FINRA Focused on e-Mail Retention

Last week FINRA fined LPL Financial LLC $7.5 million for e-mail violations. This is the largest fine brought by FINRA solely for e-mail violations, but it is indicative of the regulator's increased focus in this area.

FINRA is concerned and firms will continue to be targets of disciplinary actions for failing to retain and review business-related e-mails, especially where fast growth and increased regulatory requirements overtake stretched compliance resources, legal sources said.

In settling the case against LPL, FINRA said that as the firm “rapidly grew its business, failed to devote sufficient resources to update its e-mail system, which became increasingly complex and unwieldy.” “ Fast-growing firms and systems are always a challenge,” said FINRA enforcement chief Brad Bennett. “Compliance and legal are being asked to do more with the same resources.”

A review of FINRA e-mail cases include nine settlements with broker-dealers year-to-date, not including the LPL case. The total fines amounted to $1.65 million. These cases include Next Financial Group Inc. that agreed in May to pay FINRA a $250,000 fine to settle an e-mail case. Securities America Inc. was fined $100,000 in April, and in February, five broker-dealers owned by ING Groep NV were fined $1.2 million.

A study conducted by the law firm Sutherland Asbill & Brennan LLP found a sharp increase in e-mail-related violations last year. The law firm said FINRA fines shot up to $6.5 million in 2012, an increase of 81% from the prior year. It counted 63 e-mail cases in 2012, up from 57 cases in 2011. Sutherland included all cases where e-mail violations were part of the case, regardless of how minor. To read the full study, please click here.

We know that firms often struggle with the technology used for retaining e-mails, and glitches can occur that compliance officials may not be aware of. Also, individual brokers may fail to inform their broker-dealers about using outside or personal e-mail. Compliance policies and procedures need to take this into account when they are designed and implemented.

Red Oak Compliance Solutions is available to help. We can provide guidance on all of your compliance needs. For more information or to request information on how we can help, please contact us.

Dallas Trader Charged with Front Running

The Securities and Exchange Commission announced fraud charges and an asset freeze this week against a trader at a Dallas-based investment advisory firm, Cushing MLP Asset Management, who improperly profited by placing his own trades before executing large block trades for firm clients that had strong potential to increase the stock's price.

The SEC alleged that Daniel Bergin, a senior equity trader, secretly executed hundreds of trades through his wife's ahead of large client orders. Bergin concealed his lucrative trading by failing to disclose his wife's accounts to the firm and avoiding pre-clearance of his trades in those accounts.

"Bergin's misconduct is particularly egregious because his firm depended on him to manage market exposure and risk for its investments. Instead, he pitted his clients' financial interests against his own," said David R. Woodcock, Director of the SEC's Fort Worth Regional Office.

According to the SEC's complaint, Bergin realized at least $1.7 million in profits in his wife's accounts from 2011 to 2012 as a result of his illegal same-day or front-running trades. More than $520,000 of the $1.7 million represents profits from approximately 132 occasions in which Bergin placed his initial trades in his wife's account ahead of clients' trades.

According to the SEC's complaint, more than $1.8 million was withdrawn since July 2012 from a trading account belonging to Bergin's wife that was undisclosed to his firm. Most of the withdrawals were large transfers to her bank account. To read the full complaint, please click here.

Advertising Fines Continue to Rise

Sutherland Partners reviewed FINRA’s monthly disciplinary notices and found that in 2012 FINRA brought slightly more disciplinary actions but assessed a double-digit increase in fines. This was the fourth consecutive year of increase in the number of cases filed and the second straight year of growth in the amount of fines. Sutherland also identified the top enforcement issues for FINRA in 2012, as well as emerging trends.

Advertising was the fourth-biggest fine generator in 2012. FINRA reported 50 cases involving alleged advertising violations in 2012, which resulted in fines of $10.4 million. This is an 11% increase over 2011. Please click here for the full survey.

With the recent fines to LPL for failure to archive all emails, firms need to ensure that they also capture all advertising and archive it. Red Oak Compliance Solutions has a technology solution, AdMaster to help you with all your advertising review needs. Take that next step to ensure you are covered and can respond appropriately to all regulatory requests. Call us today for a demo of AdMaster.

SEC Fines Firm for Confidential Proxy Voting Violations

A large proxy advisory firm is being required to pay a $300,000 fine and retain an independent compliance consultant for failure to implement policies and procedures that would prevent employees from disclosing confidential voting information about proxy voting. The SEC claims that an employee received tens of thousands of dollars in tickets and meals for providing confidential client voting information. The SEC alleged that the firm knew that a proxy solicitor entertained firm employees to curry favor but did nothing to understand or prevent this from occurring. Even though the firm had a Code of Ethics which prohibited the disclosure of material nonpublic information, the firm failed to implement procedures and allowed all employees access to the client voting information; failed to audit employee access; did not train employees about their relationships with proxy solicitors; failed to require reporting and/or pre-clearance of gifts and did not review e-mails.

This shows that once again failure to have adequate policies and procedures is never a good excuse for a bad ending. Policies and procedures must be reasonably designed and these obviously were not according to the SEC. To read the full SEC case, please click here.

Cherry Picking Trades

The SEC has initiated an action against a firm that is not required to be registered. The SEC has stated that the firm cherry-picked profitable trades. The firm principals used a third party bank to custody client accounts and told the bank how to allocate block trades several days after executing the trades through large brokerage firms. According to the SEC, over a four-year period, more than 75% of 13,500 trades allocated to the principals were profitable, and fewer than 25% of trades allocated to clients were profitable. The SEC noted that the principals did not make any compensation from the adviser but relied solely on their personal trading profits. The SEC indicated that "same-day or pre-trade allocations are considered best practices because they protect against unfair allocation schemes such as cherry picking." Moreover, "it is an industry standard...to have a written trade allocation policy."

You can click here to read the full story.

SEC Chairman Mary Jo White Wants to Focus Additional Resources on Investment Advisers

In testimony before a Congressional Subcommittee, SEC Chairman Mary Jo White described how the proposed 2014 SEC budget would add significant additional resources to supervise investment advisers. She indicated that the new budget would include funds to hire 250 additional examiners "to increase the proportion of advisers examined each year, the rate of first-time examinations, and the examination coverage of investment advisers and newly registered private fund advisers." Another 60 jobs would be added to "improve oversight and examination functions related to broker-dealers, clearing agencies, transfer agents, self-regulatory organizations (SROs), and municipal advisors." She also stated that another 131 hires would be added to the Enforcement staff. She believes more funds were necessary for "expanding oversight of investment advisers and improving their regulation and compliance -- a point at which investors are most at risk of being defrauded and harmed." To read the full testimony about budget priorities, please click here.

SEC Official Raises Broker-Dealer Registration Question for Private Equity Firms

The Chief Counsel of the SEC’s Division of Trading and Markets, David Blass, raised concerns during his speech given April 5th, that private equity fund sponsors may be ignoring broker-dealer registration and licensing requirements when selling fund shares or transacting with portfolio companies. Mr. Blass explained that broker-dealer registration and representative licensing requirements are triggered when firm personnel focus on selling fund shares and receive transaction-based compensation. He described activities that may require broker-dealer registration: marketing fund shares, soliciting or negotiating transactions, and handling investor funds or securities. He explained that the issuer exemption (Rule 3a4-1) is very narrow and would not likely be available to most private equity personnel involved with fundraising. Mr. Blass further stated that broker-dealer registration may be required when fund sponsors receive investment banking or success fees for transactions involving portfolio companies. Mr. Blass rejected any argument that private equity firms should be exempt from broker-dealer registration and stated: “Unless prepared to register as a broker, a person should not engage in activities that trigger registration.” He also discussed the consequences of failing to register including possible rescission of all securities transactions involving unregistered personnel.

To read the full text of his speech please click here.