Special Risks with Trading on Margin

FINRA has issued an investor alert concerning investments purchased “on margin.”  A “margin” account allows an investor to borrow money from a brokerage account to purchase additional securities.  This loan to purchase additional securities is not free as the investor must repay the amount borrowed with interest.  Margin loans can be “highly” profitable for brokerage firms and brokers.  FINRA’s investor alert details special risks associated with trading on margin:

If the equity in your account falls below the maintenance margin requirements under the law—or the firm’s higher “house” requirements—your firm can sell the securities in your accounts to cover the margin deficiency. You will also be responsible for any short fall in the accounts after such a sale.

Some investors mistakenly believe that a firm must contact them first for a margin call to be valid. This is not the case. Most firms will attempt to notify their customers of margin calls, but they are not required to do so. Even if you’re contacted and provided with a specific date to meet a margin call, your firm may decide to sell some or all of your securities before that date without any further notice to you. For example, your firm may take this action because the market value of your securities has continued to decline in value.

There is no provision in the margin rules that gives you the right to control liquidation decisions. Your firm may decide to sell any of the securities that are collateral for your margin loan to protect its interests.

These changes in firm policy often take effect immediately and may cause a house call. If you don’t satisfy this call, your firm may liquidate or sell securities in your accounts.

While an extension of time to meet a margin call may be available to you under certain conditions, you do not have a right to the extension.

A decline in the value of the securities you purchased on margin may require you to provide additional money to your firm to avoid the forced sale of those securities or other securities in your accounts.

See FINRA’s investor alert here.

SEC Approves Revision to the Definition of “Public Arbitrator” in FINRA’s Customer Code of Arbitration

FINRA has issued Regulatory Notice 13-21 announcing that the Securities and Exchange Commission (“SEC”) has approved amendments to FINRA’s Code of Arbitration concerning the definition of “public arbitrators.”  FINRA classifies arbitrators as either “non-public” or “public.”  Non-public arbitrators are affiliated with the securities industry either through their current or former employment in the securities industry or by providing professional services to those in the securities industry.  Public arbitrators do not have any significant affiliation with the securities industry.

Under the revised definition, persons associated with, including registered through, a mutual fund or hedge fund cannot serve as “public” arbitrators.  Also, there is now a two-year “cooling off” period before certain non-public arbitrators may be reclassified as public.  Revised Rule 12100 of the Customer Code of Arbitration provides:

(u) Public Arbitrator

The term “public arbitrator” means a person who is otherwise qualified to serve as an arbitrator and:

(1) is not engaged in the conduct or activities described in paragraphs (p)(1)–(4);

(2) was not engaged in the conduct or activities described in paragraphs (p)(1)–(4) for a total of 20 years or more;

(3) is not an investment adviser, or associated with, including registered through, a mutual fund or hedge fund;

(4) is not an attorney, accountant, or other professional whose firm derived 10 percent or more of its annual revenue in the past two years from any persons or entities listed in paragraphs (p)(1)–(4);

(5) is not an attorney, accountant, or other professional whose firm derived $50,000 or more in annual revenue in the past two years from professional services rendered to any persons or entities listed in paragraph (p)(1) relating to any customer disputes concerning an investment account or transaction, including but not limited to, law firm fees, accounting firm fees, and consulting fees;

(6) is not employed by, and is not the spouse or an immediate family member of a person who is employed by, an entity that directly or indirectly controls, is controlled by, or is under common control with, any partnership, corporation, or other organization that is engaged in the securities business;

(7) is not a director or officer of, and is not the spouse or an immediate family member of a person who is a director or officer of, an entity that directly or indirectly controls, is controlled by, or is under common control with, any partnership, corporation, or other organization that is engaged in the securities business; and

(8) is not the spouse or an immediate family member of a person who is engaged in the conduct or activities described in paragraphs (p)(1)–(4). For purposes of this rule, the term immediate family member means:

(A) a person’s parent, stepparent, child, or stepchild;

(B) a member of a person’s household;

(C) an individual to whom a person provides financial support of more than 50 percent of his or her annual income; or

(D) a person who is claimed as a dependent for federal income tax purposes.

A person whom FINRA would not designate as a public arbitrator because of an affiliation under subparagraphs (3)-(7) shall not be designated as a public arbitrator for two calendar years after ending the affiliation.

For purposes of this rule, the term “revenue” shall not include mediation fees received by mediators who are also arbitrators, provided that the mediator acts in the capacity of a mediator and does not represent a party in the mediation.

(Revisions emphasized).  These revisions take effect July 1, 2013.

Banc of America and Wells Fargo Fined in Connection with Sales of Floating-Rate Bank Loan Funds

Today, FINRA issued a press release announcing that it had ordered Merrill Lynch, Pierce, Fenner & Smith Incorporated, as successor for Banc of America Investment Services, Inc., to pay a fine of $900,000 and to reimburse approximately $1.1 million in losses to 214 customers in connection with “unsuitable sales of sale of floating-rate bank loan funds.”  Wells Fargo Advisors, LLC, as successor for Wells Fargo Investments, LLC, was also ordered to pay a fine of $1.25 million and to reimburse approximately $2 million in losses to 239 customer.  Floating-rate bank loan funds are mutual funds that “generally invest in a portfolio of secured senior loans made to entities whose credit quality is rated below investment-grade. The funds are subject to significant credit risks and can also be illiquid.”

According to the press release:

FINRA found that Wells Fargo and Banc of America brokers recommended concentrated purchases of floating-rate bank loan funds to customers whose risk tolerance, investment objectives, and financial conditions were inconsistent with the risks and features of floating-rate loan funds. The customers were seeking to preserve principal, or had conservative risk tolerances, and brokers made recommendations to purchase floating-rate loan funds without having reasonable grounds to believe that the purchases were suitable for the customers. FINRA also found that the firms failed to train their sales forces regarding the unique risks and characteristics of the funds, and failed to reasonably supervise the sales of floating-rate bank loan funds.

(Emphasis added).  Wells Fargo and Banc of America neither admitted nor denied the charges, but consented to the entry of FINRA’s findings.

In October of 2012, FINRA Chairman Richard G. Ketchum spoke on the the risks concerning floating-rate bank loan funds:

Another product that has become popular with retail investors is floating rate loan funds or “levered loan” funds. These levered loan mutual funds and closed-end funds, which invest in floating-rate loans extended by financial institutions to companies of lower credit quality, are sometimes marketed inappropriately. We have seen instances where these funds have been sold with inadequate disclosures about the funds’ credit quality. In some instances the funds have been misrepresented as high-yielding, money market-like instruments.

(Emphasis added).


Florida Man Charged With Perjury and Obstruction for Providing False Testimony to SEC

According to a press release by the United States Attorney for the Southern District of Florida, a Fort Lauderdale man was charged with obstruction and perjury in connection with a Securities and Exchange Commission (“SEC”) investigation concerning the violation of federal securities laws.

As part of the investigation, the SEC attempted to identify the target’s assets and bank accounts attributable.  In response to an SEC inquiry, the target allegedly completed and provided to the SEC, a “Background Questionnaire” form purporting to list bank accounts and other assets attributable to him. However, before completing the questionnaire, the target transferred $100,000 from an account that was disclosed on the form, to a separate account that he controlled.  The Government alleges that the target willfully failed to disclose the existence of the funds or the bank account holding the funds, to the SEC and provided false sworn testimony about his assets and accounts to the SEC at its Southeast Regional Offices, in Miami, Florida.

See the U.S. Attorney’s release here.

Florida Investors Recover Investment Losses on Lehman Preferred Stock Against Royal Bank of Canada (RBC)

Bloomberg News is reporting that the Royal Bank of Canada was ordered to pay more than $800,000 to Florida investors by a FINRA arbitration panel over investment losses including losses in Lehman Brothers Holdings preferred stock.  According to the article,  the arbitration panel found that an RBC broker falsified the risk tolerance of the Florida investors and misrepresented that the government would not let Lehman fail.  The panel awarded punitive damages of $250,000 after finding that the broker had engaged in intentional misconduct and gross negligence.

SEC and FINRA Probing Dealers Over Continuing Disclosure Compliance in Municipal Bond Sales

Today, The Bond Buyer is reporting that the Securities Exchange Commission and FINRA are examining whether securities dealers have checked issuers’ continuing disclosure compliance before selling their bonds.  According to the article,

The probe, which appears to initially be focused in California, has led underwriters to fear enforcement action may be forthcoming, with SEC charging firms for violating its Rule 15c2-12 on disclosure, Municipal Securities Rulemaking Board rules, or even securities fraud laws.

In addition, the Financial Industry Regulatory Authority is examining whether dealers have checked issuers’ continuing disclosure compliance before selling their bonds, leading dealers to fear it could fine them for rule violations, sources said.

The SEC and FINRA probes have spurred firms to start scrutinizing their practices and whether they have policies and procedures in place to track issuer disclosure filings and compliance.

Generally, Rule 15c2-12 “requires dealers, when underwriting certain types of municipal securities, to ensure that the state or local government issuing the bonds enters into an agreement to provide certain information to the Municipal Securities Rulemaking Board about the securities on an ongoing basis.”  This information may include annual financial information and event notices.  See MSRB Bulletin on 15c2-12 here .

Florida Regulator Warns Investors Of Potential Fraud Concerning Profitable Sunrise Investments

Florida’s Office of Financial Regulation (“OFR”) has issued press release warning investors about potential fraud related to investments sold by Profitable Investments.  According to the Florida regulator,

Profitable Sunrise is promoting risk-free loans that promise investors a 2.15% daily return on investments. Seven states have issued Cease and Desist orders to the company’s officers, Roman Novak and Radoslav Novak, for selling investments without being properly registered and for omitting or misrepresenting facts on the company’s website.  Profitable Sunrise is not registered with the OFR to sell securities.
To attract interest in its investment offerings, Profitable Sunrise and its sub-companies may be attempting to exploit investors’ religious affinities.  The organization is believed to be engaged in a marketing campaign which makes conspicuous use of biblical quotations.
See the press release from the OFR here.

Total, S.A. (TOT) Settles fo $153 Million With SEC Over Alleged Bribes to Iranian Government Official

Total, S.A., (“Total” or the “Company”) has entered into a settlement with the Securities and Exchange Commission over alleged violations of the Foreign Corrupt Practices Act (“FCPA”).  Total is a public company organized under the laws of the Republic of France and is headquartered in Nanterre, France. Total explores for and develops oil and gas resources around the globe, and has American Depositary Shares that trade under the symbol “TOT” on the New York Stock Exchange.

According to the SEC, “[f]rom approximately September 1995 to November 2004, Total and others paid approximately$60 million in unlawful payments to intermediaries for the purpose of inducing an Iranian government official …  to use his influence to assist Total in connection with obtaining contracts to develop the Sirri A and E oil fields and two phases of the South Pars oil and gas field in Iran.”  The SEC further found that “Total mischaracterized the expenses under the Consulting Agreements as ‘business development expenses’ when they were, in fact, unlawful payments for the purpose of inducing the [official] to use his influence in connection with granting rights to Total for the development of the Sirri A and E and South Pars fields.”  The Company has agreed to pay pay disgorgement of $153 million to the United States Treasury in accordance with the SEC settlement. See SEC Release No.69654 (May 29, 2013).

Total has also entered into a deferred prosecution agreement with the United States Justice Department, agreeing to pay a $245.2 million monetary penalty.  See the DOJ release here.