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On October 11, 2016, the U.S. Securities and Exchange Commission (SEC) released its fiscal year 2016 (FY2016) enforcement results, reporting collections totaling over $4 billion in disgorgement and penalties out of a record 868 enforcement actions against executives, companies and gatekeepers.

SEC enforcement proceedings for FY2016 focused largely on cybersecurity compliance, financial reporting deficiencies, insider trading, protecting investor accounts, market structure requirements, micro-cap fraud and municipal offering disclosure failures.

“By every measure the enforcement program continues to be a resounding success holding executives, companies and market participants accountable for their illegal actions,” said SEC Chair Mary Jo White in a statement. “Over the last three years, we have changed the way we do business on the enforcement front by using new data analytics to uncover fraud, enhancing our ability to litigate tough cases, and expanding the playbook bringing novel and significant actions to better protect investors and our markets.”

On August 18, the U.S. Securities and Exchange Commission (SEC) announced it has adopted new rules proposed by the Financial Industry Regulatory Authority (FINRA) that lessen the requirements for “capital acquisition brokers” (CABs) – firms that serve to advise private placements or mergers and acquisitions and aren’t involved with managing customer accounts or trading securities.

CABs are FINRA members and subject to FINRA bylaws, but in return for limiting their activities, they are held to a relaxed set of rules compared with those of traditional broker-dealers.

Around 16% to 19% of firms currently registered with FINRA are solely engaged in advising clients around financial alternatives, mergers and acquisitions or raising equity capital and debt in private placements.

Maryland private equity fund advisory firm, Blackstreet Capital Management, LLC, and its owner, Murry N. Gunty, have agreed to pay more than $3.1 million to resolve allegations they violated the Securities Exchange and Investment Advisors Acts, the U.S. Securities and Exchange Commission (SEC) announced Wednesday. The enforcement action arose out of SEC allegations that Blackstreet engaged in brokerage activity and charged fees without registering as a broker-dealer, among other alleged violations.

The SEC Asset Management Unit has now brought eight enforcement actions on cases involving private equity advisers. Though advisers may rely on brokers when conducting activities that previously required broker-dealer registration, the SEC has not backed down with respect to private equity funds and continues to enforce regulations surrounding unregistered broker-dealer activity.

SEC Alleges Non-Registered Blackstreet In-House Broker-Dealer Activity

In 2015 alone, the Financial Industry Regulatory Authority (FINRA) brought more than 1,510 disciplinary actions, charged $95.1 million in fines and ordered $96.6 million in restitution payments.

Those violations resulting in the largest fines and monetary sanctions imposed in 2015 provide a good indication of the deficiencies FINRA takes most seriously and plans to target in the future. FINRA members will want to pay particular attention to these areas in 2016.

FINRA imposed its top five fine and restitution amounts in 2015 for (1) failing to waive mutual fund sales charges, (2) supervisory failures in Puerto Rico securities, (3) engaging in unsuitable mutual fund transactions, (4) supervisory failures related to trade surveillance, trade confirmations delivery and complex product sales, and (5) selling unregistered microcap shares and related AML violations.


FINRA recently entered into a settlement with Gar Wood Securities LLC (the “AWC”) concerning allegations that Gar Wood facilitated the sale of restricted securities in violation of the Section 5 of the 1933 Act, and the Firm failed to identify “suspicious” activity in a customer’s account that should have warranted the filing of a Form SAR-SF. The customer, identified as ICG, was apparently in business of issuing loans secured by low-priced stock. Over a two-year period, ICG supposedly deposited penny stocks into its Gar Wood brokerage account and immediately liquidated the positions and wire transferred the proceeds. ICG’s activity caught the attention of FINRA, which identified the following “red flags” that Gar Wood apparently failed to act upon:

  • ICG opened a new account and delivered physical certificates representing a large block of thinly traded or low priced securities; • ICG had a pattern of depositing physical share certificates, immediately selling the shares and then wiring out the proceeds of the sale; • ICG deposited share certificates that were recently issued or represented a large percentage of the float for the security; • The lack of a restrictive legend on deposited shares seemed inconsistent with the date the customer acquired the securities or the nature of the transaction in which the securities were acquired; • ICG had limited assets but received an electronic transfer or journal transaction of large amounts of low priced unlisted securities; • Issuers’ SEC filings were not current, were incomplete or nonexistent; and ” Some of the company stocks deposited and sold in the ICG account involved shell companies that issued shares; and • JP Morgan, the original clearing firm for the ICG account, closed the ICG account after JP Morgan identified several red flags related to ICG’s operations.

The AWC is worthwhile reading for attorneys who counsel broker-dealers on anti-money laundering compliance.

Following its broad ruling in UBS Financial Services v. Carilion Clinic, 706 F.3d 319 (4th Cir. 2013), the 4th Circuit has issued two recent decisions that somewhat lessen the impact of the UBS holding. In UBS, the court held that a customer of a FINRA firm is anyone “not a broker or dealer, who purchases commodities or services from a FINRA member in the course of the member’s business activities,” including “investment banking and the securities business.” But in two recent rulings, the Court refused to further extend that definition, enjoining two FINRA arbitrations in which claims were based on (1) losses resulting from bonds issued by a FINRA member where the claimants purchased those bonds in a secondary market transaction from an unaffiliated third party and (2) losses resulting from purchases of fraudulent securities that were recommended by an attorney informally associated with an advisor at a FINRA-member firm.

Morgan Keegan & Co. v. Silverman, 706 F.3d 562 (4th Cir. 2013)

The Defendants in Morgan Keegan suffered losses in bond funds that were distributed and underwritten by Morgan Keegan (“MK”). The losses were allegedly in part the result of MK’s failure to disclose certain information regarding the valuation of – and risk associated with – the bonds. In enjoining the arbitration, the 4th Circuit noted that no contractual relationship existed between the Defendants and MK – the Defendants had not purchased the funds through an IPO but in a secondary market transaction from Legg Mason, a FINRA member unaffiliated with MK.

Lincoln Financial Securities Corp. recently settled with FINRA concerning supervisory deficiencies over a now-deceased rep (Kenneth Wayne McLeod) who purportedly ran a Ponzi scheme targeting retired government employees (Department of Enforcement v. Lincoln Financial Services Corp. – Case No. 2010025074101). A copy of the FINRA AWC can be accessed here: (FINRA AWC). FINRAs case is a follow-up to an SEC action which charged Kenneth Wayne McLeod’s estate and entities run by Kenneth Wayne McLeod with operating a Ponzi scheme promising investors with tax-free returns of 8% to 10% per year (Securities and Exchange Commission v. Estate of Kenneth Wayne McLeod, F&S Asset Management Group, Inc. and Federal Employee Benefits Group, Inc. – Case No. 10-22078, U.S. District Court, Southern District of Florida). A copy of the SEC Complaint can be accessed here: (SEC Complaint). The supervisory deficiencies noted by FINRA were:

  • Lincoln Financial failed to place McLeod on heightened supervision given that Lincoln Financial hired McLeod while a state securities regulator had an open investigation.
  • Lincoln Financial’s registration department failed to inform McLeod’s supervisor of the pending state investigation and the advertising review department failed to inform the supervisor of concerns over McLeod’s advertising.

On January 30, 2013, we sent FINRA a comment letter concerning the controversial proposed rule which would require disclosure of all “enhanced compensation” – forgivable loans, up-front bonuses, back-end bonuses, and the like – to customers. For those opposed to the proposed rule, the comment period is open until March 5, 2013. The text of our comment letter is set forth below:

Marcia E. Asquith Office of Corporate Secretary FINRA 1735 K Street, NW Washington, DC 20006-1506

Re: Comment on Proposed FINRA Rule concerning Enhanced Compensation

Last week, the U.S. Court of Appeals for the 4th Circuit issued a favorable ruling on the arbitrability of suits against FINRA members. Traditionally, under FINRA Rule 12200 any “customer” may request arbitration of a dispute with a FINRA member. UBS and Citi argued that Carilion was an issuer of securities, not a customer, and thus did not have the right to arbitrate their claims against the banks, both of which are FINRA members. The 4th Circuit joins the U.S. Court of Appeals for the 2nd Circuit and several district courts that have recently defined “customer” broadly in the FINRA context. The case is UBS Financial Services v. Carilion Clinic, (3:12-cv-00424-JAG).


Carilion is a non-profit hospital administration group based in West Virginia that issued $308 million of municipal bonds through UBS/Citi to finance a series of renovations and improvements. $234 million of that debt was issued in the form of auction rate securities (“ARS”).

It is commonplace in the securities industry for reps to transition from one broker-dealer to another. If the rep is a big producer, it is typical for the hiring firm to offer the rep a “forgivable loan” as an inducement to join. Depending upon the size of the producer’s book, the forgivable loan can equal 100% to 200% of the producer’s trailing 12 month’s of production, and is typically forgiven in equal increments annually over a 7 to 9 year period.

FINRA just published Regulatory Notice 13-02, seeking comments on a proposed rule to require disclosure of “conflicts of interest” relating to recruitment compensation practices. The proposed rule, called “Enhanced Compensation”, has the following components:

  • For one year following the rep’s start date, the “recruiting” broker-dealer must disclose the “details” of the enhanced compensation “at the time of first individualized contact by the recruiting member or registered person with the former customer after the registered person has terminated his or her association with the previous firm.” That should make for an interesting first conversation with the customer.
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