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Investment Adviser's Legal and Compliance Guide

Featured Articles, Books and Related Sites:

SEC Law.com IPO Information Center

Introductory Materials:

Introduction to Federal Securities Laws Introduction to Blue Sky Laws (State Securities Laws)

Introduction to Securities Arbitration

Initial Public Offering Process
Introduction to Private Placements Introduction to Insider Trading

Featured Books:

Hedge Fund Disclosure Documents Line by Line: A User's Guide to Private Placement Memoranda for Funds Formed as Limited Liability Companies - a walkthrough of a private placement memorandum for a hedge fund, but the concepts are applicable to any private placement memorandum.

Regulation of Securities: Sec Compliance and Practice - Securities compliance handbook for public companies, and those responsible for their compliance issues. This is not an academic treatise, it provides straightforward answers to real-world questions.

Enforcement Actions

SEC Charges Austin-Based Investment Adviser in Fraudulent Scheme Utilizing Football Stars
The Securities and Exchange Commission today filed securities fraud charges against an Austin, Texas investment adviser and two businesses he controls for operating a multi- million dollar scam that used former professional football players to promote its offerings.

SEC Charges U.S. Subsidiary of World's Largest Inter-Dealer Broker for Displaying Fictitious Trades and Misleading Customers
ICAP Securities USA LLC to Pay $25 Million to Settle SEC Findings

NASDR Notices to Members

10-04 SEC Approves Consolidated FINRA Rules Governing Clearly Erroneous Transactions
On December 1, 2009, the SEC approved FINRA's proposed rule change to adopt a new set of rules governing clearly erroneous transactions in the consolidated rulebook. The new FINRA Rule 11890 Series replaces NASD Rule 11890, IM-11890- 1 and IM-11890-2 and was adopted as part of a market-wide effort by multiple self-regulatory organizations to provide transparency and finality with respect to clearly erroneous executions. Among other things, the new rule series includes a new general rule defining "clearly erroneous" transactions, separate provisions for the determination of clearly erroneous transactions depending upon whether the transaction involves an exchange-listed security or an over-the- counter equity security and procedures for appealing FINRA clearly erroneous determinations. In addition, the new rule series codifies minimum numerical criteria necessary for a transaction to qualify as clearly erroneous.

10-03 FINRA Requests Comments on Proposed Consolidated FINRA Rules Governing Securities Loans and Borrowings, Permissible Use of Customers' Securities and Callable Securities
As part of the process of developing a new, consolidated rulebook (the Consolidated FINRA Rulebook), FINRA is requesting comment on three proposed FINRA rules. Proposed FINRA Rule 4314 (Securities Loans and Borrowings) sets forth the requirements applicable to a member firm that is a party to an agreement for the loan or borrowing of securities. Proposed FINRA Rule 4330 (Customer Protection—Permissible Use of Customers' Securities) sets forth the requirements applicable to a member firm's borrowing or lending of a customer's margin securities that are eligible to be pledged or loaned. Proposed FINRA Rule 4340 (Callable Securities) sets forth the obligations applicable to any callable securities a member firm has in its possession or control.

10-01 Proposed Consolidated FINRA Rules Governing FINRA’s Membership Application Proceedings
As part of the process of developing a new, consolidated rulebook (the Consolidated FINRA Rulebook), FINRA is requesting comment on proposals relating to FINRA's membership rules. These rules, which were adopted in August 1997, provide a means for FINRA, through its Membership Application Process (MAP), to know and assess the proposed business activities of its potential and current member firms. The proposed amendments revise certain provisions of the existing membership rules to streamline the standards of review for new and continuing membership applications, clarify certain administrative aspects of the MAP process, update or eliminate outdated terminology and require certain additional information (including certain affiliate information) about the applicant and incorporate certain provisions from the Incorporated NYSE membership rules.

09-73 FINRA Reminds Firms of Their Sales Practice Obligations Relating to Principal-Protected Notes
The retail market for principal-protected notes (PPNs) has grown in recent years, in part because they are often marketed as combining the relative safety of bonds with a potential for growth not available with traditional fixed income products. However, these products are not risk-free, and their terms and structures can be complex. Firms must ensure that their promotional materials or communications to the public regarding these products are fair and balanced, and do not overstate either the level of protection offered or an investment's potential returns. Firms also have a duty to ensure that their registered representatives understand the risks, terms and costs associated with these products, and that they perform an adequate suitability analysis before recommending them to a customer.

FINRA Disciplinary and Other FINRA Actions for December 2009
FINRA has taken disciplinary actions against the following firms and individuals for violations of FINRA rules; federal securities laws, rules and regulations; and the rules of the Municipal Securities Rulemaking Board (MSRB).

09-71 SEC Approves Consolidated FINRA Rules Governing Financial Responsibility
The SEC approved FINRA's proposed rule change to adopt a new set of financial responsibility rules for the consolidated rulebook (the Consolidated FINRA Rulebook). FINRA Rules 4110, 4120, 4130, 4140 and 4521 are new consolidated rules governing financial responsibility that are based in part on, and replace, provisions in the NASD and Incorporated NYSE Rules. The rule change also amends FINRA Rules 9557 and 9559 to, among other things, provide members served with a notice under the financial responsibility rules an expedited appeal process, and makes certain conforming revisions to Section 4(g) of Schedule A to the FINRA By- Laws.

09-70 FINRA Requests Comment on Proposed Consolidated FINRA Rules Governing Registration and Qualification Requirements
As part of the process of developing a new consolidated rulebook (the Consolidated FINRA Rulebook), FINRA is requesting comment on a proposal to streamline and amend the FINRA registration and qualification rules.

09-69 FINRA Requests Comment on Proposed Consolidated FINRA Rule Governing Payments to Unregistered Persons
As part of the process to develop a new consolidated rulebook (the Consolidated FINRA Rulebook), FINRA is requesting comment on a proposed FINRA rule regarding payments to unregistered persons. Proposed FINRA Rule 2040 (Payments to Unregistered Persons) would be a new consolidated rule that streamlines the provisions of current rules.

09-66 SEC Approves Changes to FINRA's BrokerCheck Disclosure Rule to Retain and Make Publicly Available Information About Final Regulatory Actions Against Former Brokers
Beginning November 30, 2009, information concerning final regulatory actions against brokers—as well as certain administrative information (e.g., employment and registration history) and information about qualification examinations, if available, and the broker's most recently submitted comment, if any—will be permanently available in BrokerCheck,® regardless of when they were employed in the securities industry.

09-60 SEC Approval and Effective Dates for New Consolidated FINRA Rules
Following the consolidation of NASD and the member regulation, enforcement and arbitration functions of NYSE Regulation into FINRA, FINRA established a process to develop a new consolidated rulebook (Consolidated FINRA Rulebook), which FINRA has discussed in previous Information Notices. FINRA is proposing new consolidated rules in phases for approval by the SEC as part of the Consolidated FINRA Rulebook. In August and September, the SEC approved eleven new consolidated FINRA Rules. The new rules, except for FINRA Rule 3310 (Anti- Money Laundering Compliance Program), take effect on December 14, 2009. FINRA Rule 3310 takes effect on January 1, 2010.

09-55 FINRA Requests Comments on Proposed New Rules Governing Communications with the Public
FINRA requests comments on proposed new FINRA rules governing communications with the public. These new rules would replace current NASD Rules 2210 and 2211, the Interpretive Materials that follow NASD Rule 2210, and portions of Incorporated NYSE Rule 472.While the proposed rules are based upon these rules' current provisions, the new FINRA rules would employ new communications categories and require the filing of certain types of communications that currently are not required to be filed. The proposal also would make a number of other changes to the communications rules.

News Items

SEC Issues Concept Release Seeking Comment on Structure of Equity Markets SEC Issues Concept Release Seeking Comment on Structure of Equity Markets
The SEC issued a concept release as part of its review of the equity market structure, voting unanimously to issue a concept release seeking public comment on such issues as high frequency trading, co-locating trading terminals, and markets that do not publicly display price quotations.

SEC Proposes New Rule to Effectively Prohibit Unfiltered Access and Maintain Market Access Controls
The Securities and Exchange Commission today voted unanimously to propose a new rule that would effectively prohibit broker-dealers from providing customers with "unfiltered" or "naked" access to an exchange or alternative trading system (ATS).

SEC Announces Initiative to Encourage Individuals and Companies to Cooperate and Assist in Investigations
The SEC announced a series of measures to further strengthen its enforcement program and encourage greater cooperation by individuals and companies in the agency's investigations and enforcement actions.

SEC Charges California Telecom Company With Bribery and Other FCPA Violations
The Securities and Exchange Commission today charged Alameda, Calif.- based telecommunications company UTStarcom, Inc. with violations of the Foreign Corrupt Practices Act (FCPA) for authorizing millions of dollars in unlawful payments to foreign government officials in Asia.

FINRA Fines Pacific Cornerstone Capital, CEO $750,000 for Private Placement Offering Failures
$750,000 in fines for failing to include full and complete information in private placement offering documents and marketing material. FINRA also charged Pacific Cornerstone and Roussel with advertising violations and supervisory failures.

FINRA Expels Meeting Street Brokerage, Bars Broker, Sanctions Firm's Owner for Market Manipulation, Other Violations
All Three Schemed to Create Artificial Price and Trading Volume for Relay Capital Corporation

FINRA Fines Terra Nova Financial $400,000; Firm Made Over $1 Million in Improper Soft Dollar Payments
Three Former Employees Also Sanctioned

SEC Charges Broker for Manipulation Using Internet
Once again, the SEC is moving quickly. It is a welcome change, as they have always been known for closing the barn door after the horse has bolted. Only three weeks after an alleged fraud began, the SEC charged a securities broker with securities fraud for repeatedly creating and then distributing fake press releases to manipulate the stock prices of multiple publicly traded companies.

Morgan Stanley Plans to Double High Net Worth Advisors
Morgan Stanley Smith Barney announced the integration of Smith Barney’s Citi Family Office into its own ultra-high-net-worth division, which will now be called Morgan Stanley Private Wealth Management. Unlike the old family office, the newly combined unit will exclusively serve clients with a minimum of $20 million in assets. Morgan said it plans to add more advisors to PWM through a combination of "organic growth and selective acquisitions."

Schwab Receives Wells Notice For Mutual Funds
In an 8-K filing, Charles Schwab Corp. disclosed that it has received a Wells Notice from the SEC. Accordign to the filing, the Company has been responding to civil litigation claims and regulatory investigations regarding two fixed income mutual funds, the Schwab YieldPlus Fund(R) and the Schwab Total Bond Market Fund(TM). The Wells Notice reflects that the SEC staff intends to recommend the filing of a civil enforcement action against Schwab Investments, Charles Schwab Investment Management, Charles Schwab & Co., Inc. and the president of the funds for possible violations of the securities laws with respect to the two funds.

Beware of Auction Rate Securities Settlement "Phishing" Scam
FINRA has issued an Investor Alert to warn the public about a recent auction rate securities (ARS) "phishing" scam that promises compensation from ARS settlements in exchange for personal information. Follow the link to the FINRA web site. The email looks like it originated from FINRA—although it did not. It purports to inform the recipient of regulatory actions, including fines imposed by FINRA related to ARS, and states that the recipient is due $1.5 million regardless of the amount of their ARS investment or loss. The email then “phishes” for personal information including occupation, address and phone number.





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Nothing herein is intended as legal or financial advice. The law is different in different jurisdictions, and the facts of a particular matter can change the application of the law. Please consult an attorney or your financial advisor before acting upon the information contained in this article. SECLaw.com was created by and is sponsored by Mark J. Astarita, Esq., a securities attorney and partner in the law firm of Beam & Astarita, LLC, who represents all participants in the financial markets. Mr. Astarita can be contacted by email at astarita@beamlaw.com.

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