CLOSE X
RSS Feed LinkedIn Instagram Twitter Facebook
Search:
FMG Law Blog Line

Archive for the ‘Financial Services and Banking Litigation’ Category

SEC and FINRA Release 2021 Examination Priorities

Posted on: March 15th, 2021

By: Chad Weaver and Tyler Jacobs

On March 3rd, the SEC Division of Examinations announced their 2021 examination priorities. Earlier this year, on February 2nd, FINRA released a report of Examinations and Risk Monitoring to provide insight to member firm’s compliance programs.

Unsurprisingly, there is significant overlap between the priorities of the two securities regulatory bodies. Both the SEC and FINRA look to address the news industry risks created by the COVID-19 pandemic. For example, cybersecurity concerns in a remote work environment, Paycheck Protection Program loans for registered representatives, and how municipal advisors may have adjusted their practices.

Additionally, ensuring Regulation Best Interest (“Reg BI”) compliance is a top priority in 2021 for both regulators. FINRA highlights it will investigate: if the firms have policies, procedures and controls in place to assess recommendations using a best interest standard, if firms provide adequate Reg BI training, and if firms have policies, procedures and controls in place regarding the filing, updating, and delivery of Form CRS. The SEC adds, “[t]he Division will focus on compliance…[and] will examine whether firms are appropriately mitigating conflicts of interest…”

Other common priorities between the SEC and FINRA include: variable annuities, compliance with best execution in a zero commission environment, protecting retail senior investors, anti-money laundering, and liquidity. FINRA also prioritizes the vendor display rule, market access, and data breaches. Whereas, the SEC emphasizes FinTech, ESGs, and the London Inter-Bank Offered Rate Transition.

Overall, it appears the SEC is seeking to address the evolving risks in the industry such as concerns related to climate change and digital currencies. On the other hand, FINRA will focus on familiar issues such as communications with the public and cybersecurity risks.

A full list of the 2021 priorities for the SEC Division of Examination and FINRA can be found online at: https://www.sec.gov/files/2021-exam-priorities.pdf and https://www.finra.org/rules-guidance/guidance/reports/2021-finras-examination-and-risk-monitoring-program

If you have questions or would like more information, please contact Chad Weaver at [email protected] or Tyler Jacobs at [email protected].

Yes, Robinhood can, and should, halt the purchase of GameStop

Posted on: January 29th, 2021

By: Kirsten Patzer

In the wake of GameStop Corp. (GME) stock spiking as high as 800% over the last several weeks, broker dealers are stepping in to stop the madness. The lead up to Robinhood, Interactive Brokers, and other trading platforms halting the purchase of high-flying stocks GameStop, AMC Entertainment Holdings Inc. (AMC), and other low-value shorted securities, was a dizzying roller coaster ride fueled by users of the popular online message board, Reddit.

The strategy implemented by the Reddit members was simple: target low priced stocks held in large positions by hedge funds who were “shorting” the position; purchase those stocks in quantities large enough to move the market; watch as the hedge funds are forced to purchase the stock to offset losses held by their shorted positions; sell the stock at an outsized profit. The situation only became problematic for Robinhood and other broker dealers when new investors, not part of the initial purchases leading to the surge in prices, began buying the stocks at the inflated price hoping the rise in value would continue. The initial investors will likely see a positive return on their investments. The new investors, however, stand to lose nearly all the money they invested once the stocks lose their inflated value.

Robinhood had to step in to protect those new investors. If they had not done so, the potential for customer harm could be catastrophic, leading to litigation and regulatory scrutiny. The ill-advised class action suits filed in the Southern District of New York and the Northern District of Illinois fail to understand the regulatory landscape surrounding the financial services industry. Broker dealers have no obligation to unconditionally accept orders to buy or sell stocks or any other security. In fact, given the newly implemented Regulation Best Interest, and here in Massachusetts where a fiduciary standard applies to broker dealers, Robinhood arguably was required to shut down any further purchase of the stocks. Robinhood is already the subject of the Commonwealth’s first Enforcement Action under the new fiduciary standard (See In the Matter of: Robinhood Financial LLC Docket No. E-2020-0047).

Broker dealers have historically restricted the purchase and sale of securities they deem too risky for retail customers. In the aftermath of the 2008 financial crisis many financial advisors advised their clients to invest in triple and quadruple inverse leveraged securities, betting the rise of the markets that started in March 2009 could not possibly be maintained. Once the markets “corrected” they would receive the spoils for shorting the market. That prediction did not come to pass, and many broker dealers removed these investments from their trading platforms to stop the bleeding. These decisions are made to protect investors, not harm them.

Sometimes Wallstreet does the right thing.

For more information, please contact Kirsten Patzer at [email protected].

Statute of Limitations Tolled in California Amid Pandemic

Posted on: August 3rd, 2020

By: Matthew Jones

In response to the COVID-19 pandemic, California’s Governor Gavin Newsom issued a “state of emergency” for the entire State. In response, the California Judicial Council adopted several Emergency Rules to implement during the pandemic. In particular, Rule 9 states that all statute of limitations for civil causes of action are tolled from April 6, 2020 until 90 days after the state of emergency related to COVID-19 is lifted by the Governor. Therefore, if a party’s claim would have expired pursuant to the applicable statute of limitations during this timeframe, such claims are still very much alive. In regard to those claims, there is currently no deadline to file them since the “state of emergency” has yet to be lifted by the Governor. Once lifted, claimants will have six months to file their respective claims.

Additional Information:

FMG has formed a Coronavirus Task Force to provide up-to-the-minute information, strategic advice, and practical solutions for our clients.  Our group is an interdisciplinary team of attorneys who can address the multitude of legal issues arising out of the coronavirus pandemic, including issues related to Healthcare, Product Liability, Tort Liability, Data Privacy, and Cyber and Local Governments.  For more information about the Task Force, click here.

You can also contact your FMG relationship partner or email the team with any questions at [email protected].

**DISCLAIMER:  The attorneys at Freeman Mathis & Gary, LLP (“FMG”) have been working hard to produce educational content to address issues arising from the concern over COVID-19.  The webinars and our written material have produced many questions. Some we have been able to answer, but many we cannot without a specific legal engagement.  We can only give legal advice to clients.  Please be aware that your attendance at one of our webinars or receipt of our written material does not establish an attorney-client relationship between you and FMG.  An attorney-client relationship will not exist unless and until an FMG partner expressly and explicitly states IN WRITING that FMG will undertake an attorney-client relationship with you, after ascertaining that the firm does not have any legal conflicts of interest.  As a result, you should not transmit any personal or confidential information to FMG unless we have entered into a formal written agreement with you.  We will continue to produce education content for the public, but we must point out that none of our webinars, articles, blog posts, or other similar material constitutes legal advice, does not create an attorney client relationship and you cannot rely on it as such.  We hope you will continue to take advantage of the conferences and materials that may pertain to your work or interests.**

FINRA Amends Rules to Incentivize Timely Payment of Arbitration Awards

Posted on: June 17th, 2020

By: Kathleen Cusack and Kirsten Patzer

On May 21, 2020, the Financial Industry Regulatory Authority (FINRA) announced that effective September 14, 2020, its Membership Application Program (MAP) rules will be amended to further incentivize the timely payment of arbitration awards. The amendment to MAP will seek to do so by preventing an individual from switching firms and prevent firms from transferring assets to avoid the payment of arbitration awards. Specifically, the amendments will: (1) require members to seek a materiality consultation for changes in ownership, control, or business operations; (2) create a rebuttable presumption to deny an application for membership if the applicant is the subject of an existing claim; (3) require that a member demonstrate the ability to satisfy unpaid or pending arbitration awards; and (4) require that an applicant notify FINRA of any arbitration claim involving the applicant. 

Unpaid arbitration awards have plagued FINRA’s dispute resolution division for years. In 2018 FINRA conducted a study showing that between 2012 and 2016 more than a quarter of all arbitration awards went unpaid.

FINRA’s new MAP rules will adversely impact any financial advisor with a pending arbitration matter seeking to change firms. The rules fail to address the idiosyncrasies of the FINRA arbitration process, which allows any investor to file an arbitration matter without the vetting of their claims. With limited ability to dismiss arbitrations without going to a full hearing, an advisor could be a part of a pending arbitration for years.

The Public Investors Advocate Bar Association (PIABA) has long advocated for an industry funded pool of money to remedy the unpaid award problem and now argue that the new MAP rules do not go far enough. Samuel Edwards, partner at Shepard Smith Edwards & Kantas and president of PIABA said in an interview said that the amended rules should instead “flat-out kick [members who attempt to skirt arbitration awards] out.”

FINRA rules already require that firms and brokers who do not pay their arbitration awards be barred from the industry.

If you have questions or would like more information, please contact Kirsten Patzer at [email protected] or Kathleen Cusack at [email protected]

Additional Information:

FMG has formed a Coronavirus Task Force to provide up-to-the-minute information, strategic advice, and practical solutions for our clients. Our group is an interdisciplinary team of attorneys who can address the multitude of legal issues arising out of the coronavirus pandemic, including issues related to Healthcare, Product Liability, Tort Liability, Data Privacy, and Cyber and Local Governments. For more information about the Task Force, click here.

You can also contact your FMG relationship partner or email the team with any questions at [email protected].

**DISCLAIMER: The attorneys at Freeman Mathis & Gary, LLP (“FMG”) have been working hard to produce educational content to address issues arising from the concern over COVID-19. The webinars and our written material have produced many questions. Some we have been able to answer, but many we cannot without a specific legal engagement. We can only give legal advice to clients.  Please be aware that your attendance at one of our webinars or receipt of our written material does not establish an attorney-client relationship between you and FMG. An attorney-client relationship will not exist unless and until an FMG partner expressly and explicitly states IN WRITING that FMG will undertake an attorney-client relationship with you, after ascertaining that the firm does not have any legal conflicts of interest.  As a result, you should not transmit any personal or confidential information to FMG unless we have entered into a formal written agreement with you. We will continue to produce education content for the public, but we must point out that none of our webinars, articles, blog posts, or other similar material constitutes legal advice, does not create an attorney client relationship and you cannot rely on it as such. We hope you will continue to take advantage of the conferences and materials that may pertain to your work or interests.**

FINRA Issues Guidance on Remote Work Including Continued Warning for Cyber Threats

Posted on: June 15th, 2020

By: Kathleen Cusack and Kirsten Patzer

Although all 50 states have begun the process of reopening, business spaces have not yet returned to full capacity and many people continue to work remotely.  On May 28, 2020, the Financial Industry Regulatory Authority (FINRA) issued new guidance for working from home based on surveys of financial firms. 

One such piece of guidance is a continued reminder to be vigilant with confidentiality requirements and cybersecurity concerns.  FINRA suggests reminding associated persons of confidentiality requirements, including maintaining a private workspace while working from home and taking extra precautions when working near family or friends.  FINRA also recommends that financial businesses remind and train staff about cybersecurity vulnerabilities and potential fraud risks. 

Since 2015, FINRA has released multiple reports and notices aimed at informing financial professionals about cyber risks and best practices.  The mass shift to remote work has not only resulted in a dramatic increase in the use of personal devices for the completion of work, but has also prompted a sizable increase in cyber threats to individuals and businesses.  According to a study discussed in Forbes, cyber threats increased by about a third between January and March of this year. 

One of the most common types of cyber scams is phishing.  Phishing schemes attempt to entice users to provide sensitive information to people pretending to be a trustworthy person.  To protect against phishing scams, FINRA recommends that businesses employ a combination of technological tools and regular training for employees to identify scams. Financial advisors and other associated persons are reminded to not accept trade instructions, withdrawal requests, or third-party transfers via electronic mail. If such a request is received, the advisor should contact their client via telephone to verify and confirm the instruction.   

FINRA has also cautioned against increased cybersecurity risks with the use of mobile devices.  FINRA warns that compared to in-office devices, mobile devices face a higher risk of theft or exposure to the installation of malicious applications.  

If you have questions or would like more information, please contact Kirsten Patzer at [email protected] or Kathleen Cusack at [email protected]

Additional Information:

FMG has formed a Coronavirus Task Force to provide up-to-the-minute information, strategic advice, and practical solutions for our clients. Our group is an interdisciplinary team of attorneys who can address the multitude of legal issues arising out of the coronavirus pandemic, including issues related to Healthcare, Product Liability, Tort Liability, Data Privacy, and Cyber and Local Governments. For more information about the Task Force, click here.

You can also contact your FMG relationship partner or email the team with any questions at [email protected].

**DISCLAIMER: The attorneys at Freeman Mathis & Gary, LLP (“FMG”) have been working hard to produce educational content to address issues arising from the concern over COVID-19. The webinars and our written material have produced many questions. Some we have been able to answer, but many we cannot without a specific legal engagement. We can only give legal advice to clients.  Please be aware that your attendance at one of our webinars or receipt of our written material does not establish an attorney-client relationship between you and FMG. An attorney-client relationship will not exist unless and until an FMG partner expressly and explicitly states IN WRITING that FMG will undertake an attorney-client relationship with you, after ascertaining that the firm does not have any legal conflicts of interest.  As a result, you should not transmit any personal or confidential information to FMG unless we have entered into a formal written agreement with you. We will continue to produce education content for the public, but we must point out that none of our webinars, articles, blog posts, or other similar material constitutes legal advice, does not create an attorney client relationship and you cannot rely on it as such. We hope you will continue to take advantage of the conferences and materials that may pertain to your work or interests.**