BD Law Blog - by Georgia Securities Lawyer Joel Beck

New Securities Act Effective In Georgia

As we celebrated Independence Day last week, last week also brought about the effective date for the Georgia Securities Act of 2008.  On July 1, 2009, the new Act replaced the prior act set in place in 1973.  The Act contains changes relating to both registration of securities and of broker-dealers and investment advisers.  Jim Hamilton, over at Jim Hamilton's World of Securities Regulation provided an overview of certain of the changes.  Also, folks over at the Georgia Securities Commissioner's office (the Secretary of State's office) also published an article on the new Act in the Georgia Bar Journal.  That article is available online here. 

Important to broker-dealers and representatives, the new Act provides limitation periods for the staff to act to approve or deny applications for registration.  Pursuant to O.C.G.A. 10-5-35(d), an application for registration will become effective and approved 45 days after being filed, unless the application is denied, or there is an administrative order or proceeding in effect.

PIABA Files Petition with SEC to Allow Customers to Eliminate Industry Arbitrators

PIABA, the Public Investors Arbitration Bar Association, has filed a petition with the SEC, asking the SEC to eliminate arbitration rules that require the appointment of an industry or "non-public" arbitrator in customer cases involving claims of damages over $100,000.  According to the petition, "Requiring investors who believe they have been wronged by the securities industry to have claims decided by panels that must include a representative of that securities industry creates at the least the appearance of bias, if not actual bias."   PIABA's proposal would not seek to end the industry arbitrator position all together, but to give parties the option of choosing to have a panel consisting of entirely "public" arbitrators.  As I read it, the rule changes, if adopted, would allow each separately represented party to strike all names on the industry arbitrator list, thereby requiring that all arbitrators appointed to the case come from the public roster.  PIABA's petition can be found at the organization's website here.  I think we can expect some opposition to these changes from the industry side.  What is yet to be known is what position that FINRA Dispute Resolution will take on this matter.

FINRA Provides Template for FTC Red Flags Rule

In an effort to help its members achieve compliance with the FTC's Red Flags Rule (part of the FACT Act), FINRA has prepared a basic template for a broker-dealer's policy and procedures for the Rule.  The template can be found online at FINRA's webpage on the FTC Red Flags Rule here.  Firms that are interested in using this template should be cautious to ensure that they fully review and modify the template procedures as needed to fit the business of the firm, that they understand it, and, of course, that they follow whatever procedures they adopt. 

FINRA Discloses Disciplinary Actions - June 2009

FINRA recently released its monthly disclosure of disciplinary actions for June 2009.  The list discloses many routine violations: selling away, outside business activities, forgery, There are a few of cases that stood out to me as noteworthy.

FINRA fined a broker-dealer $25,000 and censured it based on allegations that the firm failed to adopt and enforce an adequate supervisory system relating to mutual fund "C" share transactions in qualified accounts.  FINRA found that the firm did not provide for follow-up and review of such transactions to ensure that the recommendations were suitable in light of the costs and the anticipated holding periods of the fund shares.  FINRA also found that the firm failed to ensure that its brokers made appropriate disclosures to customers regarding the cost and fee structure of the "C" shares and the anticipated holding period.  (FINRA Case No. 2007007205801).  We'll watch and see if this is the start of actions relating to "C" shares, along the lines of the "B" share cases several years ago.

In another case (FINRA Case No. 2007008264101), a registered principal was suspended in all capacities for two years and fined $10,000 based on allegations that he failed to "establish and maintain a system to supervise a registered representative's activities and to adequately investigate" the broker's background, even though the broker had a disciplinary history that FINRA found "should have alerted the firm to the fact that the representative required heightened supervision."  The findings further stated that the principal improperly delegated supervisory responsibilities to an "inexperienced, untrained and unregistered subordinate" and failed "to review firm records to learn about the extent of the representative's activities in his customer's accounts." 

Finally, in FINRA Case No. 2007010655801, FINRA accepted an Offer of Settlement (meaning that the settlement was reached after FINRA Enforcement filed a formal disciplinary complaint) from an associated person, and fined her $4,000 and suspended her from association with any member in all capacities for five months, after making findings that the associated person (meaning she was not registered) "failed to disclose material information on her employment application with a member firm."  I've not seen this type of action before, though there are always several actions each month against registered folks for failing to disclose information on their Form U-4. 

Senior Citizens Reportedly Kidnap/Beat Advisor Over Losses

News reports from Europe tell of the story (here, here and here)  of senior citizens, dubbed in one article as the geritol gang, kidnapping and holding hostage their financial advisor.  Upset about losses in their investments, the seniors reportedly kidnapped the advisor from his home, stuffed him in the trunk of a car and drove him to one of their houses, where they reportedly beat him and kept him held hostage in the cellar.  The advisor was ultimately able to send a coded message to a bank, after advising his kidnappers he could get money transferred to them.  A bank agent alerted authorizes, who stormed in and made the rescue. 

Update on SEC Rule 151A - June 26, 2009

Yesterday, I had the privilege to serve on a webcast panel for West's LegalEdCenter presenting an update on SEC Rule 151A.  The Rule, if it becomes effective as passed by the SEC, will classify indexed annuities as securities, effective January 12, 2011, subjecting them to the securities regulatory disclosure system.  Currently, these products are considered insurance products and are regulated by the insurance commissioners of the several states.  If the Rule becomes effective, they will lose their exemption as non-securities products, and their sale would be regulated by the SEC, and self-regulatory organizations such as FINRA. 

Joel Beck to Speak on SEC Rule 151A

Tomorrow, June 25, 2009, Joel Beck of The Beck Law Firm, LLC will be a presenter for West Legal Works program on SEC Rule 151A, along with Marc Dobin, Esq. and Linas Sudzius, Esq.  See my fiend Marc Dobin's blog post for more information.  Come join us tomorrow for the live webcast.  And, if you can't make it tomorrow, it will be available in recorded format for a period of time.

Catching up from Vacation!

Sorry for the infrequency of posts on BDLawBlog.com lately.  I'm getting back from vacation and attempting to get caught up.  We'll resume regular posts very soon.  Stay tuned.

Study Finds FINRA Sanctioned Less in 2008

My former colleague from my days at NASD's Enforcement Department, Brian Rubin, now with the law firm Sutherland, recently published a study of FINRA's disciplinary actions in 2008.  According to the study by Rubin, Deborah Heilizer and Shanyn Gillespie, FINRA brought fewer disciplinary cases in 2008, and obtained lower fines from respondents.  According to the trio's study, the top five issues, in terms of fines imposed, were mutual fund cases, suitability cases, licensing and registration cases, excessive commissions (markups and markdowns) cases, and electronic communication cases.  They also outlined several trends exhibited by the cases resolved in 2009.  You can read the white paper here.  Its a good read for legal and compliance folks, and I think its always a good idea to stay current with news from the regulatory front. 

Review of FINRA Disciplinary Actions for May 2009 - Several U-4 Cases

I just finished reading through FINRA's monthly report of disciplinary actions for May.  The cases were routine and ordinary, but one stood out as different.

Without admitting or denying the findings, a broker settled allegations that he "altered customer telephone records at his member firm by deleting or inaccurately updating the numbers to slow down other registered representatives at his firm that he believed would be assigned to call his customers after he resigned."  FINRA found that by changing customer telephone numbers, the broker caused his firm to create and maintain inaccurate books and records. He was suspended for 30 days and fined $5,000.  (FINRA Case #2007009372601).  I think you see the lesson here.  And if you're considering changing firms, chalk this one up in the list of things not to do.

I also noticed that there were several Form U-4 cases, wherein a broker would be suspended and fined, or barred, for material misrepresentations or omissions of fact on the Form U-4.  These are easy cases for the regulators to investigate and prosecute, and they do them often.  Now, with the recent revision to the Form U-4, and the requirement to make additional filings for the new questions, there may be at some point in the future a more broad review of Form U-4 disclosures (or non-disclosures) by the regulators. 

I've written may times about U-4 issues, and the draconian punishment imposed if a broker is found to have "willfully" omitted or misrepresented something on the Form U-4.  Brokers should understand the regulatory significance of this document, and ensure that they have accurately completed the document.  If you have questions about the U-4, take a look at these posts here.