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Archive for the ‘Financial Services and Securities Litigation’ Category

DOL Fiduciary Rule Suffers a Slow Death

Posted on: May 15th, 2018

By: Ted Peters

In 2016, the U.S. Department of Labor (“DOL”) promulgated a set of rules and regulations now infamously referred to as the “Fiduciary Rule.”  After multiple criticism and legal challenges, the Fifth Circuit Court of Appeal struck down the Fiduciary Rule effective May 7, 2018.  Surprising many, the DOL elected not to challenge the Fifth Circuit ruling.  Even more surprising, however, was the bulletin issued by the DOL on the effective date of the court’s order.

The court’s ruling, which was not opposed by the DOL, left many unanswered questions.  Enter the DOL’s field bulletin.  Rather than admitting the total defeat of the Fiduciary Rule, however, the DOL seeks to maintain the status quo.  Specifically, the DOL announced that pending further guidance, advisors will not be penalized for either complying with the Fiduciary Rule, or ignoring it in favor of pre-existing standards.  Unfortunately, this announcement leaves the single most important question unanswered – what is the standard to which advisors will be held?  With the U.S. Securities and Exchange Commission working on its own set of rules, and the wait-and-see approach embraced by the DOL notwithstanding, only time will tell.

If you have questions or would like more information, please contact Ted Peters at [email protected].

FINRA Increases Penalties For Brokers’ Bad Behavior

Posted on: May 8th, 2018

By:  Ted Peters

In further response to mounting pressure for securities regulators to exert greater control over problem brokers, the Financial Industry Regulatory Authority (“FINRA”) released Regulatory Notice 18-17 on May 2, 2018.  FINRA has long maintained a “rulebook” of sorts to guide adjudicators in disciplinary proceedings when addressing the propriety and scope of sanctions that might issue.  Akin to sentencing guidelines, the Sanction Guidelines “provide both general principles that apply to the overall process of determining sanctions for every case and specific recommendations of a range of sanctions for particular rule violations.”

The stated goal of the guidelines  is “to assist FINRA’s adjudicators in determining the appropriate sanctions in disciplinary proceedings and to provide consistency in the imposition of sanctions.”  Such sanctions can include fines, suspensions or industry bars.

This most recent Notice trumpets FINRA’s revisions to the guidelines to instruct adjudicators “to consider customer-initiated arbitrations that result in adverse arbitration awards or settlements when assessing sanctions.”  More specifically, FINRA adjudicators are now expressly instructed to consider imposing more serious sanctions when there is a discernible “pattern” considering a respondent’s disciplinary history, and history or arbitration awards.

“By enabling adjudicators to consider arbitration settlements and adverse arbitration awards, in addition to the traditionally considered final disciplinary actions, the Sanction Guidelines will allow adjudicators to take such settlements and awards into account in appropriate cases when determining whether a pattern of harm to investors or market integrity, or disregard of regulatory requirements exists.”

The Sanction Guidelines apply only to enforcement actions, not FINRA arbitrations.  The revisions go into effect on June 1, 2018.

If you have questions or would like more information, please contact Ted Peters at [email protected].

New FINRA Proposals for High Risk Brokers

Posted on: May 4th, 2018

By: Theodore C. Peters

On April 30, 2018, FINRA published Regulatory Notice 18-16, captioned “High-Risk Brokers,” which seeks comment on proposed rule amendments that would place further restrictions on not only high-risk brokers, but also the member firms that employ them.  FINRA warns that such brokers “may present heightened risk of harm to investors, and any misconduct by them also may undermine confidence in the securities markets as a whole.”

This Notice, among others, stems from the increasing pressure upon FINRA to deal with problem brokers.  According to the Notice, the amendments would serve to “strengthen existing controls.”  More specifically, the amendment would affect the Rule 9200 Series (Disciplinary Proceedings) and the Rule 9300 Series (Review of Disciplinary Proceedings by National Adjudicatory Council and FINRA Board; Application for SEC Review), and would allow a hearing panel “to impose conditions or restrictions on the activities of member firms and brokers while a disciplinary matter is on appeal to the National Adjudicatory Council (“NAC”), and to require member firms to adopt heightened supervision procedures for brokers during the period the appeal is pending.”

The proposal would also impact the Rule 9520 Series (Eligibility Proceedings) to mandate that member firms adopt heightened supervision procedures for brokers during the period a statutory disqualification (“SD”) eligibility request is under review. Further, Rule 8312 (FINRA BrokerCheck Disclosures) would require disclosure of the status of a member firm as a “taping firm” under Rule 3170 (Tape Recording of Registered Persons by Certain Firms).

Lastly, the NASD Rule 1010 Series (Membership Proceeding)(MAP Rules) would be amended to place additional limits on member firms by requiring firms to first submit a written letter to FINRA’s Department of Member Regulation through the MAP Group (the Membership Application Program Group), requesting a “materiality consultation” when a natural person who has been the subject of, within the prior five years, one or more final criminal actions or two or more specific risk events, seeks to become an owner, control person, principal or registered person of an existing member firm.  “Specific risk events” generally mean “final, adjudicated disclosure events disclosed on a person’s or firm’s Uniform Registration Forms.”

Separately, FINRA also published Regulatory Notice 18-15, which reiterates the existing obligation of member firms to adopt and implement heightened supervisory procedures under Rule 3110 (Supervision) that are specifically tailored for high-risk brokers.  Unlike Notice 18-16 which seeks comment on proposed rule amendments, Notice 18-15 intends to “reiterate the supervisory obligations of member firms regarding associated persons with a history of past misconduct that may pose a risk to investors,” and to provide guidance for member firms in implementing effective heightened supervisory procedures for such persons.

If you have questions or would like more information, please contact Ted Peters at [email protected].

DOJ Fails to Challenge 5th Circuit Ruling Striking Fiduciary Rule

Posted on: May 3rd, 2018

By: Theodore C. Peters

On March 15, 2018, the Fifth Circuit Court of Appeal stuck down the “fiduciary rule” proposed by the Department of Labor (DOL), which required brokers to act in the best interests of their clients in retirement accounts.  Subsequently, there was much speculation as to whether the Department of Justice (DOJ), acting on behalf of the DOL, would appeal that decision.  The April 30, 2018 deadline for the DOJ to appeal came and went, but …. nothing.  The Fifth Circuit’s ruling, therefore, is slotted to take effect on May 7, 2018.

In late April, AARP and several state attorneys general (including California, New York and Oregon) joined forces in seeking the court’s permission to intervene as defendants in the case, and also sought an en banc hearing before the entire 17-judge circuit. AARP contends that the court’s decision striking down the DOL rule puts Americans’ retirement security at substantial risk, resulting in an “issue of exceptional importance.”  The plaintiffs in the case, opponents of the DOL rule, formally opposed the motions to intervene on April 30.  Counsel for the plaintiffs charged that the “last-minute motions do not come close to justifying their unprecedented bid to intervene…”

On May 2, the Fifth Circuit denied the intervenors’ motions.  The court’s decision looks to be the final nail in the coffin holding the DOL’s fiduciary rule.  Despite this ruling, however, the DOL still has one more card it could play – it can file a petition by June 13 to have the Supreme Court hear the case. Even if the DOL stands quietly by and does nothing, the Supreme Court could conceivably take the case up on its own.

Ultimately, this legal brouhaha focuses attention on the SEC, which is currently taking public comment on newly proposed standards of conduct for brokers and advisors.

If you have questions or would like more information, please contact Ted Peters at [email protected].

Yahoo Fined $35M for Delay in Disclosing 2014 Cyberattack

Posted on: April 30th, 2018

By: Theodore C. Peters

On April 24, 2018, the U.S. Securities and Exchange Commission hit Altaba, Inc. (formerly known as Yahoo) with a $35 million fine.  The penalty stems from Yahoo’s failure to disclose a 2014 cyberattack until 2016, even though it knew of the breach within days after it occurred.

In its order, the SEC said that Yahoo’s information security team was promptly advised that Russian hackers had acquired highly sensitive information that Yahoo itself referred to as its “crown jewels,” namely Yahoo usernames, email addresses, telephone numbers, dates of birth, hashed passwords, and security questions and answers for hundreds of millions of accounts.  Despite such knowledge, however, Yahoo waited until September 2016, on the eve of a pending sale to Verizon Communications, Inc., before it officially disclosed the breach.

Yahoo’s disclosure of the breach resulted in an immediate 3 percent decline (estimated at $1.3B) of Yahoo’s share price, and caused Verizon to renegotiate the purchase price, lowering it by $350M (representing a 7.5% discount).  Before publicly acknowledging the breach, Yahoo released annual and quarterly reports that the SEC concluded were “materially misleading” insofar as “they claimed the company only faced the risk of potential future data breaches that might expose the company to loss of its users’ personal information…”(emphasis added).

Yahoo later amended its risk factor disclosures and MD&A (Yahoo management’s discussion of financial condition and results of operations) to reflect the 2014 breach in its subsequent public filings.  On October 9, 2016, Yahoo acknowledged that the breach occurred in 2014.  Yahoo also corrected prior public disclosures for 2014 and 2015, which indicated that Yahoo’s disclosure controls and procedures were effective.  The amended filings stated that such controls and procedures were not effective.

As part of its agreement with the SEC, Altaba neither confirmed nor denied the statements in the order.  Whether further action will be taken against any of the Yahoo executives who were employed at the time of the 2014 cyberattack remains to be seen.  Altaba must pay the $35M penalty.

Separately, a U.S. District Court Judge, for the Northern District of California, held off on sentencing of a 23-year-old Canadian “international hacker-for-hire,” Karim Baratov. At an April 24, 2018 sentencing hearing, Judge Vince Chhabria told federal prosecutors that he was concerned that Baratov could potentially face a tougher sentence solely based upon the fact that among Baratov’s clients were certain Russian nationals who committed the 2014 Yahoo cyberattack, even though there was no evidence that Baratov himself was involved in the Yahoo breach.  Prosecutors sought a near eight year term of imprisonment.  During the sentencing hearing, Judge Chhabria stated that he had “multiple concerns” about the sentence and noted that other hackers engaged in similar conduct had received lesser sentences.  Further briefing was ordered on the issue of what national sentencing ranges are for hackers convicted in federal court.

If you have questions or would like more information, please contact Ted Peters at [email protected].