Saturday, February 19, 2011

FINRA Slaps Lincoln Financial for Major Security Stumble

According to press reports, Lincoln Financial has been allowing its brokers to access confidential customer information over the Internet, using any browser, without security software. It doesn't take much effort to figure out that this is not a good idea, but the fine of $600,000 might drive the point home.

Monday, February 7, 2011

Arbitration Award Forces Closing of B-D

QA3 Financial Corp, a independent broker dealer, announced that it was closing its doors next week. According to, the decision came as a result of an arbitration award against the firm. If true, the firm didn't have much choice - an arbitration award is a hit on net capital. If a firm's net capital falls too low, it must close, and that appears to be the case here.

The firm has been caught up in the Regulation D frenzy, where investors are suing their brokers over failed investments in private placements. According to InvestmentNews, QA3 has been in suits over two deals, Medical Capital and Provident Royalties. Both companies face fraud charges from the SEC, and investors have sued the brokerage firms for selling the security, despite the fact that fraud charges have not been brought against the broker dealers.


Tuesday, February 1, 2011

Registration of Investment Advisers

Suddenly there are more questions about the registration and regulation of investment advisers. My column, Registration and Regulation of investment advisers answers most of them. It is online at here.

SEC Approves FINRA Rule Change for All Public Arbitration Panels

The FINRA practice of requiring an "industry" arbitrator on all of its arbitration panels has finally come to an end. The requirement once upon a time had some merit, back in the day when arbitrations were simple, handled in a few afternoons, and were primarily simple disputes. Over the decades that I have been representing parties in securities arbitrations, the landscape has changed dramatically. While the concept was to have someone on a panel who understood the workings of the securities industry, FINRA altered the definition of industry arbitrator to the extent that so many individuals were included that the entire concept was lost in rule changes.

It was also an issue to have an "experienced" industry arbitrator on a panel. While the thought is that the industry arbitrator could help the other arbitrators, that is simply not the case, and the risk that the panel will make decisions based on information from the industry arbitrator that was not evidence in the case has become far too great.

The practice is finally over. Yesterday FINRA announced that the SEC has approved its proposed rule change to provide customers in all FINRA arbitrations the option of having an all public panel. The amended rules will apply to all customer cases in which a list of potential arbitrators has not yet been sent to the parties.

Given the fact that 40% of all participants in the "all public" pilot program still chose an industry arbitrator, I do not expect to see any significant changes in the composition of panels. As experienced practitioners know, the best arbitrator is a fair and reasonable one, and that is very often an "industry" arbitrator. What will change is the complaining about the selection process. While the complaint that the "industry" arbitrator will side with the industry is insulting to the professionalism of our arbitrators, the complaint did have some traction with the public and the press and it was time for the requirement to go.  More...