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Wednesday, June 11, 2014

BrokerCheck disclosures expanded to "Permanently" include any investment-related settlement with a state or foreign financial regulatory authority.


FINRA will soon permanently make publicly available in BrokerCheck, information about former associated persons of a FINRA member firm who were registered on or after August 16, 1999, and who have been the subject of an investment-related civil action brought by a state or foreign financial regulatory authority that was dismissed pursuant to a settlement agreement.  See FINRA Regulatory Notice 14-08.  The amendments are effective June 23, 2014.

Should Broker's exam scores and failures be added to BrokerCheck?

As we approach the end of the academic year, students are turning their attention to final exams.  They know that these exams will test their mastery of the material they were supposed to have learned.  They also know that their exam scores will soon be reflected on report cards and, in most cases will be sent home to students' parents.  But what if those exam scores never went away?  What if they could be reviewed by prospective employers or anyone else?

There has been a fair amount of controversy over how much information BrokerCheck should include. The debate appears to be heating up again. In a recent InvestmentNews article, Professor Ben Edwards of Michigan State University College of Law argues that BrokerCheck should include information about brokers' exam scores and failures. Prof. Edwards runs a law clinic focused on protecting the interests of small investors.

In March, the Public Investors Arbitration Bar Association released a study arguing that FINRA's BrokerCheck should disclose all material public information about a broker that it possesses. More on PIABA's study can be found here. The PIABA study was co-authored by Prof. Edwards, Jason Doss, PIABA's president, and St. John's Law School Professor, Christine Lazaro, who is also the Chairwoman of PIABA's Legislation Committee.

The PIABA Study highlighted categories of information, such as broker exam scores and failure rates that are contained in FINRA's Central Registration Depository database (CRD), but are not disclosed through BrokerCheck. Edwards argues in InvestmentNews that exam scores and test failures are indisputably material information for investors citing a recent Wall Street Journal study which found that brokers "who failed the test at least three times . . . were about two-thirds more likely than brokers who passed the first time to have three or more red flags on their record."

However, the Securities Industry and Financial Markets Association (SIFMA) opposes the exam disclosures. According to an earlier InvestmentNews article, SIFMA's Managing Director and Associate General Counsel, Kevin Carroll does not feel such information is relevant or helpful to investors and could in fact be prejudicial to brokers and their firms. Carroll gave a hypothetical example of a broker who failed an exam 15 years ago, but has been successfully performing ever since. "What's the point? Are you saying he's not competent now?"
In his InvestmentNews piece, Edwards seems to be responding to this argument when he writes that including exam scores should not cause brokers to "panic" because a "reasonable investor would expect someone to get better over time." Putting a different angle on the issue, Edwards notes that "in cases where an industry veteran keeps flunking exams by wide margins, investors might want to exercise a bit more caution."

Edwards opposes what he views as the paternalistic decision to draw a modest curtain over exam scores and failures. He argues that this information is useful "input for investors--presumably competent adults who should be able to make their own decisions." He believes that "a higher score points to something--perhaps greater mastery" and that "many investors probably would deem the information material."

It remains to be seen whether FINRA will agree with Edwards and "make it easier for investors to get the gritty truth" or if FINRA will agree with SIFMA's Mr. Carroll that "there's more potential for that information to be misused and abused than to help investors make informed decisions."

(This post is a mostly a reprint of a post I made on the Securities Litigation & Arbitration Blog of the New York State Bar Association) 

Thursday, February 27, 2014

Current and former employees of financial institutions can anonymously file Whistleblower claims and may be entitled to rewards.

The Wall Street Journal reported today about a record breaking $14 Million Whistleblower award.  The SEC paid the tipster the $14 Million reward for providing information that eventually uncovered a Chicago-based scheme to defraud foreign investors seeking U.S. residency.  According to the Wall Street Journal:


The case that led to the $14 million-plus payment centers on allegations last year that about 250 investors, mostly Chinese, were "duped" by 30-year-old Anshoo R. Sethi and his two Chicago, Ill.-based companies into paying a total of more than $155 million for a supposed plan to build a hotel and conference center, said the people familiar with the matter. The SEC said the investors were led to believe they were boosting their chances of green cards, because the scheme was designed to qualify for an immigration program that offers U.S. residency for job-creating investments.

In fact, the agency alleged, Mr. Sethi and his companies lacked the necessary building permits, their claims to have the support of major hotel chains were false and the documentation they gave to the immigration authorities was "phony."
Tipsters who provide information that leads to a successful SEC sanction of more than $1 Million, can receive as much as 30% of the money collected. The $14 Million reward was the largest ever paid by the SEC.

However, the SEC's program is just one of the many government whistleblower programs designed to reward those tho provide information that leads to convictions/enforcement actions. The IRS paid $104 Million in 2012 to a former UBS AG banker for providing prosecutors with evidence about the firm's efforts to promote tax evasion. This is believed to be the largest reward ever paid under these programs.

What is important to remember for those still working in the financial services industry is that tipsters can be current or former employees of the financial institutions. The program also provides strong tools to protect the tipster's anonymity, prevents retaliation from employers and can reward the tipster with a significant monetary award. However, some recent court decisions do call into question the extent of the protection if proper procedures are not followed.

This program is a great way to help regulators ferret out fraud and protect the public. Of course, tipsters can be investors as well.

If you know of fraud at your current or former firm and want to discuss filing a #Whistleblower tip, please do not hesitate to contact me to discuss.

Thursday, February 13, 2014

FINRA approves new expungement rule.

Now the proposed rule will be submitted to the Securities and Exchange Commission for review, public comment, and approval.  See FINRA's press release here.

Friday, February 7, 2014

FINRA to Prohibit Practice of Conditioning Settlements on Investor’s Agreement not to Oppose Expungement




According to the Wall Street Journal, next week FINRA's Board of Governors will be working on rule changes that will prohibit the practice of conditioning settlements on an investor's agreement not to oppose expungement.

FINRA is focusing again on the expungement issue as a reaction to the Public Investors Arbitration Bar Association's (PIABA) scathing study released last fall and at the recent urging of two United States Senators. 

The PIABA study found that in cases resolved by settlements or stipulated awards, expungements were granted an astounding:
  • 89% of the time from June 1, 2007 through mid-May 2009, and
  • 96.9% of the time from mid-May 2009 through the end of 2011.
FINRA initially downplayed the study’s conclusions noting "[w]hile still significant, the number of arbitrator-recommended expungements executed by FINRA following a court order during the five-year period (838 orders) covered by the study is less than 5 percent of the total number of customer disputes filed (17,635)."  However, FINRA also promised to review "its rules and interpretations and consider changes to provide more clarity as to what actions in connection with conditions on settlements violate conduct rules." 

As you can imagine, the PIABA Study raised more than a few eyebrows and was widely reported by the press. Reuters, Wall Street Journal and others media outlets.  Eventually it got the attention of United States Senators Jack Reed (D - RI) and Chuck Grassley (R - Iowa) who sent a joint letter to FINRA on December 16th demanding it address the issues raised in the PIABA Study explaining:


We believe that meaningful investor protection includes the disclosure of whether a customer dispute was settled. Not just for transparency sake, but also to help prospective investors make informed decisions about which individuals or firms with whom to do business.


On January 6th, FINRA responded to the Senators in a nine page letter in which they acknowledged that there was a serious problem: 


We remain extremely concerned over the inordinately high percentage of expungement relief granted by arbitrators in settled cases.

In its comprehensive response, FINRA addressed the competing policy concerns and detailed the expungement framework including explaining how FINRA responds to expungement requests and how BrokerCheck works.  FINRA also discussed its continuing efforts to educate arbitrators and monitor expungement awards and other issues.

Significantly, as a result of the PIABA study, FINRA confirmed that it was working on a rule that would prevent respondents from conditioning settlement on an agreement by claimants to not oppose engagement:

We are presently developing rule changes that would prohibit the practice of conditioning settlements on an investor's agreement not to oppose expungement. While the suggestion to include such conditions in exchange for additional settlement compensation does not always originate with the brokerage firm or broker, this practice may interfere with the arbitrators' ability to independently determine the appropriateness of expungement and make the requisite affirmative finding.

Interestingly, FINRA also flat out rejected a proposal from the PIABA study that would have invited FINRA and a designee of the state securities commissioner to appear at the hearing on the motion for expungement relief and to oppose expungement relief when such opposition was appropriate.  FINRA reasoned that allowing third parties, like state regulators or even FINRA itself, to insert themselves into a private contractual arbitration proceeding was problematic, impractical and could threaten the ability of FINRA Dispute Resolution to operate a neutral arbitration forum. 

That being said, FINRA did say it would continue its practice of opposing expungements in court to protect the integrity of the CRD system and BrokerCheck and to establish and maintain precedents that support FINRA's legal arguments.

It will be interesting to see what the final rule proposal looks like.  Although FINRA will seek the approval of its Board to file the rule proposal during its February Board meeting, it is unclear how long it will take FINRA to file the rule proposal with the SEC.  Until then, it seems there is nothing preventing firms from continuing to bargain for cooperation in expungement requests.