Will a broker-dealer be liable when a financial advisor employed by the firm solicits investments as part of a fraudulent scheme, where the firm specifically prohibited the advisor from soliciting the investment, the fraudulent investment was made away from the firm, and the investors never became customers of the firm? The Eleventh Circuit recently answered that question with a resounding “maybe,” and clarified that the employer could be liable in negligence if it knew or should have known that its employee posed a risk of defrauding others.
The FINRA Dispute Resolution Task Force issued its final report last week, making certain recommendations designed to improve the arbitration process. More notably, however, the Task Force reported that it was unable to reach agreement on a number of more controversial issues, reflecting deep divisions among practitioners in this area.
The SEC recently approved FINRA’s proposed new rule changes to the definitions of public arbitrator (FINRA Rules 12100(u) and 13100(u)) and non-public arbitrator (FINRA Rules 12100(p) and 13100(p)), after receiving over 300 comment letters in addition to two letters from FINRA responding to the comment letters. The new rule significantly limits the pool of potential public arbitrators by, chiefly, permanently disqualifying any person who worked in the financial industry from being a public arbitrator. FINRA believes that this and other changes to the definitions of public and non-public arbitrators, as discussed below, address both investor and industry concerns about perceived bias and arbitrator neutrality.
On January 13, 2015, the SEC’s Office of Compliance Inspections and Examinations (“OCIE”) announced its 2015 examination priorities for investment advisers, broker-dealers and transfer agents. These priorities emphasize the importance of transparency and seek to identify, through enhancements in technology, potential illegal activity by focusing on the following key areas.
Protecting Retail Investors and Investors Saving for Retirement
OCIE noted that retail investors are more dependent than ever on their own investments for retirement and are increasingly facing new and complex options for investing. Products and services formerly identified as alternative or institutional like private funds, illiquid investments and structural products are increasingly being developed for retail investors. As a result, in 2015 OCIE plans several initiatives to assess the risks of these trends to retail investors, which emphasize transparency and suitability concerns. These include targeting (a) the adequacy of fee arrangements by investment advisers; (b) firms’ sales practices when making investment recommendations; (c) the suitability of recommendations; and (d) the supervision of registered representatives and financial advisors in branch offices.
Recently, the SEC approved FINRA’s proposed new Rule 3110(e) relating to background investigations of registered persons. FINRA Rule 3110(e), which replaces NASD Rule 3010(e) and goes into effect on July 1, 2015, streamlines and clarifies the rule language by providing that “each member shall ascertain by investigation the good character, business reputation, qualifications and experience of an applicant before the member applies to register that applicant with FINRA and before making a representation to that effect on the application for registration.” The rule further clarifies that a firm is required to review a copy of an applicant’s most recent Form U5, if available. Most importantly, the rule requires that firms adopt “written procedures that are reasonably designed to verify the accuracy and completeness of the information contained in an applicant’s Form U4 no later than 30 calendar days after the form is filed with FINRA.”
At the recent Columbia Law School Conference, “Hot Topics: Leading Current Issues in Securities Regulation and Enforcement,” SEC Commissioner Kara M. Stein’s keynote address focused on a number of transparency and disclosure issues regarding municipal securities, private equity and exchange traded funds.
Commissioner Stein highlighted the importance of municipal finance to the growth of the nation and noted that ordinary investors now own over 70 percent of the municipal securities market, either directly or through investment companies.
In light of this data, Commissioner Stein addressed two areas where, in her view, regulators could act to improve transparency in the municipal securities market. The first is to require post-trade pricing disclosure showing transaction costs on customer confirmations. Second, Commissioner Stein urged that market information, such as who in the market is interested in trading a municipal security and at what price, be made available to ordinary investors in advance of trading.
Like Prince Charming searching for the foot that fit the glass slipper, Justice Scalia recently issued a statement advising that he and Justice Thomas would be receptive to granting certiorari to a petition properly presenting the issue of whether, in a criminal context, a court should grant deference to an administrative agency’s statutory interpretation. And, like the townspeople who lined up to offer their own feet for consideration, lawyers across the country undoubtedly will offer the Court a variety of cases from which to choose.
On November 10, 2014, the Supreme Court issued an order denying certiorari in a matter where the Second Circuit had affirmed a criminal conviction under the securities laws. Whitman v. United States, 574 U.S. ___ (November 10, 2014). The order also included a brief statement by Justice Scalia, joined by Justice Thomas, reflecting the two Justices’ interest in considering the issue of agency deference in an appropriate future case.
In the recent decision, Goldman Sachs & Co. v. Golden Empire Sch. Fin. Auth., 764 F.3d 210 (2d Cir. 2014), the Second Circuit held that nearly-identical forum selection clauses in broker-dealer agreements between the broker-dealers/underwriters of auction rate securities (“ARS”) and the public financing authorities who issued the ARS superseded the Financial Industry Regulatory Authority, Inc. (“FINRA”) rule mandating arbitration between a customer and member. In so holding, the Second Circuit potentially has opened an avenue for firms seeking to litigate – rather than arbitrate – customer disputes subject to FINRA’s mandatory arbitration rule.