A recent FINRA disciplinary action sends a strong message to broker-dealers that the development of their compliance systems—particularly with respect to email review and retention—must keep pace with the growth of their businesses.

FINRA fined LPL Financial LLC (LPL) $7.5 million for significant failures in its email system that prevented LPL from accessing hundreds of millions of emails, and from reviewing tens of millions of other emails over an approximately six-year period. FINRA stressed that LPL’s inadequate systems and procedures caused the firm to provide incomplete responses to email requests from regulators, and also likely affected the firm’s production of emails in arbitrations and private actions. Accordingly, FINRA also required the firm to establish a $1.5 million fund to pay discovery sanctions to customer claimants that were potentially affected by the system failures, and to notify regulators that may have received incomplete email production.

…continue reading: FINRA: Broker-Dealer Email Systems Must Keep Pace with Firm Growth

In the fourth quarter of 2012, FINRA published Regulatory Notice 12-42 (the “Revised Proposal”), amending its proposal for substantive regulation of fixed-income research by FINRA-member firms. [1] The Revised Proposal represents the revision of FINRA’s earlier proposal, and modifies that proposal in meaningful ways. [2]

Executive Summary:

The Revised Proposal amends FINRA’s earlier proposal. In particular, the Revised Proposal:

…continue reading: Breaking Down FINRA’s Revised Proposed Fixed-Income Research Rule

On January 4, 2013, FINRA published Regulatory Notice 13-02, proposing a new FINRA rule (the “proposed rule”) in connection with the recruitment compensation practices of member firms. [1]

Introduction

In short, the proposed rule would:

…continue reading: FINRA Proposes Disclosure of Recruitment Practices

On December 3, 2012, FINRA’s new Rule 5123 went into effect. [1] The Rule requires members selling securities issued by non-members in a private placement to file the private placement memorandum, term sheet or other offering documents with FINRA within 15 days of the date of the first sale of securities, or indicate that there were no offering documents used. In connection with the effectiveness of the Rule, FINRA issued frequently asked questions (the “Private Placement FAQs”) on the process as well as rolled out the Private Placement Filing System in the FINRA Firm Gateway.

Private Placement FAQs

The Private Placement FAQs are a mix of technical filing requirements and substantive guidance. The technical questions address how firms gain access to the Private Placement Filing System, the use of third parties, such as law firms and consultants, to make the required filings, the requirement that offering documents be filed in searchable PDF format, and the maximum size of individual documents. In addition, while a firm can designate another member participating in the private placement to file on its behalf, it should arrange to receive confirmation from the designated filer in order to satisfy its own filing obligation.

The substantive FAQs include the following:

…continue reading: FINRA Issues Guidance for Private Placement Filings

On August 22, 2012, the SEC Division of Trading and Markets (the “Staff”) published answers to 14 frequently asked questions (“FAQs”) relating to certain provisions of Title I of the Jumpstart Our Business Startups Act, signed into law on April 5, 2012 (the “JOBS Act”), affecting research analyst and investment banking personnel conduct in connection with emerging growth companies (“EGCs”).

The most noteworthy guidance, in our view, relates to the following:

…continue reading: SEC Division of Trading and Markets Issues Guidance on JOBS Act

Judge Paul Crotty of the U.S. District Court for the Southern District of New York recently held that Goldman Sachs & Co. did not have a duty to publicly disclose the receipt of a Wells Notice from the Securities and Exchange Commission (“SEC”). Prior to this decision, no court had ever been asked to consider disclosure obligations with respect to Wells Notices. Going forward, this decision may inform companies’ consideration of whether and when to publicly disclose receipt of a Wells Notice.

The case, Richman v. Goldman Sachs Group, Inc., centered on allegations by class action plaintiffs against Goldman relating to the firm’s role in a synthetic collateralized debt obligation (“CDO”) called ABACUS 2007 AC-1 (“Abacus”). In January 2009, Goldman’s SEC filings disclosed ongoing governmental investigations related to the Abacus transaction. Between July 2009 and January 2010, the SEC issued Wells Notices to Goldman and two Goldman employees involved in the Abacus transaction, notifying them that Enforcement Division staff “intend[ed] to recommend an enforcement action.” The SEC filed a complaint against Goldman and one of its employees in April 2010, which Goldman settled for $550 million in July 2010. Plaintiffs alleged that Goldman’s failure to disclose its receipt of the Wells Notices was an actionable omission under Section 10(b) and Rule 10b-5 of the Exchange Act, and that Goldman had an affirmative legal obligation to disclose its receipt of the Wells Notices under applicable regulations.

…continue reading: Duty to Disclose SEC Wells Notices Rejected by Judge

On June 7, 2012, the US Securities and Exchange Commission (“SEC”) approved FINRA Rule 5123 governing regulation of broker-dealer participation in private placements of securities. The new rule will require member firms to file certain disclosure documents and material amendments to previous disclosure documents with the Financial Industry Regulatory Authority, Inc. (“FINRA”).

Introduction

On June 7, 2012, the SEC approved FINRA’s proposed Rule 5123 (the “Rule”), which, as adopted, significantly expands the scope of FINRA’s regulation over broker-dealer participation in private placements. [1] Among other things, unless exempt, Rule 5123 imposes a notice filing requirement on member firms participating in a private placement—with FINRA no later than 15 days after the date of first sale. The Rule’s various exemptions effectively limit its applicability to non-institutional private placements. [2]

It should be noted that FINRA has withdrawn an earlier proposal that would have required specific disclosure to each investor to whom the security is sold; that disclosure would have required (a) a description of the anticipated use of offering proceeds, (b) the amount and type of offering expenses, and (c) the amount and type of compensation provided or to be provided to sponsors, finders, consultants, and members and their associated persons in connection with the offering. As a result, the Rule as adopted requires only the filing with FINRA of the disclosure documents described below.

…continue reading: SEC Approves FINRA Private Placement Rule

FINRA proposes to amend Rule 5110, the Corporate Financing Rule, to permit a broader range of deferred compensation arrangements between member firms and issuers regarding future public offerings, provided the arrangements meet two significant new requirements. [1] Under the proposal, engagement letters for underwriting and financial advisory services will be permitted to include termination fees and rights of first refusal, but must specify that any future underwriting fees be reasonable or customary and must permit the issuer to terminate these arrangements for cause. As is currently the case, the arrangements also must be limited to two or three years in duration as described below. While the proposal will provide member firms more flexibility to negotiate deferred compensation arrangements with their issuer clients, they should consider the potential impact of the proposed new requirements on their engagement letter practices. Separately, FINRA also proposes to amend Rule 5110 to exempt a broader range of exchange-traded fund (“ETF”) offerings from the filing requirement of the Rule. FINRA has asked for comments on the proposals by July 23, 2012.

…continue reading: Deferred Underwriting Compensation in Public Offerings

FINRA has proposed to codify its front-running policy, originally adopted by the NASD in 1987, as new FINRA Rule 5270. [1] The new rule would expand the policy to prohibit member firms and their associated persons from engaging in a broader range of front-running transactions ahead of a customer block order in securities. The rule would apply to most derivative transactions, not just those in futures and options, when the block involves the underlying security, as well as to transactions in the block security itself. In addition, block orders subject to the rule would include those in most derivatives, not only futures and options. FINRA believes that the additional trading activity that would now be covered by the broader prohibition would already violate other FINRA rules. The new provisions would also state that front-running activity ahead of non-block orders may violate other FINRA rules or the federal securities laws. FINRA originally proposed these changes in 2008 and expects to announce an implementation date within 90 days after SEC approval.

…continue reading: Codifying FINRA’s Front-Running Policy

On May 31, 2012, the SEC approved two proposals submitted by the national securities exchanges and FINRA that are designed to dampen volatility in the stock market following the May 6, 2010 flash crash: the establishment of a “limit up-limit down” plan that would temporarily prevent trading in a particular listed stock in the event of rapid price swings, and the modification of existing market-wide circuit breakers. Both proposals are scheduled to go into effect on a one-year pilot basis on February 4, 2013.

Limit Up-Limit Down Plan

The new limit up-limit down plan, which is intended to replace the current single-stock circuit breaker pilot, requires exchanges, alternative trading systems, broker-dealers and other trading centers to establish policies and procedures that prevent the execution of trades and the display of offers outside of a specified price band. Price bands for each security will be set (and reset throughout the trading day) at a percentage above and below the security’s average price over the prior five minutes of trading, but will not be reset if price movements within the period are one percent or less. The price band for most stocks in the S&P 500 Index and the Russell 1000 Index, as well as certain exchange-traded funds and notes that have been designated in the SEC’s release (collectively, “Tier 1 NMS stocks”), will be 5%. The price band for most other listed stocks and certain other exchange-traded instruments will be 10%. Price bands will be doubled during opening and closing periods, and broader price bands will apply at all times for listed stocks and exchange-traded instruments priced at or below $3.00. If bid or offer quotations are at the far limit of the price band for more than 15 seconds, trading in that security will be subject to a five-minute trading pause. During its first six-months of operation, the limit up-limit down plan will apply only to Tier 1 NMS stocks. Thereafter, it will apply to all covered stocks.

…continue reading: “Limit Up-Limit Down” Plan and Circuit Breakers Approved