Updated May 08, 2008
NASDR Notices to Members
08-20 FINRA Requests Comments on Proposed
Changes to Forms U4 and U5
FINRA requests comment on proposed changes to Forms
U4 and U5. The proposed changes, which were developed by a working group composed of
regulators and industry participants (the Working Group), are intended to benefit regulators,
investors and the industry. Proposed revisions, among other things, would require firms to report,
as customer complaints, allegations of sales practice violations made in arbitration claims and
civil lawsuits against registered persons who are not named as parties in those proceedings. The
proposals also include revisions to Forms U4 and U5 designed to ease, clarify or facilitate
reporting requirements and other technical and/or conforming changes
08-18 Sound Practices for Preventing and Detecting
Unauthorized Proprietary Trading
FINRA requests comment on proposed changes to
Forms U4 and U5. The proposed changes, which were developed by a working group composed
of regulators and industry participants (the Working Group), are intended to benefit regulators,
investors and the industry. Proposed revisions, among other things, would require firms to report,
as customer complaints, allegations of sales practice violations made in arbitration claims and
civil lawsuits against registered persons who are not named as parties in those proceedings. The
proposals also include revisions to Forms U4 and U5 designed to ease, clarify or facilitate
reporting requirements and other technical and/or conforming changes.
08-17 Reporting of Customer Complaints Relating to
Auction Rate Securities
FINRA has added three new product categories for use by
member firms in reporting customer complaints relating to auction rate securities. NASD Rule
3070(c) and incorporated NYSE Rule 351(d) require all members and member organizations to
report, on a quarterly basis, statistical information regarding customer complaints. This
information is required to be filed by the fifteenth calendar day of the month following the end of the
quarter.
08-16 Member Firm Disclosure and Supervisory Review
Obligations
Effective April 7, 2008, an amendment to revise NASD Rule 2711(h)(13) and
Incorporated NYSE Rule 472(k)(4) modifies a member’s disclosure and supervisory review
obligations when it distributes or makes available third-party research reports. The rule change
creates a category of "independent third-party research" and eliminates certain supervisory review
requirements when a member distributes or makes available such research.
08-15 Foreign Research Analyst Exemption from the
Research Analyst Qualification Examination
Effective April 7, 2008, certain research
analysts employed by a member firm’s foreign affiliate who contribute to the preparation of a
member firm’s research reports are exempt from the Research Analyst Qualification Examination
per NASD Rule 1050 and Incorporated NYSE Rule 344. The rule change supersedes an existing
exemption that applies only to research analysts who are employed by foreign affiliates in certain
FINRA-approved jurisdictions
08-12 SEC Approves Amendment to NASD Rule 2210 to
Create an Exception to the Principal Approval Requirements for Certain Filed Sales
Material
Effective March 26, 2008, principal approval is no longer required for certain
previously filed sales material. The amendment to NASD Rule 2210 also codifies FINRA staff's
interpretation that a firm must maintain records of advertisements, sales literature and
independently prepared reprints for a period beginning on the date of first use and ending three
years after the date of last use.
08-11 Q&A on Electronic Filing Requirements of NASD
Rule 3170
This Notice provides answers to frequently asked questions FINRA has
received on the electronic filing requirements under NASD Rule 3170 that became effective
January 2007.
08-08 FINRA Temporarily Increases Margin
Maintenance Requirements on Auction Rate Securities Backed by Fixed Income
Products
FINRA is temporarily increasing the maintenance margin requirements for
auction rate securities pursuant to NYSE Rule 431(f)(8)(A) and NASD Rule 2520(f)(8)(A). Effective
immediately, all auction rate securities that are backed by fixed income products (e.g., municipal
bonds, collateralized debt obligations, etc.) will have a 25 percent maintenance requirement.
Increased maintenance requirements coupled with devaluation by some brokerage firms is going
to spell trouble for investors holding these securities. When a margin call is generated in the
account, either by the increased margin requirement or the decline in other securities in the
portfolio, investors will have to sell other securities, not their ARS, to meet the call.
News Items
SEC Staff Recommends Commission Action to Facilitate Investment in Small
Business
The SEC's Division of Investment Management has prepared a
recommendation for consideration by the Commission to increase the availability of capital to
certain smaller companies that do not have ready access to the public capital markets or other
forms of conventional financing. The Division has recommended that the Commission adopt an
amendment to a rule that defines the types of companies in which business development
companies (BDCs) may invest most of their assets. Congress in 1980 established BDCs, which
are publicly traded investment companies, to help make capital more readily available to small
developing and financially troubled businesses.
SEC Stops Multi-Million Dollar Fictitious Currency Trading Program
The SEC
has announced that it has obtained a court order to stop a $27 million Ponzi scheme involving
investors in the United States, Canada, and other countries. The SEC charged Las Vegas-based
Gold-Quest International and its three principals for the alleged misuse of investor funds in a
scheme that promised incentives to investors who recruited "friends and family" into the system.
The SEC alleged that Gold-Quest and its owners misrepresented that investor funds would be
pooled and invested in foreign currency exchange trading and would generate annual profits of
87.5 percent. No investor money was actually invested in foreign currency exchange trading.
SEC Charges Two Former Monster Worldwide Executives for Backdating
Options
The SEC has charged two former senior executives at Monster Worldwide, Inc.,
for their alleged participation in a multi-year scheme to secretly backdate stock options granted to
thousands of Monster officers, directors and employees.
SEC Charges Birmingham Mayor and Friends for Undisclosed Payment Scheme in
Municipal Bond Deals
The SEC has charged Birmingham Mayor Larry Langford and two
of his friends in connection with undisclosed payments to Langford related to municipal bond
offerings and swap agreement transactions Langford directed on behalf of Jefferson County, Ala.
Also charged was the Alabama broker-dealer firm that reaped millions of dollars in fees from the
deals.
Bear Loses Top
Chicago Team
On Wall Street is reporting that Bear Stearn's Chicago office has lost its
top producing team to Morgan Stanley's Chicago-based high-net-worth office. The team, headed by
35-year Bear Stearns' veteran Steve Nakovich and Art Pancoe, oversaw $1.2 billion in assets and
generated almost $5.8 million in production.
Nuveen struggles to cash out its ARS
holders
Fund giant looking to liquefy $15 billion in preferred auction-rate securities;
investors may have to wait months
FINRA Hearing Panel Dismisses 2004 Sales Practices
Complaint Against H&R Block Financial Advisors
In a decision that is surely causing
concern at FINRA, a FINRA Hearing Panel dismissed a complaint against H&R Block Financial
Advisors alleging sales practices and supervisory violations relating to sales of Enron Corporation
bonds during the one-month period immediately preceding Enron's filing for bankruptcy protection
on Dec. 2, 2001.
The panel ruled that FINRA's Department of Enforcement failed to show by a preponderance of
evidence that H&R Block registered representatives misrepresented or omitted material facts in
connection with sales of Enron bonds, or that the firm failed to implement adequate supervisory
systems and procedures. Specifically, the Panel "found no evidence" that the firm "engaged in
other wrongful conduct."
A FINRA hearing panel finds "no evidence" to support FINRA charges against a BD? While this
raises a number of concerns regarding the quality of the investigative process at FINRA and its
decision making process in commencing litigation, the proceeding was undoubtedly a significant
expense for the respondents, as the hearings consumed 24 days of testimony.
We are seeing an increasing number of hearing panels dismissing all or parts of enforcement
cases. FINRA needs to examine the quality of its investigative procedures, and to re-examine its
perception of brokers and brokerage firms, which may be clouding its collective judgment in
commencing cases where there is no evidence of any wrongdoing.
The panel issued a detailed, 54-
page decision.
BlackRock bails out its auction-rate
holders
Good news for holders of Auction rate securities. Joining Nuveen and Eaton
Vance, BlackRock, the second-largest manager of closed-end funds in the U.S., said that it would
restructure $1.9 billion of ARPs issued by both taxable and tax-exempt closed-end funds.
That means that the holders of the ARS will not have a loss on their investment. Of couse, this
all assumes that Blackrock follows through. Reports say that it has obtained 1.9 billion in financing
for the bail out, but Blackrock has over 9 billion dollars in ars in its mu
Congressmen question fund companies’
treatment of ARS holders
Letter to SEC's Cox labels resistance to cashing out closed-
end ARS funds an 'apparent conflict'
SEC Announces $30 Million Fair Fund Distribution to Investors Affected by Undisclosed
Market Timing in RS Investments Mutual Funds
The SEC announced the distribution of
approximately $30.6 million to more than 250,000 investors who were affected by undisclosed
market timing in certain RS Investments mutual funds.
The Fair Fund distribution includes $25 million in disgorgement and penalties paid by RS
Investment Management, Inc. and RS Investment Management, L.P. (RS Investments) in an SEC
enforcement action, approximately $3.3 million in disgorgement and penalties from Banc of
America Capital Management LLC, BACAP Distributors LLC, and Banc of America Securities LLC
related to a separate unlawful market timing matter that affected RS Investments investors, and
accumulated interest.
SEC settles with Wall Streeter accused of
spreading rumors about Alliance Data
Trader allegedly profited from text messaging lies
about LBO offer; 'info' was soon picked up by media outlets
SEC Charges Wall Street Short-Seller With Spreading False Rumors
The SEC
has charged Paul S. Berliner, a Wall Street trader formerly associated with Schottenfeld Group
LLC, with securities fraud and market manipulation for intentionally spreading false rumors about
The Blackstone Group's acquisition of Alliance Data Systems while selling ADS short.The SEC
alleges that five months ago, Berliner disseminated the false rumor through instant messages to
numerous individuals, including traders at brokerage firms and hedge funds. The false rumor also
was picked up by the media.
Heavy trading in ADS stock ensued, and within 30 minutes the false rumor had caused the price of
ADS stock, trading at approximately $77 per share, to plummet to an intraday low of $63.65 per
share - a 17 percent decline. In response to the unusual trading activity, the New York Stock
Exchange temporarily halted trading in ADS stock. Later in the day, ADS issued a press release
announcing that the rumor was false. By the close of trading, the price of ADS stock recovered to its
pre-rumor price of approximately $77 per share. Berliner profited by short selling ADS stock during
its precipitous decline
Merrill files claim against Nat City over First
Franklin
Claim arises from i-bank’s purchase of subprime mortgage originator from Nat
City in 2006
UBS puts its investment banking unit on a tight
leash
Private bank will no longer fund i-bank; capital 'must be generated under its own
steam'
BlackRock bails out its auction-rate
holders
Second-largest closed-end fund manager considers adding a put to $1.9 billion
worth of frozen securities to make them more salable
SEC and PAUSE help to warn investors
of securities fraud
The SEC is stepping in to protect investors against fraudulent sales
pitches and other investment related scams. Their new initiative, "PAUSE," which stands for Public
Alert: Unregistered Soliciting Entities, aims to educate investors about current company
complaints, questionable activities, boiler room fraud, phone solicitations, and other shady
practices being used by money hungry scam artists.
PAUSE currently lists 56 unregistered soliciting entities and phone agencies that investors should
avoid. The SEC plans to update the list regularly, and hopes that individuals will visit the site
before making any investment decisions.
Ex-Brookstreet brokers file $36M
claim
According to InvestmentNews, five brokers at the center of the collapse of
Brookstreet Securities Corp. have filed a $36 million arbitration complaint against Brookstreet’s
former clearing firm, National Financial Services LLC, alleging that hundreds of millions of dollars
that clients lost in highly leveraged collateralized mortgage obligations were directly attributable to
National Financial Services’wrongful conduct.
Bear Stearns, Deloitte Sued Over Hedge
Fund
The problems for Bear Stearns seem to keep on coming. After its fire sale to JP
Morgan, today's news is that the liquidators of two of its hedge funds that collapsed last year, have
filed suit against the company and its auditor, Deloitte & Touche seeking to recover over $1 billion
in losses.
Melvyn Weiss Pleads Guilty in Class Action Kickback
Scheme
Melvyn I. Weiss, co-founder of a prominent New York law firm, pleaded guilty
Wednesday to a racketeering conspiracy charge in a kickback scheme.
Mr. Weiss, 72, entered his plea under an agreement with prosecutors. He has been ordered to pay
nearly $10 million in fines and forfeiture penalties, and could be sentenced to up to 33 months in
prison at a later hearing.
Fed Monitoring Brokerage Firms
According to the Wall Street Journal,
the Federal Reserve has set up shop inside brokerages to monitor their financial condition,
perhaps the beginning of an expanded role for the central bank and additional regulation for Wall
Street. Reuters adds that the Fed has its personnel inside brokerages including Goldman Sachs
and Bear Stearns to monitor their financial state.
FINRA Issues Guidance to Investors Caught in ARS
Auction Failures
The Financial Industry Regulatory Authority (FINRA) today spelled out the
options available to investors holding unexpectedly illiquid auction rate securities (ARS) because
of recent developments in the credit market that have resulted in many ARS auctions failures.
Statement of FINRA CEO Mary L. Schapiro Regarding
Treasury Secretary's Blueprint on Revamping Financial Services Regulation
Why bother
to even put out a press release - the standard FINRA footer is longer than the statement itself.
Investors tap retirement savings to make real
estate bets
Amid housing woes, use of self-directed IRAs is on the rise
Self-Regulators Warn Against Spreading False Rumors
and Other Abusive Market Activity
The SROs are coordinating efforts to heighten the
monitoring and investigation of trading activity in issuers that may be subject to credit market-
related volatility.
The regulators are reminding brokers of the prohibitions in NYSE Rule 435(5) and NASD Rule
5120(e) against the circulation in any manner of sensational rumors that might reasonably be
expected to affect market conditions, as well as their obligations under NASD Rule 2110 and NYSE
Rule 476 to refrain from any conduct or activity inconsistent with just and equitable principles of
trade.
SEC, FINRA Announce 14 Regional CCOutreach BD
Seminars
The SEC and FINRA announced the dates and locations of 14 regional
CCOutreach BD seminars that will be held throughout the country in 2008. The program is
designed to further promote strong compliance practices for the protection of investors. At the
regional seminars, SEC and FINRA staff will address the examination process and examination
priorities, as well as highlights from relevant topics.
