Securities Regulation and Litigation Lawyer & Attorney : OverRegd Blog : Lindquist & Vennum Law Firm, Minneapolis and Denver

The USA Patriot Act amended the Bank Secrecy Act requiring all financial institutions develop and implement anti-money laundering programs with specific requirements such as a customer identification program. For the first time, the Securities and Exchange Commission has enforced the Act's mandates sanctioning the broker-dealer Crowell Weedon & Co. for failing to document its customer identification program consistent with these record-keeping requirements. For more details check out this SEC Release.

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Thought we would start sharing particularly interesting emails from readers of our blog. Here is a recent email from a retired state regulator, who agreed to be our first Guest Blogger. Thanks Ray!

Counselor:

As a retired state examiner (somewhat of an oxymoron because being a state examiner allows one to have the power of a retired examiner) I have signed up for your blog. Nevertheless, the title of the blog is not encouraging. Was the securities industry over regulated all those years that the NASD pretended to monitor spreads (the Christy Study)? Have you, like, heard of Henry Lodge and the other analysts who labeled stocks "POS"; a scatological reference that was at variance with their enthusiastic recommendations?

I'll probably think of the guy who changed his securities recommendations based upon those most likely to get his child into an elite school. Never mind, there is no need to guild the lily.

Moreover, one could go back all the way to the first SEC commissioners who numbered among their luminaries such admitted "pump and dump" operators as the senior Kennedy. Maybe it wasn't precisely illegal then; but only a fool would say Joseph Kennedy and "investor's advocate" in the same sentence. And the last ten years (and week) have pretty conclusively established , at least in my puny mind, that one cannot criticize securities regulation until it is at last tried.

But, hey, maybe you have the eloquence of angels and are endowed with the persuaveness of Michael Milken; the people who put together the Prudential Partnerships, or any of a myriad of miscreants who populated, and probably still populate the securities industry.

With respect to your talent, if not your views,


Raymond Gambel Louisiana 77-2000

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For a look at the Denver, CO media perspective on the Lay and Skilling guilty verdicts, quoting Lindquist & Vennum attorney Steve Peters, whose observations in this blog about the Enron trial have proven prophetic, check out this Denver Post editorial.

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Annuities in all their forms are the hottest retirement savings ticket in town. And the securities and insurance regulators have decided there needs to be some "comparable rules" for annuity sales whether they are fixed, variable, or equity indexed. What does this mean exactly? Are the state insurance regulations and its regulators going to start looking and acting like the NASD?

On May 5, 2006, the Minnesota Department of Commerce and the NASD co-hosted a roundtable in Washington D.C. to begin the discussion. I was impressed with the industry turnout and the willingness by all to debate the issues. And those issues were: Should there be comparable regulatory standards for supervision of insurance brokers/agents, suitability, advertising, sales force training and disclosure requirements? The NASD Chairman and Minnesota Commerce Commissioner think it was "the general consensus of the more than 20 securities and insurance regulators and industry executives who participated that investors purchasing fixed, variable or equity indexed annuities should be comparably protected, regardless of which regulatory regime covers the particular product they buy." Joint Statement of NASD Chairman and CEO Robert Glauber, Minnesota Commerce Commissioner Glenn Wilson Regarding Success of Annuity Roundtable, NASD News Release, May 16, 2006.

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Recall OverReg'd post of May 4, 2006 entitled Federal Honest Services Prosecutions? Steve Peters noted that Enron trial prosecutors, whose cross examinations of former Enron execs Kenneth Lay and Jeffrey Skilling focused heavily on the men's personal investments that placed them in conflict with those of the company and its shareholders would be used against the men during the Government's closing argument. Steve specifically predicted Lay's testimony that "no one should be a slave to the rules" would be quoted back by the Government.

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SRO Trends

The "Rogues" Report is intended to provide a roadmap for identifying "topical" or novel regulatory causes of action and the remedial measures that one may expect an SRO to impose when activity is found by the staff to be irregular or improper.

Still another emerging trend in regulatory circles for rule violations is the requirement that a firm retain an independent consultant to either create appropriate procedures or, alternatively, assess and evaluate remedial written supervisory measures adopted by the firm as a consequence of adverse regulatory findings against the firm.

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SRO Trends

Another noticeable trend in SRO administrative proceedings appears to be the size of the financial penalties imposed for technical, trade reporting violations. In the past, these fines, frequently imposed for violating OATs or TRACE reporting requirements, or late ACT transmissions, were viewed as, in essence, "parking tickets." The fines were generally in the range of $500-1,000, depending on the number of violations, and, historically, these fines were viewed by the industry as a cost of doing business. Now, the cost of business has gotten expensive, as fines seem to start at $10,000 and go up from there. And, these fines are not just being imposed against the little guys. A number of large, well-entrenched, and sophisticated firms with sophisticated trade oversight mechanisms in place to prevent, detect and avoid violations, have fallen on their swords, and resolved such SRO actions for large five figure, and in some instances, large six and seven, figure amounts. These include Allen & Co., Cantor Fitzgerald, E*Trade, Scottrade, UBS, and other industry stalwarts.

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An investigation by the Government Accountability Office ("GAO") recently revealed continued widespread flaws in the SEC's information security controls that have left the agency's financial and sensitive information vulnerable to attacks by computer hackers. The GAO's findings followed an extensive five-month investigation at the SEC's headquarters and nearby computer facility. According to the GAO, the SEC has failed to limit remote access to its servers, establish controls over passwords, securely configure all network devices and establish security-monitoring procedures. The GAO report concluded, "Overall, the SEC has not effectively implemented information security controls to properly protect the confidentiality, integrity, and availability of its financial and sensitive information and information systems."

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There are few certainties in this world. Death, taxes, and, if you are in the securities industry, the likelihood that at some point your firm will face a crisis that may lead to severe sanctions by regulatory agencies, if not handled appropriately. How will you respond? How a firm chooses to handle its internal investigation will play a key role in determining whether the matter will be picked up by the SEC or other regulatory body for enforcement. Your first steps in the investigation will be critical and will set the stage for all activity that follows.

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The current trial of former Enron executives Kenneth Lay and Jeffrey Skilling illustrates how the Justice Department has increased its reliance on conflict of interest violations in white collar prosecutions generally and securities fraud prosecutions in particular. In a case alleging massive securities fraud and byzantine accounting improprieties, the Justice Department "dummied down" its cross examination and focused instead, for example, on small investments that both defendants made in a relatively minor Enron vendor. Those investments admittedly violated the Enron Corporate Code of Conduct, and on cross examination left Mr. Lay in the position of arguing that "no one should be a slave to the rules." Expect to hear that testimony quoted back by the government during closing argument as the public debate over Enron's collapse concludes.

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SRO Trends

Unfortunately, one of the principal mechanisms used by the SROs to alert the industry to conduct that is or may be contrary to regulatory rule and regulation is through the initiation of administrative proceedings against a firm and/or associated persons. These proceedings frequently serve as harbingers to establish precedence with regard to the imposition of sanctions, and they become the standards against which similar conduct by others is judged and punished.

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Due to historically low interest rates and escalating home prices, an increasing trend shows that investors are taking out new mortgages, refinancing, or obtaining line-of-credits secured by their homes for the specific purpose of investing in the market. "Betting the home" in order to invest creates unique suitability considerations. Examine the following scenario:

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