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Archive for the ‘Financial Services and Securities Litigation’ Category

Is Virtual Currency Here To Stay?

Posted on: November 15th, 2017

By: Matthew S. Jones

With the growing interest in Bitcoin, Ethereum, and Litecoin, it was only a matter of time the U.S. Securities and Exchange Commission (“SEC”) and Internal Revenue Service (“IRS”) weighed in on the legality of such “cryptocurrency”. But what is “cryptocurrency”? It is a medium of exchange that functions like money, but is independent from national borders, central banks, sovereigns, or fiats. In the most basic sense, it only exists in the virtual world, traded on multiple global platforms, in an effort to secure and verify transactions easier.

Cryptocurrency is growing more and more popular because of the increased privacy, fast transactions (almost instantaneous), irrevocability, inexpensiveness, and global reach. In fact, approximately 80,000 to 220,000 transactions occur per day, representing over $50 million in estimated daily volume. Further, there are approximately 1,100 digital currencies in existence at this time.

So how does cryptocurrency work? Well, through a process called “the blockchain protocol.” This technology records all bitcoin transactions and removes the financial middleman, allowing transactions to be finalized within minutes. Each transaction is verified and creates a log that is public record.

However, with the use and trade of these new currencies on the rise, as well as the unknown allure of such cryptocurrencies, there has been an increase in ponzi schemes. These schemes essentially promise customers an opportunity to invest in Bitcoin when in fact, the customers are only brought into the company’s ponzi scheme.

In an effort to promote safety in the trade of these currencies, the SEC declared that any cryptocurrency token deemed to be a security must be registered with the SEC or otherwise be exempt. If such cryptocurrency is not registered or exempt from registration, the issuer and other participants may be subject to liabilities and other remedies under state and federal securities laws. Such regulation by the SEC is important to help prevent fraudulent transactions.

Additionally, with the increased trading of cryptocurrency as a security, there are tax implications as well. For example, Bitcoin value has increased approximately 800% over the past year. This has caught the IRS’s attention since tax reporting on such trades/profits does not match the actual number of individuals involved in such trading. However, this should come as no surprise given the significant and fast increases in value of cryptocurrency.

So, to answer the question posed by this blog’s title: it depends. At this point, it seems as if cryptocurrency is not going anywhere in the near future. The increased interest, fast transactions, and global reach will likely continue to drive the cryptocurrency’s use. However, with the SEC and IRS close behind to ensure its proper use, it may only be a matter of time until such currencies cease to exist or hold value.

If you have any questions or would like more information, please contact Matthew Jones at [email protected].

New FINRA Rules to Bring Significant Changes to Qualification & Registration Process for Representatives and Principals

Posted on: November 10th, 2017

By: Patrick Y. Yoo

In October, 2017, the Securities and Exchange Commission approved a new set of Rules proposed by the Financial Industry Regulatory Authority (FINRA) that will go into effect October 1, 2018.  The changes enacted by these Rules may be reviewed in FINRA’s Regulatory Notice 17-30.

For the past several years, FINRA (formerly the National Association of Securities Dealers or “NASD”) has been in the process of consolidating the NASD and New York Stock Exchange (“NYSE”) Rules into a single, uniform set of FINRA rules. Pursuant to Section 15A(g)(3) of the Securities Exchange Act of 1934, FINRA is empowered to prescribe standards of training, experience, and competence for persons associated with FINRA members.  Accordingly, some of the central focuses of this consolidation effort concerned the issues of qualification, registration and testing of persons associated with FINRA members.  These newly approved Rules seek to revise and streamline the exam process and makes significant changes to the registration categories for registered persons and principals.  According to the Regulatory Notice, “FINRA’s registration rules ensure that associated persons attain and maintain specified levels of competence and knowledge pertinent to their function.”

These new rules, which add to and amend FINRA Rules 1200 et seq, will directly affect many newcomers’ admission into the securities industry, as well as continued registration in their respective functions for those already in the industry.  For broker-dealers and their personnel, the most salient components of these new changes will bear on the registration and proficiency testing requirements of representatives and principals of FINRA member broker-dealer firms.

1. The SIE

For new representative- and principal-level applicants on or after October 1, 2018, the most noticeable change will be the implementation of the all-new general knowledge exam, called the Securities Industry Essentials (“SIE”) exam.  This exam is aimed at eliminating duplicative testing of general securities knowledge each time an individual takes an additional representative-level exam, by moving that general content into the SIE. The SIE will consist of 75 questions testing basic securities industry knowledge, including products, the structure and function of the securities industry, the regulatory agencies and their functions, and regulated and prohibited practices.  The SIE is required of representative-level and principal-level applicants, but may also be taken by all associated persons whose functions are solely and exclusively clerical or ministerial, as well as by members of the general public who are not associated persons of a member firm (i.e., not sponsored).  However, FINRA specifically advises that passing the SIE alone will not qualify an individual for registration with FINRA, and in order to be eligible for registration, the individual must be associated with a firm and pass the appropriate qualification examinations.  The SIE will be subject to a four-year expiration period.

2. Changes to the Qualification Exams

In addition to the implementation of the SIE, the new rules will also eliminate several representative-level registration categories and their associated exams. Specifically, the following registration categories will be eliminated: (1) Order Processing Assistant Representative; (2) United Kingdom Securities Representative; (3) Canada Securities Representative; (4) Options Representative; (5) Corporate Securities Representative; (6) Government Securities Representative; and (7) Foreign Associate.

Beginning October 1, 2018, FINRA will retain only the following registration categories, which will be tested by the revised versions of their relevant exams as indicated below:


FINRA Representative-Level Registration Categories and Qualification Exams


Registration Category Current Examination(s) (prior to October 1, 2018) Future Examination(s) (on or after October 1, 2018)
Investment Company and Variable Contracts Products Representative Series 6 (100 questions) SIE (75 questions) + Revised Series 6 (50 questions)
General Securities Representative Series 7 (250 questions) SIE (75 questions) + Revised Series 7 (75 questions)
Direct Participation Programs Representative Series 22 (100 questions) SIE (75 questions) + Revised Series 22 (50 questions)
Securities Trader Series 57 (125 questions) SIE (75 questions) + Revised Series 57 (50 questions)
Investment Banking Representative Series 79 (175 questions) SIE (75 questions) + Revised Series 79 (75 questions)
Private Securities Offerings Representative Series 82 (100 questions) SIE (75 questions) + Revised Series 82 (50 questions)
Research Analyst Series 7 (250 questions) + Series 86 (Part I: Analysis) (100 questions) + Series 87 (Part II: Regulatory Administration and Best Practices) (50 questions) SIE (75 questions) + Revised Series 86 (Part I: Analysis) (100 questions) + Revised Series 87 (Part II: Regulatory Administration and Best Practices) (50 questions)
Operations Professional Series 99 (100 questions) SIE (75 questions) + Revised Series 99 (50 questions)

(Posted Table from FINRA Reg. Notice 17-30)


However, individuals who apply for registration for any category being eliminated, or any individual maintaining the eliminated representative-level registrations prior to October 1, 2018, will be “grandfathered” in (i.e., they may continue to maintain their current registration on or after October 1, 2018, unless the registration lapses). As is the case currently, representative-level registrations will lapse after two years of non-registration.

3. New Principal Registration Categories

The newly approved rules affect not only representatives and representative-level applicants, but principals as well. Per these rules, effective October 1, 2018, firms will be required to designate a Principal Financial officer and a Principal Operations Officer, which designation replaces the current requirement of designating a CFO and COO for dual-FINRA and NYSE-registered members, or designating a CFO for FINRA members.  But the greatest change comes in the form of three new principal categories.

First, any individual designated Chief Compliance Officer (“CCO”) will be required to register as the new principal category, “Compliance Officer.”  Designated CCOs who are registered as a General Securities Representative (Series 7) and a General Securities Principal will automatically be registered as a Compliance Officer, while any individuals maintaining the General Securities Representative and General Securities Principal or Compliance Official registrations on October 1, 2018 are qualified to register as Compliance Officers without taking any further exams.  The second of these new categories applies to principals responsible for supervising specified investment banking activities, who will be expected to register as “Investment Banking Principals.”  This category is available to any individual maintaining an Investment Banking Representative (Series 79) registration and a General Securities Principal registration.  For those maintaining these registrations on October 1, 2018, the registration will be automatic.  The last of the new principal registration categories applies to principals solely responsible for supervising specified activities relating to private securities offerings.  These individuals may register as a Private Securities Offerings Principal if they maintain a Private Securities Offerings Representative registration and a General Securities Principal registration.  As with the other principal categories, if the individual maintains the requisite registrations on October 1, 2018, registration will be automatic.

In sum, Regulatory Notice 17-30 and the newly approved FINRA Rules continue FINRA’s practice of consolidating and streamlining registration and testing requirements in its pursuit of maintaining standards of competence and knowledge of those involved in the securities industry. With the elimination of a sponsorship requirement and the elimination of duplicative testing via implementation of the SIE, FINRA’s new rules appear poised to attract greater numbers of people to the securities industry.

If you have any questions or would like more information, please contact Patrick Yoo at [email protected].


FINRA Tightens Expungement Requirements

Posted on: October 12th, 2017

By: Brett C. Safford

On September 25, 2017, the Financial Industry Regulatory Authority (FINRA) issued a “Notice to Arbitrators and Parties on Expanded Expungement Guidance” (hereafter, the “Notice”). The Notice continues the recent pattern of FINRA issuing rules and notices which further limit a broker’s ability to expunge his or her Central Registration Depository (CRD) record.

In 2015, FINRA launched an extensive advertising campaign for its BrokerCheck website. FINRA describes BrokerCheck as “a free tool to research the background and experience of financial brokers, advisers and firms.” However, as BrokerCheck becomes an increasingly utilized resource for customers and potential employers, the impact of a broker’s disclosures on his or her career becomes more significant. With the increased impact of a broker’s disclosures, the necessity of ensuring that those disclosures are accurate likewise increases. Consequently, expungement—a legal action which allows brokers to remove inaccurate disclosures—has taken on greater importance.

FINRA’s expungement procedures are governed by FINRA Rules 12805 and 13805. In the Notice, FINRA advises, “The procedures are intended to ensure that expungement occurs only when the arbitrators find and document one of the narrow grounds specified in Rule 2080.” The three “narrow” grounds specified in FINRA Rule 2080 are: (1) the claim, allegation or information is factually impossible or clearly erroneous; (2) the registered person was not involved in the alleged investment-related sales practice violation, forgery, theft, misappropriation or conversion of funds; or (3) the claim, allegation or information is false.”

By describing the grounds for expungement set forth in Rule 2080 as “narrow,” FINRA is signaling to its arbitrators that expungements are the exception, not the norm. The Notice further advises, “Expungement is an extraordinary remedy that should be recommended only under appropriate circumstances. Customer dispute information should be expunged only when it has no meaningful investor protection or regulatory value.” Yet, FINRA fails to define “appropriate circumstances” or how to assess “meaningful investor protection” or “regulatory value.” Arbitrators are also instructed to request a copy of the broker’s BrokerCheck report and to “carefully review the report when considering whether expungement is appropriate.” Arbitrators are to “pay particular attention to the ‘Disclosure Events’ section of the report.” The Notice, however, is unclear as to what arbitrators should take away from their review the BrokerCheck report. No guidance is offered as to what extent arbitrators should factor a broker’s prior disclosures into their analysis of the pending request for expungement.

The Notice also emphasizes that “[i]t is important to allow customers and their counsel to participate in the expungement hearing in settled cases if they wish to” and instructs arbitrators to allow the customer and their counsel to appear at the hearing; allow the customer to testify (in person, telephonically, or by other method); and allow the customer’s counsel or a pro se customer to introduce documents and evidence, cross-examine the broker and witnesses, and present opening and closing arguments at the hearing. In expungement only cases where an associated person files arbitration claims solely for the purpose of seeking expungement, the Notice advises arbitrators to “order the associated persons to provide a copy of their Statement of Claim to the customer(s) involved in the customer’s arbitration case that gave rise to the customer dispute information (underlying arbitration).”

Finally, the Notice states, “A broker may not file a request for expungement of customer dispute information arising from an underlying customer arbitration until the underlying customer arbitration has concluded.” When the broker is a named respondent in the underlying customer arbitration and he or she can present a defense, this rule prevents inconsistent rulings, i.e., the broker is found liable for claims in the underlying customer arbitration while obtaining expungement of that claims in the expungement-only arbitration, or vice versa. However, this rule also applies to brokers who are not named in the underlying customer arbitration. This means that before bringing an action to expunge a meritless disclosure from his or her CRD records, an unnamed, falsely-accused broker must sit on the sideline and await the resolution of an arbitration which he or she cannot present a defense. As such, a broker’s BrokerCheck report can include a false and erroneous disclosure for years before expungement is obtained—causing significant harm to the broker’s professional reputation.

In sum, the Notice continues the trend of FINRA toughening the requirements for expungement. Public protection against crooked brokers is essential and needed, but FINRA’s expungement guidance is increasingly creating a framework in which innocent brokers may struggle to obtain necessary and justified expungements.

If you have any questions or would like more information, please contact Brett Safford at [email protected].

Another Delay Is in the Works for the DOL Fiduciary Rule

Posted on: September 1st, 2017

By: Ze’eva R. Kushner


The landscape of the Department of Labor’s Fiduciary Rule continues to shift and has changed significantly since our last commentary on this topic in June. (DOL Fiduciary Rule is Delayed No More) On June 9, 2017, two provisions of the Rule became applicable: (i) the expansion of the definition of who is a fiduciary, and (ii) the establishment of impartial conduct standards. The next step, full implementation, is currently set to take place on January 1, 2018. This date is no longer set in stone. In fact, it likely will be delayed until mid-2019.

The DOL has started the process to delay the date of full implementation by 18 months, until July 2019. On August 9, 2017, the DOL submitted its proposal for extending the date to the Office of Management and Budget (“OMB”). In less than one-third of the time statutorily allocated for review, the OMB approved the proposed 18-month delay on Monday and posted it for comment on Tuesday, August 29, 2017. The proposed extension still must go through the rulemaking process, which allows stakeholders to submit comments for consideration before implementation.

The DOL’s proposed delay pertains to three essential components of the Fiduciary Rule, the best interest contract exemption, which allows brokers to charge variable compensation for products if they sign a legally binding agreement putting their clients’ interests ahead of their own, as well as exemptions for principal transactions and for insurance agents and brokers. At the end of June, the DOL had put out a request for information regarding the best interest contract exemption, also referred to as BIC or BICE, in furtherance of its compliance with President Trump’s directive in February 2017 for additional analysis of the potential impact of the Rule.

An 18-month delay of the Fiduciary Rule could present a renewed opportunity for the DOL and U.S. Securities and Exchange Commission to work together and coordinate the implementation of a uniform fiduciary rule that applies to all investment accounts, not just retirement accounts. Or, in theory, Congress could enact some form of legislation on the topic. A postponement also would provide more time for firms to budget for the resource-intensive requirements of the regulation.

Nonetheless, the underlying narrative of the Obama-era Fiduciary Rule—that retail retirement investors should be protected from financial harm stemming from biased advice—remains the same and does not appear to be going away. The fiduciary rule, in some form or another, is the new reality for broker-dealers and registered investment advisors.

The Financial Services practice group attorneys are here to assist you. Please contact Ze’eva Kushner at [email protected] or John Goselin at [email protected] for more information.

SEC Issues Risk Alert on the Cybersecurity Practices of Registered Broker-Dealers, Investment Advisers, and Investment Funds.

Posted on: August 11th, 2017

By: Jennifer Lee


The U.S. Securities and Exchange Commission (“SEC”) is becoming increasingly focused on cybersecurity issues in recent years as data breaches and ransomware attacks become more frequent and wide-spread across all industries. The most recent Risk Alert, issued on August 7, 2016 by the SEC’s Office of Compliance Inspections and Examinations (“OCIE”), shows that cybersecurity continues to be a high priority for the SEC in 2017.

The Risk Alert was based on an examination of the cybersecurity policies and practices of 75 broker-dealers, investment advisers, and investment funds over a nine-month period, from September 2015 to June 2016. The examinations focused on firms’ written policies and procedures regarding cybersecurity, including whether such policies were actually implemented and followed.

The 6-page report found that although most firms had cybersecurity policies in place, such policies were often too general and vague, as they did not articulate specific procedures for implementing the policies or examples of how employees can apply the policies in their daily work. In addition, even when firms had specific cybersecurity protocols in place, their actual practices were much more lax and did not reflect their stated policies and procedures. For example, firms often had policies requiring all employees to complete cybersecurity awareness training. However, they did not have a mechanism in place to enforce such requirements. The Risk Alert also pointed out that some firms were using outdated operating systems that were no longer supported by security patches and not taking measures to address the results of any penetrating testing.

In light of the findings, the report listed specific measures firms can take to ensure that their cybersecurity practice are “robust,” including:

  • Creating and maintaining an inventory of data and information, including classification of the risks of the disclosure of each category of data or information and business consequences in the event of such disclosures;
  • Tracking access and requests for access to data and information;
  • Following a regular schedule of system scans and updates, including security patches;
  • Establishing and enforcing controls concerning firm network and equipment, including protocols with respect to personal devices on firm networks; and
  • Requiring mandatory employee training on cybersecurity issues.

Cybersecurity incidents are a growing and costly problem for the financial services industry, and they do not appear to be going away anytime soon. The SEC has picked up on this and has begun to dedicate more resources to cybersecurity enforcement. In fact, last year, the SEC brought charges against Morgan Stanley Smith Barney LLC (“MSSB”) following a data breach involving customer data for failure to adopt written policies and procedures reasonably designed to protect customer records and information. MSSB, a dually registered broker-dealer and investment adviser, settled the matter by agreeing to a censure and a $1 million fine. With the release of the August 7, 2017 Risk Alert, it seems more likely now, more than ever, that firms will be held accountable for cybersecurity incidents, including data breaches and ransomware attacks, if they fail to implement the recommended measures and protocols contained in the Risk Alert.

However, SEC enforcement actions are not the only thing that broker-dealers and investment advisers need to worry about. As the public becomes more aware of cybersecurity issues, data breaches and ransomware incidents will result in the filing of customer claims. This may prove to be problematic as a single incident can affect thousands of customers, so a broker-dealer or an investment adviser may find itself trying to fight off thousands of individual actions or face a handful of actions involving a large number of customers, similar to a class action or a mass tort case.

To reduce the risk of an SEC enforcement action or customer actions based on cybersecurity incidents, broker-dealers and investment advisers should ensure that they are in compliance with SEC regulations and guidelines regarding cybersecurity, including but not limited to Regulation S-P, Exchange Act Rule 13n-6, and Exchange Act Rule 15c3-5—both on paper and in practice. Firms should also proactively implement any recommendations contained in OCIE’s Risk Alerts to the extent that they have not already.

If you have any questions regarding your firm’s compliance with SEC cybersecurity regulations or cybersecurity litigation in general, please contact the writer, Jennifer Lee, at [email protected].