narrowly edged out of yet another award in the mediation round by a team representing William and Mary Law School, from Williamsburg, Virginia.

Pace also fielded a second team for the event, comprised of 3Ls Katerina Davydov, Eleanor Osmanoff and Jay Park. All six students are current or summer student interns with PIRC. The teams were coached by PIRC Assistant Director and Visiting Professor Ed Pekarek, who served as faculty advisor and coach, with assistance from coaches Christine Goodrich '11 and Bryn Fuller '11 during the competition, and by Chris Bloch '10 in the days preceding the annual event. Adjunct Professor Louis Fasulo and PIRC Director Jill Gross each provided key skills-based training sessions as part of the teams' preparation.

mediation feedback_NYSBA.jpgPekarek noted that as a result of what they are learning in their clinical studies, each Pace Law competitor "possesses dispute resolution skills that will permit them to be zealous advocates in securities dispute resolution if they choose that career path." He added, "as a result of their assigned casework, all six Pace students were more prepared and less nervous than their opponents, in no small part because they have already represented real clients in securities disputes, and in some instances against seasoned opposing counsel." Shingle noted that this event was a great warm-up for her role in the Willem C. Vis competition in the spring and Haimi observed, "this is truly a great day for Pace."

The Negotiation medal winner was a first-time entrant, Florida International University, coached by Robert "Bert" Savage. The Mediation medal went to William & Mary, and the Advocate's Choice award went to West Texas University. Prior champions are Seton Hall (2010) and St. John's (2009).

November 16, 2011

FINRA Loses Ability to Enforce Sanctions in Federal Court: Fiero v. Financial Industry Regulatory Authority, Inc.

Written by Ryan Adams and Christopher Haner*

In the wake of the financial crisis of 2008, many commentators called for increased regulatory oversight on behalf of the Securities Exchange Commission ("SEC") and the Financial Industry Regulatory Authority ("FINRA"). Despite a growing public movement for increased oversight, FINRA has been legally hampered in its ability to enforce its own rules. Recently, in Fiero v. Financial Industry Regulatory Authority, Inc.,[1] the Second Circuit Court of Appeals reversed and vacated a district court opinion that authorized FINRA to enforce fines that it had imposed against industry members. In what has been described as a surprising decision,[2] the Court of Appeals held that FINRA lacked the authority to bring federal court actions to collect disciplinary fines it has imposed. The opinion, written by Circuit Judge Winter, held that FINRA cannot enforce monetary sanctions in court under either federal securities laws or as an internal "house-keeping"[3] rule.

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