Monthly Archives: August 2013

FINRA issues investor alert about calls from brokerage firm imposters

The Financial Industry Regulatory Authority (“FINRA”) issued a new alert on August 6, 2013 labeled as Cold Calls from Brokerage Firm Imposters—Beware of Old-Fashioned Phishing to warn investors of calls from scammers claiming to be representatives of at least one well-known brokerage firm. In this latest twist on phishing scams, the fraudsters are cold-calling investors claiming to offer information about certificates of deposit with yields well above the best rates in the market in an attempt to get potential victims to divulge their personal or financial account information.

FINRA is reminding investors who receive unsolicited calls to never provide personal information or authorize any transfer of funds to any unknown person, and encourages anyone who believes that he/she has been scammed to file a complaint using its online Complaint Center or send a tip to FINRA’s Office of the Whistleblower.

August 7th, 2013|Fraud|

SEC rule amends certain broker/dealer reporting, audit and notification requirements

The amendments issued by the Securities and Exchange Commission (the “SEC”) last month include:

  • a requirement that broker-dealer audits be conducted in accordance with standards of the Public Company Accounting Oversight Board (the “PCAOB”) “in light of explicit oversight authority provided to the PCAOB by the Dodd-Frank Wall Street Reform and Consumer Protection Act  to oversee these audits;”
  • a requirement that  a broker-dealer that clears transactions or carries customer accounts agree to allow representatives of the Commission or the broker-dealer’s designated examining authority (“DEA”) to review the documentation associated with certain reports of the broker-dealer’s independent public accountant, and to allow the accountant to  discuss the findings relating to the reports with those representatives when requested in connection with a regulatory examination of the broker-dealer;  and
  • a requirement that a broker-dealer file a new form with its DEA that elicits information about the broker-dealer’s practices with respect to the custody of securities and funds of customers and non-customers.

Disciplinary action serves as reminder of due diligence requirement in Reg. D offerings

A recent disciplinary action reaffirmed FINRA member firms’ obligations to conduct a reasonable investigation of the issuer and the securities it recommends in offerings made under the SEC’s Regulation D, commonly known as private placements. Regulation D provides exemptions from the registration requirements of Section 5 under the Securities & Exchange Act, but it does not exempt these transactions from the antifraud provisions of the federal securities laws. A broker-dealer thus has a duty—enforceable under federal securities laws and FINRA rules—to conduct a reasonable investigation of the securities it recommends. Moreover, any broker-dealer that recommends securities offered under Regulation D must meet the suitability requirements under NASD Rule 2310, and comply with the advertising and supervisory rules of FINRA and the SEC.

A broker-dealer’s reasonable investigation must be tailored to each Regulation D offering, as its scope will depend on factors such as the sophistication of the investors, the broker-dealer’s affiliation with the issuer, and other facts and circumstances of the offering. The investigation, at a minimum, should include background checks of the issuer and its management, the business prospects of the issuer, the assets held or to be acquired by the issuer, the claims being made, and the intended use of the proceeds.

A firm that engages in Regulation D offerings also must have supervisory procedures under NASD Rule 3010 that are designed to ensure that its personnel and representatives conduct an inquiry that is sufficient to comply with the legal and regulatory requirements; that they perform the suitability analysis required by NASD Rule 2310; that they qualify the investors’ eligibility to purchase the securities; and that they abide by the antifraud provisions of the federal securities laws and FINRA rules regarding the preparation and distribution of offering documents or sales literature. And a broker-dealer has a further duty to adequately investigate any information located during the investigation that may be considered a “red flag.”

August 7th, 2013|Employment Decisions, Fraud|
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