Saturday, October 31, 2009


Cosgrove Law, LLC has locked horns with nationally known investment adviser Fisher Investments, Inc. on behalf of one of its clients. The matter is currently being litigated in the JAMS arbitration forum. Cosgrove Law, LLC has brought claims alleging, among other things, that Fisher Investments failed to satisfy its fiduciary duty to its clients by funneling their clients in to inappropriately aggressive portfolios comprised almost entirely of equities. Needless to say, these portfolios got destroyed by excess market exposure in 2008. Cosgrove Law, LLC has also asserted claims for unlawful merchandising, unregistered investment advice, negligent representations and an unlawfully fraudulent investment advice scheme. Fisher Investments Inc' CEO is best-selling author and Forbes columnist Ken Fisher. Mr. Fisher was recently deposed by Mr. Cosgrove in San Francisco. The case should go to hearing or trial in the first half of 2010. Stay tuned.


During the financial industry meltdown over the last two years, countless individuals have witnessed their life savings and retirement funds dwindle. At the SIFMA annual meeting on October 27, 2009, FINRA Chairman Rick Ketchum addressed these concerns and discussed some of the new patterns emerging within the financial industry, including proposed regulations and emerging business practices. The highlights of Chairman Ketchum’s address are set forth below:

Regulatory Shift

One of the main points of emphasis with regard to regulatory reform over the past few months has been the harmonization of the standard of care for broker-dealers and investment advisers. As Chairman Ketchum noted, most investors cannot distinguish between the two, in part because their services have begun to overlap each other in many respects. Accordingly, FINRA “whole-heartedly embraces” the Obama administrations goal of harmonizing the fiduciary standard for broker-dealers and investment advisers.

In addition to reforming the standard of care, the financial industry must find a way to harmonize the oversight and enforcement of that standard to ensure compliance by industry professionals. As Chairman Ketchum emphasized, for such a reformation to be effective, compliance “must be regularly and vigorously examined and enforced to ensure the protection of investors.”

Fraud Detection

Chairman Ketchum also discussed FINRA’s renewed focus on detecting and combating fraud. Namely, FINRA has enhanced its examination programs, procedures and training to help deter fraudulent conduct. In addition, FINRA recently established an Office of the Whistleblower—which handles high-risk tips—and announced the creation of an Office of Fraud Detection and Market Intelligence—which will in essence provide FINRA with a centralized anti-fraud division.

Technology Shift

With the emergence of social networking as a means to keep in contact with friends and interact with potential customers, FINRA is facing new regulatory challenges. As Chairman Ketchum noted, many younger registered representatives use sites such as Facebook, LinkedIn and Twitter as part of their everyday lives, and financial institutions cannot easily supervise their employees’ communications on these sites. As such, most firms have established rules prohibiting their employees from using these sites for business purposes. In reality, however, there is no cost-effective way to enforce these rules.

Accordingly, FINRA recently formed a Social Networking Task Force to “explore how regulation can embrace technological advancements in ways that improve the flow of information between firms and their customers.”

As is evident, the financial industry is currently facing an emergence of new patterns and challenges, both in regulation and in business practices. FINRA, as a self regulatory organization, is charged with embracing these paradigms and enacting regulations to ensure that investors stay protected. Click here for a complete copy of Chairman Ketchum’s address at the SIFMA annual meeting.

Friday, October 23, 2009


On October 22, 2009, Missouri Secretary of State Robin Carnahan announced that Merrill, Lynch, Pierce, Fenner & Smith, Inc. (“Merrill Lynch”) will pay $367,500.00 to the Missouri Investor Education and Protection Fund for failure to comply with Missouri’s registration laws. Acting on a tip from a former Merrill Lynch employee, the firm was the subject of a multi-state investigation into its registration practices. In total, the firm has been ordered to pay more than $26.5 million in “fines, penalties and other monetary sanctions and payments to the 50 states, the District of Columbia, Puerto Rico, and the U.S. Virgin Islands.”

According to the Order, Merrill Lynch violated Missouri's securities laws by “failing to ensure that its associates were properly registered in each state where they were doing business.” Under Missouri Revised Statute § 409.4-402, “it is unlawful for an individual to transact business in this state as an agent unless the individual is registered under [the Missouri Securities Act] as an agent.” Section 409.4-402 further provides that “it is unlawful for a broker-dealer engaged in offering, selling, or purchasing securities in this state, to employ or associate with an agent who transacts business in this state on behalf of broker-dealers unless the agent is registered.”

The Order also states that Merrill Lynch violated its own written policies and procedures in failing to properly supervise its client associates. Specifically, the firm generally requires its associates to pass the series 7 and 63 qualification exams and to maintain registrations in all necessary jurisdictions.

In today’s environment of heightened scrutiny and elevated enforcement actions, it is vital for financial institutions to ensure compliance with both state and federal regulations. With that in mind, our firm has the requisite knowledge and experience to ensure that you are in compliance with applicable securities laws. Please give us a call at (314) 563-2490 before you become the subject of an enforcement action.

A complete copy of the Order can be found here.

Thursday, October 22, 2009


Today, the SEC launched its new investor-focused website,, which aims to help investors invest wisely, avoid fraud and plan for their future. In addition, the website contains an entire section devoted to protecting senior investors. also serves as a tool for individuals to seek help from the SEC, report complaints and provide tips for securities laws violations.

Click here to go directly to

Friday, October 16, 2009


On October 1, 2009, we reported that the SEC and CFTC were planning to issue a joint report to Congress addressing the differences between the regulatory schemes for futures and securities. Today, the two agencies released their Joint Report of the SEC and CFTC on Harmonization of Regulation (“Joint Report”), which identifies these differences and recommends legislative and regulatory actions to address the inconsistencies.

As the Joint Report explains, there are significant differences between securities markets and futures markets. For instance, “[w]hile both regimes seek to promote market integrity and transparency, securities markets are concerned with capital formation, which futures markets are not.” Rather, futures markets are primarily concerned with the management and transfer of risk. Given that capital formation is the driving force in securities markets, securities regulation is in large part directed at proper disclosure to investors, whereas such disclosure is of less importance in futures markets.

In addressing these and other concerns, the lengthy 94 page Joint Report focuses on eight main areas in which the statutory and regulatory structure for the SEC and CFTC differ, including:

• Product listing and approval;
• Exchange/clearinghouse rule changes;
• Risk-based portfolio margining and bankruptcy/insolvency regimes;
• Linked national market and common clearing versus separate markets and exchange-directed clearing;
• Price manipulation and insider trading;
• Customer protection standards applicable to financial advisers;
• Regulatory compliance by dual registrants; and
• Cross-border regulatory matters.

In addition to identifying the differences between the two agencies’ statutory and regulatory structure in the above-referenced areas, the Joint Report contains twenty recommendations to Congress “for strengthening the agencies’ oversight and enforcement, enhancing investor and customer protection, rendering compliance more efficient, and improving coordination and cooperation between the agencies.”

Now that the SEC and CFTC have fully complied with the Obama administration’s recommendation in its White Paper, it is up to Congress to carefully consider these recommendations and work together with the SEC and CFTC to implement them.

A complete copy of the Joint Report can be found here.


Phyllis Molchatsky and Stephen Schneider, both New York residents, have sued the SEC in the United States District Court for the Southern District of New York for failure to detect Bernard L. Madoff’s Ponzi scheme.

The two claim that they would not have suffered losses from the Ponzi scheme if the SEC was not negligent in failing to detect the fraud perpetrated by Madoff despite receiving tips about Madoff’s scheme. The lawsuit seeks the $2.4 million lost by the two plaintiffs.

However, the lawsuit faces an uphill battle due to the doctrine of sovereign immunity, which shields the federal government from civil and criminal prosecution unless it has waived its immunity or consented to suit. The Federal Tort Claims Act (“FTCA”) is the statute by which the United States waives immunity and authorizes tort suits to be brought against itself. With exceptions, it makes the United States liable for injuries caused by the negligent or wrongful act or omission of any federal employee acting within the scope of his or her employment, in accordance with the law of the state where the act or omission occurred.

The plaintiffs claim that the SEC staff members were negligent in carrying out their duties by failing to investigate tips about Madoff’s Ponzi scheme. Therefore, their argument is that the FTCA applies and the SEC is not shielded by the doctrine of sovereign immunity.

Although the plaintiffs face a difficult battle, a decision in their favor would have a profound effect on the regulatory environment. Such a decision would open the door for investors to pursue the regulators where the facts may provide for a cause of action. As a result, it can be expected that the any decision in favor of the plaintiffs will likely be appealed to the highest level. We will continue to monitor this case as it progresses.

A copy of the Wall Street Journal article discussing this case can be found here.

Monday, October 12, 2009


On October 8, 2009, the SEC published for public comment its Draft Strategic Plan that outlines the Commission’s strategic goals for fiscal years 2010 through 2015. The plan was prepared in accordance with the Government Performance and Results Act of 1993.

The SEC noted that its goals and priorities were influenced by a number of external factors, including the demands imposed by changes in the past two years. Specifically, the subprime mortgage crisis exposed weaknesses in financial industry regulation and the global financial system. The crisis brought an abrupt end to the credit boom, which had pervasive financial and economic ramifications. Businesses failed and financial institutions collapsed, were acquired under duress, or became subject to government control.

The SEC noted that financial products and practices were evolving in the U.S. and in global capital markets before the recent crisis and continue to change today. As a result, it is impossible for anyone to predict with certainty how the markets will evolve and what new issues will arise. The SEC recognizes this is because it is the nature of the market environment that the search for higher or more stable returns will foster the development of new products and different practices. This makes it difficult to plan for issues that may arise in the future as a result of these innovative products and practices.

Although financial reforms are well underway, the SEC acknowledges that Members of Congress, the President’s Working Group on Financial Markets, and others have debated and will continue to debate the legislative initiatives that have been proposed. Hence, even though there is uncertainty as to the precise outline of the future legislative landscape, the SEC is using the lessons learned from the financial crisis to make improvements in areas already within its own operations as well as its regulations.

The initiatives outlined in the Strategic Plan are designed to address specific problems brought to light by the global financial crisis. These Strategic Goals are: 1) Foster and enforce compliance with the federal securities laws; 2) Establish an effective regulatory environment; 3) Facilitate access to the information investors need to make informed investment decisions; and 4) Enhance the Commission’s performance through effective alignment and management of human, information, and financial capital. The Strategic Plan outlines just over 70 initiatives to it plans to implement to achieve its Strategic Goals.

A complete copy of the SEC’s 2010-2015 Strategic Plan can be found here.

Friday, October 9, 2009


Members of Cosgrove Law, LLC recently attended the 2009 Securities Symposium, which included discussions with the Missouri Commissioner of Securities, Matthew D. Kitzi, and various other local and national securities industry leaders. The symposium covered a broad range of topics, including the current and anticipated trends in securities regulation and important issues facing Compliance Professionals today.

According to Commissioner Kitzi and his staff, the Missouri Securities Division is currently experiencing the most active period in its 80 year history in the wake of the 2008 financial crisis. Specifically, the Securities Division is on pace to receive over 2300 complaints this year, well above the previous one year high. According to the Securities Division, the most frequent complaints it has received from investors in 2009 have been in the following areas: (1) activity on accounts; (2) annuities; (3) complex products; (4) non-real estate business opportunities; and (5) real estate.

Along with an increased number of complaints, the Securities Division emphasized its commitment to step up its enforcement actions. In that regard, the Securities Division is on pace to set a record for the highest ratio of complaints vs. enforcement actions in its long history.

In addition, as we discussed on September 21, 2009, NASAA, with the help of the states, conducted a comprehensive audit sweep of Investment Advisers in 2008. Upon review of Missouri’s audit sweep, Missouri found that the most frequent deficiencies were as follows: (1) dearth of suitability on customers; (2) incomplete or out of date customer contracts; (3) incomplete or out of date ADVs; (4) inadequate computer back-up systems and poor books and records retention; and (5) financial deficiencies.

Are you concerned about the recent spark in enforcement activity from state and federal securities regulators in the wake of the Obama administration’s proposed regulatory overhaul? If so, contact a member of our firm to review and analyze your firm’s registration practices to ensure that your current practices are compliant with state and federal regulations.

Thursday, October 8, 2009


The Financial Industry Regulatory Authority (FINRA) is a private regulatory body charged with protecting investors and keeping an eye on the financial industry. As part of its services, FINRA offers BrokerCheck, an online database where investors can obtain information about registered brokers. The information made available is known as a CRD Report and contains information about employment and registration history, qualifications, as well as reportable customer disputes, disciplinary, and regulatory events. BrokerCheck allows users to access a full report and a consolidated report. Currently, under Rule 8312, this information is available for two years after a broker’s registration expires.

A recent proposal to amend the rule would make the consolidated reports available for a longer period of time, but the full reports will still be removed after the two year time period. However, this proposed change would only apply to brokers who have had a final regulatory action against them. Full reports would still be available through state agencies as they are now.

A recent Wall Street Journal article discussed the changes being made and the author took the position that the amendment was a step in the right direction, but still insufficient. In the article, the WSJ follows an insurance agent who was a former broker, but was banned from the securities industry after misappropriating $9,000. His CRD report was no longer available, but WSJ obtained it from Kentucky state regulators. After the Journal disclosed his expulsion to his current employer, he was fired from his job even though both he and his company acknowledged he had never provided financial advice in his then-current position.

One of the concerns with the proposed amendments is that only consolidated reports will be available. Consolidated disclosure does not mean better disclosure. The consolidated reports do not disclose the details about customer disputes, disciplinary, and regulatory events. Instead, the report merely states “customer dispute” or “criminal.” Because there is no full disclosure into the details of the criminal action, the information available can be very misleading. Those looking at the CRD will likely develop a bias against that person as they will not know if the criminal action is relevant to the practice of brokering. The Wall Street Journal’s chronicle ironically demonstrates this potential bias in that the former broker was fired from his job after the WSJ author disclosed the man’s CRD report.

Advocates of this amendment claim it will help delineate the “bad” brokers from the “good” brokers and better protect investors. However, this is flawed logic as more disclosure does not mean all the “bad” brokers will turn up. For example, a quick search on BrokerCheck reveals that Joseph Cassano, a former A.I.G. executive who was recently indicted for securities fraud, had a clean CRD report until the Department of Justice filed a complaint against him recently. Until the DOJ suit, there was no evidence on his consolidated report or his full report that suggested he was a “bad” broker. Our firm has also seen where incomplete or inaccurate information in the consolidated CRD report or other “public records” can have misleading results to the detriment of a “good” broker. Because the CRD also requires the reporting of information unrelated to brokers’ ability to perform their jobs well, irrelevant information in little to no context unduly punishes registered persons and does not provide real value to consumer protection.

If consumer protection is truly the goal, this proposed change would not meet that goal and would in fact provide more confusing information to the public. A more comprehensive approach would better serve all parties involved.


Last week, the House Financial Services Committee introduced the expansive Investor Protection Act of 2009. A copy of the bill can be found at Congressman Paul E. Kanjorski (D-PA), Chairman of the House Financial Services Subcommittee on Capital Markets, Insurance, and Government Sponsored Enterprises, released discussion drafts of three pieces of legislation aimed at reforming the regulatory structure of the U.S. financial services industry. The draft bills include the Investor Protection Act, the Private Fund Investment Advisers Registration Act, and the Federal Insurance Office Act. These drafts contain many of the items that have been a part of the discussions surrounding regulatory reform. The Investor Protection Act proposes “to provide the Securities and Exchange Commission with additional authority to protect investors from violations of the securities laws and other purposes.” The Bill includes, among other things, establishing a fiduciary duty for broker-dealers and granting additional enforcement authority and remedies to the SEC by allowing the SEC to restrict mandatory arbitration.

On October 6th, the full committee held a hearing on capital markets regulatory reform and heard testimony from the President of NASAA, Denny Crawford (Texas Commissioner of Securities) and Richard Ketchum (CEO of FINRA), among others. Much discussion is taking place on the delineation of regulatory powers. States continue to be aggressive in advocating their assumed role in the regulatory enforcement community as the “cops on the beat.”

Friday, October 2, 2009


The SEC held a Securities Lending and Short Sales Roundtable on September 29 - 30, 2009, at its headquarters in Washington, D.C. The purpose of the roundtable was to review securities lending practices and also analyze possible short sale pre-borrowing requirements and additional short sale disclosures.

Day one of the roundtable focused on securities lending. In SEC Chairman Mary L. Schapiro’s opening statement, she noted that as the global securities market and investing have expanded, so have short selling and related strategies. As a result, the demand for securities lending has also grown. Ms. Schapiro noted that the recent credit crisis revealed that securities lending was much riskier than most of the players had thought in the past. This was revealed particularly in cases where the cash collateral for borrowed securities was reinvested in programs which experienced unanticipated illiquidity and losses.

In order to address this issue, day one consisted of four panels. The first panel was an overview of the securities lending regime. The second panel discussed investor protections concerns, including cash collateral reinvestment and the problems created by the credit crisis and potential solutions. The third panel discussed whether there was sufficient “transparency” in the current securities lending marketplace, and whether steps needed to be taken to improve it. The final panel discussed the future of securities lending, and whether there were any regulatory gaps in the marketplace and a need for additional SEC action to enhance investor protection.

Day two of the roundtable focused on short selling issues. Ms. Schapiro stated that due to the strong opinions on short selling of both supporters and detractors, she has made it a priority to evaluate the issue of short selling regulation in her tenure as SEC chairman.

The second day roundtable discussions consisted of two panels. The first panel considered the merits of imposing a pre-borrow or “hard locate” requirement on short sellers, or alternative forms of such proposals to enhance their benefit to investors. The purpose of this discussion was to address the abusive “naked” short selling and fails to deliver and the manipulative effect this activity can have on the market. Ms. Schapiro noted that the discussion would take into account the Commission’s existing “locate” requirement under Regulation SHO, which required short sellers to borrow or at least have reasonable grounds to believe that the securities can be borrowed, and Rule 204, which requires that clearing firms immediately purchase or borrow securities to close out the fail to deliver position by no later than the beginning of regular trading hours on the settlement date following the day the participant incurred the fail to deliver position.

Ms. Schapiro announced that the second panel would consider additional means to foster short selling transparency so that investors and regulators could have more and meaningful information about short sale activity. The panel would consider what additional public or non-public disclosure of short selling transactions and short positions would be beneficial, and if so, what type of disclosure should be implemented.

Ms. Schapiro made clear in her day two opening statement that the purpose of these roundtable discussions is to ensure that forthcoming regulation in this area is the result of a deliberate and thoughtful process. This indicates that these discussions will likely lead to SEC policy changes in the future.

A complete copy of Ms. Schapiro's opening remarks on September 29 can be found here, and a copy of her opening remarks on September 30 can be found here.

Thursday, October 1, 2009


On September 2-3, 2009, pursuant to the recommendation of the Obama administration, the SEC and CFTC held joint meetings to discuss assessments of the current regulatory schemes for futures and securities, a first for the two agencies. Within the next two weeks, the chairmen of the SEC and CFTC plan to issue a joint report to Congress addressing the differences between the regulatory schemes for futures and securities and recommending legislative and regulatory actions to close the regulatory gaps and address the inconsistencies.

A release by the SEC indicated that the report will likely discuss the following issues:

• Product listing and approval
• Exchange/clearinghouse rule approval under rules—versus principal-based approaches
• Risk-based portfolio margining and bankruptcy/insolvency regimes
• Linked national market and common clearing versus separate markets and exchange-directed clearing
• Market manipulation and insider trading rules
• Customer protection standards applicable to broker-dealers, investment advisors and commodity trading advisors
• Cross-border regulatory matters

The upcoming report will surely verify the SEC and CFTC’s efforts during recent months to harmonize the two agencies and “reduce regulatory arbitrage, avoid unnecessary duplication and close regulatory gaps.” We will provide a further update once the report is issued.

For a complete reading of the SEC’s press release, click here.