FINRA Rule Proposals and the Significance of Comments – A Five Part Series

By Geoff Hafer, Fall 2016 Student Intern

In a previous blog entitled “Wednesdays Word:  Comment Letter,” I discussed the process for submitting comment letters to proposed FINRA rule changes.  In this five-part series, we will see the process in action from start to finish.  We will begin with a case study, SR-FINRA-2016-033, a proposal to expand eligibility for the public chairperson roster.  Here, we will look not only at the text of the proposed rule change but the purpose behind it. From there we will dig into SR-FINRA-2016-033 “The Good and the Bad,” and discuss how this rule impacts investors from both sides of the spectrum.  It is important as investors to consider how a rule change can impact you not only in the short-term but long-term as well.  We will then dive more specifically in to the crux of the issue in part four of the series, SR-FINRA-2016-033 “Current FINRA Chairperson Training.”  Here we will take a close look at the current FINRA Office of Dispute Resolution Chairperson Training and perhaps some of its deficiencies in light of the proposed rule change. Ultimately, we will end the series with “Public Chairperson Training – Recommended Changes.”  In an attempt to close the gap between experience and training potentially caused by the proposed rule change, “Public Chairperson Training – Recommended Changes,” touches on several potential remedies.  This final part of the series includes the comment letter submitted by the Investor Advocacy Clinic at Georgia State University College of Law on this particular rule proposal.

Hopefully through the series you will see how seemingly minor rule changes can significantly impact you as investors and why comments can and should be submitted.  It’s important to remember, rule proposals can and have changed as a result of well-constructed comments.

The SEC Cracks Down on Illegal Activity: Putting the Efforts Where the Whistle Is

By Majda Muhic, Fall 2016 Student Intern

Encouraging and protecting self-reporting has been key to the SEC’s efforts to uncover and prevent illegal activity. The SEC has taken this portion of its enforcement program very seriously in fiscal year 2016: its whistleblower program awarded over $57 million to 13 whistleblowers – more than all of the previous years combined. The SEC further charged several large companies with violations of Exchange Act Rule 21F-17 – the SEC rule that explicitly prohibits actions that discourage whistleblowers form communicating the with the SEC. The focal point of these violations is generally chilling language in separation agreements, often in the form of strict non-disclosure provisions that prevent employees from voluntarily communicating with the SEC about potential misconduct. This chilling language in turn only makes worse any other potential violations.  Continue reading

The SEC Cracks Down on Illegal Activity: Protecting Investor Securities and Cash

By Majda Muhic, Fall 2016 Student Intern

Among SEC’s most significant enforcement actions in 2016 were its charges against Merrill Lynch for its Customer Protection Rule violations. According to Andrew J. Ceresney, Director of the SEC’s Division of Enforcement, “The rules concerning the safety of customer cash and securities are fundamental protections for investors and impose lines that simply can never be crossed.” The SEC’s Customer Protection Rule is particularly salient in times of financial crisis.

An SEC 2016 investigation showed that Merrill Lynch crossed these lines when it used customer cash to generate firm profits and failed to protect customer securities from creditor claims. The investigation showed that the financial giant’s misconduct occurred as early as 2009 – at the height of the financial crisis – and continued through 2015.

The Violations Continue reading

Clinic Comments on SEC Proposal to Require Hyperlinks to Exhibits in Filings

As part of its mission of serving regular investors, the Investor Advocacy Clinic reviews rule proposals and submits comments.  Earlier this week, the clinic commented on an SEC rule proposal, S7-19-16, which would require certain registrants to include a hyperlink to each exhibit listed in the exhibit index of the filings.

The clinic’s comment, drafted primarily by fall 2016 student intern Hector Rojas, praised the SEC for taking steps to make it easier for investors to access information.  The clinic believes that requiring registrants to include hyperlinks for all exhibits will not only supply investors with the location of a specific exhibit, but also give them access to these documents more easily and quickly.  As a result, the clinic believes the proposal will allow investors to make more informed investment decisions and potentially reduce investor fraud.

Click here to read the Clinic’s comment letter in its entirety.

The SEC Cracks Down on Illegal Activity: Demanding Transparency from Investment Professionals

By Majda Muhic, Fall 2016 Student Intern

In fiscal year 2016, the Securities and Exchange Commission’s enforcement activities targeted, in part, misconduct by investment advisers and companies. The SEC brought a total of eight enforcement actions related to private equity advisers in fiscal year 2016, for a total of eleven private equity-related actions in the last two years. While the range of SEC’s charges varied, all revealed a commitment to protect investors from self-interested conduct of investment professionals and to demand full transparency in their dealings.  Continue reading

The SEC Cracks Down on Illegal Activity: Fighting Fraud by Demanding Disclosure

By Majda Muhic, Fall 2016 Student Intern

In fiscal year 2016, the Securities and Exchange Commission focused on uncovering and fighting fraud, and demanding truth – or the full disclosure of information. The agency initiated several financial fraud actions against both companies and executives focusing primarily on financial misstatements that mislead investors, often in form of inaccurate and unreliable financial reporting. Continue reading

The SEC Cracks Down on Illegal Activity: Protecting Investors and Ensuring Fair and Reliable Markets for All

By Majda Muhic, Fall 2016 Student Intern

 In fiscal year 2016, which ended September 30, the Securities and Exchange Commission reached record highs in its enforcement activities as it successfully held individual executives, companies and, market participants, including a municipality, accountable for a range of illegal conduct. The agency’s enforcement goals are wide-reaching and clear: protecting investors and ensuring fair and reliable markets for all.

The numbers of filed actions speak for themselves: in just one year, the SEC filed a record high of 868 actions exposing financial reporting-related misconduct and misconduct by registrants and gatekeepers; 160 of these involved investment advisers and investment companies – another record to date.  The financial results of the agency’s enforcement activities also speak for themselves: the agency recovered $4 billion in disgorgement and penalties, intended not only to penalize wrongdoers for their past wrongful conduct but to deter similar misconduct in the future. The agency further rewarded whistleblowers a total of $57 million in a single year – again, SEC’s highest to date.

This fiscal year further saw a range of first-of-their kind actions, including an action against a private equity adviser for acting as an unregistered broker, and a first-of-its-kind successful ligation: the SEC won its first federal jury trial against a municipality, the city of Miami, and its former Budget Director for multiple antifraud violations of the federal securities laws for failing to disclose the city’s deteriorating financial condition during 2007 and 2008. Financial fraud and the often accompanying failure to disclose form a central concern of the SEC this year.

According to SEC Chair Mary Jo White, the agency’s enforcement success is in part due to the changes in approach of its enforcement program, including the use of new data analytics to both detect illegal activity and speed up investigations. The message is clear: the SEC is committed to protecting investors and ensuring a fair and reliable marketplace for all.

This week’s series focuses on the SEC’s 2016 enforcement efforts. For a full review of its 2016 enforcement activities and results, read more here.