The conduct of investment bankers often arouses suspicion and criticism. In Toys “R” Us, the Delaware Court of Chancery referred to “already heightened suspicions about the ethics of investment banking firms”  ; in Del Monte, it criticized investment bankers for “secretly and selfishly manipulat[ing] the sale process to engineer a transaction that would permit [their firm] to obtain lucrative … fees”;  and, more recently, in Del Monte, it criticized a prominent investment banker for failing to disclose a material conflict of interest with his client, a failure the Court described as “very troubling” and “tend[ing] to undercut the credibility of … the strategic advice he gave.”  While the investment bankers involved in the cases inevitably escaped court-imposed sanctions, because they were not defendants, they also escaped sanctions from the Financial Industry Regulatory Authority (FINRA), the regulator primarily responsible for overseeing their conduct.
Posts Tagged ‘FINRA’
On October 23, 2013, the SEC voted unanimously to propose Regulation Crowdfunding,  the rules related to the offer and sale of securities through crowdfunded private offerings, as set forth in Title III of the Jumpstart Our Business Startups (“JOBS”) Act. FINRA then published its proposed rules governing the licensing and regulation of so-called “funding portals,” a new type of limited-purpose regulated intermediary solely for these offerings. Crowdfunding itself is not new. Websites like Kickstarter and IndieGoGo help all sorts of businesses, organizations and people raise money through small individual contributions for an identifiable idea or business. Until the JOBS Act, however, crowdfunding could not be used to offer or sell securities to the general public. Issuers and intermediaries relying on Regulation Crowdfunding expect to further democratize investing in start-ups, because any investor, whether or not accredited, may invest in these securities.
To permit crowdfunding, JOBS Act Title III added two provisions to the Securities Act of 1933: (1) Section 4(a)(6), which creates a new exemption to allow issuers to use crowdfunding to offer and sell securities in unregistered offerings and (2) Section 4A, which requires certain disclosures to be made by crowdfunding issuers and sets forth requirements for crowdfunding intermediaries. Proposed Regulation Crowdfunding and the proposed FINRA rules would implement these statutory provisions and create the regulatory framework for crowdfunding. Both agencies have sought comment on all aspects of their proposed rules, which are due in early February.
On October 14, 2013, FINRA issued a Report on Conflicts of Interest. The report summarizes FINRA’s observations following an initiative, launched in July 2012, to review conflict management policies and procedures at a number of broker-dealer firms. The report focuses on approaches to identifying and managing conflicts of interest in three broad areas: enterprise-level conflicts governance frameworks; new product conflicts reviews; and compensation practices.
While the report does not break new ground or create or alter legal or regulatory requirements, it offers insight into the approach that FINRA expects firms to take in implementing a robust conflict management framework. In particular, the report identifies effective practices that FINRA observed at various firms. Broker-dealers should use this report as a basis for reviewing and potentially strengthening their policies and procedures relating to managing conflicts of interests.
FINRA has proposed a trade-reporting rule change that would result in the public dissemination of secondary market transactions in corporate debt securities sold under Securities Act Rule 144A. If adopted, this change could affect secondary market transactions in a number of assets classes, including high-yield debt securities.
On July 8, 2013, the US Financial Industry Regulatory Authority, Inc. (“FINRA”) submitted an amendment to its Rule 6750 to the Securities and Exchange Commission (“SEC”). If adopted, the amendment would allow FINRA to disseminate information on transactions effected pursuant to Rule 144A under the Securities Act of 1933 (“Rule 144A”) through the Trade Reporting and Compliance Engine (“TRACE”), the principal trade-reporting system for fixed-income securities. The proposed amendment would allow FINRA to disseminate information regarding secondary transactions effected pursuant to Rule 144A. It would not require the reporting of primary transactions.
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.
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.  The Revised Proposal represents the revision of FINRA’s earlier proposal, and modifies that proposal in meaningful ways. 
The Revised Proposal amends FINRA’s earlier proposal. In particular, the Revised Proposal:
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. 
In short, the proposed rule would:
On December 3, 2012, FINRA’s new Rule 5123 went into effect.  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:
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:
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.