Securities Lawyer Blog

Not good news for Morgan Stanley. The Financial Industry Regulatory Authority (FINRA) has recently censured and fined the firm $800,000 for several public disclosure failures. These findings, which the firm neither admits nor denies, center on alleged violations of FINRA's rules that require conflict disclosures for research analysts.

FINRA's action is the result of its findings that the firm did not disclose to customers the availability of independent research, which is required under the 2003 Research Analyst Settlement. The fine and censure were also said by FINRA to have been determined with consideration of Morgan Stanley's self-review and self-reporting, remedial actions and a prior 2005 settlement on research disclosure rules.

What went wrong for Morgan Stanley? According to FINRA, for a period of over four years between 2006 and 2010, the firm did not include conflicts that existed between Morgan Stanley itself, or its analysts and the companies reported on in their research. FINRA also found that the firm failed, over a period between 2007 and 2008, to disclose in nearly 130,000 account statements that independent, third-party research was available to customers. This was part of the 2003 Research Analyst Settlement that the SEC entered into with top securities firms, that was also included in a separate agreement with FINRA.

In the recent action by FINRA, it found the firm's research reports were not accurate. In fact, FINRA quantified the deficiencies, saying the reports included over 6,000 deficient disclosures in a like number of equity research reports. Another area of disclosure failure was in the public appearance of research analysts.

Some of the disclosure failures included, among others, such conflicts as an analyst's or household's holdings in a reviewed company, Morgan Stanley's revenues from subject companies, the firm's role as manager or co-manager of public offerings of subject companies and the firm's role as a market maker for certain subject companies' securities.

The firm will remain under the disclosure microscope for the next two years. Every six months, they will be required to certify to FINRA their compliance with the research analyst conflict of interest rules after reviewing a sampling of their research reports.

In a harshly worded statement, FINRA's Executive Vice President and Acting Chief of Enforcement James S. Shorris said that the "case strikes at the heart of FINRA's research disclosure requirements, which were written in response to scandals involving research analyst conflicts of interest." He went on to say that these failures deprived the public of important information.

For more information on the disclosure requirement for research analysts and reports, please contact Wall Street's Gusrae Kaplan Nusbaum PLLC. The firm represents broker and dealers in all aspects of regulatory compliance as well as securities and commodities litigation. Please visit our website for more information on our practice and our lawyers.

Last month, the Securities and Exchange Commission (SEC) awarded $1 million to a Connecticut couple for their role in providing information on insider trading that led to civil penalties being imposed. Although this amount is unprecedented, eventually it is likely to become more commonplace than it is now.

The award was made to the couple for their role in providing the SEC with "information and documentation" on insider trading. This information led to civil penalties imposed on a hedge fund adviser, its chief executive and a Microsoft employee for insider trading in Microsoft securities. Administrative proceedings are pending against the former Microsoft employee who is also charged with insider trading "on the basis of the same conduct" engaged in by the other two parties.

The SEC had investigated the matter previously, but took no action on it. Then, a key evidentiary email was found by the couple and turned over to SEC investigators who now had what they needed to file and settle an enforcement action against the hedge fund advisor and its chief executive.

The SEC found that the chief executive emailed the Microsoft employee (who had already accepted employment at the hedge fund) after rumors arose that Microsoft was not going to meet earnings estimates for the first quarter of 2001. The Microsoft employee then sought out information from internal sources and learned that the earnings estimates were going to be positive. He then communicated this information to the chief executive who purchased Microsoft options for funds within his control and provided this information to a friend who also bought options. The illegal trading resulted in millions of dollars of gains.

The award to the couple for turning over the critically important emails and resulting civil penalties, was approved under Section 21A(e) of the Securities Exchange Act of 1934 which has been superceded by a new provision. The new provision is expected to provide some big returns for information, although it is likely that payouts will take some time.

The Dodd-Frank Wall Street Reform and Consumer Protection Act, Section 21F has been added to the Securities Exchange Act and this provision goes beyond the former insider trading bounty provisions. It gives the SEC broader authority to reward whistleblowers that help authorities. The new provision goes beyond the former scope which limited awards to insider trading cases in which civil penalties resulted. We will provide more detailed information on what is expected under the new rules in future posts.

Continue reading "Due Tell -- SEC Awards Unprecedented $1 Million Bounty for Insider Trading Information" »

Last week, the Securities Lawyer Blog posted on the enhanced BrokerCheck under Regulatory Notice 10-34. This week, we provide information regarding the dispute process for challenging the accuracy of information included on BrokerCheck®.

Beginning August 23, 2010, both individuals and firms will be subject to a formalized dispute process to challenge the accuracy of BrokerCheck® information. This will apply not only to information that was incorrect when first filed, but also applies to information that has become incorrect since the original filing.

Eligible Parties Only
The dispute process enables only an eligible party to challenge information on the service. An eligible party is essentially defined as a former member firm and "any associated person of a member firm or person formerly associated with a member firm for whom a BrokerCheck report is available." Former member firms can only dispute information through natural persons who were in the following functions at the firm: "Chief Executive Officer, Chief Financial Officer, Chief Operating Officer, Chief Legal Officer or Chief Compliance Officer, or individual with similar status or function, as identified on Schedule A of Form BD at the time the former member firm ceased being registered with FINRA."

Dispute Forms and FINRA Review
The FINRA website will include a BrokerCheck Dispute Form which is required to be used to dispute information. The form will allow eligible parties to pinpoint inaccurate information and to provide support for the claim of inaccuracy.

FINRA will determine whether the claim of inaccuracy warrants an investigation. "[T]he dispute must pertain only to factual information and not to information that is subjective in nature or a matter of interpretation." FINRA has provided a list deemed "non-exhaustive" to help members gauge disputes that will not be considered for investigation even though factual information is involved. These include disputes that:

(1) involve previously disputed facts with no submission of new information or new evidence;

(2) are filed by non-eligible parties;

(3) attempt to explain factual information, rather than challenge a BrokerCheck profile's accuracy;

(4) are merely collateral attacks on or otherwise challenges to "allegations underlying a previously reported matter such as a regulatory action, customer complaint, arbitration, civil litigation or termination;"

(5) consists of a general statement of inaccuracy without supporting explanations for the challenge; or,

(6) involve "information contained in CRD that is not disclosed through BrokerCheck."

After a dispute is filed, if FINRA finds that an investigation of the challenged information is not warranted, it will inform the person filing the dispute of this and will describe why it has reached this determination. This is not subject to appeal. On the other hand, if a dispute warrants investigation, FINRA will post a notation on the eligible party's report on the service that the party has disputed information and will remove this notation once the dispute is resolved.

FINRA will make requested changes if the Dispute Form and accompanying documentation are sufficient to warrant the change without further verification. Where necessary, FINRA will contact the reporting entity such as a firm, regulator or FINRA department, for verification that the information is accurate. It will defer to the reporting entity on accuracy and if that entity confirms the information is inaccurate, appropriate changes will be made. However, if the reporting entity states that the information is accurate, or the entity itself "no longer exists or is unable to verify the accuracy of the information, FINRA will not change the information."

FINRA will let eligible parties know the outcome of its investigation which cannot be appealed and will advise the disputing eligible party that:

(1) the information is either not accurate or was not accurately presented and is now updated, modified or deleted;

(2) the information is accurate in both content and presentation and did not warrant any changes; or,

(3) verification of the accuracy of the information or its presentation was not possible and no changes have been made.

If you have any questions concerning the dispute process for BrokerCheck or other FINRA matters, please contact New York's Gusrae Kaplan Nusbaum PLLC.

The Securities Lawyer Blog recently posted on FINRA's proposed amendments to Rule 8321 which will make significant changes to the BrokerCheck® service. The Securities and Exchange Commission has now approved the proposed amendments to the rule. Regulatory Notice 10-34 can be read in its entirety by clicking here.

It is important that all brokers and firms review these new provisions carefully and circulate RN 10-34 widely as suggested in the notice itself.

Briefly summarized, the enhanced BrokerCheck will include historic customer complaints, permanent information about various civil and criminal proceedings involving brokers, increase from two years to 10 years the broker disclosure period for former associated persons of member firms and provide codification of the current process for brokers to dispute the accuracy of, or to update, information on BrokerCheck.

RN 10-34 contains important background to the revised BrokerCheck service in each area that has been amended. A summary of two of these areas follows.

Historic Complaints
Prior to the amendments, customer complaints were limited in scope. Certain conditions needed to be met before such a complaint was included on BrokerCheck. The new rule will allow those conditions to be eliminated and this will take effect on August 23, 2010. The practical effect of this amendment is that all Historic Complaints that became non-reportable after Web CRD (stated as on or after August 16, 1999) will now be displayed on the service.

Along with these changes to Historic Complaint content, member firms will be permitted to amend Historic Complaints without first contacting FINRA. This change aligns with the way member firm's are able to amend "other reported disclosure events."

Disclosure Period Expands and Information Becomes Permanent
BrokerCheck now includes information for current and former member firms, and certain associated persons for two years post-registration. It also includes permanent information about former associated persons of a member firm who were subject to final regulatory action.

Under the expanded BrokerCheck, and beginning on November 6, 2010, the disclosure period will increase from two to 10 years and in certain circumstances information will be permanently included. In addition to final regulatory action, other circumstances that trigger the permanent disclosure include criminal convictions, guilty or nolo contendere pleas, injunctive relief related to regulatory violations and arbitration or civil judgments relating to "alleged sales practice violations."

Next week's post will include more information about the BrokerCheck dispute process which is impacted by the Regulatory Notice.

If you have any questions or concerns about this or any other FINRA matter, please contact the Wall Street law firm of Gusrae Kaplan Nusbaum PLLC.