FINRA Regulation

Published on: December 23, 2011

FINRA Ruling: Wells Fargo Fined, Complaint Filed Against Chen

December 15, 2011, the Financial Industry Regulatory Authority (FINRA) announced its decision to fine Wells Fargo Investments LLC for “unsuitable sales of reverse convertible securities through one broker to 21 customers, and for failing to provide sales charge discounts on Unit Investment Trust (UIT) transactions to eligible customers.” The fine totals $2 million; in addition, Wells Fargo must pay restitution to customers who had unsuitable reverse convertible transactions and/or did not receive the sales charge discounts on UIT transactions. Furthermore, the stock broker misconduct of Alfred Chi Chen led FINRA to file a complaint against him.

Finra Ruling: Wells Fargo Fined, Complaint Filed Against Chen

UITs offer sales charge discounts on purchases that exceed certain thresholds, often called “breakpoints,” or involve redemption or termination proceeds from another UIT during the initial offering period. Wells Fargo’s insufficient monitoring of the reverse convertible sales caused them to fail to provide breakpoint and rollover and exchange discounts in the sales of UITs to eligible customers from January 2006 to July 2008.

The registered representative, who is no longer with Wells Fargo, Alfred Chi Chen, made unauthorized trades in multiple customer accounts. In some cases, the customer accounts belonged to deceased individuals. FINRA filed a complaint against Chen, in addition to its decision to fine Wells Fargo. According to FINRA’s investigation, Chen’s broker misconduct extended to 21 clients, most of which had limited experience in investments, low risk tolerances and/or were elderly. To these 21 clients, Chen made hundreds of unsuitable recommendations for reverse convertible investments. Repayment of reverse convertibles, which are interest-bearing notes, is tied to the performance of a stock, basket of stocks, or another underlying asset. These investments were unsuitable for many of Chen’s low-risk profile clients because they risk sustaining a loss if the value of the underlying asset falls below a certain level at maturity or during the term of the reverse convertible, according to FINRA.

Published on: November 28, 2011

Wells Investment Securities Fined for Misleading Marketing

by InvestorLawyers

On November 22, the Financial Industry Regulatory Authority (FINRA) announced its securities arbitration decision to fine Wells Investment Securities Inc. for using misleading marketing materials. The materials were used in the sale of Wells Timberland REIT Inc., for which Wells was the wholesaler and dealer-manager, and the fine imposed by FINRA was $300,000.

Wells Timberland REIT is a non-traded Real Estate Investment Trust that invested in timber-producing land. Because it was the wholesaler, Wells was responsible for the review, approval and distribution of the marketing materials. According to FINRA’s investigation, Wells distributed 116 sales materials and advertising that contained exaggerated, unwarranted and misleading statements concerning the REIT from May 2007 through September 2009.

One of the misleading statements contained in the offering prospectus was that Wells Timberland intended to qualify as a Real Estate Investment Trust for the Dec. 31, 2006 tax year when, in fact, it did not qualify until the Dec. 31, 2009 tax year. Furthermore, most of the sales literature and advertisements either did not adequately express the significance of the investment’s non-REIT status or suggested that the investment was a REIT when it had not yet qualified. In addition, the FINRA investigation found that the supervisory procedures of the firm did not adequately monitor whether sensitive customer information that was stored on laptops was adequately safeguarded through the use of encryption technology.

Published on: November 17, 2011

A Notice to LaeRoc Income Funds Investors

by InvestorLawyers

LaeRoc Funds, a real estate investment firm that, according to its website, has managed assets totaling more than $650 million over the last 23 years, is currently attempting to raise another $12 million to $15 million to pay off debt for its LaeRoc 2005-2006 Income Fund. The fund’s debt totals at least $49 million. This “cash call” could be a negative sign for individuals invested in the fund. In addition, an article in Investment News states that, “The fund’s leaders have said that they will foreclose on one of its holdings, the Country Club Plaza shopping center in Sacramento, Calif., by the end of the year if they can’t raise enough money.”

A Notice to LaeRoc Income Funds Investors

The due diligence and sales practices of FINRA-registered brokerage firms who solicited this fund, along with the LaeRoc 2002 Investment Fund, are currently being investigated. In total, the two LaeRoc Funds purchased eight properties, costing a total of more than $180 million, and still owe mortgage debt totaling $105 million.

According to investors of the fund, the investment was represented as fixed income and conservative. If it can be proven that the investments were misrepresented, or the full extent of the risks associated with them were not disclosed, investors who believed the investment to be conservative may have a claim for a securities arbitration case. FINRA Rules state that firms must perform a “reasonable” investigation of the securities recommended as private placements, like the LaeRock Fund. Private placements — offerings made under Regulation D of the Securities Act of 1933 — are not exempt from the federal securities law’s antifraud provisions, even though exemptions are provided by Regulation D from registration requirements of Section 5 of the act.

Published on: November 14, 2011

Morgan Stanley Fined $1 Million, Plus Restitution

by InvestorLawyers

According to a recent press release from the Financial Industry Regulatory Authority (FINRA), Morgan Stanley & Co. Inc. and Morgan Stanley Smith Barney LLC, together were fined $1 million in securities arbitration. Furthermore, Morgan Stanley was ordered to pay $371,000 in restitution and interest. The restitution and interest will go to Morgan Stanley customers because of supervision violations and excessive markups and markdowns that were charged on their municipal bond transactions.

Morgan Stanley Fined $1 Million, Plus Restitution

Markups refer to the difference between the lowest current offering price of an investment for the dealer and the actual price the dealer charges the customer. According to the Municipal Securities Rulemaking Board, or MSRB, “MSRB rules require that the price at which a broker-dealer sells a municipal security to a customer be fair and reasonable, taking into consideration all relevant factors.” Though the MSRB does not set numerical guidelines for what constitutes a “reasonable” markup, they do acknowledge that whether the total price paid by the customer can be considered “fair and reasonable” can be affected by the mark-up.

According to FINRA’s investigation, Morgan Stanley’s 5 percent to 13.8 percent markups and markdowns were higher than warranted when considering market conditions, value of services rendered to customers and the cost of executing the transactions. In addition, the supervisory system Morgan Stanley had in place for corporate and municipal bond markups and markdowns was found to be inadequate by FINRA. Inadequacies of the supervisory system included a failure to include markups and markdowns less than 5 percent — regardless of if they were excessive or not — and the firms’ policies and procedures.

Published on: October 28, 2011

FINRA Decision: UBS Securities Fined $12 Million

by InvestorLawyers

On October 21, the Financial Industry Regulatory Authority (FINRA) announced its decision to fine UBS Securities $12 million in securities arbitration. The fine is for charges of Regulation SHO violation and failure to supervise. UBS Securities did not properly supervise short sales and the result was millions of mismarked short sale orders, some of which were “placed to the market without reasonable grounds to believe that the securities could be borrowed and delivered,” according to the FINRA press release.

FINRA Decision: UBS Securities Fined $12 Million

Short sales occur when a security is sold by a seller that does not own it. When delivery is due, it is either purchased or borrowed by the short seller so that the delivery can be made. Regulation SHO requires that there are reasonable grounds for the broker-dealer to believe it could be borrowed and available for delivery. Regulation SHO reduces potential failures to deliver and states that broker-dealers must mark the trades as long or short. FINRA’s findings indicated that the supervisory system used by UBS was significantly flawed. Furthermore the flaws “resulted in a systemic supervisory failure that contributed to serious Reg SEO failures across its equities trading business,” according to FINRA documents.

FINRA’s investigation found that UBS Securities mismarked millions of sale trading orders, placed millions of short sale orders without locates and had significant aggregation unit deficiencies. Because of UBS’ supervisory failures, it wasn’t until after FINRA’s investigation and the resulting review of its systems and monitoring that many of its violations were corrected. According to FINRA, it wasn’t until at least 2009 that UBS’ supervisory framework was able to achieve compliance with certain securities laws, rules and regulations.

Published on: September 12, 2011

FINRA Evaluating High Frequency Trading

by InvestorLawyers

High-frequency trading — a process in which computer algorithms are used to trade shares, foreign exchange and derivatives at superfast speeds — earns profits by extricating tiny price differences thousands of times a day, across trading platforms. The algorithms being used are treated by their owners as top secret; in fact, many have taken legal action against ex-employees who have allegedly stolen them. But this high-frequency trading may be a threat to market security.

Banks and other members of exchanges, along with broker-dealers, are being asked by the Financial Industry Regulatory Authority (FINRA) to hand over their high-frequency trading strategies and/or the software code so that the agency might watch for unusual trading patterns. Proponents of high-frequency trading claim that these strategies tighten the spread of market prices, but FINRA is concerned that they could hide potential market abuse.

FINRA, along with other securities authorities, has been trying to evaluate how high-frequency trading affects capital markets, and this request for strategy details and software code is just one more step toward that end. It would be possible for this technology to manipulate share prices, and so it is necessary for authorities to evaluate potential threats to prevent market abuse.

Published on: August 31, 2011

RESOURCES FOR INVESTOR PROTECTION

by InvestorLawyers

Though investors who have already been “burned” by stock broker fraud or broker misconduct may have a perfectly understandable fear of getting back into the securities game, there are ways investors can help protect themselves in the future. One of the most significant protective measures an investor can take is to look into the background and credentials of a potential stock broker or investment adviser before working with them.

Resources for investor protection

Any time a business hires a new employee, they run a background check — so why wouldn’t an investor do the same when hiring a stock broker or financial adviser? According to a Financial Industry Regulatory Authority (FINRA) survey, only 15 percent of investors perform a background check when hiring an adviser. In addition, just because they’re registered when you hire them doesn’t mean you’re finished. Investors should check broker registration yearly.

To find out if your broker has had any arbitrations, criminal records, investment-related investigation, bankruptcy or disciplinary actions, utilize FINRA’s BrokerCheck. Other information available through BrokerCheck includes employment history, licenses held and where the broker is registered. While not every stock broker or brokerage firm can be found in BrokerCheck, the database is extensive, including around 1.3 million brokers and 17,000 firms.

Published on: August 25, 2011

FIDUCIARY DUTY: THE DIFFERENCE BETWEEN BROKERS AND ADVISERS

by InvestorLawyers

Financial advisers are bound by their fiduciary duty. Put simply, fiduciary duty is when one party (in this case, the financial adviser) must, by law, act in the best interest of another party (in this case, the client). Financial advisors have a legal obligation to act in the best interest of their client as they are entrusted with the care of their money. If a financial advisor does not adhere to his or her fiduciary duty, then securities arbitration can be brought against that person.

Fiduciary duty: the difference between brokers and advisers

Broker-dealers, on the other hand, only must adhere to the far less rigid “suitability standard.” This means they only have to make “suitable” recommendations. This makes sense in the old view of a broker as a salesman. After all, a clothing retailer isn’t required to only sell you jeans that don’t make you look fat. However, brokers aren’t simply salesmen anymore. Especially in recent years, the line that separates brokers from advisers has grown fuzzy and all but disappeared. Advisers buy for their clients and brokers advise clients in their purchases. It is for this reason that many believe that brokers should be held to the same, or at the very least similar, standards as advisers.

In January of this year, the SEC recommended that brokers be held to a common fiduciary duty as advisers. According to the SEC’s Study on Investment Advisers and Broker-Dealers, “Broker-dealers and investment advisers are regulated extensively, but the regulatory regimes differ, and broker-dealers and investment advisers are subject to different standards under federal law when providing investment advice about securities. Retail investors generally are not aware of these differences or their legal implications.”