tag:blogger.com,1999:blog-61913271775115696912024-02-08T10:27:01.187-05:00New England Securities Litigation & Arbitration Law BlogNews and commentary from the Financial Services attorneys at Preti Flaherty.Preti Flahertyhttp://www.blogger.com/profile/15705885958424673901noreply@blogger.comBlogger102125tag:blogger.com,1999:blog-6191327177511569691.post-58602382634338247812023-01-27T14:14:00.002-05:002023-01-27T14:14:22.641-05:00A Few Things About AAA Arbitration of RIA (and Other) Claims <p>At a recent webinar, representatives of the American Arbitration Association ("AAA") provided several comments about the arbitration process as applied to claims involving registered investment advisors ("RIAs"):</p><p><u>Do the consumer or commercial AAA Rules apply?</u></p><p>Where the operative arbitration clause determines the applicable rules, that controls. Otherwise, AAA's case team reviews the claim to determine whether the claim falls under the consumer or commercial rules. On motion, the appointed arbitrator may also be asked to review which rules apply.</p><p><u>What's the number one difference between the Rules from the consumer perspective?</u></p><p>The AAA identified the fee structure as a primary difference between commercial and consumer AAA rules. The fees for consumer cases are much easier on the wallet; fees are capped at $2,500 per hearing day. The consumer's filing fee is $225 and no other fee is charged to the consumer. Under the commercial rules, AAA fees are charged at the arbitrators' standard hourly rates.</p><p><u>How are arbitrators assigned under the Commercial Rules?</u></p><p></p><ul style="text-align: left;"><li>The strike-and-rank method.</li><li>AAA will provide the parties with a link to arbitrators and they can then pick from the list. The parties may also limit the list based on the parties' requests regarding arbitrator fees or qualifications.</li><li>AAA will discuss with the parties desired arbitrator qualifications, often industry experts are desired</li><li>AAA will look at the contract and assess arbitrator qualifications best suited for the case. </li></ul><div><u>How are arbitrators assigned under the Consumer Rules?</u></div><div><ul style="text-align: left;"><li>the arbitrator is directly appointed by AAA, the parties are provided the selected arbitrator's resume and allowed to object</li><li>the parties may also agree to a panel of three; selection via strike-and-rank method (the AAA charge is $250 for five names)</li></ul></div><p></p><p><u>What if the arbitration clause is unclear about the size/composition of an arbitration panel?</u></p><p>AAA will make a judgment regarding the size and composition of an arbitration panel upfront. Where there is an ambiguity in the arbitration clause, AAA will first seek agreement from the parties. If there is no agreement, AAA will make judgment. AAA generally will take into account that multi-arbitrator proceedings are much more expensive (in AAA's experience 5x more costly) and slower (on average requiring months of additional time).</p><p><u>How are conflicts vetted? </u></p><p>AAA arbitrators are instructed to disclose, disclose, disclose; if in doubt, disclose. </p><p>The parties can also request enhanced arbitrator selection, which makes particular sense on high-stakes cases. This typically involves getting on a ZOOM call and have a discussion with the arbitrators and pose questions related to any conflict-of-interest questions or concerns.</p><p>A party may make a bias or similar serious challenge to an arbitrator to AAA's Administrative Review Council. The Council hears about 300 challenges per year. The challenges result in a "yea" or nay" decision, not an explained decision about whether an arbitrator should stay or be removed.</p><p><u>What if a party wishes to object to hearing location, even where that is defined by agreement?</u></p><p>The AAA will make an initial determination, and a request can be made for review by AAA's Administrative Review Council. The arbitrator can also be asked to make a ruling.</p>Sigmund Schutzhttp://www.blogger.com/profile/11257537099713835163noreply@blogger.com0tag:blogger.com,1999:blog-6191327177511569691.post-89901091340646304662023-01-12T16:14:00.001-05:002023-01-12T16:14:58.944-05:00Registered Investment Advisor Claims and American Arbitration Association (AAA)<p>The American Arbitration Association (AAA) handles a great number of financial disputes. At a recent seminar, AAA shared some data:</p><p></p><ul style="text-align: left;"><li>the AAA case load has risen rather sharply, a 19% rise in claimsin 2022 as compared to the prior year;</li><li>The primary claim types driving that increase are: lender debtor, banking services, partnerships;</li><li>90% of cases are decided in favor of one side or the other--in general they do not see claims resolved on a "split the baby" basis;</li><li>the usual time frame from filing to award is 6-9 months, of course there are outliers; </li><li>65% of cases settle;</li><li>case decisions are generally non-public, with exception of employment, labor, and some international case types (searchable in Westlaw);</li><li>arbitration awards are not disclosed to securities regulators; and</li><li>the AAA does not track win/loss ratio with particular arbitrators.</li></ul><p></p><h3 style="background: rgb(255, 255, 255); border: 0px; box-sizing: border-box; color: #7b99a8; font-family: Roboto, sans-serif; font-size: 21px; line-height: 1.1; margin: 0px 0px 7px 9px; outline: 0px; padding: 0px; vertical-align: baseline;"><br /></h3><h3 style="background: rgb(255, 255, 255); border: 0px; box-sizing: border-box; color: #7b99a8; font-family: Roboto, sans-serif; font-size: 21px; line-height: 1.1; margin: 0px 0px 7px 9px; outline: 0px; padding: 0px; vertical-align: baseline;"><br /></h3><p><br /></p>Sigmund Schutzhttp://www.blogger.com/profile/11257537099713835163noreply@blogger.com0tag:blogger.com,1999:blog-6191327177511569691.post-88190317142920846592022-08-30T09:00:00.002-04:002022-08-30T09:00:30.977-04:002022 Revisions to American Arbitration Association Rules <p></p><p class="MsoNormal" style="line-height: normal;"><a name="_GoBack"></a><span style="color: black; font-family: "Arial",sans-serif; font-size: 10.0pt; mso-themecolor: text1;">The American Arbitration Association </span><span style="-webkit-text-stroke-width: 0px; font-variant-caps: normal; font-variant-ligatures: normal; orphans: 2; text-decoration-color: initial; text-decoration-style: initial; text-decoration-thickness: initial; widows: 2; word-spacing: 0px;">(AAA) has updated its </span><span style="-webkit-text-stroke-width: 0px; font-variant-caps: normal; font-variant-ligatures: normal; orphans: 2; text-decoration-color: initial; text-decoration-style: initial; text-decoration-thickness: initial; widows: 2; word-spacing: 0px;"><i>Commercial Arbitration Rules and Mediation Procedures</i></span><span style="-webkit-text-stroke-width: 0px; font-variant-caps: normal; font-variant-ligatures: normal; orphans: 2; text-decoration-color: initial; text-decoration-style: initial; text-decoration-thickness: initial; widows: 2; word-spacing: 0px;">, effective September 1, 2022.</span>
Per AAA’s <a href="https://go.adr.org/2022-commercial-rules-update.html">announcement </a>the changes
reflect the input of a wide range of AAA stakeholders, and “<span style="background: white;">standardize important longstanding AAA practices—confidentiality,
consideration of consolidation/joinder motions, and civility—as well as revise
rules to further promote efficiency, reflect advances in technology, and
include where appropriate discussions regarding cybersecurity.”</span><o:p></o:p></p>
<p class="MsoNormal" style="line-height: normal;"><span style="color: black; font-family: "Arial",sans-serif; font-size: 10.0pt; mso-themecolor: text1;">The AAA
highlights five key changes:<o:p></o:p></span></p>
<ol start="1" style="margin-top: 0in;" type="1">
<li class="MsoNormal" style="background: white; color: black; line-height: normal; margin-bottom: 0in; mso-list: l0 level1 lfo1; mso-themecolor: text1; tab-stops: list .5in;"><b><span style="font-family: "Arial",sans-serif; font-size: 10.0pt; mso-fareast-font-family: "Times New Roman";">Consolidation:</span></b><span style="font-family: "Arial",sans-serif; font-size: 10.0pt; mso-fareast-font-family: "Times New Roman";"> AAA’s first-ever commercial rule for the
consolidation of existing arbitrations or the joinder of additional
parties.<span style="mso-spacerun: yes;"> </span>New Rule R-8 now explicitly
allows a party to file a request to consolidate and establishes a
procedure for acting on such requests.</span></li>
<li class="MsoNormal" style="background: white; color: black; line-height: normal; margin-bottom: 0in; mso-list: l0 level1 lfo1; mso-themecolor: text1; tab-stops: list .5in;"><b><span style="font-family: "Arial",sans-serif; font-size: 10.0pt; mso-fareast-font-family: "Times New Roman";">Confidentiality:</span></b><span style="font-family: "Arial",sans-serif; font-size: 10.0pt; mso-fareast-font-family: "Times New Roman";"> Captures the long-standing requirements of
the <i>Code of Ethics for Arbitrators</i> by including a
commitment to the confidentiality of arbitration in the Rules, pursuant to
new Rule 45(a).<span style="mso-spacerun: yes;"> </span>Rule 45(b)
specifically permits arbitrators to issue confidentiality orders.<o:p></o:p></span></li>
<li class="MsoNormal" style="background: white; color: black; line-height: normal; margin-bottom: 0in; mso-list: l0 level1 lfo1; mso-themecolor: text1; tab-stops: list .5in;"><b><span style="font-family: "Arial",sans-serif; font-size: 10.0pt; mso-fareast-font-family: "Times New Roman";">Conduct of parties and their
representatives:</span></b><span style="font-family: "Arial",sans-serif; font-size: 10.0pt; mso-fareast-font-family: "Times New Roman";"> Specifically incorporates
into the Rules the AAA’s expectations of civility and professionalism of
all participants in arbitrations.<o:p></o:p></span></li>
<li class="MsoNormal" style="background: white; color: black; line-height: normal; margin-bottom: 0in; mso-list: l0 level1 lfo1; mso-themecolor: text1; tab-stops: list .5in;"><b><span style="font-family: "Arial",sans-serif; font-size: 10.0pt; mso-fareast-font-family: "Times New Roman";">Providing arbitrators with the
authority to interpret awards:</span></b><span style="font-family: "Arial",sans-serif; font-size: 10.0pt; mso-fareast-font-family: "Times New Roman";"> Allows
the arbitrator to explain the award (and correct clerical, typographical,
or computational errors) on a party’s motion, per an update to Rule R-52.<o:p></o:p></span></li>
<li class="MsoNormal" style="background: white; color: black; line-height: normal; margin-bottom: 0in; mso-list: l0 level1 lfo1; mso-themecolor: text1; tab-stops: list .5in;"><b><span style="font-family: "Arial",sans-serif; font-size: 10.0pt; mso-fareast-font-family: "Times New Roman";">The importance of
cybersecurity, privacy, and data protection:</span></b><span style="font-family: "Arial",sans-serif; font-size: 10.0pt; mso-fareast-font-family: "Times New Roman";"> Reflects the weight that the AAA places on
cybersecurity and recommends that data protection be discussed in the
preliminary hearing.</span></li></ol>
<p class="MsoNormal" style="background: white; line-height: normal; margin-bottom: 0in;"><span style="color: black; font-family: "Arial",sans-serif; font-size: 10.0pt; mso-fareast-font-family: "Times New Roman"; mso-themecolor: text1;">The revised rules include a
number of other important changes.<span style="mso-spacerun: yes;"> </span>The upper
limit dollar threshold for the application of the <i>Expedited Procedures</i> rises
from $75,000 to $100,000 and, similarly, the lower limit for application of <i>Large,
Complex Commercial Disputes Procedures</i> doubles from $500,000 to $1 million.
<span style="mso-spacerun: yes;"> </span>Rule R-34 establishes procedures for
dispositive motions and Expedited Procedure E-5 prohibits them absent good
cause shown and arbitrator permission. Other rule amendments expressly authorize and promote use of videoconferencing. </span></p>
<p class="MsoNormal" style="line-height: normal;"><span style="color: black; font-family: "Arial",sans-serif; font-size: 10.0pt; mso-themecolor: text1;">These are all welcome changes to promote AAA's goal of an "orderly, economical, and expeditious" procedure for the determination of disputes. The amended rules
can be found <a href="https://go.adr.org/rs/294-SFS-516/images/CommercialRules_Web.pdf" target="_blank">here</a>. <o:p></o:p></span></p><br /><p></p>Sigmund Schutzhttp://www.blogger.com/profile/11257537099713835163noreply@blogger.com0tag:blogger.com,1999:blog-6191327177511569691.post-47514447992577296782022-06-27T08:50:00.000-04:002022-06-27T08:50:26.768-04:00Attorneys' Fees under the Uniform Securities ActBecause of the expense of litigation (and arbitration), a common question is whether attorneys' fees are available to the prevailing party. Yes, but only in connection with some claims and don't bank on it.<div><br /></div><div>Under the <a href="https://www.uniformlaws.org/committees/community-home?CommunityKey=8c3c2581-0fea-4e91-8a50-27eee58da1cf">Uniform Securities Act</a>, which has been adopted in four New England States, the answer is yes, although recovery of attorneys' fees is permissive, not mandatory. Maine and New Hampshire adopted the current version of the Act. Massachusetts and Rhode Island adopted the original Act but have not adopted the current version. Both the current and prior versions of the Act provide for recovery of attorneys' fees in connection with certain civil claims by the seller, purchaser, and in several other situations.</div>Sigmund Schutzhttp://www.blogger.com/profile/11257537099713835163noreply@blogger.com0tag:blogger.com,1999:blog-6191327177511569691.post-81771267748486869862020-06-02T16:51:00.001-04:002020-06-02T16:51:40.667-04:00Update on Securities Arbitration Administered by FINRA<span style="font-family: inherit;">This <span style="color: #232333;">is by no means verbatim, but presents the highlights </span>of a town hall meeting with <span style="color: #232333;">Rick
Berry, Director of FINRA’s Arbitration Services and Manly Ray, Director of
FINRA Arbitration’s Southeast Regional Office and the head of FINRA’s Mediation
program, and Sam Edwards, President of the </span><span style="color: #232333;">Public</span><span style="color: #232333;"> Investors Arbitration Association.</span></span><br />
<b style="color: #232333;"><span style="font-family: inherit;"><br /></span></b>
<span style="font-family: inherit;"><b style="color: #232333;">Has FINRA seen a spike in cases as a result of stock market volatility and the economic downturn? </b><span style="color: #232333;"> Not yet. FINRA expects a 3-6 month lag, or possibly longer as a result of delays caused by the COVID-19 situation. So far in 2020, customer case filings are down 7%.</span></span><br />
<span style="color: #232333;"><span style="font-family: inherit;"><br /></span></span>
<span style="color: #232333;"><span style="font-family: inherit;"><b>How fast are expedited cases moving? </b> They are moving as fast as allowed by the Code. FINRA is considering changes to the Code to speed up cases for claimants over age 75 or with very serious medical conditions.</span></span><br />
<span style="color: #232333;"><span style="font-family: inherit;"><br /></span></span>
<span style="color: #232333;"><b style="font-family: inherit;">Has the mix of securities at issue in </b><b>arbitration</b><b style="font-family: inherit;"> changed?</b><span style="font-family: inherit;"> Yes. In 2020, claims related to common stock, private equity, REITs are the top three claim types, followed by bonds and bond funds. In recent prior years the top cases by volume were bond and bond fund cases. The number of cases that go to hearing as a percentage of total cases continues to trend lower, perhaps driven by pre-hearing settlement of many bond cases.</span></span><br />
<span style="color: #232333;"><span style="font-family: inherit;"><br /></span></span>
<span style="color: #232333; font-family: inherit;"><b>Updated on commitment to diversity?</b><b> </b>Of the new arbitrators added to the list in 2019, 39% were women, 19% were African-American, and 3% were Asian. Many newer arbitrators are younger. Mediator diversity is also improving.</span><br />
<span style="color: #232333; font-family: inherit;"><br /></span>
<span style="color: #232333; font-family: inherit;"><b>What portal improvements are in the works? </b> FINRA is working toward offering a real-time fee display. FINRA is working toward more clear and frequent invoicing. FINRA will also move toward electronic expense, billing, and invoicing. TAll arbitrator selection, including short lists, will be through the portal sometime next year.</span><br />
<span style="color: #232333; font-family: inherit;"><br /></span>
<span style="color: #232333;"><span style="font-family: inherit;"><b>Any progress toward reforming the expungement process? </b> Last week the SEC approved a new filing fee for expungement, $1575 fee. The FINRA Board approved in Fall, 2019 a special roster of arbitrators to handle expungement cases. </span><span style="font-family: inherit;"> They will have enhanced training and a certain amount of experience will be required. Comments from SEC are pending. FINRA is moving toward codifying Expanded Expungement Guidance, which currently describes the best practices arbitrators should follow when deciding expungement requests.</span></span><br />
<span style="color: #232333; font-family: inherit;"><br /></span>
<span style="color: #232333;"><span style="font-family: inherit;"><b>What's going on with unpaid arbitration awards?</b> FINRA has done three things to attack the issue of unpaid awards. First, stopping bad conduct from taking place on the front end--</span>targeting<span style="font-family: inherit;"> firms with significant history of misconduct. Second, rule changes would give investor claimants more options in pursuing claims against firms/brokers that become inactive at any stage of the case; to withdraw a claim and go to court or to amend claims. The proposal is meant to provide more flexibility in proceedings against defunct or inactive parties. Third, the Membership Application Program (MAP) incentivizes the timely payment of arbitration awards and prevents an individual from switching firms, or a firm from using asset transfers or similar transactions to avoid payment of arbitration awards. FINRA continues to weigh other options.</span></span><br />
<span style="color: #232333;"><span style="font-family: inherit;"><br /></span></span>
<span style="color: #232333;"><b>When will insurance information be discoverable? </b>The issue remains under study at FINRA, and there is no set deadline to update Code to require discovery of insurance information. This will require further action by the FINRA Board. </span><br />
<span style="color: #232333;"><br /></span>
<span style="color: #232333;"><b>How successful has the simplified arbitration process been? </b>The rule became effective September 17, 2018. It has not been a big success. As of June 1, 2020, 66 cases have been administered under this rule. 11 of 66 cases were closed by award; 1 case awarded damages. FINRA is considering moving to video as a default or at least making video optional.</span><br />
<span style="color: #232333; font-family: inherit;"><br /></span>
<span style="color: #232333; font-family: inherit;"><b><u>FINRA Response to COVID-19.</u></b></span><br />
<span style="color: #232333; font-family: inherit;"><br /></span>
<span style="color: #232333; font-family: inherit;">Aside from in-person hearings and mediation, FINRA continues to move forward with remote hearings and electronic filings as normal. The schedule and pace of cases has not slipped, with one exception ... FINRA postponed all hearings through July 31. FINRA has also offered to waive hearing postponement fees through September 4, 2020. By joint agreement, hearings can be conducted via Zoom. The same is true for mediation (with added incentive of reduced fee mediation).</span><br />
<span style="color: #232333; font-family: inherit;"><br /></span>
<span style="color: #232333; font-family: inherit;">In customer cases, FINRA arbitrators have heard 18 contested motions by Zoom (in all cases 28 motions have been heard). No customer cases have been heard in their entirety by Zoom; one case had a final hearing date by Zoom but the vast majority of the case was presented in-person. One industry case was heard stem-to stern by Zoom. The Zoom recording (audio only-not video) will be the official hearing record.</span><br />
<br />
<span style="color: #232333;">FINRA has been encouraging Zoom mediation. FINRA's reduced fee mediation program has been working well since May 6. Fee is $100/hr split by the parites. FINRA waives all filing and administrative fees. To date only 4 cases have opted in, but 20 or so are scheduled. Some mediators use a mix of Zoom and telephone.</span><br />
<span style="color: #232333; font-family: inherit;"><br /></span>
<span style="color: #232333;">FINRA staff will host and facilitate Zoom hearings. FINRA has substantial familiarity with Zoom and has been using it for several years. </span><br />
<span style="color: #232333;"><br /></span>
<span style="color: #232333;">Arbitrators are presenting best practices for use of Zoom in "The Neutral Corner." FINRA is finalizing a Zoom Guide for Arbitrators, and recording three instructional videos (3-5 minutes each): introduction to Zoom, technical instructions, and Zoom etiquette. </span><br />
<span style="color: #232333;"><br /></span>
<span style="color: #232333;">For practitioners who prefer a remote hearing platform other than Zoom, the parties can file a motion with the panel and propose an alternative. FINRA has thoroughly vetted Zoom and that is the default, but FINRA has not ruled out using other platforms if preferred by the parties or ordered by an arbitration panel.</span><br />
<br />
<span style="color: #232333;"><span style="font-family: inherit;">The future of in-person </span>hearings is revisited on an ongoing basis. The lodestar is public health and safety. <span style="font-family: inherit;">FINRA is considering geographic differentiation; moving forward with in-person hearings in some locations, but not others. FINRA is also considering venues that would </span>accommodate<span style="font-family: inherit;"> social distancing. It is considering whether to require masks at hearings and other changes when in-person hearings begin.</span></span><br />
<span style="color: #232333; font-family: inherit;"><br /></span>
<br />
<br />Sigmund Schutzhttp://www.blogger.com/profile/11257537099713835163noreply@blogger.com0tag:blogger.com,1999:blog-6191327177511569691.post-70809461461409228352020-04-07T08:52:00.000-04:002020-04-07T08:52:19.080-04:00Maine Securities Administrator Warns of COVID-19-Related Fraudulent Investment Schemes<span style="font-family: inherit;">In an April 3, 2020 <a href="http://www.maine.gov/tools/whatsnew/index.php?topic=SEC-PressReleases&id=2320025&v=Default" target="_blank">warning</a> urging investors to be on guard against an anticipated surge of COVID-19 fraudulent investment schemes, the Maine Securities Administrator cautions that scammers will be targeting investors, capitalizing on the double whammey of the recent economic downturn and anxiety about the virus. </span><br />
<span style="font-family: inherit;"><br /></span>
<span style="font-family: inherit;">Of special concern are get rich quick schemes specifically tied to the threat of COVID-19. "Bad actors can be expected to develop schemes that falsely purport to raise capital for companies manufacturing surgical masks and gowns, producing ventilators and other medical equipment, distributing small-molecule drugs and other preventative pharmaceuticals, or manufacturing vaccines and miracle cures." </span><br />
<span style="font-family: inherit;"><br /></span>
<span style="font-family: inherit;">Also flagged by the Securities Administrator as areas of likely abuse:</span><br />
<br />
<ul>
<li><span style="font-family: inherit;">Private placements and off-market securities. Scammers will take advantage of concerns with the regulated securities market to promote off-market private deals. These schemes will continue to pose a threat to retail investors because private securities transactions are not subject to review by federal or state regulators. </span></li>
</ul>
<ul>
<li><span style="font-family: inherit;">Gold, silver and other commodities. Scammers may also take advantage of the decline in the public securities markets by selling fraudulent investments in gold, silver and other commodities that are not tied to the stock market. These assets may also be attractive because they are often promoted as safe or guaranteed as hedging against inflation and mitigating systematic risks. However, scammers may conceal hidden fees and mark-ups, and the illiquidity of the assets may prevent retail investors from selling the assets for fair market value. </span></li>
</ul>
<ul>
<li><span style="font-family: inherit;">Recovery schemes. Retail investors should be wary of buy-low sell-high recovery schemes. For example, scammers will begin promoting investments tied to oil and gas, encouraging investors to purchase working or direct interests now so they can recognize significant gains after the price of oil recovers. Scammers will also begin selling equity at a discount, promising the value of the investments will significantly increase when the markets strengthen. </span></li>
</ul>
<ul>
<li><span style="font-family: inherit;">Replacement and swap schemes. Investors should be wary of any unlicensed person encouraging them to liquidate their investments and use the proceeds to invest in more stable, more profitable products. Investors may pay considerable fees when liquidating the investments, and the new products often fail to provide the promised stability or profitability. Advisors may need to be registered before promoting these transactions and legally required to disclose hidden fees, mark-ups and other costs.</span></li>
</ul>
<ul>
<li><span style="font-family: inherit;">Real estate schemes. Real estate investments may prove appealing because the real estate market has been strong and low interest rates have been increasing the demand for housing. Scammers often promote these schemes as safe and secure, claiming real estate can be sold and the proceeds can be used to cover any losses. However, real estate investments present significant risks, and changes to the economy and the real estate market may negatively impact the performance of the products.</span></li>
</ul>
<br />
<span style="font-family: inherit;">As <a href="https://www.pressherald.com/2020/04/06/maine-regulator-predicts-outbreak-of-virus-related-scams/" target="_blank">reported </a>in the Portland Press Herald, scammers are also using email "phishing" and other techniques to get access to investors' computers and steal stimulus relief checks.</span><br />
<span style="font-family: inherit;"><br /></span>
<span style="font-family: inherit;">Any investor targeted by suspicious activity is encouraged to contact the Maine Office of Securities at <a href="https://www.investors.maine.gov/">https://www.investors.maine.gov</a> , by calling 1-877-624-8551 or writing to the Maine Office of Securities, 121 SHS, Augusta, Maine 04333-0121.</span><br />
<br />
<br />Sigmund Schutzhttp://www.blogger.com/profile/11257537099713835163noreply@blogger.com0tag:blogger.com,1999:blog-6191327177511569691.post-63652193819526598892020-02-02T13:07:00.003-05:002020-02-02T13:07:41.029-05:00Maine Joins Other States by Requiring Mandatory Reporting of Suspected Financial ExploitationTo enhance prompt reporting of financial exploitation to state securities regulators and adult protective services, on April 2, 2019 Maine joined 25 other states by enacting the Act to Protect Vulnerable Adults from Financial Exploitation, <a href="http://legislature.maine.gov/legis/bills/getPDF.asp?paper=HP0410&item=3&snum=129" target="_blank">Public Law 2019 Ch. 17</a>. The Act makes broker-dealers and others mandatory reporters of suspected financial exploitation of seniors and vulnerable adults. <br />
<br />
The Act is intended to combat financial exploitation of elderly and disabled persons, a not infrequent occurrence. According to one <a href="http://serveourseniors.org/wp-content/uploads/2020/01/NASAA-Model-Act-Updated-Commentary-for-2020-Session-012820.pdf" target="_blank">reputable source</a> as many as 20% of adults over the age of 65 have been victimized by financial fraud, and only one in 44 cases of financial abuse is ever reported. The Maine law is largely identical to a <a href="https://www.nasaa.org/industry-resources/senior-issues/model-act-to-protect-vulnerable-adults-from-financial-exploitation/" target="_blank">model act</a> developed by the North American Securities Administrators Association (NASAA), an organization of state securities administrators dedicated to protecting senior investors from financial exploitation. <br />
<br />
The Act contains five key elements:<br />
<br />
<ul>
<li>mandatory <b><u>reporting</u></b> to a state securities regulator and state adult protective services agency when a qualified individual has a reasonable belief that financial exploitation--generally, wrongful or unauthorized use of money--of an eligible adult has been attempted or has occurred;</li>
<li>authorized <b><u>disclosure</u></b> only to third parties<b> </b>in instances where an eligible adult has previously designated the third party to whom disclosure may be made;</li>
<li>authority for broker-dealers and investment advisers to <b><u>delay disbursing</u></b> funds from an eligible adult's account if there is a reasonable belief that a disbursement would result in financial exploitation;</li>
<li><b><u>immunity from liability</u> </b>for reporting of suspected financial abuse and for delayed disbursements; and</li>
<li>mandatory <b><u>cooperation with requests for information </u></b>by state investigators in cases of suspected financial abuse (any records provided under this clause are exempt from state public records law).</li>
</ul>
The Act applies to any "eligible adult," which is defined as persons age 65 or older or who are protected under adult protective services law. The mandatory reporting requirement applies to any agent, investment adviser representative or individual who serves in a supervisory, compliance or legal capacity for a broker-dealer or investment adviser. According to NASAA, the "reasonable belief" standard for making a report "is intended to be both a subjective and objective standard – i.e., a qualified individual must have a subjective belief in the existence of the financial exploitation, and this belief must be objectively reasonable."<br /><div>
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The Act will force broker-dealers to make tough calls about whether to make a report. Broker-dealers may perceive reporting as having the potential to alienate a customer or a customer's family, who may react negatively to a report and ensuing investigation. Although a mandatory reporter is immune from liability, that does not mean that a customer (or customer's family) is obligated to continue to do business with a broker-dealer who (in the family's view) instigated an unjustified investigation. Many customers will, however, recognize that reporting is ultimately for their own benefit.</div>
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How well is the Act working? The Maine Office of Securities has not made public any statistics on the number of reports, the outcome of reports, or other activity related to the Act. Nor has it pursued any enforcement action for failure to report. The focus of Maine regulators is on educating the regulated community about this obligation, so far.</div>
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Sigmund Schutzhttp://www.blogger.com/profile/11257537099713835163noreply@blogger.com0tag:blogger.com,1999:blog-6191327177511569691.post-35715601867067352612020-01-16T09:30:00.002-05:002020-01-16T09:30:43.315-05:00Unpaid Arbitration Awards: An Unabated Problem<span style="font-family: Arial, Helvetica, sans-serif;">Earlier posts highlighted a long-recognized problem in the securities industry: investors who've proven that they were harmed by bad actors all too often wind up recovering little or nothing even after winning a legal claim.</span><br />
<span style="font-family: Arial, Helvetica, sans-serif;"><br /></span>
<span style="font-family: Arial, Helvetica, sans-serif;">An <a href="http://pretisecuritieslitigationarbitration.blogspot.com/2016/03/the-problem-of-unpaid-securities.html" target="_blank">analysis</a> of arbitration awards a few years ago revealed that about 25%, nearly<span style="background-color: white; color: #222222;"> $1 out of every $4 awarded to customers in arbitration went unpaid. There are solutions to the problem, like requiring insurance (as is required to register an automobile), requiring that broker-dealers maintain higher minimum capital reserves, or establishing a fund that could be used to pay arbitration awards against broker-dealers who can't or won't pay, as described <a href="http://pretisecuritieslitigationarbitration.blogspot.com/2016/09/finra-contemplates-creation-of-fund-for.html" target="_blank">here</a>. Have these or other solutions been implemented? No, although they remain under consideration.</span></span><br />
<span style="background-color: white; color: #222222;"><span style="font-family: Arial, Helvetica, sans-serif;"><br /></span></span>
<span style="font-family: Arial, Helvetica, sans-serif;"><span style="background-color: white; color: #222222;">And the problem remains prevalent. The industry faces a "fresh wave" of unpaid arbitration awards, according to <a href="https://www.investmentnews.com/article/20191120/FREE/191129992/industry-to-face-fresh-wave-of-unpaid-arbitration-claims" target="_blank">reporting</a> by Bruce Kelly in Investment News. He reports, "</span><span style="color: #222222;">From 2013 to 2017, brokers and firms failed to pay $167 million in arbitration awards to customers that FINRA hearing panels had approved." A $1 million award made in Maine not long ago remains unpaid. That's quite a bit of money, especially considering that it represents awards obtained after a legal proceeding and the vast majority, in some instances, of investors' retirement savings. </span></span><br />
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<span style="background-color: white; color: #222222;"><span style="font-family: Arial, Helvetica, sans-serif;">This a a problem in need of a solution. At stake is not just the well-being of customers who have been defrauded and face dire personal financial and lifestyle consequences, or the injustice of leaving customers without any real-world remedy in all too many instances. The industry needs to weigh the risk of seriously undermining consumer confidence, which could have much broader implications for the health of financial markets.</span></span>Sigmund Schutzhttp://www.blogger.com/profile/11257537099713835163noreply@blogger.com0tag:blogger.com,1999:blog-6191327177511569691.post-14128803278653322932019-11-12T19:05:00.000-05:002019-11-12T19:05:44.716-05:00Expungement: A Seriously Flawed Process?<span style="font-family: Arial, Helvetica, sans-serif;">In 2017, this blog featured a post examining the standard applied to requests by brokers to cleanse (erase) their public records of customer complaints, a process called "expungement," <a href="https://pretisecuritieslitigationarbitration.blogspot.com/2017/07/expungement-extraordinary-remedy.html" target="_blank">here</a>. A recently released (October 2019) <a href="https://piabafoundation.org/wp-content/uploads/2019/10/Expungement-Study-101519-FINAL-VERSION.pdf" target="_blank">study</a> by the investor protection foundation run by the Public Investors Arbitration Bar Association (PIABA) reports that <span style="background-color: #fefefe;">t</span><span style="background-color: #fefefe;">he process is “broken” as a result of being “systematically gamed, exploited and abused” by brokers and brokerage firms. </span></span><br />
<span style="background-color: #fefefe;"><span style="font-family: Arial, Helvetica, sans-serif;"><br /></span></span>
<span style="background-color: #fefefe;"><span style="font-family: Arial, Helvetica, sans-serif;">Among the problems found, according to PIABA's study are sham cases seeking nominal damages ($1.00) resulting in lower costs and fewer arbitrators, and brokerage firms which almost never (only 2% of the time) oppose brokers' requests for expungement. Investors only rarely appear to oppose expungement requests, and may not even get notice of expungement hearings. The result is that the dice are loaded in favor of expungement, with the result that investor complaints, including those that may be settled for a significant payment, never see the light of day. </span></span><br />
<span style="background-color: #fefefe;"><span style="font-family: Arial, Helvetica, sans-serif;"><br /></span></span>
<span style="background-color: #fefefe;"><span style="font-family: Arial, Helvetica, sans-serif;">Are meritless claims against brokers made by investors? Without question. Should brokers be able to unilaterally wipe the slate clean, leaving the appearance that no claim had ever been filed in the first place? That is a much tougher to justify--especially if the system for vetting such requests lacks sufficient safeguards to ensure that they are granted only in extraordinary cases where the request is truly justified.</span></span><br />
<br />Sigmund Schutzhttp://www.blogger.com/profile/11257537099713835163noreply@blogger.com0tag:blogger.com,1999:blog-6191327177511569691.post-78029554480085563632019-10-01T18:15:00.000-04:002019-11-12T18:43:30.489-05:00Lessons From "Arbitration Nation:" an Empirical Study of 40,000+ Consumer ArbitrationsA recent <a href="https://scholarship.law.berkeley.edu/cgi/viewcontent.cgi?article=4445&context=californialawreview" target="_blank">study</a> identifies a problem -- "we know little about what actually happens
in" arbitration -- and offers a solution: find out what happened in more than 40,000 consumer arbitrations administered by four major arbitration forums over the course of six years.<br />
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In the study, "Arbitration Nation: Data from Four Providers," Professors Andra Cann Chandrasekher and David Horton analyzed "40,775 consumer,
employment, and medical malpractice arbitrations filed between 2010 and 2016
in four major arbitration administrators: the AAA, Judicial Arbitration and
Mediation Services (JAMS), ADR Services, Inc., and the Kaiser Health Care
Office of Independent Administration (Kaiser)."</div>
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Important conclusions:</div>
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<ul>
<li>consumer arbitration is relatively fast and affordable, with corporate defendants paying the lion's share of the costs;</li>
<li>although the U.S. Supreme Court has repeatedly and emphatically enforced mandatory arbitration clauses in recent years, the uptick in the volume of arbitration "has been modest;"</li>
<li>plaintiffs who represent themselves in arbitration rarely win (they only prevail in 10% of employment cases)--"pro se plaintiffs
struggle mightily" (but do they fare any better in court? -- the authors don't comment) and</li>
<li>arbitration favors repeat players (what I'll call frequent flyers) on both sides--arbitration favors frequent flyer corporate defendants but also frequent flyer plaintiffs' law firms.</li>
</ul>
To encourage more lawyers to take relatively small value cases to arbitration and thus (presumably) weed out cases without merit and improve outcomes for plaintiffs who have cases with merit, the authors propose "that state lawmakers create rewards for
plaintiffs’ lawyers to arbitrate. Specifically, jurisdictions should create a
statutory 'arbitration multiplier': an extra bounty for winning a case in
arbitration." Intriguing. And, not likely to be preempted.<br />
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What about securities arbitration? Alas, the authors' study did not include data on FINRA arbitrations. That is in part because the study relied on data on consumer arbitrations made public as required by Section 1281.96 of the California Code of Civil Procedure--a law that does not cover FINRA. </div>
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Sigmund Schutzhttp://www.blogger.com/profile/11257537099713835163noreply@blogger.com0tag:blogger.com,1999:blog-6191327177511569691.post-91393786782617533642019-08-07T12:01:00.000-04:002019-08-16T10:13:48.002-04:00New Maine Restrictions on Non-Compete Agreements; Bans Restrictive Employment AgreementsA new Maine law will make it more difficult for Maine employers to enforce non-compete agreements, an issue of particular interest in the securities industry where non-competition agreements often have been used to deter brokers from changing jobs. In enacting the new legislation, Maine joins other New England states, including Rhode Island, Massachusetts, and New Hampshire, which also have new laws on the books limiting the enforceability of non-compete agreements.<br />
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On June 28, 2019, Governor Mills signed LD 733 (“An Act to Promote Keeping Workers in Maine”) into law. Under the new law, a noncompete agreement is defined as a contract or contract provision that prohibits an employee or prospective employee from working in the same or a similar profession or in a specified geographic area for a certain period of time following termination of employment.</div>
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The new law applies to noncompete agreements entered into or renewed after September 18, 2019.</div>
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The new law makes clear that noncompete agreements are “contrary to public policy” and enforceable only to the extent that they are reasonable and are no broader than necessary to protect one or more of the following legitimate business interests of the employer: the employer’s trade secrets, the employer’s confidential information that does not qualify as a trade secret, or the employer’s goodwill. A noncompete agreement may be presumed necessary if the legitimate business interest cannot be adequately protected through an alternative restrictive covenant, including but not limited to a nonsolicitation agreement or a nondisclosure or confidentiality agreement. </div>
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Further, the new law prohibits an employer from requiring or entering into a noncompete agreement with an employee earning wages at or below 400% of the federal poverty level. </div>
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If an employer requires a noncompete agreement for a position of employment, the employer must disclose that requirement in any advertisement for that position, and an employer must provide an employee or prospective employee with a copy of a noncompete agreement at least three business days before requiring that employee or prospective employee to sign the agreement. </div>
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The terms of a noncompete agreement (except for a noncompete agreement with a physician) are not in effect until after an employee has been employed with the employer for at least one year or a period of six months from the date the agreement was signed, whichever is later. </div>
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The law is enforceable as civil violation subject to a fine of $5,000 or more. The Department of Labor is responsible for enforcement of the law. </div>
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LD 733 also addresses “Restrictive employment agreements,” defined as an agreement: (a) between two or more employers, including through a franchise agreement or a contractor and subcontractor agreement; and (b) prohibits or restricts one employer from soliciting or hiring another employer's employees or former employees. With respect to such agreements, an employer may not enter into a restrictive employment agreement or enforce or threaten to enforce a restrictive employment agreement. An employer that does so commits a civil violation subject to a fine of $5,000 or more. The Department of Labor is also responsible for enforcement of this section.</div>
John J. Cronan IIIhttp://www.blogger.com/profile/12313730029828052444noreply@blogger.com0tag:blogger.com,1999:blog-6191327177511569691.post-64093403795777434102018-11-21T08:57:00.000-05:002018-11-21T08:57:20.329-05:00Investing in Private Companies: Opportunities Abound, But So Do RisksMore retail investors than ever are investing in private companies, but doing so can be "high-risk" and "more opaque" and private companies tend to be a magnet for fraud, according to the <a href="https://www.wsj.com/articles/opportunities-to-invest-in-private-companies-grow-1537722023" target="_blank">Wall Street Journal</a>. "More opaque" means "more secretive"--subject to lesser regulatory oversight and fewer obligations to disclose to the public how their business is performing. Also problematic is that it can be hard to sell investments in private companies, which means that buying private companies can "<a href="http://www.finra.org/investors/alerts/private-placements-risks" target="_blank">tie up your money for a long time</a>." Sometimes, selling an investment in a private company can be subject to penalties or fees, which may not have been disclosed or understood when the investment was first made. Investments in private companies are sometimes referred to as "private placements" and include stock and limited partnerships.<br />
<br />
Also of concern is that tens of billions of dollars a year in securities in private companies are being sold by securities firms with a checkered past, including investor complaints and other red flags suggesting potential misconduct, according to the Journal. Investments in private companies also tend to pay higher commissions, creating an incentive for securities professionals to overlook or justify risk in return for a larger commission. The result is that investors facing the special risks associated with private securities are too often receiving recommendations from registered representatives at securities firms less prepared (or willing) to provide suitable recommendations and to aggressively supervise securities professionals making recommendations to buy private securities. <br />
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Private placement memoranda and sales materials given to investors sometimes contain inaccurate statements. In addition, some materials omit information necessary to make informed investment decisions, and some firms fail to conduct an adequate investigation of the issuer to determine if the private placements were suitable for their customers, according to the <a href="http://www.finra.org/investors/alerts/private-placements-risks" target="_blank">Financial Industry Regulatory Authority</a>. <br />
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The <a href="https://www.wsj.com/articles/opportunities-to-invest-in-private-companies-grow-1537722023" target="_blank">Journal </a>also reports that the Securities and Exchange Commission is planning to increase the number of people allowed to buy private companies, even though that population has "already grown 10-fold since the 1980s." An investor typically must be "accredited" to buy stock in private companies, which requires an annual income of more than $200,000 ($300,000 with a spouse) or a net worth of more than $1 million (excluding the investor's primary residence). But those thresholds were set more than 30 years ago in 1982. "If the limits had been adjusted to keep pace with inflation, an accredited investor would now need an annual income of about $515,000--more than double the actual $200,000 limit--and a net worth of more than $2.5 million," according to the Journal.<br />
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To put it bluntly, $200,000 isn't the same income it used to be. Nor does a net worth of $1 million automatically put someone in a position to make speculative investments. A few years ago the<a href="https://www.sec.gov/news/statement/spch121714laa.html" target="_blank"> Commission provided these examples </a>of people who would generally be considered "accredited" investors:<br />
<ul>
<li>A single working parent of three children with an annual salary of $205,000, and likely with a home mortgage to pay; </li>
<li> A recent widow who inherited $1 million, but is not earning a separate income; and</li>
<li> A senior retiree who has accumulated over $1 million in his or her retirement account and needs that money for the retirement years.</li>
</ul>
Other "accredited" investors include people who have suffered catastrophic injuries and received payments as a result of personal injury claims. But, such persons should not be assumed to have the "financial sophistication and/or investment experience to be able to assess whether any particular investment is appropriate for them," according to the Commission. <br />
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Of course, "<a href="http://www.finra.org/investors/alerts/private-placements-risks" target="_blank">each year, companies raise billions of dollars selling securities in non-public offerings that are exempt from registration under the federal securities laws. These offerings . . . can be a key source of capital for American businesses, especially small or start-up companies</a>." But for retail investors who receive recommendations to invest in private companies, consult the Financial Industry Regulatory Authority's list of <a href="http://www.finra.org/investors/alerts/private-placements-risks" target="_blank">tips and cautions</a> before buying--the gist of which is look very, very carefully before leaping.<br />
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<br />Sigmund Schutzhttp://www.blogger.com/profile/11257537099713835163noreply@blogger.com0tag:blogger.com,1999:blog-6191327177511569691.post-35017690501882644812018-10-09T10:14:00.000-04:002018-10-09T10:14:01.059-04:00Public Investors Bar Association Report: Draft Reforms to FINRA Supervision Rules Leave Investors Vulnerable<br />
In a report titled, FINRA’s Attempt to Gut Investor Protections: Proposed Reforms to FINRA Supervision Rules, Public Investors Arbitration Bar Association (PIABA) argues, “FINRA is currently contemplating the evisceration of crucial protections that have been in place for decades to safeguard investors against investment schemes by brokerage firms’ registered representatives, including ‘selling away’ schemes. If FINRA’s proposed changes are approved, there will likely be more investment scams perpetrated by registered representatives. If these proposals are adopted, brokerage firms will no longer be held primarily responsible for identifying and stopping rogue brokers.” <div>
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FINRA is currently contemplating changes to FINRA Rules 3270 and 3280 as outlined in FINRA Regulatory Notice 18-08. Both rules impose broad supervisory responsibilities and obligations for registered representatives and member firms with respect to outside business activities and private securities transactions. FINRA Regulatory Notice 18-08 proposes to exempt member firms from supervising:</div>
<div>
<ul>
<li>Investment-related activities at third‐party investment advisor firms;</li>
<li>Investment-related activities at member affiliates, including IAs, banks, and insurance companies;</li>
<li>Non‐investment–related work and outside business activities; and</li>
<li>Personal investments</li>
</ul>
</div>
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According to PIABA, outside business activities manifest themselves in a variety of schemes and fraudulent activity every year, including but not limited to, fraudulent private placements, Ponzi schemes, and investment frauds perpetrated through third-party IAs established by the registered representative. According to PIABA, “A common modus operandi in these schemes is for a registered representative to establish a solo or small IA firm and perpetrate the fraud through outside business activities in an effort to avoid member supervision.” </div>
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FINRA proposed Rule 3290 narrows and reduces member firms’ supervisory obligations and, according to PIABA, results in unacceptable adverse consequences, including:</div>
<div>
<ul>
<li>Dramatically weakening long-standing supervisory obligations;</li>
<li>Creating glaring supervisory deficiencies;</li>
<li>Encouraging de facto violations of federal securities laws;</li>
<li>Generating inconsistencies with other FINRA rules and regulatory guidance;</li>
<li>Producing perverse incentives for registered representatives and members; and</li>
<li>Leaving investors with inadequate protection</li>
</ul>
<br />
According to <a href="https://www.fa-mag.com/news/finra-proposal-would-unleash-rogue-brokers--association-warns-41215.html?print">Financial Advisor Magazine</a><span id="goog_1093610959"></span><a href="https://www.blogger.com/"></a><span id="goog_1093610960"></span>, the comment period for the FINRA proposal is closed. “Now all eyes are on FINRA to see what they’ll do and if they’ll put investor protection interests first and let this horrific rule die,” says Andrew Stoltman, current President and member of the Board of Directors for PIABA.</div>
John J. Cronan IIIhttp://www.blogger.com/profile/12313730029828052444noreply@blogger.com0tag:blogger.com,1999:blog-6191327177511569691.post-25418711606740944282018-08-21T10:39:00.000-04:002018-08-21T10:39:01.160-04:00FINRA Arbitration Requirements Take Priority over Forum Selection ClauseThe Third Circuit Court of Appeals recently ruled that Bear Stearns must comply with the Financial Industry Regulatory Authority (FINRA) rules that require arbitration of a customer’s claims despite the existence of a forum selection clause. That ruling, in <i>Reading Health System v. Bear Stearns & Co., n/k/a J.P. Morgan Securities, LLC</i>, involved a broker-dealer agreement between Bear Stearns (now J.P. Morgan Securities) and Reading Health System regarding offerings of certain securities by Reading Health through which J.P. Morgan Securities served as broker-dealer and underwriter. The agreement provided that any actions and proceedings arising out of the agreement or the underlying transactions had to be filed in the U.S. District Court for the Southern District of New York. However, <a href="http://finra.complinet.com/en/display/display.html?rbid=2403&element_id=4106">FINRA Rule 12200</a> generally requires FINRA members to arbitrate disputes with customers at the customers’ request if arbitration is required by written agreement or requested by a customer. <br /><br /><div>
Reading Health filed a Statement of Claim with FINRA, alleging that J.P. Morgan Securities engaged in improper conduct in conjunction with the offerings. J.P. Morgan Securities refused to participate in FINRA arbitration. It cited the forum selection clause in its agreement with Reading Health. In response, Reading Health filed a declaratory judgment action to address the arbitration issue. </div>
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The U.S. District Court ordered J.P. Morgan Securities to arbitrate. On appeal, the Third Circuit affirmed. The court found J.P. Morgan Securities’ argument unpersuasive that, in agreeing to the forum selection clauses included in the broker-dealer agreements, Reading Health waived the right to FINRA arbitration under <a href="http://finra.complinet.com/en/display/display.html?rbid=2403&element_id=4106"> Rule 12200</a>. The Third Circuit found that the forum selection clause, which did not refer to arbitration, lacked the specificity to support a finding of waiver. Although waiver of <a href="http://finra.complinet.com/en/display/display.html?rbid=2403&element_id=4106">FINRA Rule 12200</a> <i>might</i> be found under different facts, the assertion of waiver would need to be supported by explicit language waiving the specific right to FINRA arbitration. </div>
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The court found that Reading Health System had not waived its right to compel Bear Stearns to arbitrate under FINRA’s rules. </div>
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The deadline to file a writ of certiorari to the U.S. Supreme Court in this case is 90 days from the entry of judgment on August 7, 2018. This ruling widens a circuit split. The Second and Ninth Circuits have enforced forum selection clauses, while the Fourth Circuit has held that the FINRA Rule requires arbitration even in the face of a forum selection clause.</div>
John J. Cronan IIIhttp://www.blogger.com/profile/12313730029828052444noreply@blogger.com0tag:blogger.com,1999:blog-6191327177511569691.post-30947235018796990492018-06-11T16:03:00.000-04:002018-06-11T16:19:38.118-04:00FINRA Issues Guidance on Heightened Supervision for Persons with a History of Past Misconduct<br />
<div class="MsoNormal" style="background: white; line-height: normal; margin-bottom: 11.25pt; text-align: justify;">
<span style="font-family: "arial" , "sans-serif"; mso-bidi-font-size: 12.0pt; mso-fareast-font-family: "Times New Roman";">To reiterate
the supervisory obligations of FINRA member firms regarding associated persons
with a history of past misconduct that may pose a risk to investors, FINRA
recently published Regulatory Notice 18-15. <o:p></o:p></span></div>
<div class="MsoNormal" style="background: white; line-height: normal; margin-bottom: 11.25pt; text-align: justify;">
<span style="font-family: "arial" , "sans-serif"; mso-bidi-font-size: 12.0pt; mso-fareast-font-family: "Times New Roman";">FINRA Rule 3110
(Supervision) requires member firms to establish and maintain systems to
supervise activities of associated persons to comply with applicable securities
laws and FINRA rules. Member firms have a fundamental obligation to implement a
supervisory system that is tailored to the member firm’s business and addresses
the activities of all its associated persons. <o:p></o:p></span></div>
<div class="MsoNormal" style="background: white; line-height: normal; margin-bottom: 11.25pt; text-align: justify;">
<span style="font-family: "arial" , "sans-serif"; mso-bidi-font-size: 12.0pt; mso-fareast-font-family: "Times New Roman";">Notice 18-15
highlights particular instances where heightened supervision of an associated
person may be appropriate. Firms are encouraged to adopt the practices that are
outlined in Notice 18-15 to strengthen their supervisory procedures. Notice 18-15
is one of several FINRA initiatives focused on associated persons with a
history of past misconduct that pose a risk to investors and the firms that
employ them. These initiatives are designed to strengthen oversight through
guidance, rule changes, and surveillance programs. <o:p></o:p></span></div>
<div class="MsoNormal" style="line-height: normal; text-align: justify;">
<span style="font-family: "arial" , "sans-serif"; mso-bidi-font-size: 12.0pt; mso-fareast-font-family: "Times New Roman";">In Notice 18-15, FINRA instructs that a firm should
routinely evaluate its supervisory procedures to ensure they are appropriately
tailored for each associated person and consider, among other things, the
person’s activities and history of industry and regulatory-related incidents.
When an associated person of the firm has a history of industry or
regulatory-related incidents, the firm must determine whether its standard
supervisory and educational programs are adequate to address the issues such
person’s history raises or whether the firm should develop tailored heightened
supervisory procedures to address such issues. The failure to assess the
adequacy of its supervisory procedures in light of an associated person’s
history of industry or regulatory-related incidents will be closely evaluated
in determining whether the firm itself should be subject to disciplinary action
for a failure to supervise should that person be the subject of a future
industry or regulatory related incident.<br /><br /><o:p></o:p></span></div>
<div class="MsoNormal" style="line-height: normal; text-align: justify;">
<span style="font-family: "arial" , "sans-serif"; mso-bidi-font-size: 12.0pt; mso-fareast-font-family: "Times New Roman";">In short, firms can’t rely on ordinary garden variety
supervisory processes and procedures when a broker has a pattern of
misconduct.<span style="mso-spacerun: yes;"> </span><o:p></o:p></span></div>
<br />John J. Cronan IIIhttp://www.blogger.com/profile/12313730029828052444noreply@blogger.com0tag:blogger.com,1999:blog-6191327177511569691.post-88421795408421948532018-05-03T09:37:00.001-04:002018-05-04T10:45:50.631-04:00Blockchain, Digital Currencies, and Securities Regulation<span style="font-family: "arial" , "helvetica" , sans-serif;"></span><br />
<span style="font-family: "arial" , "helvetica" , sans-serif;">As with any new investment product or asset class, cryptocurrencies and related blockchain technology have been the subject of a great deal of investor interest and regulatory activity, particularly<span style="font-family: "arial" , "helvetica" , sans-serif;"> as bad actors have exploited public interest to peddle unsuitable investments or--even worse--perpetrate frauds.</span></span><br />
<span style="font-family: "arial" , "helvetica" , sans-serif;"><span style="font-family: "arial" , "helvetica" , sans-serif;"></span></span><br />
<span style="font-family: "arial" , "helvetica" , sans-serif;"><span style="font-family: "arial" , "helvetica" , sans-serif;">A blockchain is a public, distributed ledger that is replicated and hosted on numerous computers, creating thousands of identical digital copies that give the system credibility and oversight needed to create a secure public list of an asset. That list can describe things such as identification, contracts, or cryptocurrencies--scarce, virtual assets represented on a blockchain. The most well-known cryptocurrency is Bitcoin. Other popular cryptocurrencies include Dash, Monero, Litecoin, Ethereum, and Ripple. <span style="font-family: "arial" , "helvetica" , sans-serif;">Blockchain technology is also sometimes referred to as distributed ledger technology (DLT) or distributed database technology. </span></span></span><br />
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<span style="font-family: "arial" , "helvetica" , sans-serif;">For regulatory purposes, federal agencies categorize cryptocurrency in different ways. To the Internal Revenue Services it is property. To the Commodity Futures Trading Commission it is a commodity. The Securities and Exchange Commission says that cryptocurrency tokens can be a security. </span><br />
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<span style="font-family: "arial" , "helvetica" , sans-serif;">Many securities rules administered by the SEC and the Financial Industry Regulatory Authority (FINRA) are implicated by crytocurrency, as FINRA made clear in its report, "</span><a href="http://www.finra.org/sites/default/files/FINRA_Blockchain_Report.pdf" target="_blank"><span style="font-family: "arial" , "helvetica" , sans-serif;">Distributed Ledger Technology: Implications of Blockchain for the Securities Industry</span></a><span style="font-family: "arial" , "helvetica" , sans-serif;">" (March 2018) For example, </span><br />
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<li><span style="font-family: "arial" , "helvetica" , sans-serif;">a DLT application that seeks to alter clearing arrangements
or serve as a source of recordkeeping by broker-dealers may implicate FINRA’s rules
related to carrying agreements and books and records requirements;</span></li>
<li><span style="font-family: "arial" , "helvetica" , sans-serif;">DLT may have implications for trade and order reporting requirements to the extent it seeks
to alter the equity or debt trading process; and</span></li>
<li><span style="font-family: "arial" , "helvetica" , sans-serif;">FINRA rules such as those related to financial condition, verification of assets, anti-money
laundering, know-your-customer (suitability), supervision and surveillance, fees and commissions, payment
to unregistered persons, customer confirmations, materiality impact on business operations,
and business continuity plans also may to be impacted depending on the nature of the DLT
application.</span></li>
</ul>
<span style="font-family: "arial" , "helvetica" , sans-serif;">DLT applications are being used or tested within the equity, debt and derivative
markets.</span><br />
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<span style="font-family: "arial" , "helvetica" , sans-serif;">Unsurprisingly, investors have been attracted to blockchain related investments. A new fundraising vehicle, the initial coin offering (ICO)--also called a "token generation event" or "initial token offering"--allows accredited investors (those with a net worth of more than $1 million) to bankroll the creation of a blockchain in exchange for payment cryptocurrency "coins" or tokens." In 2017, more than 200 ICOs raised more than $4 billion. The size and nature of ICOs vary greatly.</span><br />
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<span style="font-family: "arial" , "helvetica" , sans-serif;">The SEC issued an </span><a href="https://www.investor.gov/additional-resources/news-alerts/alerts-bulletins/investor-alert-public-companies-making-ico-related" target="_blank"><span style="font-family: "arial" , "helvetica" , sans-serif;">Investor Alert: Public Companies Making ICO-Related Claims</span></a><span style="font-family: "arial" , "helvetica" , sans-serif;"> (August 2017) warning "<span style="color: #040707;">about potential scams involving stock of companies claiming to be related to, or asserting they are engaging in [ICOs]" According to the SEC, "</span>Fraudsters often try to use the lure of new and emerging technologies to convince potential victims to invest their money in scams. These frauds include 'pump-and-dump' and market manipulation schemes involving publicly traded companies that claim to provide exposure to these new technologies." </span><br />
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<span style="font-family: "arial" , "helvetica" , sans-serif;">The North American Securities Administrators Association advises investors considering putting money into an ICO to exercise "extreme caution" in its "</span><a href="http://www.nasaa.org/44836/informed-investor-advisory-initial-coin-offerings/" target="_blank"><span style="font-family: "arial" , "helvetica" , sans-serif;">Informed Investor Advisory: Initial Coin Offerings</span></a><span style="font-family: "arial" , "helvetica" , sans-serif;">" (April 2018) as <span style="color: black;">follows:</span></span><br />
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<li><span style="color: black; font-family: "arial" , "helvetica" , sans-serif;">ICOs are very risky and are not suitable for many investors;</span></li>
<li><span style="background-color: white; color: #333333; display: inline; float: none; font-family: "arial" , "helevtica" , "verdana" ,; font-style: normal; font-weight: 400; letter-spacing: normal; text-indent: 0px; text-transform: none; white-space: normal; word-spacing: 0px;"><span style="color: black; font-family: "arial" , "helvetica" , sans-serif;">Use extreme caution when dealing with promoters who claim their ICO offering is exempt from securities registration yet do not ask about your income, net worth or level of investing sophistication; and</span></span></li>
<li><span style="background-color: white; color: #333333; display: inline; float: none; font-family: "arial" , "helevtica" , "verdana" ,; font-style: normal; font-weight: 400; letter-spacing: normal; text-indent: 0px; text-transform: none; white-space: normal; word-spacing: 0px;"><span style="background-color: white; color: #333333; display: inline; float: none; font-family: "arial" , "helevtica" , "verdana" ,; font-style: normal; font-weight: 400; letter-spacing: normal; text-indent: 0px; text-transform: none; white-space: normal; word-spacing: 0px;"><span style="font-family: "arial" , "helvetica" , sans-serif;"><span style="color: black;">ask whether the “coins” or “tokens” are considered securities and whether the offering itself has been registered with appropriate securities regulators. </span></span></span></span></li>
</ul>
<span style="background-color: white; color: #333333; display: inline; float: none; font-family: "arial" , "helevtica" , "verdana" ,; font-style: normal; font-weight: 400; letter-spacing: normal; text-indent: 0px; text-transform: none; white-space: normal; word-spacing: 0px;"><span style="background-color: white; color: #333333; display: inline; float: none; font-family: "arial" , "helevtica" , "verdana" ,; font-style: normal; font-weight: 400; letter-spacing: normal; text-indent: 0px; text-transform: none; white-space: normal; word-spacing: 0px;"><span style="color: black; font-family: "arial" , "helvetica" , sans-serif;">State regulators, like the SEC, have engaged in active ongoing enforcement activity, including regulators in Texas, North Carolina, New Jersey, and Massachusetts. Hey, let's <a href="https://www.youtube.com/watch?v=_pIkkzDagsY" target="_blank">be careful out there</a>.</span></span></span><br />
<span style="font-family: "arial" , "helvetica" , sans-serif;"></span>Sigmund Schutzhttp://www.blogger.com/profile/11257537099713835163noreply@blogger.com0tag:blogger.com,1999:blog-6191327177511569691.post-61355546677865313872018-02-27T12:19:00.001-05:002018-02-27T12:19:44.007-05:00FINRA to Investors: Beware of "Regulator" Impostor ScamsThe Financial Industry Regulatory Authority (FINRA) recently issued an <a href="http://www.finra.org/investors/alerts/imposter-scams-dont-be-fooled-guarantees-or-money-making-pitches-regulators">Investor Alert</a>, warning investors to beware of financial scammers posing as regulators.<br />
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Gerri Walsh, FINRA’s Senior Vice President for Investor Education warns, “Financial fraudsters go to great lengths to appear legitimate, making it difficult for investors to recognize their ruses.” “That’s why we are telling investors flat out that FINRA does not guarantee investments, and our officers play no role in facilitating investment opportunities. We want people to know that and to understand how they can verify who the real FINRA is.” </div>
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Financial fraudsters have gone so far in recent times as to use FINRA’s name and logo in correspondence—and a fake signature from FINRA President and Chief Executive Officer Robert W. Cook—to create the impression that FINRA provided guarantees related to an investment opportunity that was, in fact, an advance-fee scam. </div>
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One common fraudulent scheme involves luring investors into sending money to cover administrative or regulatory charges associated with a buyback of shares of stock that are generally worthless or underperforming. Once investors send the money, they never see it—or any money promised from the stock buyback—again. Sometimes, the con artists will ask for additional money or simply disappear. </div>
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On other occasions, fraudsters send e-mails to unsuspecting individuals, purporting to originate from FINRA’s CEO, notifying potential victims that “approval has been granted for the release and payment of your outstanding inheritance fund.” The victim would be asked to fly to another country—outside of the jurisdiction of any U.S. regulator or law enforcement officer—to claim the “inheritance.” The victim is asked to provide personal information, including a copy of their passport—a common tactic used in phishing scams. </div>
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To avoid losing money in these types of scams, FINRA advises investors to hang up on suspected fraudulent callers and delete e-mails from these individuals. Walsh adds, “If you’re unsure whether an investment solicitation is legitimate, do your own independent search for the official number for the government agency, office, or employee, and call to confirm its authenticity.” </div>
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If an investor is suspicious about an offer or thinks the claims might be exaggerated or misleading, FINRA offers a <a href="https://tools.finra.org/scam_meter/">Scam Meter</a> tool to help investors assess whether an opportunity is too good to be true. FINRA also developed a <a href="https://tools.finra.org/risk_meter/">Risk Meter</a>, which determines if an investor shares characteristics and behavior traits that have been shown to make some individuals particularly vulnerable to investment fraud.</div>
John J. Cronan IIIhttp://www.blogger.com/profile/12313730029828052444noreply@blogger.com0tag:blogger.com,1999:blog-6191327177511569691.post-81625706559803351562018-02-21T11:21:00.000-05:002018-02-21T11:21:22.567-05:00FINRA Proposes Special Procedure for Simplified CasesThe Financial Industry Regulatory Authority (FINRA) proposes to amend the Code of Arbitration Procedure for Customer Disputes and the Code of Arbitration Procedure for Industry Disputes to include a Special Proceeding for Simplified Arbitration. FINRA claims involving $50,000 or less would benefit by having an additional, intermediate form of adjudication that would provide the chance to argue cases before an arbitrator in a shorter, limited telephone hearing format. The Special Proceeding would be limited to two hearing sessions. <div>
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The highlights: </div>
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<li>A Special Proceeding would be held by telephone unless the parties agree to another method of appearance </li>
<li>The claimants, collectively, would be limited to two hours to present their case and 1⁄2 hour for any rebuttal and closing statement, exclusive of questions from the arbitrator and responses to such questions </li>
<li>The respondents, collectively, would be limited to two hours to present their case and 1⁄2 hour for any rebuttal and closing statement, exclusive of questions from the arbitrator and responses to such questions </li>
<li>Notwithstanding the above-mentioned conditions, the arbitrator would have the discretion to cede his or her allotted time to the parties; in no event could a Special Proceeding exceed two hearing sessions, exclusive of prehearing conferences </li>
<li>The parties would not be permitted to question the opposing parties’witnesses </li>
<li>A customer could not call an opposing party, a current or former associated person of a member party, or a current or former employee of a member party as a witness, and members and associated persons could not call a customer of a member party as a witness </li>
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FINRA believes the proposed rule change would provide parties with claims of $50,000 or less with an additional, cost-effective hearing option for resolving disputes and limit the potential costs of a hearing and provide parties with the opportunity to present their case without cross-examination from their opponents. <br /><br />The ability to present their case without cross-examination may benefit those who would otherwise be intimidated by a direct confrontation. FINRA believes that the broader role of arbitrators for a Special Proceeding in asking questions of the parties would serve a similar function to cross-examination, effectively charging the arbitrator with clarifying issues, and asking questions necessary to assess witness credibility. </div>
John J. Cronan IIIhttp://www.blogger.com/profile/12313730029828052444noreply@blogger.com0tag:blogger.com,1999:blog-6191327177511569691.post-58743778701862429912018-02-01T11:33:00.000-05:002018-02-01T11:33:12.315-05:00FINRA 2018 Regulatory and Exam Priorities ReleasedThe Financial Industry Regulatory Authority (FINRA) recently released its <a href="http://www.finra.org/industry/2018-regulatory-and-examination-priorities-letter">2018 Regulatory and Examination Priorities Letter</a> (the “Priorities Letter”), highlighting topics FINRA will focus on in 2018.<div>
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FINRA regulates brokerage firms doing business with the public in the United States. FINRA writes rules; examines for and enforces compliance with FINRA rules and federal securities laws; registers broker-dealer personnel and offers them education and training; and informs the investing public. FINRA provides surveillance and other regulatory services for equities and options markets, as well as trade reporting and other industry utilities. FINRA also administers a dispute resolution forum for investors and brokerage firms and their registered employees. </div>
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Some of the key topics identified in the Priorities Letter as areas of focus in 2018 are fraud, high-risk firms and brokers, operational and financial risks—including technology governance and cybersecurity—and market regulation. Other areas of priority in 2018 include: </div>
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<li>Sales practice risks, including recommendations of complex products to unsophisticated, vulnerable investors </li>
<li>Protection of customer assets and the accuracy of firms’ financial data </li>
<li>Market integrity, including best execution, manipulation across markets and products, and fixed income data integrity </li>
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In the Priorities Letter, FINRA CEO Robert Cook wrote, “The coming year will bring both continuity and change in FINRA’s programs. . . . The continuity comes, first and foremost, in our unwavering commitment to our mission: protecting investors and promoting market integrity in a manner that facilitates vibrant capital markets. Change will come in how we accomplish that mission.” </div>
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FINRA flags the following significant new rules that are currently scheduled to become applicable in 2018. </div>
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<li><b>Financial Exploitation of Specified Adults –</b> FINRA Rule 2165 will become effective February 5, 2018. The rule permits members to place temporary holds on disbursements of funds or securities from the accounts of specified customers where there is a reasonable belief of financial exploitation of these customers. </li>
<li><b>Amendments to FINRA Rule 4512 (Customer Account Information) –</b> An amendment to FINRA Rule 4512 requires members to make reasonable efforts to obtain the name of and contact information for a trusted contact person for a non-institutional customer’s account. The amendment will become effective February 5, 2018. </li>
<li><b>Amendments to FINRA Rule 2232 (Customer Confirmations) –</b> The amended FINRA Rule 2232 requires a member to disclose the amount of mark-up or mark-down it applies to trades with retail customers in corporate or agency debt securities if the member also executes offsetting principal trades in the same security on the same trading day. The amended rule also requires members to disclose two additional items on all retail customer confirmations for corporate and agency debt security trades: (1) a reference, and a hyperlink if the confirmation is electronic, to a web page hosted by FINRA that contains publicly available trading data for the specific security that was traded, and (2) the execution time of the transaction, expressed to the second. These amendments are scheduled to become effective on May 14, 2018. </li>
<li><b>Margin Requirements for Covered Agency Transactions (Amendments to FINRA Rule 4210) –</b> FINRA’s new margin requirements for Covered Agency Transactions are slated to become effective June 25, 2018. Covered Agency Transactions include (1) To Be Announced (TBA) transactions, inclusive of adjustable rate mortgage (ARM) transactions; (2) Specified Pool Transactions; and (3) transactions in Collateralized Mortgage Obligations (CMOs), issued in conformity with a program of an agency or Government-Sponsored Enterprise (GSE), with forward settlement dates. Members are reminded that the risk limit determination requirements under the amendments to Rule 4210 became effective on December 15, 2016.</li>
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John J. Cronan IIIhttp://www.blogger.com/profile/12313730029828052444noreply@blogger.com0tag:blogger.com,1999:blog-6191327177511569691.post-25337555500263842312017-12-27T11:02:00.000-05:002017-12-27T11:02:21.794-05:00FINRA Proposes Amendments to the Codes of Arbitration Procedure Regarding Requests to Expunge Customer Dispute InformationThrough <a href="http://www.finra.org/industry/notices/17-42?utm_source=MM&utm_medium=email&utm_campaign=Weekly%5FUpdate%5F120617%5FFINAL">Financial Industry Regulatory Authority (FINRA) Regulatory Notice 17-42</a>, FINRA proposes establishing a roster of arbitrators with certain training, backgrounds, or experience to handle requests to expunge customer dispute information. These arbitrators would decide expungement requests where the underlying customer-initiated arbitration is not resolved on the merits (e.g., settled) or the associated person files a separate claim requesting expungement of customer dispute information. <br /><br />FINRA also proposes additional changes to the expungement process, such as changes to the timeframe in which an associated person can seek expungement of the customer dispute information, as well as unanimous consent of a three-person panel of arbitrators to grant expungement.<br /><br /> This is one piece of a larger series of initiatives FINRA is considering related to the expungement process. Comments are requested. The comment period expires February 5, 2018.John J. Cronan IIIhttp://www.blogger.com/profile/12313730029828052444noreply@blogger.com0tag:blogger.com,1999:blog-6191327177511569691.post-9390811770233054852017-12-05T10:26:00.001-05:002017-12-05T10:26:47.541-05:00FINRA Board Accused of Conflicts of InterestAs reported in <a href="http://www.investmentnews.com/article/20171115/FREE/171119965/piaba-accuses-finra-of-conflicts-of-interest?NLID=daily&NL_issueDate=20171115&utm_source=Daily-20171115&utm_medium=email&utm_campaign=investmentnews&utm_visit=35884&itx%5bemail%5d=&itx%5bemail%5d=bbd5e7b36b26706c30ef056038eb81ba567b90a5476e0e6ae3034a8537bf94ec%40investmentnews"><i>InvestmentNews</i></a>, the Public Investors Arbitration Bar Association (PIABA) issued a <a href="https://piaba.org/piaba-newsroom/report-finra-governance-review-public-governors-should-protect-public-interest-novemb">report</a> asserting that certain “public governors” on the Financial Industry Regulatory Authority’s (FINRA) 24-person board serve on too many corporate boards and/or have connections to Wall Street such that they cannot represent the publicly effectively and face conflicts of interest.<br />
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FINRA is a self-regulatory organization which oversees thousands of broker-dealers on behalf of the Securities and Exchange Commission (SEC). It has 13 public governors, 10 industry governors and one seat for its CEO. The PIABA report notes that, under FINRA’s by-laws, its public governors shall not have any material business relationship with a broker or dealer or other self-regulatory organization.</div>
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PIABA states that, instead of bringing a customer-oriented view to the table, FINRA’s public governors “often provide additional representation for security industry constituencies.” PIABA also critiques the selection of public governors with ties to the security industry. It states, “In many instances FINRA’s public governors join the board after long careers in the securities industry. . . . Although some academics and former regulators do serve on FINRA’s board as public governors, the board only infrequently includes persons primarily identified as investor protection advocates. This absence is troubling for an organization that publicly characterizes itself as dedicated to investor protection.”</div>
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<i>InvestmentNews </i>also reports that a FINRA spokesperson defended the FINRA board and its public governors, noting that “Each governor, regardless of his or her affiliation or classification, is responsible for serving in an unbiased and objective manner, and voting on matters for the good of the investors, industry and marketplace.”</div>
John J. Cronan IIIhttp://www.blogger.com/profile/12313730029828052444noreply@blogger.com0tag:blogger.com,1999:blog-6191327177511569691.post-81694966983020685132017-11-03T09:49:00.000-04:002017-11-03T09:49:18.071-04:00NASAA Releases Annual Enforcement ReportOn September 26, 2017, the North American Securities Administrators Association (NASAA) released its annual Enforcement Report. The report is available on the NASAA website at <a href="http://www.nasaa.org/">www.nasaa.org</a>.<br /><br />In its Enforcement Report, NASAA reported that state securities regulators conducted 4,341 investigations in 2016, and took 2,017 enforcement actions overall. These actions led to more than $231 million in restitution returned to investors, fines of $682 million and criminal relief of 1,346 years (incarceration and probation).<br /><br />For the second consecutive year, NASAA reported that its U.S. members brought more enforcement actions against registered firms and individuals (620), compared to unregistered individuals and firms (604).<br /><br />State securities regulators reported a significant increase in investigations of investment adviser firms and representatives, with 700 investigations (a 31 % increase year-over-year). <br /><br />State securities regulators also continue to serve a vital gatekeeper function to screen bad actors before they have an opportunity to conduct business with investors. A total of 2,843 securities licenses were withdrawn in 2016 as a result of state action, and an additional 657 licenses were either denied, revoked, suspended or conditioned.<br /><br /> As the report makes clear, NASAA members:<div>
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<li>Routinely share information with other state and federal regulators and coordinate enforcement efforts to increase efficiency and eliminate duplication of efforts;</li>
<li>Are committed to protecting vulnerable senior investors through enforcement actions and legislative improvements; and</li>
<li>Are working to counter the threat posed by emerging financial technologies, such as binary options and speculative cryptocurrency trading, through both enforcement and education efforts</li>
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John J. Cronan IIIhttp://www.blogger.com/profile/12313730029828052444noreply@blogger.com0tag:blogger.com,1999:blog-6191327177511569691.post-32524864047674287072017-10-26T19:18:00.000-04:002017-10-26T19:18:39.152-04:00Maine Superior Court Grants Expungement of Customer Complaint Against Broker<span style="font-family: Arial, Helvetica, sans-serif;">A previous post discusses the high standard necessary to expunge a customer complaint from a broker's record, <a href="https://pretisecuritieslitigationarbitration.blogspot.com/2017/07/expungement-extraordinary-remedy.html" target="_blank">here</a>. </span><br />
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<span style="font-family: Arial, Helvetica, sans-serif;">A recent Maine case demonstrates how that standard can be met. In an unfortunate family dispute, <i>Ferland v. Ferland</i>, Docket No. CV-15-292 (Aug. 2, 2017), the claimant alleged that she had loaned about $721,408 to her son (a stockbroker a/k/a registered representative), which remained unpaid, and that the broker sold her an unsuitable annuity. The broker denied all of the allegations. The parties ultimately settled for $749,803, according to a record still available on Broker Check. The Court's order describes the settlement as a "resolution" that involved "payment and/or restructuring of certain loans" made by the claimant to the broker.</span><br />
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<span style="font-family: Arial, Helvetica, sans-serif;">The Court's order says that FINRA had been notified of the motion for expungement, but whether FINRA actually participated is unclear.</span><br />
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<span style="font-family: Arial, Helvetica, sans-serif;">The order states that the broker's conduct "did not constitute investment-related sales practice violations, forgery, theft, misappropriation or conversion of funds." More specifically, the claimant "freely loaned [the broker] and one of his business partners approximately [$721,408] as part of a commercial real estate transaction that was evidenced by a promissory note; secured by a life insurance policy on [the broker's] life; and resulted in scheduled payments to [the claimant]." The loan was unrelated to the broker's role as financial advisor, as were most of the other allegations that formed the basis of the complaint. As for the annuity, the claimant had purchased it from Allianz, not Ameriprise as she had alleged in her sworn complaint. The court found that her allegations related to the annuity were baseless.</span><br />
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<span style="font-family: Arial, Helvetica, sans-serif;">Although expungement is the rare exception, the outcome in this instance demonstrates that it is appropriate where allegations are "clearly erroneous" or "false." </span><br />
<br />Sigmund Schutzhttp://www.blogger.com/profile/11257537099713835163noreply@blogger.com0tag:blogger.com,1999:blog-6191327177511569691.post-51262941365880999172017-08-28T09:55:00.001-04:002017-10-26T18:50:20.479-04:00Proposed FINRA Rule Change Revises to the Definition of Non-Public Arbitrator to Expand Arbitrator Pool <div class="MsoPlainText" style="text-align: justify;">
<span lang="EN"><span style="font-family: Arial, Helvetica, sans-serif;">FINRA arbitrators—neutral, qualified individuals—serve as
decision makers, weigh the facts of each case presented and render a final and
binding decision. Arbitrators have long been classified as “public” or “non-public.”
Public arbitrators are individuals who are not required to have knowledge of
the securities industry, but often do. Non-public arbitrators are individuals
who have worked in the financial industry or regularly provide services to
brokers, broker-dealers, their customers, and others in the financial industry. <o:p></o:p></span></span></div>
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<span lang="EN"><span style="font-family: Arial, Helvetica, sans-serif;">But the line-drawing exercise delineating who qualifies as
“public” or “non-public” is fairly arbitrary, and often excludes qualified
neutrals who fall through the cracks in that they are not primarily financial
industry professionals, but also for one reason or another do not meet the
“public” definition. The proposed rule change aims to cure this problem.<o:p></o:p></span></span></div>
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<span lang="EN"><span style="font-family: Arial, Helvetica, sans-serif;">Some history on arbitrator classifications sets the stage
for the recent change. In 2015 the SEC
approved amendments to the definition of non-public arbitrators and public arbitrators.
Among other things, the amendments provided that persons who worked in the
financial industry at any point in their careers would always be classified as
non-public arbitrators. The amendments also
added new disqualifications to the public arbitrator definition relating to an
arbitrator’s provision of services to parties in securities arbitration and
litigation and to revenues earned from the financial industry by an arbitrator’s
co-workers. The amendments also broadened disqualifications based on the activities
or affiliations of an arbitrator’s family members. The proposed rule change was
intended to address concerns about arbitrator neutrality.<o:p></o:p></span></span></div>
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<span lang="EN"><span style="font-family: Arial, Helvetica, sans-serif;">A key focus of the 2015 amendments was the elimination of
certain individuals from the public arbitrator roster. However, FINRA’s intent
was not to prevent these individuals from serving in any capacity. Many
arbitrators or arbitrator applicants who formerly qualified to serve as public
arbitrators are now unable to serve even as non-public arbitrators. As a result,
the pool of eligible arbitrators has decreased.
FINRA has turned away many candidates who would have been eligible to
service but for the 2015 amendments. <o:p></o:p></span></span></div>
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<div class="MsoPlainText" style="text-align: justify;">
<span style="font-family: Arial, Helvetica, sans-serif;">On July 10, 2017, FINRA
filed a proposed rule change with the SEC, (SR-FINRA-2017-025),to revise the
non-public arbitrator definition. Specifically, the proposal would define a
non-public arbitrator to mean a person who is otherwise qualified to serve as
an arbitrator, and is disqualified from service as a public arbitrator under
the Codes. <span lang="EN">The proposed rule change would expand
the pool of candidates eligible to serve as non-public arbitrators. The change
would permit these previously eligible persons to serve as non-public
arbitrators.</span></span></div>
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<span lang="EN"><span style="font-family: Arial, Helvetica, sans-serif;">A practical
result of the rule change will be that parties skeptical of “non-public”
arbitrators should take a closer look.
The roster of non-public arbitrators is likely to include an increasing
number of neutrals with limited “industry” background, but who for one reason
or another do not qualify as “public.”
For example, a well-qualified former judge affiliated with a larger law
firm may not qualify as “public” if the law firm has any significant financial
industry clients, as is likely, but may be impeccably qualified and neutral to
a fault. </span></span><o:p></o:p></div>
Unknownnoreply@blogger.com0tag:blogger.com,1999:blog-6191327177511569691.post-13775014148368022552017-07-17T11:58:00.000-04:002017-07-17T11:58:11.098-04:00Expungement: an "Extraordinary Remedy"<span style="font-family: "Century","serif"; mso-ansi-language: EN-US; mso-bidi-font-family: Arial; mso-bidi-language: AR-SA; mso-fareast-font-family: "MS Mincho"; mso-fareast-language: EN-US; mso-fareast-theme-font: minor-fareast;"><span style="font-family: "Arial","sans-serif"; font-size: 10pt;">What
are the rules of the road with regard to broker requests to expunge customer
claims from their records? This post surveys the current standards for applicable to broker requests to remove customer complaints from their records (i.e., the <a href="http://www.finra.org/industry/crd" target="_blank">Central Registration Depository</a> or "CRD"). According to FINRA, the CRD system is "<span style="-webkit-text-stroke-width: 0px; color: #1c1c1c; display: inline !important; float: none; font-family: Arial, sans-serif; font-size: 14px; font-style: normal; font-variant-caps: normal; font-variant-ligatures: normal; font-weight: normal; letter-spacing: normal; orphans: 2; text-align: left; text-decoration-color: initial; text-decoration-style: initial; text-indent: 0px; text-transform: none; white-space: normal; widows: 2; word-spacing: 0px;">the central licensing and registration system for the U.S. securities industry and its regulators. The system contains the registration records of more than 3,790 registered broker-dealers, and the qualification, employment and disclosure histories of more than 632,735 active registered individuals."</span></span><span style="font-family: Times New Roman;">
</span><br />
<span style="font-family: "Arial","sans-serif"; font-size: 10pt; mso-fareast-font-family: "Times New Roman"; mso-fareast-theme-font: minor-fareast;">FINRA describes
expungement is an “extraordinary remedy.” FINRA cautions, “Customer
dispute information should be expunged only when it has no meaningful investor
protection or regulatory value.”<span style="mso-spacerun: yes;"> </span>This is
because the availability of customer dispute resolution services important
institutional interests. FINRA explains, “Ensuring that CRD information is
accurate and meaningful is essential to investors, who may rely on the
information when making decisions about brokers with whom they may conduct
business; to regulators, who rely on the information to fulfill their
regulatory responsibilities; and to prospective broker-dealer employers, who
rely on the information when making hiring decisions.”</span><span style="font-family: "Arial","sans-serif"; font-size: 10pt;"><o:p></o:p></span><br />
<span style="font-family: Times New Roman;">
</span><br />
<span style="font-family: "Arial","sans-serif"; font-size: 10pt;">FINRA Rules
12805 and 13805 establish procedures – recently tightened up considerably –
that arbitrators must follow before recommending expungement of customer
dispute information related to arbitration cases from a broker’s CRD record.<span style="mso-spacerun: yes;"> </span>The expungement procedures ensure that it
occurs only when the arbitrators find and document one of the “narrow grounds”
specified in Rule 2080:<u1:p></u1:p><o:p></o:p></span><br />
<span style="font-family: Times New Roman;">
</span><br />
<div style="margin-left: 0.5in;">
<span style="font-family: "Arial","sans-serif"; font-size: 10pt; mso-font-kerning: 1.0pt;">(A)<span style="mso-tab-count: 1;"> </span></span><span style="font-family: "Arial","sans-serif"; font-size: 10pt;">the claim, allegation
or information is factually impossible or clearly erroneous;<u1:p></u1:p><br />
<span style="mso-font-kerning: 1.0pt;">(B)<span style="mso-tab-count: 1;"> </span></span>the
registered person was not involved in the alleged investment-related sales
practice violation, forgery, theft, misappropriation or conversion of funds; or<u1:p></u1:p><br />
<span style="mso-font-kerning: 1.0pt;">(C)<span style="mso-tab-count: 1;"> </span></span>the
claim, allegation or information is false.<u1:p></u1:p><o:p></o:p></span></div>
<span style="font-family: Times New Roman;">
</span><br />
<span style="font-family: "Arial","sans-serif"; font-size: 10pt; mso-fareast-font-family: "Times New Roman"; mso-fareast-theme-font: minor-fareast;">The burden of proof
falls on the party seeking expungement to show that these high standards are
met. <o:p></o:p></span><br />
<span style="font-family: Times New Roman;">
</span><br />
<span style="font-family: "Arial","sans-serif"; font-size: 10pt;">To reject
expungement on the first prong of the expungement standard an arbitration panel
need only find that the claims mare factually “possible” and not “clearly
erroneous.”<span style="mso-spacerun: yes;"> </span>The second prong of the expungement
standard applies to situations of mistaken identity, where the wrong person is
named in a claim.<span style="mso-spacerun: yes;"> </span>According to FINRA
this “standard would require an affirmative arbitral finding that the
registered person was not involved . . . .”<span style="mso-spacerun: yes;">
</span>The final prong of the expungement standard requires that the panel
assess whether the claims or allegations are “false.”<span style="mso-spacerun: yes;"> </span>If expungement is sought for this reason, the
panel must “assess the evidence in the case, make an affirmative finding that
the claim, allegation, or information is false.”</span><br />
<span style="font-family: "Arial","sans-serif"; font-size: 10pt;"></span><br />
<span style="font-family: "Arial","sans-serif"; font-size: 10pt;">The net result is a strong default rule against expungement. The fact of a customer complaint, whether or not validated by favorable arbitration award or a settlement, does (and should) typically remain on record. By the same token, all complaints are not created equal. Just as a broker without any record of complaints still may be a compliance nightmare, a broker with one or few complaints may <em>not</em> turn out to be a compliance problem. </span></span>Sigmund Schutzhttp://www.blogger.com/profile/11257537099713835163noreply@blogger.com0