Monday, June 29, 2009


In an effort to avoid the problems experienced by money market funds during the financial crisis of 2008, the SEC has proposed rule amendments to enhance the regulatory regime for these types of funds. Money market funds are investment funds which aim to provide safe, low-risk investment for individuals while maintaining a net asset value of $1.00 per share. Although an important objective of money market funds is to maintain a stable net asset value, they are securities and are therefore subject to a potential loss of principal.

A press release by the SEC summarized the proposed amendments as having the following affects:

(a) Requiring that money market funds have certain minimum percentages of their assets in cash or securities that can be readily converted to cash, to pay redeeming investors;

(b) Shortening the weighted average maturity limits for money market fund portfolios;

(c) Limiting money market funds to investing in only the highest quality securities;

(d) Requiring funds to stress test fund portfolios periodically to determine whether the fund can withstand market turbulence;

(e) Requiring money market funds to report their portfolio holdings monthly to the SEC and post them on their websites;

(f) Requiring funds to be able to process purchases and redemptions at a price other than $1.00; and

(g) Permitting a money market fund that has “broken the buck” (net asset value fallen below $1.00 per share) and decided to liquidate to suspend redemptions while the fund undertakes an orderly liquidation of assets.

In her statement at the SEC open meeting on June 24, 2009, SEC Chairman Mary L. Schapiro noted that the proposed rules are consistent with President Obama's support to strengthen the money market fund regulatory regime, as explained in his recently-released white paper. In addition, Ms. Schapiro opined that the rule amendments will “go a long way toward better protecting investors and making money market funds more resilient to short-term market risks.”

The rule amendments above are merely proposals. As such, they are subject to public comments for 60 days after their publication in the Federal Registrar.

Wednesday, June 24, 2009


Last week the Obama administration announced its financial regulation reform – the “White Paper.” There has been much discussion about the plan. Some critics argue that it calls for too much regulation, while others argue that the plan does not call for enough fundamental change in the financial systems. One thing is clear, while the proposal provides an outline of the Administration’s goals, there is a great deal of detail that will be left to Congress to figure out.

One of the tenants of the plan is the creation of the Consumer Financial Protection Agency (CFPA). The CFPA would be dedicated to protecting consumers in the financial products and service markets, except for investment products and services already regulated by the SEC or CFTC. The Administration proposes to give this agency broad power in rule making, supervising and enforcement. The stated goal of this agency would be to reduce the gaps in federal supervision, increase coordination between the states, and to promote the consistent regulation of similar products. The agency would have supervisory and enforcement authority over banking and nonbanking institutions.

The question that immediately rises is exactly what types of financial products and services will this Agency be responsible for monitoring? The White Paper specifically mentions the mortgage industry and consumer debt services, but there are a myriad of financial products available to the consumer. For instance while securities and commodities are regulated by the SEC and CFTC there are multiple exemptions in securities and commodities codes at the federal and state level. Will the sellers and issuers who work to ensure that these products qualify for exemptions now be subject to additional rules and regulations under the CFPA?

The Obama Administration’s Plan provides a broad outline for a new reform system, but it leaves much of the details to be filled in by the Hill– and we all know the devil is in the details. While we have a general idea of where financial regulatory reform may be headed there is a great deal more to be seen.

Tuesday, June 23, 2009


Attorneys for the Public Investors Arbitration Bar Association (PIABA) recently submitted a proposal to the SEC to eliminate the requirement that a securities industry arbitrator sit in on all public investor cases arbitrated before the Financial Industry Regulatory Authority (FINRA) in which the amount in controversy exceeds $100,000.00. PIABA claims that investors are unfairly disadvantaged when they are forced to arbitrate their securities claims before an arbitration panel which includes a member of the securities industry.

PIABA's proposal opines that in today's financial industry, the vast majority of agreements entered into between investors and brokers-dealers require that any disputes be brought in an arbitration forum before FINRA Dispute Resolution. Accordingly, investors do not have the option to bring their claims before a court of law, and instead are limited solely to FINRA arbitration proceedings. As such, the FINRA Code of Arbitration Procedure is basically binding on investors who bring suits against brokers-dealers.

Under the current FINRA Code of Arbitration Procedure, arbitration claims which exceed $100,000.00 must be heard by a panel of three arbitrators. Section 12401(c). Of those three, one arbitrator must be a “non-public arbitrator,” which is defined in relevant part as “any individual who currently works in the securities industry, worked in the securities industry within the past five years, or retired individuals who spent a substantial amount of their career employed in the securities industry.” Sections 12100(p), 12401(c), 12402(b).

To eliminate the inherent unjustness associated with FINRA's current mandatory rule, PIABA proposes that the SEC revise the FINRA Code of Arbitration Procedure and give the parties an option to choose whether a securities industry arbitrator sits on the panel. In support of its proposal, PIABA cites the United States Supreme Court's ruling in Shearson/American Express, Inc. v. McMahon, in which the Court held that the SEC has the power to regulate securities self-regulatory organizations (SROs), including the “adoption of any rules it deems necessary to ensure that arbitration procedures adequately protect statutory rights.” 482 U.S. 220, 233-34 (1987).

PIABA's proposal is likely to cause an uproar in the securities industry, which will no doubt do everything in its power to maintain its representation in FINRA arbitration proceedings. We will keep a close watch on this issue.

Click here to read PIABA's proposal in its entirety.

Monday, June 22, 2009


On June 18, 2009, just one day after President Obama unveiled his white paper, SEC Chairman Mary L. Schapiro gave an address at the New York Financial Writers' Association Annual Awards Dinner in which she acknowledged that Obama's regulatory reform plan makes real progress in strengthening the SEC and ultimately improving investor protection.

In her address, Ms. Schapiro emphasized that under Obama's new plan the SEC still has an underlying duty to protect individual investors, and opined that one way to protect investors is to resolve the inherent problems associated with the regulatory regimes governing financial service providers. Accordingly, the SEC is re-assessing the standards of conduct applicable to all financial service providers in an effort to help investors more fully understand what is required of their financial professionals. “Investors are not well-served by a confusing array of varying disclosure, liability, recordkeeping and conflict management requirements,” Ms. Schapiro said.

Ms. Schapiro noted that although there are a multitude of choices for investors to consider when seeking financial advice or assistance, financial service providers often perform similar and overlapping functions. However, despite this commonality of services, financial professionals such as broker-dealers and investment advisors are subject to varying and inconsistent legal standards. Such a regulator structure, Ms. Schapiro stated, is faulty in that “when investors receive similar services from similar financial service providers, they should be subject to the same standard of conduct.” As such, the SEC is now focused on instituting consistent fiduciary standards of conduct applicable to all financial service providers that provide personalized investment advise about securities, regardless of their labels, which will help ensure that these professionals act at all times in the interests of the individual investors.

Harmonizing the regulatory regimes for financial service providers will no doubt minimize the confusion investors must face under the current regimes. However, in her address, Ms. Schapiro correctly acknowledged that the implementation of consistent fiduciary standards of conduct will do nothing to ensure that financial professionals adhere to the requisite standards. Instead, such a change is merely a first step aimed at protecting individual investors.

Our firm provides effective legal advice and representation for individuals who have been subject to investment fraud, negligent misrepresentation or breach of fiduciary duty by their financial advisers. For more information, please visit our website here.

Friday, June 19, 2009


This week I attended a meeting here in St Louis of the Securities Industry and Financial Markets Association's Compliance & Legal Division. It was well worth the price of admission. Folks from the SEC, SIFMA, FINRA and NASAA were present, as well as representatives of dozens of organizations, including Wells Fargo Advisiors, Stifel Nicolaus (one of our clients), Edward Jones, Scottrade, etc. A series of panels covered a myriad of regulatory and national and local enforcement and compliance topics. The stress on the markets the last year, coupled with seminal events such as the ARS market meltdown and Madoff scandal, has generated a storm of both regulatory, legislative, and enforcement activity. Our firm handles the defense of government enforcement actions (as trial attorneys and former regulators) as well as both the prosecution and defense of customer claims against brokers and advisors. Finally, the Obama white paper was issued the very morning of the conference. An interesting and productive day to say the least!


In an effort to prevent another economic meltdown, President Barack Obama recently proposed the most sweeping financial regulatory system overhaul since the Great Depression. Many thought Obama's plan would strip the SEC of its powers and hand over control to the Federal Reserve. Since its inception, the SEC has been charged with regulating stock markets and the securities industry, including enforcing federal securities laws and regulations. As of recent, the SEC has come under harsh criticism, with some believing it was responsible for missing the signs of the impending financial crisis of 2008.

Initial reports of Obama's plan to reorganize the financial sector indicated that the SEC may take a backseat role in its financial market oversight. However, under Obama's plan, the SEC will retain most of its market power and and gain new tools to protect investors. Specifically, the SEC will be given oversight over the hedge fund industry. In addition, the SEC will be gain more authority over the enforcement of company disclosures, along with more exhaustive enforcement sanctions to ensure compliance with securities laws.

Although Obama's plan will give the SEC more expanded market power, the plan also recognizes the SEC's failure to properly oversee the country's largest financial firms, many of which collapsed under the SEC's supervision during the financial meltdown of 2008. Accordingly, Obama's regulatory overhaul will relinquish the SEC's power over these large financial firms, and instead will name the Federal Reserve as the supervisor and regulator of these firms to help prevent another collapse.

It is important to note that the new Obama plan is merely a proposal to overhaul the regulatory system. The fight in Congress is only beginning, as the Obama administration now tries to draft a bill that will give Obama the votes necessary to sign legislation on his proposed changes, which he hopes to accomplish by then end of 2009.

Monday, June 15, 2009


A recent article in the Wall Street Journal indicated that new research has found a correlation between variable prepaid forward contracts, which are in essence complex executive stock-sale deals designed to protect executives from declines in their company's stock prices, and a disproportionate decline in company stock prices shortly after executives enter into such deals. Typically, the contracts involve arrangements between executives and brokerage firms whereby the executives agree to deliver to the brokerage firms a variable amount of shares at some future date in exchange for up-front cash equal to approximately 75% to 85% of the market value at the time of the arrangement.

Variable prepaid forward contracts are an attractive investment for executives because they protect them from a decline in company stock prices while allowing the executives to enjoy appreciation in stock prices up to a threshold limit established by the agreement. Some companies have banned these arrangements, noting that executives who enter into such deals are doing so against the interests of the company.

The discovery of a correlation between the execution of variable prepaid forward contracts and a subsequent decline in companies' stock prices now reveals the emergence of yet another executive compensation scandal. Although not illegal in and of itself, stock options backdating raises a number of legal issues. For instance, in the past few years there have been countless civil enforcement actions, criminal prosecutions and class action lawsuits brought against companies that have engaged in stock options backdating on behalf of their executives without properly disclosing the agreements in their financial records or their SEC filings.

Ultimately, the new developments may create another round of civil and criminal litigation as investors and governments at all levels try to crack down on securities fraud engaged in by company executives. The most common notion is that executives who enter into variable prepaid forward contracts have inside knowledge of a troublesome future for their company and are looking for a way to protect themselves. By in effect hiding the sale of their company stock through forward-looking sales contracts, executives create a false sense of stability. As the WSJ article indicated, these arrangements are also drawing the attention of the IRS and the SEC because they allow executives to gain up-front cash but defer the taxes on their capital gains until the termination of the contract.