Securities Compliance & Arbitration

The United States Securities and Exchange Commission’s (SEC) Office of Compliance Inspections and Examinations (OCIE) are now conducting examinations of investment advisers concerning “crypto-assets,” which they define to include crypto-currency, initial coin offerings, distributed ledger technology, blockchain or any related products, and pooled investment vehicles investing in these assets or technology.

Continue Reading SEC’s Office of Compliance Inspections and Examinations Begins Conducting Targeted Reviews Related to Crypto-Assets

Max Schatzow, Esq., on behalf of Stark & Stark’s Investment Management & Securities Practice Group, submitted a comment letter to the U.S. Securities & Exchange Commission (“SEC”) in response to the SEC’s proposed interpretation of the standard of conduct under the Investment Advisers Act of 1940.

While Stark & Stark largely agreed with the SEC’s proposed interpretation of the standard of conduct, it took issue with its characterization of the duty of care owed by investment advisers. As a general matter, investment advisers owe their clients both a duty of care and a duty of loyalty. Stark & Stark generally agreed with the SEC’s framework surrounding the duty of loyalty. However, the SEC’s proposed interpretation of the duty of care would require “the duty to act and to provide advice that is in the best interest of the client.”

Continue Reading Stark & Stark Investment Management & Securities Practice Group Submits a Comment Letter to the SEC on Recent Rule Proposals

Two US Senators recently demanded that FINRA explain how it plans to minimize the high rate of brokers who are involved in criminal activity or have been the subject of customer complaints.

Clearly Senators Warren and Cotton are not familiar with how the FINRA U-4 and U-5 process works. In addition, they are probably not overly familiar with the history of federal securities laws. As a brief background, the federal securities laws have been built on and continue to operate on the theory that “sunlight is the greatest disinfectant.” The laws have been built and we continue to operate under a fair market where people are free to make their own informed decisions. Senators Warren and Cotton should look past this misleading data and understand some common realities.

Continue Reading Senators Warren and Cotton Misled by Misleading Report on Broker Check

Investment advisers should take note, as there has been an announcement of a new rule which might affect them. More specifically, any investment advisers that: (1) act solely as advisers to one or more venture capital funds; (2) are exempt from the registration requirements under the Investment Advisers Act of 1940; and (3) comply with SEC Rule 203(1)-1 (regarding venture capital advisers), are excluded from the District of Columbia Securities Act’s investment adviser definition, according to a new order issued on February 8, 2016. Exempt venture capital advisers excluded from the investment adviser definition must now comply with SEC Rule 204-4 reporting requirements.

To comply with Rule 204-4, an adviser must subject itself to the Exempt Reporting Adviser regime by gaining entitlement through the IARD, prepare a Form ADV as an Exempt Reporting Adviser, and submit it to the SEC and the DC Department of Insurance, Securities and Banking. The IARD will require a $250 fee that will be paid directly to the District of Columbia and a $150 fee that will be paid to the SEC.

Continue Reading Washington DC Issues New Exempt Reporting Adviser Rule for Venture Capital Funds

Martin Shkreli, the controversial CEO of Turning Pharmaceuticals, and his attorney were indicted in an alleged securities fraud scheme. On December 14, 2015, a grand jury paneled in Brooklyn, New York, returned a seven-count indictment against Martin Shkreli. Mr. Shkreli is charged with seven counts of securities fraud and conspiracy. His attorney, Evan L. Greebel is charged with a single count of wire fraud conspiracy. Greebel and Shkreli also face a United States Securities and Exchange Commission (“SEC”) civil complaint. The SEC commenced an eight-count civil suit against Shkreli, and contains a single aiding and abetting count against Greebel. Shkreli is accused of running a Ponzi scheme that allegedly funneled money from Retrophin, Inc. to deceived investors in a series of ailing hedge funds. Attorney Greebel is charged with aiding the alleged scam. Continue Reading Martin Shkreli Arrested for Alleged Securities Fraud Scheme

Introduction

On December 30, 2014, the Securities and Exchange Commission (“SEC”) approved a new Financial Industry Regulatory Authority (“FINRA”) rule governing transaction-based payments to unregistered persons. The new FINRA rule—Rule 2040—became effective on August 24, 2015. If you are a FINRA-registered broker-dealer that currently pays an unregistered person, now is a perfect time to examine the relationship and make sure that these payments are proper. In addition, if you are an unregistered or unlicensed person, then you may want to make sure that you can receive or continue receiving these payments. Lastly, if your firm permits “selling groups” of registered representatives for expense paying and marketing purposes, it is also a good time to reassess these practices.

More specifically, this new rule addresses many situations that can arise in a broker-dealer’s regular course of business. These situations include, but are not limited to:

  • Asset purchase arrangements between current representatives;
  • The receipt of continuing compensation by retiring representatives, their beneficiaries, or estates; and,
  • Referral arrangements.

As a result of these new changes, the current FINRA rules addressing payments to non-registered persons, as well as related New York Stock Exchange rules have been deleted from the FINRA rulebook. The rest of this article deals specifically with the requirements and implications of Rule 2040 and Section 15(a) of the Securities Exchange Act (the “Exchange Act”).

Continue Reading Payments of Transaction-Based Compensation by FINRA Members – A Changing Game for Asset Purchases, Selling Groups and Retiring Representatives

Shareholder Thomas D. Giachetti, Chair of the Securities Practice Group, authored the article SEC Clarifies RIAs’ Cybersecurity Obligations, which was published in the November issue of Investment Advisor. The article explains how the Securities and Exchange Commission’s (SEC) recent cybersecurity focus will affect RIAs. The SEC’s Office of Compliance Inspections & Examinations (OCIE) released a Risk Alert in the spring of 2014, which announced that it would “conduct examinations of more than 50 financial institutions, including RIAs, focused on: cybersecurity governance; identification and assessment of cybersecurity risks; protection of networks and information; risks associated with remote customer access and funds transfer requests; risks associated with vendors and other third parties; detection of unauthorized activity; and experiences with certain cybersecurity threats.” Most recently, in September 2015, OCIE released a follow-up Risk Alert which better elaborated on the “areas of focus” that would be examined during the cybersecurity process. Some of these areas would include “an RIA’s governance and risk assessment, access rights and controls, data loss prevention, vendor management, staff training and incident response.” As a result, Mr. Giachetti recommended three steps that RIAs should take immediately in relation to the OCIE’s Risk Alert. This includes consulting with the business’s IT staff or IT vendors to ensure that the highest level of protection is or has been implemented, as well as adopting a proper cybersecurity policy that specifically addresses these recent Risk Alerts. For more information, read the full article.

On June 19, 2015, real estate developers have a new avenue for raising funds. They no longer have to knock on banks doors and pay interest and provide personal guarantees, sign commercial documents pledging their homes, real estate or their business equipment, comply with Regulation D and Rule 506, or use their own finances. They can issue stock or partnership interests directly to the public without every investor having to be “accredited.”

The JOBS Act directed the SEC to adopt rules adding a class of securities exempt from the registration requirements of the Securities Act for offerings of up to $50 million of securities within a 12-month period. In March of 2015, the SEC finally released its final rules to comply with the JOBS Act.

The new rule is commonly referred to as Regulation A+ and divides offerings into two tiers: Tier 1, for securities offerings up to $20 million; and Tier 2, for offerings up to $50 million. Tier 1 offerings are not fully exempt offerings and they still remain subject to registration under state securities laws. Therefore, Tier 2 offerings are the subject of this article.

Continue Reading Real Estate Developers Interested in Offering Equity or Debt for New Projects under Regulation A+

Whether intentionally or not, in drafting certain provisions of settlement and severance agreements with employees, many employers have used language that violates the anti-retaliation protections for individuals who report violations of the securities laws and Foreign Corrupt Practices Act (“FCPA”). The Securities and Exchange Committee (“SEC”) promulgated Rule 21F-17(a) making it unlawful “to impede the efforts of individuals from communicating directly with the Commission staff… including enforcing, or threatening to enforce, a confidentiality agreement…” (17 C.F.R. §240.21F-17(a)). 

Continue Reading Employers Must Comply with SEC when Drafting Settlement Agreements

Brian A. Carlis, Shareholder and member of Stark & Stark’s Securities Arbitration Group, was featured in the article, “Few RIAs Accept Finra Invitation,” published in the Wall Street Journal on May 29, 2013.

The article discusses the meager RIA response to Financial Industry Regulatory Authority (“Finra”) expanding its arbitration forum to include registered investment advisors.  Traditionally the Finra arbitration process was used solely by broker-dealers.  This attempt to take over the role of overseer from the Securities and Exchange Commission (SEC) would mean lower arbitration fees for brokerages who would otherwise turn to the American Arbitration Association (“AAA”) to resolve issues with customers or employees. 

Mr. Carlis, who represents RIAs in securities arbitration proceedings, explains that the higher AAA fees deter investors with small financial claims who are seeking a quick or cheap settlement.  However, Finra is better equipped to handle securities disputes and ultimately clients would save money in the long run, even if it meant having to amend pre-dispute agreements in their contracts with clients to reflect this change in plan.

Mr. Carlis believes that many RIAs are reluctant to commit to Finra’s system until they see how others fare in the program.  He said that as the first few cases are handled by Finra, he expects the number of RIAs who switch over to Finra to grow.  Mr. Carlis “routinely discusses the pros and cons of both forums with his RIA clients, who might have to foot a hefty bill for an AAA hearing.”