Securities Lawyer Blog

The Auction Rate Securities troubles continue as the The Financial Industry Regulatory Authority (FINRA) has entered into a $3 million settlement with Nuveen Investments for "creating misleading marketing materials used in sales of auction rate preferred securities (ARPS)." Although a form of ARS, the Nuveen Funds' ARPS were preferred shares that were issued by closed end mutual funds which in turn were used to raise money for investment.

According to FINRA, one of the central problems with these ARPS were the materials used by third-party broker-dealers to sell them to customers. A staggering $15 billion of these securities were sold by third parties, but Nuveen created the marketing brochures for these securities.

Among the allegations were that these materials did not adequately disclose liquidity risks (which was a major problem with other ARS sold by other firms); there was no statement that the auctions could fail at some point, or that if they did fail, customers would not be able to gain access to their funds for some time. As was the case with ARS products sold by other firms, these were positioned as safe and liquid. Finally, FINRA alleged that the firm had failed to maintain adequate supervisory procedures that would make certain the materials reflected the actual risks of investing.

Prior to the wider failure of the auctions which impacted all ARS, the firm is alleged to have known of a problem with the auctions when its lead auction manager advised the firm that it would no longer manage these securities. An auction failed as early as January 2008 -- when the wider problem with these securities occurred in February. This led FINRA to conclude that Nuveen knew that liquidity could become a serious problem, but did not change its marketing of these securities or advise customers of the risks which kept them from knowing critical investment information.

Nearly all but $1 billion in these Nuveen securities have been redeemed. As part of the settlement, the firm has committed to continue the redemption process.

The New York securities regulation and enforcement attorneys at Gusrae Kaplan Nusbaum PLLC represent broker-dealers in regulatory and enforcement matters. Our lawyers advise clients and defend industry members in matters involving a broad spectrum of issues, including maintaining adequate supervision and providing marketing materials that properly disclose risks. Contact our law firm to consult with one of our attorneys.

The Securities and Exchange Commission (SEC) announced last week that a case that began in 2004 against Neurotech Development Corporation and its officers who are father and son, has now come to a conclusion. The case has reached this conclusion in stages and over a period of many years.

The Report and Recommendation that were issued by a Magistrate Judge against the company were adopted in full Judge Platt of the United States District Court for the Eastern District of New York. The individual respondents will over $173,000 and over $141,000 in civil penalties, disgorgement of ill-gotten gains and prejudgment interest. As noted in the SEC's press release on this litigation "[t]he Magistrate Judge stated that the recommended civil penalties were 'third tier' penalties and that he considered the defendants' financial conditions" in the decision to "not recommend higher penalty amounts."

The original allegations against the company and its two officers were filed in 2004 and centered around claims that during the period between 1999 through 2003 it had made false statements in SEC filings. Specifically, the complaint alleged that Neurotech made false claims concerning the sale and construction of prefabricated hospitals in China and Indonesia and overseas construction contracts that were falsely stated to be in the billions of dollars. The SEC also alleged that false public statements were made regarding bank guarantees to finance the construction of hospitals and that the principals sold the company's common stock and received illicit gains from those sales into the market.

According to the SEC, the company settled in 2010 and the father and son agreed to partial settlements that included: permanent injunctions from violating Section 10(b) of the Securities Exchange Act of 1934 (Exchange Act); Rule 10b-5; Section 16(a) of the Exchange Act; aiding and abetting Neurotech's violations of reporting provisions of the Exchange Act; and the individual defendants' false certifications of SEC filings as well as five-year officer and director and penny stock bars.

The disgorgement, interest, and civil penalties remained to be determined by the court and these have now been completed with the final acceptance of the Report and Recommendation.

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.

Along with every new legitimate opportunity for investment in technology, come "opportunities" that are instead fraudulent and deceptive. Apparently, FINRA decided that the public needed further warning in this area due to the attraction of social media companies and their potential profits. And to address this, FINRA has issued a warning about social media investment with an investor alert on Pre-IPO offerings.

The warning concerns scams that are attempting to lure potential investors into believing they will be offered pre-IPO shares in social media sites such as Facebook. These "con artists" offer what are non-existent private stock offerings in the most well-known social media companies. The FINRA alert is entitled Pre-IPO Offerings -- These Scammers Are Not Your Friends.

FINRA has created a list of ways investors can identify legitimate private placements as opposed to the scams that have been cropping up. These include: avoiding any unsolicited pre-IPO offer that comes from someone you do not know; being alert to the tactics that are used by scammers such as high returns and discounts; knowing whether the offer is coming from a licensed person; checking search engines for information on possible scammers; seeking advice from a licensed broker-dealer and/or an attorney.

In the recent past, there have been some reports of legitimate pre-IPO speculation with some major social media sites. These "private placements" are not for most investors and generally are offered to entities or individuals that have significant resources and can manage the risk that goes along with the purchase of pre-IPO shares.

The concern for the general public is that even though pre-IPO offerings can be what they purport to be, there are some very deceiving offerings being made as well. According to FINRA, there have been attempts to sell fake Facebook shares in this manner. For example, the SEC just completed a case involving a securities trader who was self-employed and is alleged to have raised close to $10 million dollars for fake pre-IPO shares of sites like Facebook and Google.

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 who are preeminent former regulators and experienced litigators.

This is a very sad story. But in some ways it mirrors other recent cases the Securities Lawyer Blog has noted, in which the trust of unsuspecting investors is completely shattered by someone within their own community.

Earlier this month, the Securities and Exchange Commission (SEC) sought a civil injunction in Ohio against an Amish man who targeted mainly Amish investors in an "unregistered and fraudulent offering of securities" through a company called A&M Investments. This scheme occurred over a twenty-year period in which the defendant, Mr. Beachy, raised over $33 million from 2,600 mainly Amish investors.

The promise Mr. Beachy is alleged to have made to investors was that they would receive a return on their investments that was greater than that offered by banks. He said these returns would come from risk-free United States government securities. Many investors treated their relationship with the investment business, A&M Investments like a money market account and they withdrew funds from time to time.

Rather than invest as he promised his investors, Mr. Beachy is alleged to have "used the money to make speculative investments in high yield (junk) bonds, mutual funds, and stocks." And in its complaint, the SEC alleges that not only did he lose large amounts of his investors' principal, but he also falsified their monthly statements with fake rates of return, no information on their actual losses and inflated balances that were not accurate.

Investors were not aware that the $33 million they thought was in these accounts, was actually less than $18 million after the major losses that the investment company apparently suffered in the investments Mr. Beachy was making without authorization or knowledge of his investors. And now, the remaining assets of the investment company and what is left of the funds owned by formerly unsuspecting investors, are held by a bankruptcy trustee as Mr. Beachy has filed for Chapter 7 bankruptcy.

Although subject to the approval of the United States District Court for the Northern District of Ohio, Mr. Beachy has agreed to settle the action and has consented to entry of a permanent injunction in which he is enjoined from further violations under various provisions of the Securities Act and the Exchange Act.

New York City's Wall Street law firm, Gusrae Kaplan Nusbaum PLLC, represents brokers and traders before all regulatory agencies and handles securities and commodities litigation and appeals. Please contact our law firm to talk with one our lawyers about representation and our litigation and advisory practice. Our lawyers are former regulators and experienced litigators in all aspects of securities practice.

Late last year, the Securities Lawyer Blog posted that the Financial Industry Regulatory Authority (FINRA) had proposed a rule change to enable customers to select an "all public panel." This week FINRA announced that the Securities and Exchange Commission (SEC) has approved this proposed rule change.

The new Optional All Public Panel Rule 12403(d) is the result of concerns about investor confidence as to how business is conducted Wall Street and the desire to enhance the investing public's perception of the fairness of arbitration proceedings when they have a dispute involving their investments. Providing "an additional choice" to investors in arbitration proceedings is intended in part to "increase public confidence in the fairness of [the} dispute resolution process," says FINRA Chairman and CEO, Richard Ketchum.

Prior to this change, panels have included one arbitrator that is in the securities industry and two public arbitrators. The all-public arbitration panel option will apply going forward, and will be available to those arbitrations for which the list of potential arbitrators has not been provided. FINRA is imposing a brief moratorium on sending arbitrator lists in customer cases with three arbitrators, from the time of the issuance of the SEC approval order and ending with publication of FINRA's Regulatory Notice.

After a lengthy pilot program that took place over a 27-month time frame, with 14 firms volunteering to participate, FINRA determined that in about 60 percent of the arbitrations included in the pilot, customers chose the all-public option. In many instances, investors also included a non-public arbitrator.

Public perception was apparently key in this rule change, as the ability to choose was a favorable part of the process for investors involved in the pilot. The "right to decide" whether a panel included a non-public member was strongly support by investors and consumer groups.

For detailed information on the new "Optional All Public Panel Rule" please click here.

Wall Street's Gusrae Kaplan Nusbaum PLLC acts as counsel to FINRA underwriters, placement agents and issuers in private placement and public offerings of equity and debt securities under the Securities Act of 1933, as amended. We also have extensive experience representing broker-dealers in all regulatory proceedings. Please contact our law firm to discuss legal representation before FINRA and other regulatory entities.

Earlier this week, the Securities and Exchange Commission (SEC) announced that it had filed a Cease and Desist Order against Merrill, Lynch under Sections 15(b)(4) and 21C of the Securities Exchange Act of 1934 ("Exchange Act"). The SEC alleged the firm had engaged in the misuse of customer order information and in so doing committed fraud by using this information "to place proprietary trades for the firm and for charging customers undisclosed trading fees."

According to the SEC, it accepted Merrill's $10 million settlement of this matter after considering remedial actions that have been put in place since the firm's acquisition by Bank of America.

All of this is alleged to have occurred over a two-year period between 2003 and 2005. The firm's proprietary trading desk known as the Equity Trading Desk (ESD) was operated only on the firm's behalf and was not involved in customer orders. However, it was operated on the same trading floor where the firm received and made customer trades from its market-making desk.

The SEC alleged that although customer order information was supposed to be maintained discreetly and disclosed only "on a need-to-know basis" the proprietary traders were able not only to obtain information that should not have been disclosed to them from the traders on the market-making desk, but that trades were placed on the firm's behalf using this information. The SEC said that this was contrary to representations the firm had made to customers regarding how information would be used.

Additional allegations in the SEC order included claims that, contrary to the firm's agreements with certain institutional and high net worth customers that they would "only charge a commission equivalent for executing riskless principal trades," the firm charged some customers undisclosed trading fees that were contrary to its agreements with customers.

As noted by the SEC's Asset Management Unit Co-Chief, "[c]harging ... undisclosed mark-ups and mark-downs was improper and contrary to Merrill's agreements with its customers. He went on to say that "[b]rokers must act honestly and transparently when charging fees to their customers. There is no place in our markets for charging investors undisclosed trading fees."

The New York law firm of Gusrae Kaplan Nusbaum PLLC, represents broker-dealers in litigation and before all regulatory tribunals. We are a firm of preeminent former regulators and very experienced litigators, with a significant and well-respected breadth and depth of practice in securities and commodities litigation and broker-dealer representation. Please contact our law firm to speak with one of our lawyers and for more information about our law practice.

The big settlement story this week is the $119 million resolution reached between Charles Schwab Corporation and the SEC. This settlement resolves both state and federal lawsuits for allegations that the company misled investors in a bond mutual fund that held mortgage-backed securities. A separate settlement was reached between Schwab and the Financial Industry Regulatory Authority.

The SEC alleged that the company made "misleading statements" with regard to its YieldPlus fund. The fund was represented by Schwab to be similar to a money market investment in safety. But in fact, sitting in the background waiting to implode were risky mortgage-backed securities. The housing market collapse brought big losses to YieldPlus.

Similar to the auction rate securities markets, firms put themselves at peril in representing safety where there was risk. The Securities Lawyer Blog posted on the ARS market failure in which firms marketed the safety of the ARS market comparing it to CD deposits.

In this case, the SEC noted that Schwab's marketing documents contained misrepresentations and omissions. About half of the YieldPlus fund was composed of mortgage-backed securities.

Schwab regrets that shareholders lost money, but stated that the "decline in the YieldPlus fund was the result of an unprecedented and unforeseeable credit crisis and market collapse."

The executives who oversaw the fund intend to fight SEC charges that they violated federal securities laws, as well as the company's internal policy that shareholders must approve when more than 25% of assets derive from one industry.

Schwab has also agreed to pay $235 million for resolution of two private class-action shareholder suits, which would bring the total YieldPlus settlements to $350 million.

Contact the lawyers at the Wall Street law firm of Gusrae Kaplan Nusbaum PLLC for more information on broker-dealer representation before all regulatory agencies, as well as broker-dealer advisory services.

The Securities and Exchange Commission (SEC) has begun 2011 with several litigation filings around the country. Among these are a case involving two executives alleged to have been involved in an illegal stock distribution scheme and another involving an investment adviser and his company that are alleged to have fraudulently raised and diverted investment funds.

In the first matter, filed in Sacramento, California, Gendarme Capital Corporation (Gendarme) is alleged to have "repeatedly acquired deeply discounted shares from penny stock issuers under the pretense of a long-term investment." These shares were then allegedly "dumped" into the market, which impacted public stock distributions. The allegations are that Gendarme failed to comply with disclosure requirements of the federal securities laws which resulted in illicit profits of over $1.6 million for the company's principals.

The complaint filed by the SEC chronicles a scheme in which Gendarme allegedly created deals with penny stock issuers that gave the company rights to purchase stocks at significant discounts off the market price. Allegedly, false representations were then made to issuers that the shares were being secured for "investment purposes only" and were not registered or disclosed under the securities laws.

Gendarme is then alleged to have sold these unregistered stock distributions in public markets, reaping significant profits. The company's outside counsel is also alleged to have issued false legal opinion letters to support these activities.

Across the country in Georgia, the SEC secured temporary injunctive relief and filed civil injunctive relief against a registered investment adviser and his investment firm related to allegedly defrauding investors in two hedge funds managed by the firm in violation of federal securities laws.

According to the complaint, the firm raised $65 million for two hedge funds. Investors were allegedly told their investments would be invested in "unaffiliated" underlying funds and that the firm would take a low percentage management fee and percentage of profits.

The SEC's complaint alleges that undisclosed funds were created from which millions of dollars were diverted for the personal use of the principal and his firm in violation of federal securities laws.

The law firm of Gusrae Kaplan Nusbaum PLLC has defended individuals, issuers underwriters, investment banks, broker/dealers, hedge funds, officers and directors in connection with a wide range of regulatory or enforcement matters. For more information, please contact our firm to speak with one of our lawyers.

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.

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.

In the grand scheme for Goldman, Sachs & Co., a $650,000 FINRA fine is not a major financial hit. However, this fine closes a chapter on some big headaches for the firm.

FINRA announced the imposition of the fine earlier this week, after Goldman Sachs settled allegations that the firm failed to timely update Form U4 for two registered representatives. Goldman did not admit or deny the allegations.

The firm was required to update Form U4 within 30 days after the Securities and Exchange Commission (SEC) filed a "Wells Notice" for each of these representatives, including Fabrice Tourre. The "Wells Notices" provided formal notice that the two representatives were each the subject of SEC investigations.

However, the updated Form U4 was not filed until after the SEC had filed suit against Tourre and Goldman for allegedly misleading the public with regard to subprime offerings. This was more than seven months after the required 30-day period. Goldman has settled the underlying case with the SEC for $550 million, while Tourre continues to litigate the matter.

A major issue with regard to the untimely filings, was FINRA's finding that Goldman's supervisory procedures and systems were inadequate to make certain that the requisite disclosures were made when "registered employees received notice that they were the subject of a regulatory investigation." According to FINRA, the firm's "written supervisory procedures, manuals and policies were inadequate." Specifically, "Wells Notices" were not included as triggering events for disclosure in the firm's procedures and policies.

Goldman will now review its supervisory procedures and systems for updating and reporting. Citing the inability of investors and other market participants to "adequately assess" these individuals through BrokerCheck®, FINRA noted that the firm's "failures [also] impacted the ability of FINRA and other securities regulators to discharge their registration, examination and oversight duties."

Related Web Resources

For more information on BrokerCheck®, click here.

The New York firm, Gusrae Kaplan Nusbaum PLLC, represents broker-dealers before regulatory and enforcement agencies. Please contact our firm for more information and to learn more about our areas of expertise and practice.

FINRA has issued Regulatory Notice 10-57 to help firms develop funding and risk management programs in the event of another serious credit crisis. It seems clear that FINRA expects the lessons of the past to instruct the future and in this Notice it seeks to assist broker-dealers in making sure they are ready for a worst-case scenario.

Noting that a credit crisis could severely impact operations costs and perhaps make funding unavailable, FINRA "expects broker-dealers to develop and maintain robust funding and liquidity risk management practices to prepare for adverse circumstances." It also "expects broker-dealers affiliated with holding companies to undertake these efforts at the broker-dealer level."

DIrected mainly to broker-dealers that carry inventory positions and carry customer accounts, the Notice states that all broker-dealers should find this a valuable resource. It outlines practices that were identified through the review of 15 mid-sized and large broker-dealers.

The Notice provisions are not meant as an exhaustive list, but do provide solid guidance, suggesting that each broker-dealer "consider the practices that are best suited to its operations, whether or not they are mentioned in this Notice." The following is a summary of what is found in the full Notice.

1. Risk Limits and Reporting
This portion of the Notice urges that the governing board and senior management be fully informed on their firm's risk management policies and procedures and "should participate in setting and periodically re-evaluating the level of funding and liquidity risk the organization is willing to accept to meet its business goals." The expectation is that senior management communicate this through the organization and across all business lines. The suggested analysis includes escalation procedures and risk reporting.

2. Independent Risk Oversight
In this area it is suggested that broker-dealers "use staff that is independent of business lines to ensure that the firm does not exceed the levels of risk tolerance set by the governing board and senior management" and also give that staff sufficient resources and authority. Functions suggested include exposure analysis, stress tests and other monitoring for early warning signs of potential liquidity challenges.

3. Maturity Profile of Funding Sources
This item cautions the '[o]ver reliance on shorter-term funding to finance longer-term assets' which was "a significant factor in the severe difficulties faced by some financial firms during the credit crisis." Specific suggestions to avoid potential exposure are outlined and should be consulted.

4. Red Flags of Potential Funding and Liquidity Problems
This section of the Notice outlines a fairly lengthy list of red flags that should trigger immediate action by management.

5. Inventory Valuation
In this section of the Notice, FINRA provides a list of controls that should be used by broker-dealers to identify the "true liquidation value of inventory holdings" which are
"essential for an effective funding and liquidity management program." The use of staff that is technically competent and independent from the lines of business is encouraged to "evaluate pricing decisions" and "challenge pricing assumptions."

6. Stress Testing
A critical component of the liquidity and risk management is effective stress-testing to assist broker-dealers in identifying and quantifying "potential liquidity strains" and analyzing "effects on its cash-flows, profitability and solvency."

7. Contingency Funding Plan
This area suggests the ways broker-dealers can react to a credit crisis with contingency funding, including procedures for senior management and governing boards to formally sign off on these plans.

8. Use of Customer Assets
This section assists in the analysis for compliance under Exchange Act Rule 15c3-3, which requires broker-dealers to calculate how much it needs, if any, to deposit on behalf of customers in its reserve bank accounts for the exclusive benefit of those customers.

In its conclusion FINRA makes it very clear that broker-dealers must be proactive in developing funding and liquidity risk management practices, as well as ensuring they are rigorously followed.

For more information on FINRA Regulatory Notice 10-57 and for representation before FINRA and other regulatory and enforcement bodies, please contact the Wall Street law firm of Gusrae Kaplan Nusbaum PLLC.

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.