Recruiting Bonus to Be Banned?

Last year Mary Shapiro started talking about bonuses on Wall Street and how bad they were. (That's almost funny given the source) and the SEC has finally gotten around to addressing the boss' concern.

On Wednesday, the SEC proposed new rules aimed at reigning in incentive comp. The rules, which stem from Section 956 of the Dodd-Frank Act, would prohibit incentive-based compensation arrangements that encourage “inappropriate” risk-taking or could lead to “material financial loss” at broker-dealers and investment advisers with $1 billion or more of assets.

The current proposal would not affect most investment advisors, and so far, recruiting bonuses are safe - so long as they do not provide additional bonuses for performance, and according to one source, so long as there are no claw-backs based on performance.

However, the traditional recruiting bonus does have a claw-back provision of sorts - if the broker leaves the firm before the term of the note and the additional compensation agreement, he has to pay back the note. In reality, the broker is paying back the bonus, and that is a claw back provision. Couple that with a termination for lack of production, and you have a true performance based bonus, which the SEC is going to ban.

The rule is not final yet, but if it is approved as is, we are going to have an interesting situation. Firms will be forced to restructure their bonus and notes, and are going to have to address the termination for lack of performance issue. There is certainly no way that firms are going to remove that clause, and they cannot realistically remove recruiting bonuses, which puts them in a bit of a bind.

My money is on the third choice - an exemption for repayment of loans on termination for lack of production. I'll update as events move forward.

Why Is the Financial Services Industry Still Lukewarm About Social Media?

It's the regulators of course. Update on the use of social media by financial firms from Financial-Planning.com

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.

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 InvestmentNews.com, 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.

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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 SECLaw.com 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...

SEC Charges Attorney With Misconduct in Connection with Client Exam

The SEC instituted administrative proceedings against a Greenberg Traurig partner for engaging in improper professional conduct during an SEC examination. The SEC alleges that the attorney, in the course of an SEC examination of his client NewPoint Securities LLC in April and May 2009 — altered private placement memoranda (PPMs) purportedly used in the offer and sale of securities issued by NewPoint Financial Services. The original PPMs purportedly provided to investors stated that the funds raised in the offerings would be used primarily for real estate related investments. According to the SEC, the vast majority of money raised in the offerings was misappropriated by NewPoint’s principal John Farahi.

The SEC alleges that the attorney added language to the PPMs to make it appear that it was disclosed to investors that much of the money raised by NewPoint would be loaned to Farahi. The PPMs were then produced to the SEC’s examination and enforcement staff. According to the Office of the General Counsel, Tamman knew that the language he added to the documents was not included in the PPMs actually provided to investors.

My thoughts, in two simple sentences. This is simply an accusation, and we all know that the SEC doesn't always have it's facts straight. It is certainly possible that the SEC is wrong, but assuming the allegations are true,  what loon would alter an existing document on behalf of a client and then provide it to the SEC? And, if you were such a loon, given the fact that the PPM has been distributed to third parties during the course of the offering, did you really think that it would go unnoticed by the Staff?

And one more thought. He changed the language in the existing PPM to reflect that the money raised was going to be loaned to the issuer's principal? Really? Imagine what that PPM looked like after it was altered. Dozens of pages describing the company and its business and at the end of the use of proceeds section..."loan to officer."

Amazing.



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