Securities Lawyer Blog

Last week, the Securities Lawyer Blog posted the highlights of the FINRA year in review. We continue this week with additional specifics on FINRA's major initiatives that have developed over the past year.

In the area of market regulation and surveillance, FINRA expanded its regulatory services and now provides these services to 11 exchanges that operate 17 equities and options markets. FINRA's responsibility expanded into surveillance of the NYSE EuroNext's five markets that operate in the United States. Additional expanded areas include "a second BATS equity exchange and BATS options, the NASDAQ OMX PHLX's equity and options markets, and two equity exchanges operated by Direct Edge."

With the joining of the insider trading programs of the NYSE and FINRA, all U.S. exchange-listed and OTC equity securities are under its purview. Specifically, 244 matters were referred to the SEC in this area. These referrals included circumstances involving "suspicious trading ahead of material news announcements by hedge funds, institutional investors, private equity firms and retail investors."

Fraud Surveillance was a major area of activity this year. Referrals from the OFDMI included "issuer fraud, pump-and-dump schemes, market manipulation and account intrusions."

FINRA's enforcement activities resulted in significant fines and restitution, involved the expulsion, suspension and barring of individuals and firms. The reach was broad and included sweeps and targeted exams involving "Regulation D offerings, placement agents, trading activity fees, direct market access and junk bonds."

Retail sales of private placement interests and broker-dealers affiliated with private placement issuers were areas of sweeps in which the focus was "compliance with suitability, supervision and advertising rules, as well as potential instances of fraud and unregistered sales of securities."

On the horizon are rule amendments that will govern private placements, as FINRA says it will continue to "prevent misconduct in the sale of private placements" by expanding the areas of "disclosure, filing requirements and limitations on the use of offering proceeds to a wider range of private placement offerings."

Another major area of focus was FINRA's increase in "the scope of its regulation of securities firms, changing the way it deploys resources to monitor and examine firms." Specifically, the sales practice examination program was targeted "to be more risk-based" with exams that placed greater focus on "business lines engaged in by the firms that pose the highest risk to investors." According to FINRA, it has "conducted approximately 2,600 cycle examinations and 6,600 cause examinations."

Finally, FINRA reports that it has expanded and strengthened in the areas of Trade Reporting and Compliance Engine (TRACE), disclosure, dispute resolution and investor and financial education.

Wall Street's Gusrae Kaplan Nusbaum PLLC, publisher of the Securities Lawyer Blog, wishes its readers a Happy New Year in 2011.

As 2010 draws to a close, FINRA has issued a look back at the year in a compilation of its activities in the areas of investor protection and market regulation. Calling these areas of activity "significantly expanded and enhanced," FINRA notes progress in all areas of its mission and scope including "market and firm regulation, transparency, registration and disclosure, dispute resolution and investor education."

For broker-dealers, FINRA's review of 2010 is worthy reading and can be viewed here. In summary, FINRA's areas of progress in the context of "changes sweeping financial markets, ongoing economic challenges and the implementation of a new industry regulatory framework" are indeed ambitious in scope and breadth.

FINRA highlights the following broad areas of activity for the year, including:

-- Market oversight responsibilities expanded and now include over ten new markets and surveillance of 80 percent of the trading volume of U.S. equity markets.

-- The Office of Fraud Detection and Market Intelligence (OFDMI), was launched and referred over 500 matters to other agencies for investigation.

-- Over 240 insider-trading referrals were made to the SEC with refinements in the analytics applied by the Insider Trading Surveillance unit.

In 2010, FINRA brought nearly 1800 disciplinary actions and levied $41.1 million in fines, $8 million in restitution to investors and expelled 14 firms from the securities industry. A total of 270 individuals were barred and 407 firms suspended from "association with FINRA-regulated firms."

Among other big areas of enhancements and improvements include a 50% increase in the "number of reportable debt instruments" through the Trade Reporting and Compliance Engine (TRACE) and major changes to BrokerCheck to include more information on broker historical data.

Other accomplishments noted by FINRA include the Investor Education Foundation, which this year completed a Military Financial Capability Survey that measured the financial picture for service members and their families and, as the Securities Lawyer Blog noted last week, the launch of a state-by-state interactive website. The new website provides information for the public and the industry to review and compare the financial capabilities of the American public across various regions of the country.

Next week, the Securities Lawyer Blog will continue a review of FINRA's year in highlights.

The Wall Street law firm of Gusrae Kaplan Nusbaum PLLC, brings readers the Securities Lawyer Blog. Please contact our offices to speak with our lawyers about our practice areas on behalf of broker-dealers, including regulatory and enforcement representation.

At a time of economic upheaval and uncertainty, FINRA's Investor Education Foundation has launched a tool to help the "public, policymakers and researchers" understand the financial capabilities of Americans state-by-state. The web-based interactive site located at www.usfinancialcapability.org.

The site includes the State-by-State Financial Capability Survey the result of over 28,000 responses and developed in consultation the U.S. Department of the Treasury and the President's Advisory Council on Financial Literacy.

Not surprisingly perhaps, the survey determined that there are great differences state-by-state in financial capability around the country and in various demographics. Some of the broader findings include: young Americans are more likely to borrow from sources other than banks and are not as financially capable as older Americans; those in Kentucky and Montana have more financial capability challenges than other states; those living in New York, New Jersey and New Hampshire have the most financial capability.

Emphasizing the importance of financial education for Americans, FINRA Foundation Chairman Rick Ketchum stated in the launch announcement that "[w]hile the current economic conditions can exacerbate the consequences of poor financial decisions, some states are still well ahead of others."

The findings are sobering. Most Americans are: living paycheck-to-paycheck; many are outspending their income; and, most do not have the recommended emergency funds of three months income. The study also found Americans lacking in fundamental financial concepts.

The intention is that the study's findings will assist the FINRA Foundation in its efforts to ensure that across America's diverse population and demographics, we are better informed about saving and borrowing. According to the FINRA Foundation, the study's findings are expected to be "especially useful in informing FINRA Foundation-funded community-based organizations about the financial education needs of different demographics in their communities."

The goal is to help Americans plan for the future and make better decisions along the way.

The Wall Street law firm, Gusrae Kaplan Nusbaum PLLC has decades of experience in advising and representing members of the broker-dealer community. Please contact us at any time to consult with one of our lawyers.

Earlier this week, San Antonio's Pinnacle Partners Financial Corporation, and its president, were hit with a notice by FINRA of its initiation of a proceeding seeking a Temporary Cease and Desist Order (TCDO). The purpose of the action is to avoid customer harm and depletion of assets.

According to FINRA, the TCDO is necessary because the parties are engaged in allegedly fraudulent and illegal sales activities that involve "eight unregistered private placement offerings selling interests in oil and gas joint ventures."

The action for the TCDO will proceed quickly since FINRA rules require that, unless the time is extended, a hearing will take place "not later than 15 days after service of the notice and filing that initiates the temporary cease and desist proceeding." A decision will then issue no later than 10 days after the hearing transcript is received. The TCDO would remain in place until the underlying action against these parties is resolved.

The underlying complaint alleges, among other things, that the parties have been operating what they deem a "boiler room" from which cold calls are made week after week. The effort has succeeded in raising over $10 million from more than 100 investors.

The alleged wrongdoing also includes the sale of unregistered securities, failure to report customer complaints, material misrepresentations and omissions, such as inflated natural gas prices and estimated returns, as well as the use of customer funds for purposes unrelated to the business and personal expenses.

The Securities Lawyer Blog will keep our readers posted on the status of this matter as it proceeds.

New York City's Gusrae Kaplan Nusbaum PLLC, represents broker-dealers in all aspects of compliance and enforcement. Please contact us for more information on our practice before FINRA and other regulatory agencies on behalf of broker-dealers.

Earlier this week, the SEC announced that it has charged a former Deloitte Tax LLP partner and his wife with "repeatedly leaking confidential merger and acquisition information to family members overseas in a multi-million dollar insider trading scheme."

Robert Khuzami, Director of the SEC's Division of Enforcement said of the alleged scheme, that involved the couple's close relatives across the pond, "[i]n this day and age, whether it's across oceans or across markets, the SEC and its domestic and foreign law enforcement partners are committed to identifying and prosecuting illegal insider trading."

The SEC's complaint alleges that the Deloitte partner, Arnold McClellan and his wife, provided confidential information to relatives in London about his clients' targeted acquisitions of United States companies. The trading tips were provided over the phone or on personal visits and the relatives and others then took financial positions within these companies. The SEC apparently tracked back the timing of these calls and visits with positions taken by relatives and others in companies that were about to be acquired.

Mr. McClellan allegedly "had access to highly confidential information while serving as the head of one of Deloitte's regional mergers and acquisitions teams." His area of practice including tax and related advice in clients' potential acquisitions.

The couple's London relatives, James and Miranda Sanders and his colleagues have been charged by the UK Financial Services Authority, as the scheme involved alleged tipping of information within Mr. Sanders' derivatives firm. These tips resulted in trades with the firm's clients with gains of about $20 million.

The alleged scheme took place between 2006 and 2008 and involved confidential information about targeted acquisitions of such companies as Getty Images, Inc., Kronos Inc. and aQuantive Inc. The complaint against the couple charges violations of federal securities laws antifraud provisions and seeks permanent injunctive relief as well as disgorgement of illicit profits.

Our New York City law firm, Gusrae Kaplan Nusbaum PLLC, is comprised of lawyers with decades of experience in securities regulatory and enforcement. Please contact us for more information on our securities and commodities litigation practice and our regulatory and enforcement experience.