Friday’s Fraud – Third Party Service Providers: The Importance of Regulation

By Benjamin Stubbs, Spring 2014 Student Intern

referee flagA few weeks ago, I wrote about how private offerings are more risky for investors because they are not regulated in the same way as public offerings. I compared regulators and regulations to referees and noted that fewer referees often means that more mistakes and misconduct will go unnoticed. The same analogy applies to today’s topic—third party service providers.

Like last week’s post, this week’s post is geared more towards small business owners than individual investors. Listed tenth on NASAA’s list of common investment frauds of 2013 are unregulated third party service providers. Below I’ll explain a little about the dangers of using unregulated service providers and how you can protect yourself.

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Update on SR-FINRA-2014-005: SEC Institutes “Rare” Proceedings on Proposed FINRA Rule Concerning Arbitrators’ Mid-Case Referrals

In March, the Investor Advocacy Clinic, led by student interns Scott EvansBenjamin Stubbs and Patricia Uceda, filed a comment on SR-FINRA-2014-005.  As explained in Evans’ earlier post describing the proposal and the clinic’s comment, the proposed rule would permit arbitrators to speak up mid-case and refer up the ladder their belief, based on more than just the pleadings, that investors may be threatened by the continuing conduct of a wrongdoer.  While the clinic supported the proposal’s goal of protecting innocent investors, we raised concerns about the individual investor in the proceeding and how such a mid-case referral would impact the proceeding and the complaining investor.

After receiving comments on the proposal, FINRA responded to all comments, including those made by the clinic.  You can read FINRA’s response here.

In addition, the SEC instituted formal proceedings to consider FINRA’s proposal. Citing FINRA’s former director of arbitration, Investment News reports that the SEC’s institution of proceedings on a proposed FINRA rule change is rare.

You can read the SEC’s full notice in the Federal Register here.  Specifically, the SEC has asked interested parties to consider providing information in response to several questions directly related to the concerns raised by the clinic in its comments:

  • Would the proposal adversely affect retail investors?  If so, how?
  • Should FINRA propose a different standard for referral? If so, what standard(s) would be appropriate?
  • Does Partial Amendment No. 1 ameliorate commenters’ concerns that notifying parties of a mid-case referral could lead to adverse consequences to the claimant, including requests for recusal and challenges to an award? If not, should FINRA amend the proposal to preclude the Director, or anyone else, from notifying the parties of a referral?

Parties interested in providing information for the SEC’s consideration should do so by the June 26, 2014 deadline.

The clinic will continue to monitor SR-FINRA-2014-005 and other proposals that may impact individual investors.

Wednesday’s Word: SEC

By Dylan Donley, Spring 2014 Graduate Research Assistant

The Security Exchange Commission, otherwise known as the SEC, was created by Congress through the enactment of the Securities Act of 1933 and 1934 following the Great Depression. As an organization, the SEC’s mission is to protect investors, maintain fair, orderly, and efficient markets, and facilitate capital formation. Its chief responsibilities include:

  • Interpreting and enforcing federal securities laws;
  • Issuing new rules and amending existing rules;
  • Overseeing the inspection of securities firms, brokers, investment advisers, and ratings agencies;
  • Overseeing private regulatory organizations in the securities, accounting, and auditing fields; and
  • Coordinating U.S. securities regulation with federal, state, and foreign authorities.

Churning a Client’s Investment Into a Broker’s Bread and Butter

By Nataliya Nemtseva, Spring 2014 Student Intern

churningIt is safe to say that most of us have never made our own butter. We find it nicely packed in a bright container in the dairy aisle of a grocery store. Many, however, may know that butter is made by a process called “churning.” This process involves vigorously stirring or beating the milk to separate out the fat and turn it into butter. But why are we talking about churning?” you ask. In the financial context, the term “churning” is used to describe an excessive trading activity undertaken by a broker in an investor’s account solely for the purpose of, by analogy, producing more “butter,” which is the broker’s commission. This blog post will introduce you to how churning may give rise to a claim against a broker, the measurements that are used to determine if excessive trading has occurred and what you can do to spot or prevent churning.

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