Securities Lawyer Blog

Recent experience has shown that back-office operations can at times be quite problematic for investors. The Securities Lawyer Blog has posted on instances in which back-office has caused real harm to customers. FINRA appears to seek to put an end to that, or at least regulate those involved.

This past week the Financial Industry Regulatory Authority (FINRA) issued Regulatory Notice 10-25 in which it requests comment on its proposal that would make some important additions to its regulatory scope. Comments on this new proposed rule are due prior to July 12, 2010. The rule would be subject to SEC approval.

The Notice concerns a new proposed rule that would provide greater oversight to back office operations. Specifically, the new rule would establish expanded registration requirements that would apply to those "individuals engaging in, or supervising, activities related to sales and trading support, and handling of customer assets."

This means that in addition to broker dealers, those individuals who are part of the operations staff that support broker dealer activities will now be subject to registration. The new rule would apply to certain individuals involved in activities that could impact investors and customers in a significant way. The rule would not only require their registration, but also would require testing and continuing education.

According to FINRA, "[t]hese employees perform an integral role inside the firms, and their actions can have meaningful connections to the safety of customer funds, accounts and transactions, and the overall integrity of firm books and records." Recent history seems to bear this out.

Specifically, the individuals that are intended to fall under this new rule are those involved with valuation models, and manage such activities as trade confirmations, account statements, trade settlement and margin. Additionally, those individuals who oversee such activities as stock loan/securities lending, prime brokerage, receipt and delivery of securities, and/or financial regulatory reporting would also be covered by this registration rule.

FINRA notes that the SEC has suggested that raising awareness of back-office personnel and ensuring a level of knowledge of the securities industry would be advisable. FINRA's goal appears to be the enhanced likelihood that individuals involved in these activities understand their obligations and become more aware of potential problems, as well as have a basic knowledge of the industry and its high level of regulation.

Continue reading "Back-Office Personnel Targeted for Registration and Education" »

Regulatory enforcement continues to keep the Financial Industry Regulatory Authority (FINRA) busy. Another large set of fines imposed for alleged Regulation SHO violations was announced earlier this week for two broker dealers, Deutsche Bank Securities ($575,000) and National Financial Services ($350,000), respectively.

Simply stated, short sales are subject to Regulation SHO, which requires that brokers or dealers secure and document a "locate" prior to a short sale. The "locate" is necessary for a short sale to be accepted or ordered to ensure that the security can be borrowed and delivered.

Calling the locate "an essential component of ensuring that short sales are executed properly," James S. Shorris, FINRA Executive Vice President and Acting Chief of Enforcement, stated that "[t]he failure to design, implement and supervise systems that reasonably ensure that shares of a security are available to be borrowed before a short sale is executed significantly undermines the effectiveness of Regulation SHO."

The specific problem for these firms was similar, as was the end result of their system failures with regard to ensuring compliance with Regulation SHO. Each firm did maintain systems to block short sale orders that did not have a documented "locate." But in both cases there were exceptions to that which end up being fairly costly and had the effect of failing to block short sales that did not have a locate associated with them.

What FINRA found when sampling short sale orders for each of these firms, was a failure to ensure that a locate had been secured before such trades were executed. In Deutsche Bank's case the block was disabled in "certain instances" and in NFS' case, a separate system applied to "certain customers."

Ironically, because Deutsche Bank's systems had some outages that at times precluded data involving locates to be imported, the firm disabled the system altogether during outages. This occurred over a four-year period. No system was created to ensure that during the period when the system was disabled, another review was in place. This allowed short sales to go through that otherwise were not in compliance with the locate requirement.

Similarly, NFS maintained an automated system, but also excepted some firms that circumvented automatic blocks and allowed manual locate requests and approvals with account representatives. This occurred over a similar time-frame to that of the Deutsche Bank's challenges with regard to compliance with Regulation SHO. The FINRA press release called this a "flawed system."

In both instances, FINRA also found that the review processes for these firms on this type of trading was not adequate nor were the implementation of supervisory systems. The violations of Regulation SHO apparently could have been avoided had these systems been developed and reviewed for compliance.

To learn more about on Regulation SHO and short selling practices, visit investopedia.com.

Continue reading "SHO Down -- Nearly $1 Million in Fines for Regulation SHO Violations" »

During the past several years, many investment companies have closed branches or have closed completely. One Los Angeles-based company will feel some pain for a while over regulatory problems with its former Long Island offices.

Westpark Capital, Inc., has been ordered to pay $100,000 in fines and $300,000 in restitution to those customers impacted by several alleged failures, says the Financial Industry Regulatory Association (FINRA). The problems for Westpark derive from its Long Island operations in which it is alleged that brokers churned their customers' accounts and made both unauthorized and unsuitable trades.

The allegations include failures between 2006-2007 to: (1) establish and maintain an adequate system for supervising its brokers, including failures to monitor customer account activities despite former disciplinary records and customer complaints on suitability and authorization; (2) monitor excessive trading; and, (3) supervise managers with either little experience or prior disciplinary histories.

The firm will not only pay monetary fines, but is also dealing with suspensions of a former Chief Compliance Officer who is suspended for four months and is set to pay a $5,000 fine as well as its current Chief Operations Officer who is suspended for three months as a principal and set to pay a $20,000 fine.

Apparently, Westpark hired brokers that already had disciplinary histories themselves or had worked for broker-dealers that had such records. Some of these broker-dealers had even been expelled by the securities industry.

FINRA's Executive Vice President and Executive Director of Enforcement, James S. Shorris had some harsh words for the firm's hiring and operational practices saying that they failed to "recognize and respond adequately to both broker and customer account-related issues" which "resulted in significant customer harm."

Specific complaints and actions involving individual brokers in these cases are available for review on FINRA's website.

Related Web Resources

For more information on broker status, visit the BrokerCheck® service on the FINRA website.

Continue reading "Hands Off Doesn't Pay -- $400,000 for Westpark Capital to Customers and FINRA Fines" »