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Archive for the ‘Financial Services and Banking Litigation’ Category

Robinhood v. The Commonwealth

Posted on: April 20th, 2021

By: Kirsten Patzer

Even before Robinhood made headlines with the GameStop debacle earlier this year, the Massachusetts Securities Division and Secretary of the Commonwealth, William Galvin, had Robinhood in their sight. On December 16, 2020 the Massachusetts regulators brought their first action under the recently implemented fiduciary rule standard, alleging Robinhood aggressively targeted young people with little to no investment experience, failed to follow its own supervisory policies and procedures, and used gamification strategies to encourage frequent trading on their platform breaching the fiduciary conduct standard under Massachusetts law.        

Now Robinhood is fighting back.

Last week, in response to Secretary Galvin amending the original administrative complaint calling for the revocation of Robinhood’s brokerage license with the Commonwealth, Robinhood filed a Complaint for Injunctive and Declaratory Relief. The Complaint, filed in the Business Litigation Session of Suffolk Superior Court, is not just claiming Robinhood did not breach the new fiduciary standard, they are challenging the rule itself as invalid under both Massachusetts and federal law.

Robinhood argues the new rule is invalid because it contradicts the Massachusetts’ Supreme Judicial Court’s prior rulings that, as a matter of law, brokerage firms are not fiduciaries of their customers and the Massachusetts Constitution specifically prohibits the Secretary from usurping the authority of the judiciary or creating or amending laws passed by the legislature.

Robinhood also attacks the underlying administrative proceeding as “futile”, noting the presiding officer over the action is a “senior attorney in the Division who: has worked for the Secretary for decades; was instrumental in enacting the very regulation that Robinhood is challenging; and participated in the Division’s investigation of Robinhood.” And, even if the administrative officer were to find in Robinhood’s favor, the Securities Division’s director can overturn their decision.

Additionally, by implementing the fiduciary standard, Robinhood alleges the Division and Secretary have violated the Supremacy Clause of the United States Constitution, as the new rule directly conflicts with the new Regulation Best Interest standard promulgated by the SEC in June 2020, the Dodd-Frank Act, and the Commerce Clause.

While Massachusetts is the first to implement a higher fiduciary standard for broker-dealers operating in their jurisdiction, other states, like Nevada and New Jersey, are well on their way to adopting the stricter standard. This action could change the regulatory landscape governing the securities industry as the courts now have to tackle, head on, the question of whether states can create their own set of standards.

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

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.**