Friday, July 31, 2009


In an effort to curb abusive short sales and provide public investors with greater disclosure, the SEC made permanent the amendments contained within Interim Final Temporary Rule 204T of Regulation SHO. The temporary rule, enacted in 2008, was originally set to expire on July 31, 2009. However, due to the documented success of Rule 204T, the SEC decided to adopt the rule long-term with some minor modifications.

Short selling is a form of advanced trading whereby a trader essentially bets on the failure, at least in the short-term, of a company. In a typical scenario, an investor sells borrowed securities to a particular buyer for full ownership, with the intent to buy back equivalent shares once the price has declined. The seller then returns the equivalent shares to the lender, thus satisfying any obligations to the lender and profiting from the decline in share price.

In a second and more problematic scenario, an investor sells securities to a particular buyer without having first arranged to borrow the shares which the investor sold. In essence, the investor sells securities in which he or she has no rights with the hope that the investor will then be able to purchase equivalent securities at a diminished price prior to the clearing time period at which delivery to the buyer must be made. This type of trading is commonly known as “naked” short-selling.

Abusive short-selling, and particularly naked short-selling, has been of particular concern to the SEC in that the practice often results in a “failure to deliver,” whereby an investor is unable to deliver the shares he or she has borrowed or sold within the specified time frame. A “failure to deliver” can create a misleading impression of the market for investors, and can have the effect of depriving rightful shareholders of the benefits of ownership.

As such, in 2005 the SEC enacted Regulation SHO, which targets abusive “naked” short-selling by attempting to reduce failures to deliver. Rule 204T, adopted on a temporary basis in October 2008, strengthens the close-out requirements of Regulation SHO for failures to deliver securities resulting from investor short-selling in the securities market. The SEC’s permanent enactment of Rule 204T provides strong evidence of the SEC’s determination to tackle the problems associated with abusive short-selling.

Wednesday, July 29, 2009


NASAA proposed a new model rule today pertaining to solicitors. The stated goal of the Proposed Rule is to keep intact the increased investor protection standards presently required by the states and at the same time it seeks to limit or clarify the conditions under which investment advisors, their representatives, and solicitors must operate.

This rule should be examined by investment advisors who use solicitors to help in their business as well as investors or potential investors who have been contacted by others on behalf of an investment advisor or investment firm.

The Proposed Rule defines a “Solicitor” as an individual or entity who, either directly or indirectly, receives a fee or economic benefit for referring, offering, or otherwise negotiating for the sale of investment advisory services to clients on behalf of an investment advisor.

This rule offers exemptions for a solicitor who provides impersonal services such as written marketing materials or statistical information that is not directed towards the needs of a specific client. An additional exemption exists where there is a written agreement between the investment advisor and the solicitor for the solicitor to provide services and this relationship is disclosed in writing to the client prior to the time the client signs a written investment advisory contract. The rules for solicitors do not apply to a partner, officer, director or employee of an investment advisory firm. This Proposed Rule does not relieve a person of any fiduciary duties or other obligations to which they may be subject to under any law.

NASAA is accepting comments on the Proposed Rule until Monday, August 17. A complete copy of the proposed rule can be found at this website:

This Proposed Rule follows the SEC’s announcement on July 22, 2009 that it has proposed a rule aimed to end “pay to play” practices by investment advisors who seek to manage public funds for state and local governments. The overall goal of this proposed rule is to restrict the use of campaign contributions in exchange for the opportunity to manage such funds. One of the provisions of the proposed rule specifically bans the use of solicitors to act directly or indirectly on their behalf in securing an opportunity to manage funds for state and local governments.

The full text of this Proposed Rule has not yet been released by the SEC.

Friday, July 24, 2009


During recent years, more and more individual investors have entered into the municipal securities market. Particularly troublesome has been the noticeable discrepancy between the information disclosed to investors in municipal securities and the information available to corporate securities investors. Accordingly, on July 17, 2009, the SEC issued a proposal to amend the current municipal securities disclosure requirements provided under Rule 15c12-12 of the Securities Exchange Act of 1934.

The proposed amendments would serve five main functions, including:

(1) Requiring a broker, dealer or municipal securities dealer to reasonably determine that the issuer or obligated person has agreed to provide notice of specified events in a timely manner;

(2) Amending the list of events for which a notice is to be provided;

(3) Modifying the events that are subject to a materiality determination before triggering a notice to the MSRB;

(4) Revising an exemption from the rule for certain offerings of municipal securities with put features; and

(5) Providing interpretive guidance intended to assist municipal securities issuers, brokers, dealers and municipal securities dealers in meeting their obligations under the antifraud provisions.

Chairman Mary L. Schapiro summarized the likely impact the proposed amendments would have by explaining that they would “help investors make more knowledgeable investment decisions about municipal securities, while at the same time enabling broker-dealers to satisfy their obligations.”

Public comments on the SEC’s most recent proposal are due September 8, 2009.

Monday, July 20, 2009


Under the current FINRA rules for customer disputes and industry disputes, “no claim shall be eligible for submission to arbitration under the Code where six years have elapsed from the occurrence to the event giving rise to the claim.” Rule 12206(a) of the Code of Arbitration Procedure for Customer Disputes; Rule 13206(a) of the Code of Arbitration Procedure for Industry Disputes. Neither rule extends applicable statutes of limitations, but each provides that “where permitted by applicable law,” the time limit for filing a claim in court is tolled while FINRA maintains jurisdiction after an arbitration claim has been filed. Rule 12206(c); Rule 13206(c).

Although the language of the above-referenced tolling provisions is intended to toll all statutes of limitations while an arbitration claim is pending, at least one state court has interpreted the phrase, “where permitted by applicable law,” to mean that the time limit for filing a claim in court is only tolled if state law expressly permits such tolling. FINRA has expressed concern over the state court decision, noting that the holding may allow courts to dismiss customer claims on the basis that the statute of limitations ran while the arbitration claim was still pending.

As such, with the approval of the SEC, FINRA recently decided to remove the phrase, “where permitted by applicable law.” The amendment will negate any concern over state court interpretations as to the tolling provisions, thereby preserving FINRA’s original intent. The amendment becomes effective on August 10, 2009, and will apply to all claims filed on or after that date.

You can read FINRA’s Regulatory Notice 09-36 here.

Sunday, July 12, 2009

401(k) Plans Carry Frequently Ignored Fiduciary Duties for Plan Administrators

Last year the U.S. Supreme Court held that a 401(k) plan participant could sue for an alleged breach of fiduciary duty as long as the allegations related to the proper management, administration, and investment of asset plans. This past Friday the St. Louis Business Journal published an article reviewing the millions of dollars in losses suffered by the 401(k) plans of dozens of large St Louis employers in 2008. Some of the plans noted in the article had losses exceeding 30%. While a mere substantial loss alone, particularly in such a difficult economic and market environment, is not a sufficient basis for a law suit, it may (hint-should) prompt you to have a professional take a look at your plan to make sure it is and was being administered diligently, prudently, and consistent with your and your other plan participants' best interests. Cosgrove Law, LLC works with investment professionals on a variety of matters, including the legal and financial assessment of 401(k) plans--plans in which rest your hopes for a decent retirement.

Thursday, July 9, 2009


Through routine compliance examinations, the SEC keeps a close eye on SEC-registered investment advisors, investment companies, broker-dealers, and other types of registered firms to ensure that these firms are maintaining compliance with federal securities laws, and also to identify any potential weaknesses in the SEC’s compliance and supervisory controls.

In June 2007, the SEC for the first time issued its "ComplianceAlert," which provides financial firms with a periodical summary of select compliance areas the SEC examiners are concerned with, thereby providing firms with a forewarning of these problem areas so that they can review and modify their practices where necessary. In its most recent ComplianceAlert, dated July 2008, the SEC noted concern over the following selected practices by SEC-registered firms:

(a) Investment Advisors/Mutual Funds

a. Personal Trading by Advisory Staff—SEC compliance examiners reviewed advisors’ international compliance controls surrounding their employees’ trading and trading by the firms for their own proprietary accounts.

b. Proxy Voting and Funds’ Use of Proxy Voting Services—SEC compliance examiners reviewed practices with respect to the use of third-party proxy voting services, including oversight and operational aspects of mutual funds’ proxy voting, and how advisors managed conflicts of interest in proxy voting.

c. Valuation and Liquidity Issues in High Yield Municipal Bond Funds—SEC compliance examiners reviewed the portfolio composition, valuation and transaction activity of high yield municipal bond funds.

d. Soft Dollar Practices of Investment Advisors—SEC compliance examiners reviewed the soft dollar arrangements maintained by registered investment advisors, including the arrangements these advisors may have with both third-party and proprietary providers.

(b) Broker-Dealers

a. Examinations of Securities Firms Providing “Free Lunch” Sales Seminars—SEC, compliance examiners, in coordination with FINRA and NASAA, performed over 100 examinations of broker-dealers, investment advisors and other financial services firms that offer “free lunch” sales seminars targeting seniors in particular.

b. Valuation and Collateral Management Processes—SEC compliance examiners, in coordination with FINRA, reviewed large broker-dealer firms to assess their valuation and collateral management practices as they related to subprime mortgage-related products, including the firms’ controls around the valuation process.

c. Broker-Dealers Affiliated with Insurance Companies—SEC compliance examiners conducted targeted reviews of a number of broker-dealer subsidiaries of insurance companies.

d. Supervision of Solicitations of Advisory Services—SEC compliance examiners reviewed broker-dealer firms that had designated their registered representatives as “solicitors” for an investment advisor, including how supervision was implemented for these registered representatives’ activities as solicitors.

e. Mortgage financing as Credit for the Purchase of Securities—SEC compliance examiners conducted risk-targeted examinations of broker-dealer firms to evaluate their practice of recommending that their customers finance the purchase of their securities by obtaining a second or reverse mortgage on their home through a bank affiliated with the broker-dealer.

f. Office of Supervisory Jurisdiction Supervisory Structure—SEC compliance examiners reviewed broker-dealer firms’ supervisory and compliance controls under an Office of Supervisory Jurisdiction (OSJ) structure, including each firm’s supervisory structure and practices, and its supervision of its branch offices.

(c) Transfer Agents

a. Practices with Respect to “Lost SecurityHolders”—SEC compliance examiners reviewed transfer agents in order to understand current practices with respect to the search process performed for “lost” securityholders and the use of third-party “search firms” that search for lost securityholders.

Notably, not all of the above-referenced practices are legal requirements, but instead some are merely suggestions by the SEC compliance examiners. Based upon the SEC’s June 2007 and July 2008 release dates for its prior ComplianceAlert letters, it is likely that the 2009 alert will be released shortly. We will provide you with a summary of the SEC’s most recent compliance concerns at that time.

Friday, July 3, 2009


The latest in a wave of SEC proposals aimed at helping protect investors from more financial turmoil focuses on company disclosures during the proxy process. Under the SEC's newest consideration, corporate officers and directors would no longer be able to govern blindly at the risk of their shareholders. Instead, these governing bodies would be forced to disclose more detailed information in a more timely fashion to ensure that shareholders had the information necessary to make informed decisions during the proxy process.

The SEC's goal is not to provide additional disclosures, but rather to compel better disclosure in three specific proxy-related disclosure areas:

(a) Executive compensation—seeking better disclosure regarding the relationship between executive compensation policies and company risk;

(b) Director and nominee qualifications—seeking better disclosure regarding individuals' qualifications for board membership; and

(c) Board governance—seeking better disclosure as to a board's leadership structure and risk management role.

The SEC also wants to improve proxy voting disclosure by requiring more timely disclosure of annual meeting voting results. These considerations would inevitably increase transactions costs and thereby cost companies more money. However, the SEC feels that shareholders, as owners of these companies, have a right to proper disclosure by companies who are charged with managing their investments.

In addition, on July 1, 2009, the SEC issued a proposal to amend the proxy rules under the Securities and Exchange Act of 1934 to implement specific requirements for companies subject to Section 111(e) of the Emergency Economic Stabilization Act of 2008. Specifically, the proposed amendments would require that any companies receiving monetary relief under the Troubled Asset Relief Program (“TARP”) must permit a shareholder vote to approve executive compensation during the time period in which the company's TARP obligations remain outstanding. The SEC's proposal explains that “the proposed amendments are intended to provide useful, comparable and consistent information to assist an informed voting decision when registrants that are TARP recipients present to investors the advisory vote on executive compensation required pursuant to Section 111(e)(1) of the EESA.”

To read the proposed rule in its entirety, click here.