Securities Lawyer Blog

Broker-dealer chief compliance officers and senior staff have the opportunity to attend the annual CCOutreach BD National Seminar held by the Securities and Exchange Commission and Financial Industry Regulatory Authority (FINRA). The program is being developed now. CCO's are invited to suggest topics for discussion to ensure the program is a "practical and informative experience."

Registration opens next week and will be on a first-come, first-serve basis. There is no cost for the program which is to be held on February 8, 2011 in Washington, D.C. at the SEC. The program will also be available through a webcast on the SEC's website.

According to the joint press release, the program is intended to serve as a "forum for discussion on effective compliance practices and timely compliance issues in ever-changing markets." It also serves as a support to cco's with such critical tasks as communications and maintenance of compliance controls, as well as internal programs that will ultimately benefit investors.

Overall the dialogue between regulators and the industry is considered by the SEC and FINRA to be of great benefit to both, particularly in a time of regulatory change. Carlo di Florio, Director of the SEC's Office of Compliance Inspections and Examinations (OCIE) noted that " '[t]he CCOutreach BD program has proven invaluable in helping the SEC understand the needs and concerns of compliance officers.' " He continued by saying that the program is a way to support " 'effective communication between regulators and the industry and to reinforce our commitment to prevent securities laws violations and better serve investors.' "

For more information on the CCOutreach BD program and the National Seminar please visit the SEC website.

The lawyers at Wall Street's Gusrae Kaplan Nusbaum PLLC encourage all CCO's and senior staff to participate in the National Seminar. Please contact our office for more information on our broker-dealer representation and advisory services in all aspects of compliance and other regulatory matters.

The Financial Industry Regulatory Authority (FINRA) has taken aim at alleged suitability and supervision failures in the sale of reverse convertible notes. Without admitting or denying charges brought by FINRA. the former Ferris, Baker Watts LLC, which was acquired by RBC Wealth Management, will pay $500,000 in fines and restitution to resolve allegations that the firm did not adequately supervise sales of these notes to retail customers.

A number of accounts were held by customers who were 85 years or older and have "modest net worth." As part of the settlement, these account holders will receive restitution for their losses from these notes.

Citing the complexity of reverse convertible notes as investments and the potential risks associated with them, James Shorris, FINRA Executive Vice President and Acting Chief of Enforcement noted that the firm maintained inadequate written procedures which "resulted in recommendations of sales to customers for whom the purchase of these securities was not suitable, including elderly customers and investors who had very modest assets."

Those in the industry are aware that reverse convertible notes carry a coupon interest rate of various time frames and are connected to the performance of specific stock. The investment value rides on the price of the underlying stock at maturity.

These notes carry a risk of significant depreciation, as well as more common risks of issuer default and inflation. In this matter, most customers who received the underlying stock at maturity, ended up with an investment loss.

FINRA cautioned that the added risk must be evaluated in the suitability recommendation for these notes and that in a two-year period the firm did not adequately guide its brokers and managers on the suitability assessment for these investments. FINRA also noted that because the firm did not adequately monitor these investments, it also failed to detect when there was an over-concentration of them in customer accounts, particularly elderly customers holding moderate net worth who were not told of the potential for loss in these investments.

Related Web Resources
To learn more about national statistics on reverse convertible notes and this case, go to businessweek.com .

Gusrae Kaplan Nusbaum PLLC represents broker-dealers in all aspects of securities and commodities litigation and regulatory and enforcement actions. Please contact us to speak with one of our lawyers about our experience and practice.

Focusing on what was formerly a largely unregulated market, the Securities and Exchange Commission has proposed rules this week directed towards mitigation of conflicts of interest in security-based swaps. The SEC says investors need protection in this area and the current regulatory picture has what it calls, "gaps."

Title VII of the Dodd-Frank Act authorizes the SEC to regulate security-based swaps and more specifically, "Section 765 directs the Commission to adopt rules to mitigate conflicts of interest." Proposed Regulation MC is targeted at the swap clearing agencies, execution facilities and national securities exchanges that either make security-based swaps available for trading or that post them.

SEC Chairman Mary L. Schapiro explained at a recent Open Meeting that in order to achieve conflict of interest mitigation, the law provides that the SEC's rules "can limit control or voting rights with respect to any security-based swap clearing agency, security-based swap execution facility, or exchange that posts or makes available for trading security-based swaps."

Chairman Schapiro noted that "[t]he concern about conflicts of interest stems from the fact that the over-the-counter derivatives markets have a relatively high concentration of market activity through a limited number of dealers -- and those dealers earn significant revenues from their transactions in an opaque over the counter market."

The SEC's proposal is similar to the Commodity Futures Trading Commission's proposed rules concerning derivatives clearing organizations.

For more detailed information regarding SEF's, the conflict of interest concerns, and the specific proposed alternatives for ownership, voiting and governance, please review the statement issued by the SEC and Chairman Shapiro's recent speech regarding the proposal.

Wall Street's Gusrae Kaplan Nusbaum PLLC represents broker-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.

Earlier this week, Bloomberg.com reported on a public finance conference that took place in San Francisco and comments made by Elaine Greenberg, chief of SEC municipal securities and public pensions unit. The message was clear - municipal bond issuers must ensure they are in compliance with the federal securities laws that protect individual investors.

One thing is quite evident. The protection of individual bond investors is on the SEC's front burner for enforcement actions. To bring home this point, Ms. Greenberg issued a stern warning to issuers that " '[t]hey need to be aware that the SEC is out there looking to protect the interests of these bondholders. If we find that you hid or misrepresented material information to these investors, we will be holding you accountable and you may find yourself being the defendant in an enforcement action.' "

According to Bloomberg, the statistics reported by Ms. Greenberg also drive home the enforcement point. She stated that individuals now hold $1 trillion in municipal bond investments and represent over 70% of this market.

Ms. Greenberg who has been an SEC enforcer for two decades, was appointed earlier this year to head one of the task forces that was put in place once the credit crisis hit to look at the SEC's failures to detect the Madoff Ponzi scheme.

The SEC is not just talking about the importance that bond issuers comply with federal law. The warnings issued by the agency have already begun to be implemented. For example, several months ago, New Jersey experienced first hand that this warning is not just talk. They settled with the SEC after the agency claimed that the state had misled bond investors by allegedly underfunding its two biggest pension funds and not telling investors. Issuers, be forewarned.

Resources

For more information on the SEC's settlement with New Jersey and the settlement reached click here.

Gusrae Kaplan Nusbaum PLLC represents broker-dealers in all aspects of securities and commodities litigation and regulatory and enforcement actions. Please contact us to speak with one of our lawyers about our experience and practice.