Statutory Framework.doc
Document Sample
BROKER DEALER REGULATION: CORE CONCEPTS--LECTURE TOPICS AND
READING ASSIGNMENTS
Fall 2010
Professors MacDonald/Caridi
I. B-D Entity Registration, Agent Registration, Continuing Education
Statutes & Rules:
Section 15 of Securities Exchange Act of 1934
Section 15a-6 (Foreign Broker Dealers)
Bank Exemptions (Permitted Dealer and Broker activities) ( Reg. R)
Exempt Securities (Govs, Munis)
States’ Uniform Securities Acts
FINRA Rules 311, 312, 1021, 1031, 1120 (Member Formation, Approval)
FINRA Rule 345A (Continuing Education For Registered Persons)
Rosenberg v. Metlife Inc.
453 F. 3d. 122, 2007 U.S. App. LEXIS 16195
(2nd Cir. June 28, 2007)
Hiring/Firing (Forms U-4 and U-5)
Statutory Disqualifications (Section 3(a) (39)
II. Net Capital Requirements/Margin/Credit Issues
Statutes & Rules:
’34 Act: Section 7(a), Section 11 (d), Rule 10b-16
FINRA Rule 431
Reg. X, Reg. U
FINRA NTM 01-26; Information Memo 01-09 (Day Trading Margin Requirements)
FINRA Rule 2520
SEC 34 Act Release 34 44009 (February 27, 2001)
Handouts:
Sample Customer Agreement
Sample Credit Statement 10b-16
FINRA Investor Alert: Investing With Borrowed Funds: No “Margin” For Error (Sept.
2003)
III. Clearing Brokers/Prime Brokers
Statutes, Rules and Interpretations:
FINRA Rules 382, 3230 (Carrying Agreements)
FINRA NTM 99-57
FINRA Information Memo 99-33 (Carrying Agreements)
SEC Releases No. 34-41468 and 41469 (June 1999)
Clearing Agreement (Handout)
Prime Brokerage Agreement (Handout)
In re A.R. Baron Co. 1998 Bankr. LEXIS 1447 (U.S. Bankruptcy Court
for the SDNY October 16, 1998)
A.R. Baron/Bear Stearns Release:
SEC 1933 Release No. 7719
SEC 1934 Release No. 41708 (August 5, 1999)
Goldman Sachs Execution & Clearing vs. The Official Unsecured Creditors Committee
of Bayou Group LLC, 10 Civ. 5622 (JSR) SIFMA Amicus Curiae (8/5/10)
IV. Supervision/Internal Controls/Compliance and Legal Functions
Statutes, Rules and Interpretations:
34 Act (15 USCA § 78)
o Section 15 (b)(4)(E) (Affirmative Defense)
o Section 20 (a) (Control Person Liability)
o Section 15(f) (Mandatory Internal Controls/Information Barriers)
o Rule 10b-5 (Fraud)
Sarbanes Oxley Act of 2002, Section 307
FINRA Rule 342, 351, 354, 405, 722
FINRA Rule 3010 et seq.
FINRA RN 08-57 (Consolidated Rules)
FINRA NTM 99-45 (Supervision)
FINRA NTM 04-71 and 05-08 (Supervisory Controls)
FINRA NTM 04-79 (Annual Compliance Certification and Designation of CCO
FINRA JOINT MEMO 05-07 ( “Internal Controls”)
FINRA Guidance on Complying with NASD Rule 3012 and FINRA Rule 3130
SIA White Paper on the Role of Compliance, July 2005,
www.sia.com/2005_comment_letters/pdf/SIACLwhitePaper7-13-05.pdf
In the Matter of Louis R. Trujillo 1987 SEC Lexis 1978 (SEC Adm. Procedure No 3-
6555, April 23, 1987), reversed, 1989 SEC Lexis 480 (Exchange Act Rel.)No 34-
26635, March 16, 1989)
In the Matter of John H. Gutfreund et al.
1992 SEC Lexis 2939
Exchange Act Rel. No. 34-3155 (SEC Administrative Proceeding December 3, 1992)
Morgan Stanley & Co Incorporated
Exchange Act Ref. No. 54047 (Administrative Proceeding, June 27, 2006)
2
#164938v1
In the Matter of Theodore W. Urban (10/19/09)
Sec.gov/litigation/admin/2009/34-60837.pdf
V. Know Your Customer “KYC”/Suitability/Anti-Money Laundering
(“AML”)
Statutes, Rules and Interpretations:
FINRA Rule 405 (Know Your Customer)
FINRA Rule 2310 (Suitability)
FINRA Proposed Rule 2111(Suitability) and Rule 2090 (Know Your Customer) 7/30/10
SEC Release No. 34-62477 Study Regarding Obligations of Broker/Dealers and
Investment Advisors (July 27, 2010)
Product Specific Suitability Rules:
FINRA Rules 2115 (Recommendations to Customers in OTC Low Priced Equity
Securities); Rules 721 and 723, 2860 (Options); Rule 2865 (security futures);
FINRA NTM 01-23 (Online Suitability)
FINRA IM2310-3 (Suitability with respect to Institutions)
FINRA NTM 03-71 (Non-Conventional Investments)
FINRA NTM 94-16 (Mutual Funds)
FINRA NTM 00-44 (Variable Life Insurance)
FINRA NTM 96-60 (Speculative and Low Priced Securities)
FINRA NTM 93-73 (Collateralized Mortgaged Obligations)
FINRA NTM 03-07 (Hedge Funds and Fund of Hedge Funds)
AML
FINRA Rule 445 (AML Compliance Program); NASD IM 3011-1
Uniting and Strengthening America by Providing Appropriate Tools Required to
Intercept and Obstruct Terrorism Act of 2001 (PATRIOT Act), 31 U.S.C. Parts 103
U.S. Treasury Department Office of Foreign Assets Control (OFAC)
FINRA Notice to Members 02-21, (Guidance on AML Programs)
31 U.S.C. §5318(g) (1), SARs
31 U.S.C. §5313, CTRs
FinCen Guidance: Obtaining and Retaining Beneficial Ownership Information (3/5/10)
Sample New Account Form (Handout)
Cases:
Banca Cremi v. Alex. Brown
1997 U.S. Dist. LEXIS 1211
(D.C. Md. February 5, 1997) affirmed, 1997 U.S. App. LEXIS 36404
(3rd Cir., December 30, 1997)
3
#164938v1
DeKwiatkowski v. Bear Stearns Co. et. al
306 F.3d 1293 (2d Cir. 2003)
In the Matter of Park Financial Group and
Gordon C. Cantley, Administrative Proceeding
File No. 12614, Release No. 34-55614, April 11, 2007 (Failure to File SARS)
VI. Fraudulent Practices
Insider Trading
Classical Theory
Misappropriation Theory
Selective Disclosure: Regulation FD
SEC Compliance and Disclosure Interpretations: Regulation FD (6/4/10)
Sales Related Frauds
Churning/Negative Churning
Unauthorized Trading
Micro-cap Fraud
Mutual Fund Breakpoint Sales
Wrong Number Voicemails/Phishing/Nigerian Letters/Phantom Regulators/Phoney
Government Regulator Websites
Trading Related Frauds
Marking the Close
Adjusted Trading
Frontrunning
Parking
Trading Long
Wash Trades
Squeezes & Corners
Mutual Fund Market-Timing and Late Trading
Other Trading Issues
Best Execution
Short Sales
Soft Dollars
Payment for Order Flow
Penny Stocks
Mark-Ups
Trade Reporting
4
#164938v1
Statutes, Rules and Interpretations:
Rules 15g1-5, 15c-11 (‘34 Act)
FINRA Notice to Members 98-69 (Supervision Responsibilities for Trade Reporting)
FINRA Notices to Member 01-22 (Best Execution)
SEC Release 34-43084, Disclosure of Order Routing and Execution Practices
(July 28, 2000)
FINRA IM 2440
Section 9 (b) (34 Act)
Sections 11(a) (34 Act)
SEC Regulation SHO/FINRA Rule 203(b) (3)
NASAA-CSA Investment Fraud Awareness Quiz (handout)
Cases:
F.B. Horner & Associates and Fred Horner, Exchange Act Rel. No 34-30884
(July 2, 1992)
In Re Morgan Stanley, Inc
Exchange Release No. 55726 (May 9, 2007)
UBS Settlement on July 16, 2007 or State of New York v. UBS Financial Services,
Inc. (Filed in NYS Supreme Court, County of NY on December 12, 2006) (Handout)
VII. Communications with the Public
Correspondence
Confirmations
Account Statements
Advertisements and Sales Literature
Telemarketing
Statutes & Rules:
’33 Act, Section 5(b) (1) and (2), Rule 460;
’34 Act, Rule 15c2-8(c)-(e), Rule 434
‘34 Act, Rule 10b-10, FINRA 725(Confirmations)
FINRA Rule 409, 2340 and 2860 (b) (15) (Account Statements)
FINRA RULE 2210, 2211 (Advertisements, Sales Literature and Correspondence)
FINRA RULE 2212; SEC Release No. 34-38480 (Telemarketing)
FINRA Notice to Members 9-29 (Origination and Circulation of Rumors)
FINRA Rule 342.17 (Review of Communications with the Public)
FINRA Rule 3010(d) (2), and Rule 2211 (Review of Corresponence)
FINRA Information Memo 98-3 (Electronic Delivery of Information Between Members and Their
Customers)
5
#164938v1
FINRA NTM 98-11(SEC Approves Rules Regarding Supervision, Review, and Record Retention of
Correspondence)
FINRA NTM 01-23 (Online Suitability)
FINRA NTM 03-33 (Instant Messaging)
FINRA RN 09-55 (Proposed New Rules Governing Communications with the Public)
FINRA RN 10-06 (Social Networking Sites)
FTC, Dot Com Disclosures; FTC Advertising and Marketing on the Internet (4/98)
FINRA RN 10-06 Guidance on Blogs and Social Networking Web Sites
Guide to the Internet for Registered Representatives,
www.FINRA.com/web/idcplg?IdcService=SS_GET_PAGE&ssDocName=FINRAW_006118
Research
Rules and Interpretations:
FINRA Rules 344, 472, 2210, 2711
SEC Regulation AC
SEC Division of Market Regulation Responses to Frequently Asked Question
Concerning Regulation Analyst Certification, April 26, 2005
www.sec.gov/divisions/marketreg/mregacfaq0803.htm
FINRA NTM 04-18 Joint Guidance: Research Analysts and Research Reports
SEC Interpretation Re: Use of Internet Web Sites to Offer Securities or Advertise
Investment Services Offshore, www.sec.gov/rules/interp/33-7516.htm (Nov. 2006)
FINRA Notice to Members 06-35 (FINRA and NYSE Joint Guidance on Fixed Income
Research)
Enforcement Actions:
Dirks v. SEC
463 U.S. 646 (1983)
Private Actions:
Barclays Capital Inc, et al vs. Theflyonthewall.com, inc. ,10-1372-CV 2d Cir. Brief for
Amicus Curiae SIFMA (7/22/10)
Recommended Reading:
Securities Industry Association publication: “How to Read a Research Report” 2002
SEC Alert “Analyzing Analyst Recommendations”
www.sec.gov/investor/pubs/analysts.htm
Joint Report by FINRA on the Operation and Effectiveness of the Research Analyst
Conflict of Interest Rules, December 2005
6
#164938v1
IX. Restricted Persons, Spinning, Laddering, Allocations and
Relationship between Research and Investment Banking
FINRA Rule 2711, 5130 (Restrictions on the Purchase and Sale of Initial Equity Public
Offerings)
SEC Staff Legal Bulletin No. 10 (August 25, 2000) (Prohibited Solicitations and “Tie-In”
Agreements for After Market Purchase
www.sec.gov/interps/legal/slbmr10.htm
In re Merrill Lynch & Co Inc. Research Reports Securities Litigation 02MDL 1484 (MP)
2003 WL 215100293 (SDNY June 30, 2003) and 2003 WL 21518833 (SDNY July 2,
2003)
X. Market Structure, Alternative Trading Systems, Dark Pools, High
Frequency Trading/Co-Location, Algorithmic Trading, Sponsored
Access
Statutes, Rules and Interpretations:
SEC Regulation ATS
SEC Regulation NMS
SEC Regulation SHO
Exchange Art Rule 11Ac1-1
Brief Chronology
Reg ATS
Decimalization
2005 Reg SHO and tick test pilot
2006 NYSE becomes a for profit exchange
2006 NASDAQ splits form NASD as an exchange
2007 Reg NMS ; short sale tick test eliminated
2008 Rapid consolidation; financial crisis
2010 Flash Crash
XI. Products
Public Offerings
Private Offerings
Mutual Funds
Non-Conventional Investments
IPOs
Wrap Accounts/Fee-Based Services
Derivatives
Statutes & Rules:
7
#164938v1
SEC Release No. 33-8591 (July 19, 2005) (Adopting Release: Securities Offering
Reform); 17 CFR Parts 200, 228, 229 et al (August 3, 2005)
Regulations M, D and S (‘34 Act)
Rules 144 and 144A (‘33 Act)
FINRA RN 10-22 (Due Diligence in Regulation D Offerings)
Dodd –Frank: Change to Net Worth Test for Accredited Investors under Regulation D
FINRA Notice to Members 03-79 (Initial Public Offerings)
FINRA Notice to Members 03-71 (Obligations When Selling Non-Conventional
Investments)
FINRA Notice to Members 05-26 (Best Practices for Reviewing New Products)
NYSE Information Memo 05-51 (Non-Managed Fee Based Account Programs)
FINRA Notice to Members 03-68 (Fee Based Compensation)
XII. Securities Enforcement
SEC (Injunctive & Administrative Proceedings; 21(a) Reports)
SROs (Disciplinary Proceedings)
States (New York State Martin Act)
NY Attorney General and SEC Settlements Regarding Auction Rate Securities
SEC v. Tambone , No. 07-1384 (1st Cir. 3/10/10)
SEC v. Goldman, Sachs and Fabrice Tourre, 10 CV 3229 (BSJ)
SEC Enforcement Manual (January 2010)
XIII. Investor Remedies
Private Rights of Action
Class Actions
Arbitration
Mediation
FINRA Notice to Members 99-90
Cases:
DeKwiatkowski v. Bear Stearns & Co., 2002 WL 31086924 (2d Cir. September 19,
2002)
Central Bank of Denver, N.A. v. First Interstate Bank of Denver
511 U.S. 164 (1994)
Stoneridge Investment Partners LLC v. Scientific- Atlantic, Inc. et. al., 128 S. Ct. 761
(2008)
Starr Foundation v. AIG Inc. 2010 NY Slip Op 04526 (5/27/10)
8
#164938v1
Morrison v. National Australia Bank Ltd , 2010 WL 2518523 (US 6/24/10), affirming,
547 F. 3rd 167
310333
9
#164938v1
