The Financial Industry Regulatory Authority (FINRA) recently fined the independent broker-dealer Berthel Fisher & Co. Financial Services Inc. and one of its affiliates $775,000 for compliance failures. According to FINRA, Berthel Fisher failed to supervise the sale of alternative investments, including non-traded real estate investment trusts (REITs) and leveraged and inverse exchange-traded funds (ETFs).
The alternative investments at issue included managed futures, oil and gas investments, equipment leasing programs, and business development companies. These complex products are subject to strong compliance and supervision standards, which FINRA determined Berthel Fisher failed to meet. FINRA requires broker-dealers to ensure their registered representatives understand the risks and suitability standards of these products before selling them to customers.
Berthel Fisher consented to the entry of FINRA’s findings, but it neither admitted nor denied the charges. In addition to paying the $775,000 fine, Berthel Fisher must retain an independent consultant to improve its supervisory procedures.
This is just one example of many where a brokerage firm has been fined for failing to supervise and selling unsuitable investments and securities to unsuspecting clients. Shustak Reynolds & Partners, P.C. handles a wide range of securities and FINRA related issues and has substantial expertise and experience in the securities and brokerage business.
The virtual currency Bitcoin was the subject of a hearing held this week by the U.S. Senate Committee on Homeland Security and Governmental Affairs. The hearing focused on potential implications of the rise of virtual currencies, also known as digital currencies, in today’s market. Appearing at the hearing to testify regarding the benefits, risks and potential regulation of virtual currencies were representatives of the Department of Justice, the Secret Service, the Department of the Treasury, and the Bitcoin Foundation, among others.
Despite widespread expectation that the hearing would focus on risks and dangers of virtual currencies, the Senate Committee heard generally positive testimony. Jennifer Calvery, director of the Financial Crimes Enforcement Network, praised the “innovation virtual currencies provide” and noted “their capacity to empower customers, encourage the development of innovative financial products, and expand access to financial services.” Mythili Raman testified that “the Department of Justice recognizes that many virtual currency systems offer legitimate financial services and have the potential to promote more efficient global commerce.”
The darker side of virtual currencies includes their association with illegal transactions, such as money laundering, gambling, drug trafficking and other black market sales. Last month, the FBI shut down the online black market Silk Road, which used Bitcoins to provide buyers and sellers of contraband a certain degree of anonymity in conducting illegal transactions. Although virtual currencies have been associated with criminal activities, they are not per se illegal, and, as noted at the Senate Committee hearing, there are plenty of legitimate uses for virtual currencies. In addition to its exchange value, Bitcoin is accepted as currency by WordPress, Reddit, and hundreds of other merchants.
Bitcoin’s exchange value spiked to over $900 in the wake of the Senate hearing’s favorable tone. For comparison, a Bitcoin traded for mere pennies in 2010. BTC China, the largest Bitcoin exchange, recently raised $5 million of investment capital, further bolstering consumer confidence in the currency and boosting its exchange value. However, investors should exercise caution before investing in a virtual currency such as Bitcoin. The digital and decentralized nature of the currency makes its extremely volatile, as well as vulnerable to online theft andfraud. The current lack of regulatory framework governing virtual currencies provides little, if any, recourse for victims of virtual currency fraud.
The full hearing is available at http://www.hsgac.senate.gov/hearings/beyond-silk-road-potential-risks-threats-and-promises-of-virtual-currencies.
The Financial Industry Regulatory Authority (FINRA) released a new report regarding conflicts of interest in the broker-dealer industry. FINRA began working on the report last year, when it started gathering data from 14 large firms regarding compliance procedures in place to monitor and prevent conflicts. The report urges broker-dealers to manage conflicts by closely managing broker compensation and reviewing new financial products. Also, when firms identify potential conflicts regarding new products, “plain English” disclosures are preferred. Clear, plain English disclosures may avoid the problems of less knowledgeable investors misunderstanding potential conflicts with complex financial products.
FINRA also addresses broker compensation practices in the conflicts report. Conflicts may arise when compensation practices creates incentives for registered representatives to prefer one type of product over another. The report advises broker-dealers to adopt and follow compliance procedures to identify and avoid conflicts that arise in the normal course of business. The report identifies “product agnostic” compensation grids, also known as “neutral grids,” as well as capping the credit a registered representative may receive for comparable products as two potential methods of reducing potential conflicts relating to compensation.
Shustak Reynolds & Partners, P.C. has litigated a wide variety of disputes involving investors, registered representatives and broker-dealer misconduct. If you have a business or securities law concern, please contact us at 619.696.9500 or shustak@shufirm.com.
A full copy of the report is available on the FINRA website. Financial Industry Regulatory Authority, Report on Conflicts of Interest (Oct. 2013), http://www.finra.org/web/groups/industry/@ip/@reg/@guide/documents/industry/p359971.pdf.
Securities and Exchange Commission Chair Mary Jo White recently announced plans to widen the scope of SEC enforcement to investigate, uncover and punish smaller violations of securities regulations. In her speech before the Securities Enforcement Forum last Wednesday, White emphasized the goal of SEC enforcement to be “everywhere, pursuing all types of violations of our federal securities laws, big and small.” She likened this approach to the “Broken Windows” theory: just as a broken window left unfixed “is a signal that no one cares, and so breaking more windows costs nothing,” overlooking or ignoring minor securities violations “can feed bigger ones, and, perhaps more importantly, can foster a culture where laws are increasingly treated as toothless guidelines.”
Although the SEC has declared small violations and infractions as new targets for its investigations, it certainly does not intend to ignore bigger cases. “Quite the opposite,” White said, “[i]t is critical that we continue to focus on the larger, tougher, and more complicated cases.” One might wonder, given its finite resources, how the SEC can maintain the same level of focus on bigger cases while also introducing a greater level of scrutiny in smaller cases. According to White, the SEC will stretch its resources by streamlining its investigations and making better use of resources, data tools, and other “force multipliers,” including collaboration with other law enforcement agencies and whistleblowers. To maximize its resources, the SEC intends to bring cases quickly, establish consistent approaches to penalties, and incentive parties to settle quickly. White explained that the SEC “will strive for settlements that have a deterrent effect” in all its cases.
These remarks are in line with White’s view that the SEC should be seen as a “tough cop,” protecting investors and the integrity of our markets by enforcing securities regulations. By living up to that role, the SEC hopes investors will feel more confident about participating in our markets.
Shustak Reynolds & Partners, P.C. handles a wide range of securities and FINRA related issues and has substantial expertise and experience in the securities and brokerage business. If you believe you have been the victim of fraudulent or negligent misrepresentations in connection with the sale of securities, please contact our firm’s managing partner, Erwin Shustak, at 619.696.9500 or shustak@shufirm.com.
A full copy of White’s speech is available on the SEC website. Mary Jo White, Chair, SEC, Remarks at the Securities Enforcement Forum (Oct. 9, 2013) http://www.sec.gov/News/Speech/Detail/Speech/1370539872100.
