Category Archives: Regulatory

FINRA Investor Study

Recently, FINRA published a report regarding its investor survey (FINRA Investors in the US 2016).  The report summarizes findings from an online survey addressing investor relationships with broker-dealers and advisers, investor understanding of fees charged for investment services and investor literacy.  The survey finds that a very small percentage of investors own “complex securities,” such as REITs, options and structured notes, which have been a focus of regulatory attention.  Most investors own principally individual stocks and mutual funds.  More than half of those investors surveyed rely on the services of a broker or other professional adviser for some of their investment decisions, with the percentage being somewhat higher for investors aged 55 and higher.  Approximately 16% of those surveyed use robo-advisers.  In making investment decisions, 49% expressed a preference for paper deliver of documents.  An overwhelming percentage of investors (68%) rely on information from the company in which they are investing in order to make their investment decisions.  The investor literacy component of the survey questions revealed that many investors do not have a complete understanding of concepts like short selling and buying stocks on margin, which suggests that broker-dealers and investment advisers have continued work ahead of them in terms of investor education.

 

At-Risk Investors

For some time now, NASAA, FINRA and the SEC’s Division of Enforcement have been focused on cases involving sales of securities to at risk investors, including senior citizens.  In various published remarks, NASAA representatives have noted that approximately one-third of the enforcement actions in recent years have involved sales made to senior citizens.  In October 2016, FINRA filed with the SEC proposed rules that would amend Rule 4512 and adopt new Rule 2165.  These proposals address a number of the concerns raised by FINRA’s Notice to Members 15-37.

The FINRA proposal would amend existing customer account information rules to require brokers to attempt to obtain the name and contact information for a “trusted contact person” upon opening an account. A broker would not be required to attempt to obtain the name of or contact information for a trusted contact person for accounts in existence prior to the effective date of the proposed rule change until the time that it updates the information for the account either in the course of its normal business, or until it is otherwise required to do so under applicable laws or rules.

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Combating Disruptive Electronic Trading: Expedited Cease and Desist Proceedings by FINRA

The Financial Industry Regulatory Authority, Inc. (“FINRA”) recently filed an immediately effective proposal with the Securities and Exchange Commission (“SEC”) to adopt new rules aimed at certain abusive forms of electronic trading.  The proposed rules prohibit two specific types of disruptive quoting and trading activity, and permit FINRA to bring expedited cease and desist proceedings against violations, even if there is no showing of improper intent.  The proposal was published by the SEC on November 21, and will become operative on December 15 (see SR-FINRA-2016-043, available here).

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SEC Inaugural Fintech Forum

On November 14, 2016, the SEC plans to hold its first-ever “Fintech Forum” to discuss technological innovations in the financial services industry.  Among other things, the forum will analyze the impact of automated investment advisory programs or so-called “robo-advisers,” and the impact of blockchain on the traditional clearance and settlement of security transactions.  The SEC has released its agenda for the forum, which includes panel discussions from industry experts and executives from the leading financial technology firms.

FINRA 5110 Enforcement Action. . . A Harbinger of Things to Come?

On November 3, 2016, FINRA issued an enforcement action against a registered broker-dealer for violations related to FINRA Rule 5110, which requires firms to make certain regulatory filings in connection with the public offering of securities.  More specifically, the firm replaced the dealer manager of a real estate investment trust offering, and failed to seek or obtain FINRA approval, instead incorrectly believing that they could rely on the prior dealer manager’s FINRA approval.  In addition, the firm failed to have adequate supervisory procedures to monitor the limits on underwriting compensation as required by FINRA Rule 5110.  FINRA rarely issues enforcement actions for violations of FINRA Rule 5110, so this action may represent an increased regulatory focus on how firms handle and manage the offering of securities.