On January 8, 2018, FINRA published its 2018 Annual Regulatory and Examination Priorities Letter.  As we noted in our last blog post, FINRA announced in December 2017 that it would continue to make enforcement a priority in the coming year.  This Letter can be useful in helping firms ensure compliance since it outlines regulatory issues that FINRA plans to prioritize in the coming year.

According to the Letter, fraud is perpetually a significant issue for FINRA.  This past year, FINRA made numerous referrals to the Securities and Exchange Commission “for potential insider trading and other fraudulent activities involving individuals outside FINRA’s jurisdiction.”  One area of fraud that FINRA intends to place particular focus on is microcap fraud schemes, especially schemes targeting senior investors.  FINRA advises member firms that they should pay attention to their brokers’ activities involving microcap stocks, especially when the brokers show a newfound interest in purchasing microcap stocks for their accounts or for customers’ accounts. Continue reading

Susan A. Schroeder, the Executive Vice President and Head of Enforcement at the Financial Industry Regulatory Authority, recently discussed FINRA’s Enforcement Department’s day-to-day activities and goals at an event sponsored by the Securities Industry and Financial Markets Association (“SIFMA”).  Schroeder discussed FINRA’s efforts to combine two enforcement groups into one unit, as well as FINRA’s intention to continue to devote its time to “vigorous enforcement” despite calls for less regulation in Washington.

In early 2017, FINRA began what Schroeder described as “a comprehensive self-evaluation and organizational improvement initiative called FINRA360.”  Before FINRA360, FINRA employed two separate enforcement teams.  One was tasked with administering disciplinary events pertaining to trading-based matters discovered by FINRA’s Market Regulation oversight division.  The other was tasked with administering disciplinary events brought forward by FINRA’s other regulatory oversight divisions, such as Member Regulation and Corporate Financing.  FINRA concluded through FINRA360 that combining these two enforcement groups into one unit could bring about “more efficiency and greater effectiveness through better communication.” Continue reading

On November 15, 2017, Stephanie Avakian and Steven Peikin, the Co-Directors of the Securities and Exchange Commission’s Division of Enforcement, published the Division’s Annual Report for fiscal year 2017.  Avakian and Peikin emphasized the Division’s commitment to enforcing the federal securities laws in order to “combat wrongdoing, compensate harmed investors, and maintain confidence in the integrity and fairness of our markets.”  They also emphasized their goals of shielding investors, discouraging misconduct, and reprimanding and penalizing those who violate the federal securities laws.  To accomplish these goals, five core principles, according to Avakian and Peikin, will serve as the Division’s road map.

First, the Division will focus primarily on retail investors, who Avakian and Peikin believe are not only the most common market participants, but also are the most susceptible and least equipped to handle financial loss.  The Division plans to keep confronting violations of the securities laws that can have a strong impact on retail investors, such as accounting fraud, sales of unsuitable products, Ponzi schemes, and pump and dump schemes.  The Division has also established a Retail Strategy Task Force to formulate competent methods of confronting securities law violations that affect retail investors.  The Retail Strategy Task Force will work with the SEC’s examination staff and the Office of Investor Education and Advocacy to pinpoint risk areas common to retail investors. Continue reading

The Department of Labor (DOL) last week published a final rule extending the transition period of the Fiduciary Rule and delaying the second phase of implementation from January 1, 2018 to July 1, 2019. The DOL stated that the primary reason for delaying the rule was to give the DOL necessary time to review the substantial commentary it has received under the criteria set forth in the Presidential Memorandum issued in February of this year, as well as to consider possible changes or alternatives to the Fiduciary Rule exemptions and to seek input from the SEC and other securities regulators.

The Fiduciary Rule was enacted in April 2016, with its applicability date originally set for April 10, 2017. It also provided for a transition period through January 1, 2018 for compliance with certain new and amended Prohibited Transaction Exemptions (PTEs), including the new Best Interest Contract (BIC) exemption. The full requirements of the BIC exemption, including the written contract requirement for transactions involving IRA owners, are not required until the end of the transition period. Continue reading

Earlier this year the Maryland General Assembly amended parts of the Maryland Securities Act and added some new sections to it.  The amendments went into effect on October 1, 2017.  Changes to the Maryland Securities Act include the creation of the Securities Act Registration Fund, adoption of the North American Securities Administrators Association’s Senior Model Act to address financial exploitation of seniors, and changes in fees for certain filing categories.

The amendments added a new section, Section 11-208, which establishes a Securities Act Registration Fund.  The Fund’s purpose is “to help fund the direct and indirect costs of administering and enforcing the Maryland Securities Act.”  The Fund will comprise registration fees, money that the State sets aside for the Fund in its budget, and any money accepted from any other source for the Fund’s benefit.  The Fund cannot be used for any purpose other than administering and enforcing the Maryland Securities Act. Continue reading

Earlier this year, the Kansas Court of Appeals affirmed a district court decision holding that Mark R. Schneider (“Schneider”), an investment adviser representative and broker-dealer, violated the Kansas Uniform Securities Act by recommending nontraditional exchange-traded funds (“ETFs”) to a client whose investment objective was to produce income.  Schneider was ordered to pay $94,720.60 in restitution and a $25,000 civil penalty.

For over 20 years, Schneider acted as investment adviser to Mary Lou and Jeffrey Silverman.  Schneider oversaw the Silvermans’ assets, tax returns, and life insurance, and he had discretionary authority over their investments.  In 2010, Mr. Silverman died, and Mrs. Silverman obtained $1,150,000 from Mr. Silverman’s life insurance policy.  In May 2010, Schneider formulated a financial plan to help Mrs. Silverman garner income from investments she would make using the money from the life insurance policy. Continue reading

In August of this year, the Securities and Exchange Commission (“SEC”) issued an Order Instituting Cease-and-Desist Proceedings (“Order”) against Capital Dynamics, Inc. (“CDI”), a New York-based investment adviser.  The SEC alleged that from March 2011 to July 2015, CDI allocated certain expenses to private funds it was advising when the funds’ governing documents did not authorize the funds to pay these expenses.  CDI submitted an Offer of Settlement in conjunction with the Order.

According to the SEC’s complaint, CDI and its affiliates formed the private funds, collectively known as the “Solar Fund,” “to introduce a new investment program focused on clean energy and infrastructure.”  The documents that governed the funds provided that CDI and the funds’ general partners were obligated to pay “normal operating expenses,” such as employee expenditures and fees for specified services.  They could not charge these expenses to the funds. Continue reading

On October 24, 2017, Morgan Stanley declared that it has decided to withdraw from the Protocol for Broker Recruiting (“Protocol”).  Morgan Stanley stated that the Protocol is “replete with opportunities for gamesmanship and loopholes” and that the Protocol is “no longer sustainable.”  It believes that leaving the Protocol will be beneficial for its growth as a company.  However, it is expected that Morgan Stanley’s withdrawal from the Protocol might bring significant consequences to the investment management industry, including potentially the end of the Protocol itself. Continue reading

Earlier this year, Securities and Exchange Commission Chairman Jay Clayton appointed Stephanie Avakian and Steven Peikin as co-directors of the SEC’s Enforcement Division.  In an interview with Reuters, Avakian and Peikin expressed particular concern about cyber threats and how the SEC should make cybersecurity an enforcement priority.  According to Peikin, “The greatest threat to our markets right now is the cyber threat… That crosses not just this building, but all over the country.”

The SEC has expanded of investigations relating to cybercrimes.  There also appears to be an increase in incidents of hackers attempting to gain access to brokerage accounts.  In response, the SEC has begun obtaining statistics about cybercrimes to assess market-wide issues. Continue reading

On October 2, 2017, the Securities and Exchange Commission filed a complaint in the United States District Court for the Central District of California against Tweed Financial Services, Inc. (“TFSI”), an investment advisory firm, and its proprietor, Robert Russel Tweed (“Tweed”).  The SEC’s complaint alleges that TFSI and Tweed “defrauded their clients by misleading them about how their money had been invested and how poorly those investments were performing.”  According to the SEC, TFSI and Tweed violated the Investment Advisers Act of 1940 by deceiving their clients.

According to the SEC’s complaint, TFSI and Tweed formed Athenian Fund L.P., a private fund, in 2008.  Twenty-four investors placed money in the Athenian Fund, and the fund raised approximately $1.7 million.  The Athenian Fund’s private placement memorandum informed investors that money invested in Athenian Fund would be invested in a master fund that “had been established to trade stocks using an algorithmic trading platform developed by acquaintances of Tweed.”  However, beginning in March 2010, Tweed transferred all of the Athenian Fund’s assets to another fund.  In March 2011, TFSI and Tweed had the Athenian Fund loan $200,000 to a startup software company.  The SEC alleged that these two ventures resulted in the Athenian fund losing approximately $800,000. Continue reading