SEC Cracking Down On Investment Advisers

Agency files record number of cases in fiscal 2012; more of the same coming

By Mark Schoeff Jr. at Investment News

November 14, 2012

The Securities and Exchange Commission is cracking down on investment advisers at a record level, the agency announced on Wednesday.

The SEC took 147 enforcement actions against advisers and investment companies in fiscal year 2012, which ended on Sept. 30. That number is one more than the previous record of 146 set in fiscal year 2011. The agency also took 134 enforcement actions against brokers, a 19% increase over the last fiscal year.

The SEC highlighted cases against UBS Financial Services of Puerto Rico and two of its executives for disclosure violations related to closed-end mutual funds. It also touted a case against OppenheimerFunds “for misleading investors in two funds suffering significant losses during the financial crisis.”

UBS and Oppenheimer paid more than $26 million and $35 million, respectively, to settle the charges.

Overall, the SEC filed 734 enforcement actions in fiscal year 2012, which fell one short of its fiscal 2011 record of 735. In 2012, the agency obtained more than $3 billion in penalties and disgorgements for harmed investors, an 11% increase over last year. Over the last two years, the SEC has obtained $5.9 billion in disgorgements and penalties.

The agency said that the enforcement productivity is the result of the “most significant reorganization [of the division] since it was established in the early 1970s.” Among other reforms, the division has streamlined its structure, set up specialized units, including the Asset Management Unit, strengthened training, bolstered its tips and complaints process and hired industry experts with experience in complicated financial products and transactions.

“The record of performance is a testament to the professionalism and perseverance of the staff and the innovative reforms put in place over the past few years,” SEC chairman Mary Schapiro said in a statement. “We've now brought more enforcement actions in each of the last two years than ever before, including some of the most complex cases we've ever seen.”

Earlier this week the SEC was mostly dealt a setback in its case against Bruce Bent and his son, Bruce Bent II, who were cleared of fraud in a federal civil trial on Monday. The SEC had charged the pair with misleading investors about the safety of the $62-billion Reserve Primary Fund, a money market fund that “broke the buck” in 2008, when Lehman Brothers Holdings Inc. went bankrupt.

The jury did rule that the company was liable for fraud and that Bruce Bent II was guilty of negligence.

The SEC has been criticized for not punishing Wall Street executives allegedly responsible for the 2008 market collapse. In its announcement on Wednesday, the agency said that it filed “29 separate actions naming 38 individuals, including 24 CEOs, CFOs and other senior corporate officers, regarding wrongdoing related to the financial crisis.”

Merrill fined $500,000 for not filing reports: FINRA

(Reporting By Suzanne Barlyn; Editing by Alden Bentley)

(Reuters) - Merrill Lynch accepted a $500,000 fine to settle charges that it failed to file, or was late with, hundreds of required reports about its brokers, including details of customer complaints, Wall Street's industry-funded watchdog announced Monday.

In addition, Merrill Lynch, a unit of Bank of America Corp, did not properly supervise or train employees who were responsible for tracking and reporting complaints about brokers, said the Financial Industry Regulatory Authority (FINRA), which also censured Merrill.

The firm's conduct, which occurred between 2005 and 2011, included not notifying FINRA about 650 reports, ranging from arbitration claims filed by customers to settlements reached by the brokerage, according to a regulatory document.

Securities industry rules require brokerages to disclose certain information about its brokers, including criminal and civil complaints involving them, typically within 30 days. Those details are available in databases for regulators, other securities brokerages, and investors. Brokerages must also submit a form to the regulator when it hires a new broker or when a broker leaves.

Merrill's violations may have prevented investors from fully researching the backgrounds of certain brokers through FINRA's database for investors, known as BrokerCheck, FINRA said.

The brokerage learned of the problems during an internal review that began in 2009, according to Merrill spokesman, William Halldin. "We have enhanced our policies and procedures to address issues raised in this matter and to ensure that client complaints are properly reported," Halldin said.

Among the problems: The firm was late or failed to report certain criminal and civil complaints it received about brokers during a three-year period, according to FINRA.

Merrill self-reported its problems to FINRA, according to its settlement with the regulator. As part of the settlement, Merrill neither admitted nor denied the charges, but consented to FINRA's findings

Expungement by FINRA

When a broker is named as a respondent in a customer-initiated arbitration, the arbitration claim and any allegations of wrongdoing are required to be reported on the broker's Form U4. Brokerage firms must submit a disclosure report when a broker is the "subject of" allegations of sales practice violations made in arbitration claims or civil lawsuits, but is not a named party to the arbitration or lawsuit. Once reported, this information is recorded on the broker's record in the Central Registration Depository (CRD®) System and becomes available to the public upon request through FINRA's BrokerCheck program.

Brokers may seek to have a reference to allegations or to involvement in an arbitration removed from their CRD® System records. The process of removing this information from the CRD® system is called "expungement."

Before ruling on a request for expungement, the arbitrators must review and follow the procedures provided under FINRA Rules 2080, 12805 and 13805.

FINRA Rule 2080 contains standards and procedures for expungement of customer dispute information from CRD. The rule requires that a court of competent jurisdiction confirm an arbitration award granting expungement relief or order such expungement.  It also requires that firms or associated persons name FINRA as an additional party in any court proceeding in which they seek an order to expunge customer dispute information or request confirmation of an award containing an order of expungement. FINRA will generally oppose confirmation of the expungement portion of the arbitration award in most cases in which it participates in the judicial proceeding.

Upon request, however, FINRA, in its discretion, may waive the requirement to name FINRA as a party in these proceedings provided the arbitration award directing expungement contains at least one of the following judicial or arbitral findings:

the claim, allegation or information is factually impossible or clearly erroneous;
the registered person was not involved in the alleged investment-related sales practice violation, forgery, theft, misappropriation or conversion of funds; or
the claim, allegation or information is false.

FINRA Rules 12805 and 13805 provide enhanced safeguards to ensure that arbitrators have the opportunity to consider the facts that support or weigh against a decision to grant expungement. These rules also provide that expungement occurs only when the arbitrators find and document one of the narrow grounds specified in FINRA Rule 2080. Under FINRA Rules 12805 and 13805, the panel must follow the outlined procedures in order to grant expungement of customer dispute information under FINRA Rule 2080:

The arbitration panel must hold a recorded hearing session by telephone or in person regarding the appropriateness of expungement.

In cases involving settlements, the arbitration panel must review the settlement documents, consider the amount paid to any party and consider any other terms and conditions of the settlement that might raise concerns about the associated person's involvement in the alleged misconduct before awarding expungement.
The arbitration panel must indicate which of the grounds for expungement under FINRA Rule 2080(b)(1)(A)-(C) serves as the basis for their expungement order, and provide a brief written explanation of the reasons for ordering expungement.

The arbitration panel must assess against the parties requesting expungement relief all forum fees for hearing sessions in which the sole topic is the determination of the appropriateness of expungement.

Merrill Submits $40 Million Class-Action Settlement With Ex-Brokers

By Caitlin Nish and Corrie Driebusch - Dow Jones Newswires

NEW YORK--Merrill Lynch presented a proposed class-action settlement Friday that envisions paying about $40 million to some 1,500 of the company's former brokers.

The settlement was put before a federal judge in New York City and requires her approval. It would compensate the brokers for deferred pay that they were denied when they left Merrill in the wake of the firm's 2008 acquisition by Bank of America Corp. (BAC).

The brokers would receive between 40% and 60% of the value of their deferred plan accounts, depending on when they left Merrill and whether they made claims for their deferred compensation or initiated litigation or arbitration.

Both parties will need to submit a renewed proposal in court by Sept. 6.

The settlement applies only to those brokers who generated about $500,000 or less in annual fees and commissions. Brokers in that category are estimated to total about 1,500 and would be able to decide whether to be members of the class or to opt out and pursue their own individual claims in the Financial Industry Regulatory Authority's arbitration forum.

Another 1,500 brokers who were higher producers also the left the firm after the acquisition, and any claims by them wouldn't be covered by the settlement.

Brokers' contracts typically required them to remain employed for several years before they gained vested rights to their deferred compensation, which they could claim only in a shorter time frame if they left for good reason. At issue is whether Merrill Lynch's September 2008 sale to Bank of America, and the changes that accompanied that event, constituted a good reason.

In the class action, lawyers argued that a new pay scheme introduced after the acquisition reduced the pay of lower- producing brokers and gave them good reason to leave.

Merrill Lynch had multiple deferred-compensation programs. In documents filed in the class-action case, a Merrill Lynch human resources and compensation executive estimated the average amount each former broker had in one of the accounts was $36,000 and in another $16,000.

MSSB Retention Packages

LAW OFFICES OF DAVID HARRISON INVESTIGATES MORGAN STANLEY SMITH BARNEY'S TREATMENT OF FINANCIAL ADVISORS REGARDING RETENTION PACKAGES

Law Offices of David Harrison has initiated an investigation of Morgan Stanley Smith Barney ("MSSB") over its treatment of financial advisors regarding retention packages offered to them after Morgan Stanley purchased Smith Barney. This investigation stems from MSSB offering retention packages to financial advisors in 2008 and 2009 which called for a back-end payment in 2012. Financial advisors signed retention packages in the expectation that all terms would be met by MSSB. When 2012 arrived, financial advisors were stunned that MSSB took the position that the 2012 backend payment did not apply to them and declined to make any additional payments.

Morgan Stanley Smith Barney financial advisors may have rights to collect and be paid out their complete retention packages.

If you signed a MSSB retention package and you feel you were not treated properly and compensation is owed to you, contact our firm for an evaluation of your rights. You can contact David Harrison directly at (310) 499-4732 or by email at dshesq@gmail.com.

Merrill Lynch Deferred Compensation

LAW OFFICES OF DAVID HARRISON INVESTIGATES MERRILL LYNCH OVER FINANCIAL ADVISORS' DEFERRED COMPENSATION PROGRAM

Law Offices of David Harrison has initiated an investigation of Merrill Lynch ("Merrill") over its treatment of financial advisors regarding deferred compensation packages. Financial advisors who did not sign retention packages with Bank of America after the brokerage acquired Merrill Lynch in 2008 were shocked to learn that Merrill refused to pay financial advisors their deferred compensation plan. Many financial advisors left Merrill Lynch due to the uncertainty surrounding the Bank of America / Merrill merger believing a change of control in the company caused the deferred compensation to vest. A FINRA arbitration panel lambasted Merrill for running a "systemic fraudulent scheme to deprive claimants of their rights" under the deferred-compensation plans. The arbitration panel further said that the committee Merrill Lynch instituted to determine whether compensation programs vests was "a sham committee that did nothing more than rubber-stamp denials." According to the arbitration panel, Merrill has never approved a request for vesting despite the firm's own "numerous ... analyses and anticipated turnover projections that indicated anywhere from hundreds of millions to several billion dollars in potential liability."

Merrill Lynch financial advisors who did not sign Bank of America retention packages may have rights to collect their deferred compensation packages.

If you believel you were not treated properly and compensation is owed to you, contact our firm for an evaluation of your rights. You can contact David Harrison directly at (310) 499-4732 or by email at dshesq@gmail.com.