Scherzer Blog

FINRA issues investor alert about calls from brokerage firm imposters

The Financial Industry Regulatory Authority (“FINRA”) issued a new alert on August 6, 2013 labeled as Cold Calls from Brokerage Firm Imposters—Beware of Old-Fashioned Phishing to warn investors of calls from scammers claiming to be representatives of at least one well-known brokerage firm. In this latest twist on phishing scams, the fraudsters are cold-calling investors claiming to offer information about certificates of deposit with yields well above the best rates in the market in an attempt to get potential victims to divulge their personal or financial account information.

FINRA is reminding investors who receive unsolicited calls to never provide personal information or authorize any transfer of funds to any unknown person, and encourages anyone who believes that he/she has been scammed to file a complaint using its online Complaint Center or send a tip to FINRA’s Office of the Whistleblower.

|Fraud|

SEC rule amends certain broker/dealer reporting, audit and notification requirements

The amendments issued by the Securities and Exchange Commission (the “SEC”) last month include:

a requirement that broker-dealer audits be conducted in accordance with standards of the Public Company Accounting Oversight Board (the “PCAOB”) “in light of explicit oversight authority provided to the PCAOB by the Dodd-Frank Wall Street Reform and Consumer Protection Act to oversee these audits;”
a requirement that a broker-dealer that clears transactions or carries customer accounts agree to allow representatives of the Commission or the broker-dealer’s designated examining authority (“DEA”) to review the documentation associated with certain reports of the broker-dealer’s independent public accountant, and to allow the accountant to discuss the findings relating to the reports with those representatives when requested in connection with a regulatory examination of the broker-dealer; and
a requirement that a broker-dealer file a new form with its DEA that elicits information about the broker-dealer’s practices with respect to the custody of securities and funds of customers and non-customers.

|Business Transactions, Legislation|

Disciplinary action serves as reminder of due diligence requirement in Reg. D offerings

A recent disciplinary action reaffirmed FINRA member firms’ obligations to conduct a reasonable investigation of the issuer and the securities it recommends in offerings made under the SEC’s Regulation D, commonly known as private placements. Regulation D provides exemptions from the registration requirements of Section 5 under the Securities & Exchange Act, but it does not exempt these transactions from the antifraud provisions of the federal securities laws. A broker-dealer thus has a duty—enforceable under federal securities laws and FINRA rules—to conduct a reasonable investigation of the securities it recommends. Moreover, any broker-dealer that recommends securities offered under Regulation D must meet the suitability requirements under NASD Rule 2310, and comply with the advertising and supervisory rules of FINRA and the SEC.

A broker-dealer’s reasonable investigation must be tailored to each Regulation D offering, as its scope will depend on factors such as the sophistication of the investors, the broker-dealer’s affiliation with the issuer, and other facts and circumstances of the offering. The investigation, at a minimum, should include background checks of the issuer and its management, the business prospects of the issuer, the assets held or to be acquired by the issuer, the claims being made, and the intended use of the proceeds.

A firm that engages in Regulation D offerings also must have supervisory procedures under NASD Rule 3010 that are designed to ensure that its personnel and representatives conduct an inquiry that is sufficient to comply with the legal and regulatory requirements; that they perform the suitability analysis required by NASD Rule 2310; that they qualify the investors’ eligibility to purchase the securities; and that they abide by the antifraud provisions of the federal securities laws and FINRA rules regarding the preparation and distribution of offering documents or sales literature. And a broker-dealer has a further duty to adequately investigate any information located during the investigation that may be considered a “red flag.”

|Employment Decisions, Fraud|

Rhode Island is the latest state to “ban the box”

On July 16, 2013, Rhode Island’s SB357 was signed into law, making it the eighth state to pass “ban the box” legislation. Effective January 1, 2014, the law, with a few exceptions, will make it an “unlawful employment practice” for an employer in the state to inquire whether an applicant has ever been convicted of a crime before the ﬁrst interview. In “banning the box” for private employers, Rhode Island follows on the heels of Hawaii, Massachusetts, and Minnesota, as well as the cities of Seattle, Buffalo, Philadelphia, and Newark. And many more jurisdictions have already “banned the box” for public employers and public contractors, and even more have some form of the legislation under consideration. Congress too is pondering its federal HR 6220 or “Ban the Box Act” introduced last July, which similar to these state and local laws, would make it illegal for an employer to ask about criminal history in an interview or on an employment application.

|Employment Decisions, Legislation|

SEC approves JOBS Act requirement to lift general solicitation ban and adopts final rule to disqualify bad actors from certain offerings

The Securities and Exchange Commission (the “SEC”) today adopted a new rule implementing a JOBS Act requirement to lift the ban on general solicitation or general advertising for certain private securities offerings. In connection with this new rule, the SEC issued an amendment proposal requiring issuers to provide additional information about these offerings to better monitor the market with that ban now lifted. The proposal provides for additional safeguards as the market changes and new practices develop.

Continuing the momentum, the SEC also adopted a long-awaited rule that disqualifies felons and other bad actors from participating in certain securities offerings as required by the Dodd-Frank Act. Under this final rule, an issuer cannot rely on the Rule 506 exemption if the issuer or any other covered person had what the SEC considers a “disqualifying event,” briefly described as a securities-related criminal conviction, court injunction or restraining order, final bar order, SEC disciplinary, cease-and-desist or stop order, suspension or expulsion from membership in a self-regulatory organization, or U.S. Postal Service false representation order.

The final rule provides an exception from disqualification when the issuer can show that it did not know and, in the exercise of reasonable care, could not have known that a covered person with a disqualifying event participated in the offering. The disqualification applies only for events that occur after the effective date of this rule. However, matters that existed before the effective date and that otherwise would be disqualifying are subject to a mandatory disclosure requirement to investors.

|Dodd-Frank, Educational Series|

SEC announces new enforcement initiatives to combat fraud

The Securities and Exchange Commission, (the “SEC”) announced today three new initiatives that will build on its Division of Enforcement’s ongoing efforts to concentrate resources on high-risk areas, as follows:

The Financial Reporting and Audit Task Force will concentrate on expanding and strengthening the Division’s efforts to identify securities law violations relating to the preparation of financial statements, issuer reporting and disclosure, and audit failures. Its principal goal will be fraud detection and increased prosecution of violations involving false or misleading financial statements and disclosures.

The Microcap Fraud Task Force will investigate fraud in the issuance, marketing, and trading of microcap securities. These abuses frequently involve serial violators and organized syndicates that employ new media, especially websites and social media, to conduct fraudulent promotional campaigns and engage in manipulative trading strategies to amass ill-gotten gains, largely at the expense of less sophisticated investors. The task force’s principal goal will be to develop and implement long-term strategies for detecting and combating fraud especially by targeting “gatekeepers,” such as attorneys, auditors, broker-dealers, and transfer agents, and other significant participants, such as stock promoters and purveyors of shell companies.

The Center for Risk and Quantitative Analytics (CRQA) will support and coordinate the Division’s risk identification, risk assessment and data analytic activities by identifying risks and threats that could harm investors, and assist staff nationwide in conducting risk-based investigations and developing methods of monitoring for signs of possible wrongdoing. A central point of contact for risk-based initiatives nationwide, CRQA will serve as both an analytical hub and source of information about characteristics and patterns indicative of possible fraud or other illegality.

|Educational Series, Fraud|

CFPB issues long-awaited rule on supervising non-banks that pose risks to consumers

On June 26, 2013, the Consumer Financial Protection Bureau (the “CFPB”) issued a final rule that establishes procedures to bring under its supervisory authority certain nonbanks whose activities pose risks to consumers. Non-banks subject to the rule are companies that offer or provide consumer financial products or services but do not have a bank, thrift, or credit union charter, and include a nonbank’s affiliate service providers. The final rule will be effective 30 days after its publication in the Federal Register.

Under the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”), the CFPB is authorized to supervise any nonbank, regardless of its size, that the CFPB has reasonable cause to determine “is engaging, or has engaged, in conduct that poses risks to consumers with regard to the offering or provision of consumer financial products or services.”

The CFPB has already finalized “larger participant” rules for the credit reporting and debt collection markets and has proposed such a rule for the federal and private student loan servicing market.

|Dodd-Frank|

Updated guide from the FTC: fighting identity theft with Red Flags Rule for businesses

On June 12, 2013, the Federal Trade Commission (the “FTC”) issued revised guidance designed to help businesses comply with the requirements of the Red Flags Rule, which protects consumers by requiring businesses to watch for and respond to warning signs or “red flags” of identity theft. The guidance outlines which businesses – financial institutions and some creditors – are covered by the Rule and what is required to protect consumers from identity theft.

The FTC enforces the Red Flags Rule with several other agencies. Its guide has tips for organizations under FTC jurisdiction to determine whether they need to design an identity theft prevention program, and can help businesses spot suspicious patterns and prevent the costly consequences of identity theft.

|Educational Series, Guidance|

FINRA is spot-checking social media communications

In posting a Targeted Examination Letter (often referred as a sweep letter) on its website earlier this month, FINRA invoked Rule 2210(c)(6), which states that each FINRA firm’s written (including electronic) communications are subject to a periodic spot-check procedure.

FINRA’s sweep letter seeks, among other things, an explanation of how the firm is using social media at the corporate level in conducting its business; the identity of all individuals who post and/or update content; how the firm’s registered representatives and associated persons generally use social media to conduct the firm’s business; written supervisory procedures concerning the production, approval and distribution of social media communications; the measures to monitor compliance with the firm’s social media policies; and a tabular list of the firm’s top 20 producing registered representatives (based on commissioned sales) who used social media for business purposes to interact with retail investors.

|Legislation|

Virginia takes workers’ privacy to a new level

Starting July 1, 2013, new Virginia Code §40.1-28.7:4 provides that “employers shall not, unless a listed exemption applies, be required to release, communicate, or distribute to a third-party, any current or former employee’s personal identifying information.”

In this context, “personal identifying information” is defined as a “home telephone number, mobile telephone number, e-mail address, shift times, or work schedule.” Exceptions permitting the disclosure of such information include requirements of federal laws that supersede state statutes, court orders, judicial warrants or a subpoena in a civil or criminal case. Although there is no penalty, the statute establishes a public policy that endorses protection of the personal identifying information and could be used in a lawsuit against employers.

|Educational Series, Legislation|