August 2011 - IPO Allocations — The Largest Consolidated Securities Case in History
What were you doing in 1998? Were you lamenting over the series finale of Seinfeld? Were you celebrating the Denver Broncos victory over the Green Bay Packers at the Super Bowl XXXII? Were you investing in Technology IPOs? Chances are, if you answered yes to anyone of these, you were in the mainstream with so many other Americans.
By 1998, the "Dot Com Bubble" was already three years into the making. The headlines, reminiscent of the 1849 California Gold Rush, contained reports of instant millionaires who had invested in any IPO distribution that contained a ".com" in its name.
It was in 1998 that abusive IPO allocation practices began leading to the largest consolidated securities case in history. Allegations in the case named most of the nation's leading investment banks including claims against 55 underwriters, 309 issuers, and more than 1,000 individual defendants. In hundreds of initial public offerings between 1998 and 2000, investors in technology IPOs were required to enter into unwritten "tie-in" agreements to buy additional shares of the issuer in the secondary market at higher prices as a condition of receiving an allocation. This activity artificially inflated demand for the shares, thereby inflating the price of the shares to unsustainable levels. Other allegations in the case reported that certain underwriters were receiving higher-than-usual commission or demanding kickbacks as compensation for the IPO allocations.
Those involved in the case spent years trying to determine the legality of the claims and the allocation practices. Ten years later in 2009, a settlement was finally reached with an agreement made by the investment banks and tech-company insurers to pay $586 million to shareholders for release of the claims. This settlement is a far cry from the 2006 tentative settlement of $1 billion that would have been levied if the case had been brought as a class action suit.
FINRA has recently published various regulatory notices outlining its concerns as well as rule changes and firm obligations for the distribution of new issues, both public and private. This month's newsletter, "FINRA Rule 5131 — New Issues Allocations and Distributions," is an excerpt from our newest course, Public and Private Offerings — Regulatory Concerns. This course details those concerns so that you can provide this information to your registered employees and reduce the risk of improperly offering these securities to public or private investors.
About the Course
Public and Private Offerings — Regulatory Concerns reviews the results of the SEC sweep exams that exposed abuses in broker/dealer self-offerings. In response, FINRA developed Rule 5121 — public offerings of securities with conflicts of interest — which requires prominent disclosure of any conflicts of interest with an offering. In certain cases, it requires the appointment of a qualified independent underwriter to assist with an IPO offering.
The course also reviews the new FINRA Rule 5131, which contains prohibitions against the allocation of IPO shares to obtain a "kickback," excessive compensation, or the assurance of future business.
Revisions to the Papilsky Rules (NASD Rules 2730, 2740, and 2750) are addressed in this course and we explain how they have been consolidated into FINRA Rule 5141, which seeks to protect the integrity of the fixed price offering process.
Finally, this course defines the term "private placement" and describes when a firm is obligated to investigate a private placement issuer. It also helps students identify conflicts of interest that would increase the scope of an investigation, and outlines specific points to investigate.
The development and rule updates covered in this course encompass the recent efforts made by regulators to strengthen the integrity of the new issue process.
Highlights of the course include:
July 2011 - The Greatest Threat to the Career of a Securities Professional
During the development of FIRE Solutions' newest course, Risk Management for Securities Professionals, we conducted an industry-wide risk assessment survey to determine the greatest threat to the career of any securities professional. The assessment, gleaned from interviews with regulators and other industry experts, analyzed the following regulatory data sources:
These data sources revealed that the #1 threat to securities professionals' careers is recommending securities without fully understanding every aspect of the securities product. The analysis also indicated that there is a significant threat in noncompliance with private securities transaction rules. Within these top two risk factors, FIRE Solutions' Risk Management for Securities Professionals describes the specific action steps that professionals should take to reduce or eliminate these threats, as well as many others.
These data sources revealed that the #1 threat to securities professionals' careers is recommending securities without fully understanding every aspect of the securities product. The analysis also indicated that there is a significant threat in noncompliance with private securities transaction rules. Within these top two risk factors, FIRE Solutions' Risk Management for Securities Professionals describes the specific action steps that professionals should take to reduce or eliminate these threats, as well as many others.
Click here for your copy of "Risk Management Strategies".
About the Course — Risk Management for Securities Professionals
Just as firms must take a close look at the factors that can threaten their business, securities professionals should examine the risk factors that can threaten their jobs, finances, and livelihood.
Risk Management for Securities Professionals reviews common risks, such as certain regulatory violations; how securities professionals can assess their own level of risk; and how to prioritize and reduce those risks. This is an interactive course; in Lesson 2, we provide the tools for securities professionals to follow along and develop their own risk management plan.
Risk Management for Securities Professionals is intended for retail and institutional representatives, as well as investment advisers and fund managers in the securities industry. This course is also appropriate for financial and operations principals, executive management personnel, and anyone with a vested interest in reducing regulatory risks.
Highlights of the course include:
June 2011 Cases of Fraud Continue to Threaten U.S. Financial Systems
Money laundering is not the only major threat to the financial services industries. Fraud, bribery, and foreign corruption continue to threaten and impact U.S. financial systems. The volume of regulatory action cases pursued by the Securities and Exchange Commission and the FBI is on the rise, accounting for approximately 2,000 cases in 2010. This supports the increasing need for strong fraud prevention and detection programs at brokerage firms.
Fraudulent activities have farther-reaching jurisdiction than your typical rule violations. Fraud cases are usually handled by the SEC and the FBI, regulators that can cross political borders to gain the assistance and cooperation of other criminal enforcement divisions as well as foreign regulators. Consequences of committing fraud can go beyond regulatory fines or suspensions and include civil litigation as well as jail sentences.
Activities that constitute securities fraud are very difficult to detect if the individuals committing the fraudulent acts take measures to hide their deceitful intentions. In addition, individuals who are ignorant of fraudulent practices can inadvertently find themselves involved in more trouble than they could have imagined, as in the case described in "The Case of the Missing Hedge Fund Adviser" in this month's issue of FIRE On Your Side. This case study is an excerpt from our newest course called Fraud Prevention and Detection.
Click here for your copy of "The Case of the Missing Hedge Fund Adviser".
About the Course
Fraud Prevention and Detection covers emerging law requirements, as well as updated methods of detecting and preventing various types of fraud, bribery, and corruption. The course provides an overview of what the U.S. securities laws consider fraudulent, as well as details about some of the most common types of fraud. Case studies included in this course illustrate the mistakes that firms have made with regards to fraud and the consequences for their ignorance of fraud laws or intentions to commit fraud.
The course then delves into the specific securities laws that seek to curtail the efforts of those who intend to commit fraud. In addition to preventive measures, the student is presented with specific red flags that could alert firms, representatives, advisers, and support staff of suspicious activities related to fraudulent activity.
Finally, students will receive an overview, case study, and list of red flag activities of the Foreign Corrupt Practices Act with key provisions to which domestic and international firms should be alerted.
Highlights of the course include:
May 2011 Will Your Firm Be Ready for the New Suitability Updates?
When is the effective date?
Are there new elements to the client-specific suitability determination?
How will the institutional suitability requirements change?
Is there a third suitability determination to consider?
What is "de-facto control" and why do reps need to know about it?
Do your representatives know the answers to these questions? All these questions and more are explained in "Suitability Rule Consolidation," an excerpt from our Firm Element CE course entitled Suitability and Supervision.
Effective July 9, 2012, NASD's suitability Rule 2310 will be replaced with FINRA Rule 2111. FIRE Solutions has proactively updated its courses to reflect these changes to help representatives, advisers, and institutional representatives start thinking in terms of how these updates will change the way they make recommendations. The rule updates are presented in such a way as to make it clear what is currently in effect, and what will be required when the rule goes into effect.
Click here for your copy of "Suitability Rule Consolidation".
Suitability and Supervision is an introductory level course designed for registered representatives, investment advisers, institutional representatives and their supervisors, and sales support staff. It is also appropriate for other financial service industry professionals interested in a refresher of regulatory concerns regarding suitability.
Highlights of the course include:
April 2011 Failure to Disclose
Any idea what the #1 "failure to disclose" is? It may surprise you.
Each year FIRE Solutions conducts a review of FINRA enforcement cases over a one-year period. This information is presented in the spirit that awareness is a key element in the prevention of these types of violations. At a minimum, each of the persons represented in our analysis will forever have to disclose their violation(s), and most of the cases involve significant fines and suspensions as well. This information translates into personal and professional damage. In the world of securities regulations, ignorance of the rules is not a valid defense. Learning from the mistakes of others will help in your efforts to reduce the risk of someone in your firm ending up in our analysis next year.
This year's review period is from April 2010 through March 2011. Our analysis shows an average caseload of 94 disciplinary proceedings per month against firms and their representatives. This represents a 9% increase from last year's analysis. During that same one-year period, 26.6% of the cases cited some form of failure to disclose.
A portion of our analysis is provided here in a document entitled, "Failure to Disclose - Enforcement Cases Analysis 2011," an excerpt from FIRE's Firm Element CE course entitled Regulatory Actions Against Firms and Representatives. Our analysis in the course details, by type and number of cases, the activities that subject firms and their representatives to fines, suspensions, and debarment from the industry. The results are enlightening! Click on the link below to find out the #1 failure to disclose.
About the Course
Regulatory Actions Against Firms and Representatives is intended for all FINRA registered representatives, investment advisers, and their supervisors. This course would also be beneficial for compliance professionals and management level officers.
Regulatory Actions Against Firms and Representatives raises awareness of the FINRA disciplinary process, and the degree to which firms and representatives can be punished for making bad decisions.
Lesson 1 reviews the disciplinary process and relevant statistics highlighted in charts for various failure to disclose scenarios. Commentary and analysis after each chart helps boost awareness in an effort to reduce the risk of violations. The lesson is summarized with a look at the motivating factors behind bad decisions in an effort to redirect the potential for unethical behavior.
Lesson 2 provides an opportunity for representatives to anticipate what sanctions might be levied for various rule violations. Although this "Guess the Punishment" game is meant to be entertaining, it is not meant to make light of the people depicted in these cases, and all the names have been changed to protect the privacy of those involved.
The final lesson in the course outlines case studies of extraordinary crimes in the securities arena, and highlights the enormous efforts they require of multiple enforcement agencies to bring these activities to a stop.
Highlights of the course include:
March 2011 AML Current Issues - Case Studies
Much of what we learn about the evolution of money-laundering strategies comes from a review of criminal cases and industry violations. It is important to learn from the misdeeds or mistakes of others in an effort to reduce our own regulatory risk surrounding AML rules.
This month's excerpt is a review of common mistakes and rule infractions made by securities and futures industry firms. It focuses on cases of criminal prosecutions and violations of industry insiders. The article provides a discussion of the rule violations when a firm has a duty to investigate and emphasizes the rules which can reduce the risk of disciplinary actions.
About the Course
AML - Current Issues 2011 is intended for securities and futures industry professionals interested in the latest developments and trends in anti-money laundering efforts, as well as the changing regulatory environment. This course is also beneficial for AML Compliance Officers and compliance administrators. However, it is not intended for depository institutions that accept cash deposits and cash equivalents.
AML - Current Issues 2011 presumes that the reader has a basic understanding of the anti-money laundering requirements under the Patriot Act. The course focuses on the following topics:
Highlights of the course include:
February 2011 Political Contributions by Investment Advisers
A three-year investigation into the New York Pension System has netted the return of $120 million back into the Common Retirement Fund, paid by investment firms and their associates who received management fees as a result of pay-to-play practices. New York State Attorney General Andrew M. Cuomo held nothing back when exposing these practices and requiring 11 firms to sign the Attorney General's Public Pension Fund Reform Code of Conduct.
Although it is clear that pay-to-play practices will not be tolerated with New York State pension funds, it is not clear which states or local governments will follow suit with similar investigations. However, the SEC is implementing the new Rule 206(4)-5, the Investment Adviser Act equivalent to Rule MSRB G-37 on political contributions for municipal underwriters.
This month's newsletter entitled, Investment Advisers Act - Pay-to-Play Rule, describes the rule's provisions - who must comply and how. The article details allowable contribution limits, prohibitions, books and records requirements, and a due diligence obligation not found in the MSRB rule.
About the Course
With Rule 206(4)-5 taking effect March 14, 2011, investment advisers now have to comply with political contribution rules in much the same way as municipal financial professionals under MSRB G-37. Investment advisers will have similar contribution limits and compensation bans for their public pension fund investment advisory services. Fire Solution's Continuing Education course, Investment Advisers Pay-To-Play Rules, outlines the specific limits and restrictions on contributions that could trigger a compensation ban, or worse, a securities fraud violation.
The course focuses on the following topics:
January 2011 Outside Business Actvities
An analysis of FINRA disciplinary actions show that 30 to 40% of cases brought against registered representatives include some form of selling away - the representatives' failure to report outside business activities or personal trading accounts. These activities pose an enormous risk to firms and potential harm to clients.The consolidation of NASD Rule 3030 and NYSE 346 into FINRA Rule 3270 went into effect December 15, 2010, and requires firms to conduct and document a review of registered persons' outside business activity notifications. FINRA member firms have until June 15, 2011 to document their compliance with the new supervisory review provisions for registered persons who have disclosed outside business activities prior to December 15, 2010.
This month's excerpt, FINRA Rule 3270 - Outside Business Activities of Registered Persons, is taken from the FIRE Solutions Outside Business and Personal Trading Activities Firm Element CE course and outlines the specific supervisory review requirements of the rule updates. This excerpt also details the applicability and timing of required reporting by registered persons.
About the Course
The Outside Business and Personal Trading Activities course is divided into two lessons with case studies:
- Outside Business Activities - FINRA Rule 3270
- Personal Trading Activities - NASD Rule 3040 and 3050
In this course, we examine how the activities of representatives can have a negative impact on a firm if they fail to fully disclose their business activities away from the firm. It outlines regulatory updates imposed by SEC's approval of FINRA Rule 3270 (Outside Business Activities of Registered Persons), defines private securities transactions, and outlines the various obligations of opening or maintaining a personal trading account. Additionally, the required principal supervisory obligations over these activities to protect the firm and its clients are examined.
The course focuses on the following topics:
- The definition and applicability of the updated outside business activities rules
- Examples of outside business activities
- Conflicts of interest with outside business activities
- Supervision of outside business activities, private securities transactions, and personal trading accounts
- The definition of a private securities transaction
- The responsibilities of opening or maintaining a personal trading account
- Prohibited activities
- Case studies
September 2010 The Great Fiduciary Culture Shock
The new Fiduciary Standard is one of the most hotly debated issues resulting from the Wall Street Reform and Consumer Protection Act of 2010 (the Dodd-Frank Act). The SEC is currently conducting studies and reviewing opinions that will change the way retail sales representatives view every recommendation they make. As regulatory reform is poised to change the playing field, it is important to insure that representatives understand what distinguishes a fiduciary from a non-fiduciary, and how the Dodd-Frank Act will standardize the level of care administered by fiduciaries and non-fiduciaries.
This month's excerpt, "Proposed Regulation of the Fiduciary Responsibility," is taken from the FIRE Solutions Fiduciary Responsibility firm element CE course and examines the key issues surrounding the debate over the new fiduciary standards. It also focuses on how coming changes to the existing fiduciary rules will affect the way that retail sales reps currently do business.
About the Course
Proposed Regulation of the Fiduciary Responsibility is an introduction to the basics of fiduciary law and is intended for investment advisers, investment adviser representatives, and certified financial planners. The course covers changing standards and the latest developments in fiduciary law. When the new fiduciary standard is finalized, the course will be updated with references to the new laws and how they will affect financial services professionals.
The course currently focuses on the following topics:
- The definition of fiduciary standard and who must comply
- Fiduciary vs. non-fiduciary recommendations
- The applicability of common law principals to basic trustee duties
- Theoretical discussions and new, on-the-table regulations
- Setting client expectations
July 2010 Revisions to the Iran Sanctions Act of 1996
Money laundering represents one of the most pressing issues facing regulatory authorities and the domestic and international financial markets. Existing rules and regulations covering this global problem provide a deterrent, but by no means has money laundering been eliminated. Laundered money may be associated with other organized criminal activities, including tax evasion, illicit drug sales, arms running, and terrorism. Detecting money laundering activities consumes tremendous resources and the associated damages related to tax evasion and criminal funding pose a burden to government, and to the banking and financial services industry.
In response to terrorist threats and threats to our national safety, the Financial Crimes Enforcement Network (FinCEN), a U.S. government agency charged with fighting terrorist financial networks, will utilize the anti-money laundering programs established under the Patriot Act to assist in the enforcement of sanctions against countries who pose such threats, such as North Korea and Iran. Through the use of alerts, FinCEN has published guidance on how financial services firms are to respond to financial activities that further the proliferation of weapons of mass destruction by the North Korean and Iranian governments. (FIRE Solutions provides a review of this guidance in its Firm Element CE course, AML — Current Issues 2010). The latest development in the area of combating threats to national safety comes in the passing of a bill into law, that not only tightens the ability of the Iran government to procure petroleum products and financial services to aid in the proliferation of nuclear weapons, but also imposes sanctions on firms in the petroleum and financial services industries for inadvertently providing assistance in these areas.
By a vote of 412 to 12, the House of Representatives passed the Iran Refined Petroleum Sanctions Act (IRPSA) to enhance diplomatic efforts, amend current sanctions against Iran imposed by the Iran Sanctions Act of 1996, and extend the sanctions through 2016. In March 2010, the bill passed the Senate by unanimous consent and President Obama signed the bill into law on July 1, 2010.
In an effort to keep our clients abreast of the most current regulations, FIRE Solutions has revised its AML — Current Issues 2010 course to cover IRPSA. In the attached excerpt, "Comprehensive Iran Sanctions, Accountability, and Divestment Act," we outline key provisions of the new law that must be followed by foreign and domestic financial institutions to avoid government sanctions for conducting business with restricted entities. Sanctions for violations are extremely serious and financial institutions should be aware of and avoid activities that could inadvertently help the proliferations of nuclear weapons in Iran.
About the Course
AML — Current Issues 2010 is intended for any financial service industry professional interested in the latest developments and trends in anti-money laundering efforts, as well as the changing regulatory environment. This course is also beneficial for AML compliance officers and compliance administrators.
AML — Current Issues 2010 presumes that the reader has a basic understanding of the anti-money laundering requirements under the Patriot Act.
The course focuses on the following topics:
- Developing trends and current issues in the financial services industry
- Efforts to combat money laundering and other abuses of U.S. financial systems
- Highlights current AML issues that might be faced by registered reps, compliance staff, and firm personnel
- Reviews current AML rule violations and enforcement actions against banks and broker dealer firms
- Highlights emerging money laundering trends and enforcement agency focus
- Reviews suspicious actions and client behaviors that are considered red flags for the latest abuses of our financial systems
Highlights of the course include:
- FINRA's new AML rule
- Updated correspondent and private banking account requirements
- Definition and responsibilities of publicly exposed persons (PEPs)
- Four types of foreign institutions that require due diligence
- The five risk factors of correspondent accounts
- Minimum standards for foreign bank due diligence
- General filing trends
- Case study — mortgage fraud
- The red flags of foreclosure rescue scams
- Abuses of the Troubled Asset Relief Programs (TARP)
- Due diligence and red flags to detect TARP scams
- FinCEN's advisory on North Korea's abuse of U.S. financial systems
- Amended sanctions against Iran and the impact on financial services firms
- Report on abuse of charities for money laundering and tax evasion
July 2010 Exchange Traded Funds
Exchange Traded Funds (ETFs) have gained popularity in recent years as a low cost alternative to mutual funds with their one-time commission fee and lower operating expenses. As a result of this popularity, ETFs have been the focus of increased regulatory concern. In response to this concern and special requests from our clients, FIRE Solutions has developed a Firm Element Continuing Education course entitled Exchange Traded Funds, designed to accommodate the training needs of our clients who offer ETFs.
FIRE Solutions Firm CE Course - Exchange Traded Funds
Exchange Traded Funds is intended for any financial service industry professional interested in the latest developments and regulatory focus of the ETF market. This course is most beneficial for institutional representatives, representatives with high net-worth clients, investment advisers, supervisors, and support staff.
This course is designed to provide students with a working knowledge of distinctive ETF terms, features, suitability factors, and risks. It will also help students gain proficiency with leveraged and inverse ETF calculations.
This course presumes knowledge of basic trading and analysis concepts. It also requires some light mathematic calculations.
FIRE's Exchange Traded Funds course includes:
- ETF terms and features
- Types, purpose, and structure of ETFs
- Suitability and risks
- Communication practices regarding ETFs
- Leveraged and inverse ETFs
- Time and volatility calculations
- Margin requirements for leveraged ETFs
FIRE Solutions has conducted a review of FINRA enforcement cases over a one-year period (June 2009 – May 2010), showing an average caseload of 81 disciplinary proceedings per month against firms and their representatives. Of the cases cited, 22% reported some form of undisclosed conflict of interest. The results of this review are provided here in a document entitled, "Failure to Disclose — Enforcement Cases Analysis," an excerpt from FIRE's Conflicts of Interest Firm Element CE course. This document details by type and number of cases, the activities that subjected firms and their representatives to fines, suspensions, or barring from the industry during that period. The results are enlightening!
FIRE Solutions Firm CE Course - Conflicts of Interest
Facing conflicts of interest issues is an ongoing concern for those administering "advice" as professionals. This course discusses the rules that relate to registered representatives concerning conflicts of interest, as well as detailed descriptions of defined conflicts of interest.
The issues discussed include disclosure obligations, books and record keeping requirements, personal trading issues, and actual trading practices. Topics are supported by case studies that illustrate violations of failures to disclose.
FIRE's Conflicts of Interest course includes:
- A definition of conflicts of interest and the requirements for disclosing material information
- A review of various types of conflicts of interest that could arise in relationships with clients
- A review of disclosure procedures
- A review of FINRA enforcement cases involving failures to disclose
- A definition of Private Securities Transactions and the regulatory concerns surrounding them
- A discussion of compliance measures for Investment Advisor activities
- A review of personal trading account requirements and trading restrictions