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

June 5, 2013 By Jay Eng

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

June 4, 2013 By Jay Eng

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

May 31, 2013 By Jay Eng

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

May 30, 2013 By Jay Eng

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 .

Massachusetts Regulator Reaches $9.5 Million REIT Settlement Against Ameriprise Financial Services, Commonwealth Financial Network, Royal Alliance Associates,Securities America and Lincoln Financial Advisers Corp.

May 23, 2013 By Jay Eng

Massachusetts Secretary of the Commonwealth William Galvin has settled with five broker-dealers, Ameriprise Financial Services, the broker-dealer arm of Ameriprise Financial Inc ; Commonwealth Financial Network; Royal Alliance Associates; Securities America and Lincoln Financial Advisers Corp., concerning their improper sales of REITS to Massachusetts clients.  See the settlement orders here.

LPL Financial LLC Hammered With $7.5 Million FINRA Fine for EMail Deficiencies & Misstatments to FINRA

May 22, 2013 By Jay Eng

Yesterday, FINRA issued a press release announcing that LPL Financial LLC (“LPL”) was hit with a $7.5 million fine “for 35 separate, significant email system failures, which prevented LPL from accessing hundreds of millions of emails and reviewing tens of millions of other emails” and for making material misstatements to FINRA during its investigation of the firm’s email failures.

According to the release, examples of LPL’s failures include the following:

  • Over a four-year period, LPL failed to supervise 28 million “doing business as” (DBA) emails sent and received by thousands of representatives who were operating as independent contractors.
  • LPL failed to maintain access to hundreds of millions of emails during a transition to a less expensive email archive, and 80 million of those emails became corrupted.
  • For seven years, LPL failed to keep and review 3.5 million Bloomberg messages.
  • LPL failed to archive emails sent to customers through third-party email-based advertising platforms.

As a result of LPL’s numerous deficiencies in retaining and surveilling emails, the firm “failed to produce all requested email to certain federal and state regulators, and FINRA, and also likely failed to produce all emails to certain private litigants and customers in arbitration proceedings, as required.”  (Emphasis added).  FINRA further stated:

In addition, LPL likely failed to provide emails to certain arbitration claimants and private litigants. LPL will notify eligible claimants by letter within 60 days from the date of the settlement and the firm will deposit $1.5 million into a fund to pay customer claimants for its potential discovery failures. Customer claimants who brought arbitrations or litigations against LPL as of Jan. 1, 2007, and which were closed by Dec. 17, 2012, will receive, upon request, emails that the firm failed to provide them. Claimants will also have a choice of whether to accept a standard payment of $3,000 from LPL or have a fund administrator determine the amount, if any, that the claimant should receive depending on the particular facts and circumstances of that individual case. Maximum payment in cases decided by the fund administrator cannot exceed $20,000. If the total payments to claimants exceed $1.5 million, LPL will pay the additional amount.

See LPL’s Letter of Acceptance, Waiver and Consent (AWC) here (No. 2012032218001).

SEC and FINRA Issue Investor Alert Concerning Purchase of Risky Pension or Settlement Income Streams from Brokers

May 20, 2013 By Jay Eng

The Securities and Exchange Commission (SEC) and FINRA have issued an investor alerts concerning the sale and purchase of pension or settlement income streams. According to the SEC’s Press Release, investors should beware of special risks and issues concerning these products:

  1. Products can be expensive with commissions of seven percent or higher.
  2. Pension and structured settlement income-stream products may or may not be securities and may not be registered with the SEC.  Accordingly, there will be more limited information concerning the product.
  3. These products are illiquid.
  4. Your “rights” to the income stream you purchased could face legal challenges.  For example, it may not be legal to purchase someone’s pension or structured settlement.

See the SEC’s Bulletin here.

Charles Schwab Backs Down on Class Action Waivers in Client Account Agreements

May 17, 2013 By Jay Eng

Reuters is reporting that the brokerage firm of Charles Schwab Corp. is backing down on its requirement that account holders waiver class action lawsuits.  Reuters reports

Charles Schwab Corp has temporarily reversed its requirement that clients waive their right to bring class-action lawsuits, adding a new twist in a battle closely watched by the securities industry and plaintiffs’ attorneys.

“Effective immediately, Schwab is modifying its account agreements to eliminate the existing class-action lawsuit waiver for disputes related to events occurring on or after May 15, 2013 and for the foreseeable future,” the San Francisco-based brokerage company said in a statement that was posted on its website on Wednesday.

Schwab still believes that arbitration is the best forum for clients to resolve disputes with the firm, but said it was backing off the litigation ban in deference to clients who are uncertain about their rights as it fights to defend its original ban.

Schwab’s attempt to curtail consumer rights has drawn broad attention in recent months and has been cited as a principal reason by lawmakers to entirely abolish the mandatory pre-dispute arbitration provisions in customer account agreements.   Section 921 of Dodd-Frank Act provided the SEC with the discretionary rulemaking authority to restrict mandatory pre-dispute arbitration.  However, the SEC has taken no action on this issue to date.

 

 

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