Permanent Bar Proves Less Than Permanent As SEC Approves Return to Industry (BrokeAndBroker.com Blog)Feds accuse Visa consultant of stonewalling on documents as legal wrangling heats up in antitrust investigation into Visa acquisition of Plaid / Visa paid Bain & Co. for insights on competitive position and pricing. The DOJ says it has a right to documents as part of its antitrust investigation (RIABiz by Oisin Breen)FINRA Censures and Fines National Securities Corporation over U4 and U5 filings, Customer Complaint reporting, and Contingency OfferingsSEC Adopts Modernized Regulatory Framework for Derivatives Use by Registered Funds and Business Development Companies (SEC Release)Opening Statement on Use of Derivatives by Registered Investment Companies and Business Development Companies (SEC Commissioner Hester Peirce)
[W]ang sold hard currency in U.S. dollars that he collected from various third parties. His customers were typically individuals with bank accounts in China who could not readily access cash in the United States due to capital controls that cap the amount of Chinese yuan that an individual can convert to foreign currency. Often these customers needed the money to gamble at the casinos in Las Vegas and elsewhere. Upon receiving U.S. dollars, the customers would transfer from a Chinese bank account an equivalent value in yuan, over their mobile phones in the United States, to a separate bank account in China designated by Wang. As part of a typical money exchange transaction, Wang was introduced to his customers by a casino host whose job it was to facilitate that customer's play at a particular casino. The customer then used the U.S. currency to gamble.
In July 2011, Burke formed Burke Development Associates Limited Liability Company (BDA), a family-run real-estate and construction business. Before forming BDA, Burke disclosed the venture to personnel at FTN, but only in a single, brief oral conversation, without submitting FTN's required outside business activity disclosure form. In his oral disclosure, Burke stated he would merely invest in BDA leading FTN personnel to believe that he would be a passive investor, when he was not. Notably, Burke did not disclose that he would be BDA's sole managing member and tax matters partner, have signatory authority over BDA's financial accounts, devote approximately five to ten hours per month to BDA business, supervise BDA's activities, and participate in strategic business decisions.
Between January 2012 and August 2013, LeBlanc participated in two private securities transactions involving $1.75 million in securities. First, LeBlanc participated in the purchase by a customer of a $500,000 membership interest in a closely held film company organized as an LLC. Second, LeBlanc participated in the sale of $1.25 million in preferred stock in a closely held men's apparel company to an investor group consisting of the first customer and two other customers. He used the firm's email system to participate in these transactions.LeBlanc neither originated the customers' investments nor did he recommend that the customers purchase the securities. However, he participated in the purchases by arranging for and attending a meeting between the first customer and the president of the closely held LLC, and by attending a meeting between the two other customers and a major shareholder of the second company. He received legal documentation from the customers' attorney and forwarded that documentation to his clients. He was instructed by two of his clients to pay for the investments from their firm accounts. He also discussed the investments with executives of both companies; the customers; and the customers' attorney. Although the companies are still operating, the three customers are unlikely to receive any return on these investments.All three customers were pre-existing customers of the firm at the time of the sales; were experienced investors, had a high net worth, and, in connection with these investments, were represented by counsel. LeBlanc received no compensation for his participation in the transactions. LeBlanc did not provide written notice to the firm prior to his participation in the private securities transactions, as required by NASD Rule 3040 and the firm's written supervisory procedures. During June 2013 and May 2014, LeBlanc also failed to list his involvement with these private investments on Firm annual certifications calling for him to disclose his involvement with securities transactions away from the firm.
In determining the appropriate sanction in this matter, FINRA considered, among other factors, that (1) the customers were each experienced investors, had a high net worth, and were represented by counsel in these transactions; (2) LeBlanc did not recommend the investments, but rather facilitated transactions that the customers themselves wanted to make; and (3) LeBlanc was not compensated for his role in the transactions.
Between May 2015 and November 2018, National Securities filed four late amendments to Forms U4 and eight late amendments to Forms U5 relating to reportable customer complaints and an unsatisfied judgment. The firm knew about each of these events but was between one month and two years late in disclosing them, with an average delay of more than 13 months, and often did not disclose them until after FINRA inquiry. The firm also failed to file five Form U4 amendments relating to reportable customer complaints during this period.. . .Between May 2015 and November 2018, National Securities failed to comply with its reporting obligations under FINRA Rule 4530. The firm reported a $30,000 settlement of a customer's claim for damages against one of its associated persons for sales practice violations a year late. The firm also failed to report, or failed to report timely, statistical and summary information to FINRA regarding 19 written customer complaints. In addition, the firm submitted 34 inaccurate or incomplete filings required by FINRA Rule 4530(d).. . .Between May 2015 and November 2018, National Securities had written procedures in place regarding the firm's obligations to collect and report information to FINRA on Forms U4 and U5 and as required by FINRA Rule 4530. However, National Securities failed to enforce these procedures to ensure the timely and accurate filing of required information. The failure to enforce the firm's procedures occurred for various reasons. In some instances, firm personnel failed to identify the communication at issue as a complaint or incorrectly determined that a customer complaint was not a reportable event. In other instances, firm personnel failed to timely review and process customer complaints in accordance with firm procedures. On certain other occasions, the firm's registration group entered the wrong problem code or failed to identify the subject security in a FINRA Rule 4530 filing.. . .From July 2015 through March 2017, National Securities derived nearly 25 percent of its revenue from underwriting activity and participated in at least 20 contingency offerings. Although the firm maintained written supervisory procedures addressing contingency offerings under Exchange Act Section 10(b) and Rule 10b-9, these written procedures were limited in that they only covered escrow requirements and the return of funds where a contingency was not met by the closing date. The firm's written procedures failed to address circumstances involving material changes to an offering such as the extension of an offering, a change in the contingency amount, or a change in the structure. The written procedures also were silent on non bona-fide sales, which are prohibited by the Rule absent required disclosures. National Securities revised its written procedures in March 2017.
Rule 18f-4 provides certain exemptions from the Act subject to conditions. The conditions and other elements of the rule include the following:
[D]erivatives have proven useful to funds in the face of wider market developments, and in certain cases can strengthen funds' ability to compete. The resulting return enhancements and cost savings should inure to the benefit of investors, particularly where there is transparent competition among funds. However, we cannot lose sight of the fact that, regardless of their principal purpose, derivatives can and often do create the type of exposure, including the risk of significant losses to fund investors, that the section 18 restriction on "senior securities" was intended to limit.So, our task is to continue to permit funds to use derivatives in a manner that best serves the investment objectives of the fund (including its liquidity and risk management polices) while addressing the concerns underlying section 18; and to do so in a manner that provides clarity and consistency. . .
[W]e should have taken other opportunities to recognize the diversity of knowledge and differences across fund strategies by further empowering funds and advisers to tailor how they manage and monitor derivatives-related risk.Despite my concerns, there is much to commend this rule, both in its general approach and in its specifics. I appreciate, for instance, the commonsense exception from the rule's coverage for funds that limit their derivative exposures to 10 percent of their net assets. In addition, in response to some commenters who, using the volatile markets of last spring as a highly informative analytical canvas, urged us to rethink the proposed relative and absolute VaR limits, the rule increases them from 150 percent and 15 percent to 200 percent and 20 percent, respectively. Also welcome is the revision to the proposed reporting obligations for a fund that exceeds its VaR limit. Relatedly, I am glad to see the extension of the remediation period, the removal of the proposed prohibition on derivatives transactions for funds that go above their VaR limit, and the elimination of the proposed restrictions on a fund's ability to enter into derivatives transactions while out of compliance. The final rule appropriately provides funds flexibility to manage through stressed markets without an arbitrary regulatory hammer hanging over them threatening harm to funds, fund shareholders, and the broader markets.
I am pleased to see that this final recommendation does not include the proposed sales practice rules that would have applied only to leveraged and inverse, or "geared," ETFs. I believe that, to the greatest extent possible, the Commission should maintain a consistent regulatory approach to the products we oversee. Instead, these proposed rules would have introduced a new layer of regulation applicable to only a narrow subset of securities products.
As the proposal explained, the effects of portfolio rebalancing and compounding in these products can cause a fund's returns to vary substantially from the performance of the underlying index, especially over periods of time that exceed the fund's investment time horizon, which is typically one day. Investors holding shares of these funds over a longer period of time may suffer large and unexpected losses or returns that otherwise substantially deviate from what they reasonably anticipated.The Commission's concern about leveraged and inverse ETFs is not academic or theoretical. Numerous enforcement cases, both at the Commission and FINRA, have shown that even investment professionals often lack a basic understanding of these complex products. The problem is even more pronounced in self-directed brokerages, where investors do not currently have the benefit of an intermediary to help them understand and evaluate the risks.Today, the Commission pulls this important protection out of the final rule, pointing to what it describes as "unique challenges" and attempting to justify inaction, at least in part, by suggesting that the proposed sales practice rules might have been under-inclusive. Indeed, other types of complex products not addressed by the proposed rules are known to cause similar harm to unsophisticated retail investors. That view is confirmed in the statement that the Chairman and Division directors issued this morning, but that does not justify or explain why we decline to act now to protect retail investors in leveraged and inverse ETFs, given that the Commission had already preliminarily concluded in its proposal that these protections are needed. The fact that other products present similar dangers should not deter us from addressing the harm to retirees, middle class savers, and other retail investors that is presently and squarely before us.
The use of derivatives, the focus of today's rule, can present an inordinate amount of risk to funds and the investors who hold them, particularly in the face of market volatility. Yet during this global pandemic, as we have seen increased trading in some of these products, we have failed to address the significant risk that derivatives can pose to funds and investors. One of our core mandates is to protect investors - including retail investors who often use mutual funds and ETFs to save for retirement, their child's education, or a down payment on a house. We had an opportunity today to ensure that some of the greatest risks to funds-derivatives and leverage risk-are appropriately constrained, but, unfortunately, the majority of the Commission is telling investors they are on their own. The world has been turned upside down. We should stop to reassess our views, but instead we have made things markedly worse than our original proposal.