SEC Proposes Major Revisions to Rule 15a-6

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What This Means

The Securities and Exchange Commission (SEC) recently proposed substantial amendments to Rule 15a-6 under the Securities Exchange Act of 1934 (Exchange Act), which provides conditional exemptions from broker-dealer registration for foreign entities involved in certain activities involving certain U.S. investors. The proposed amendments to Rule 15a-6 would expand the scope of certain of those exemptions, and would ease or eliminate some of existing restrictions on interactions between foreign broker-dealers and U.S. customers. Comments on the proposal are due to the SEC 60 days after the proposal is published in the Federal Register, which should be during this week (June 30). >>> continued

FINRA Issues Proposals on Rulebook Consolidation

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What This Means

FINRA has issued four proposals to consolidate existing NASD and NYSE rules into a single rulebook. Comments on the proposals are due to FINRA by June 13, 2008. The proposals are preliminary—they still must be filed with and adopted by the SEC before they can take effect. However, these proposals represent the first formal steps toward creating a single rulebook for broker-dealers that are FINRA members, which was a main objective of last year’s consolidation of member regulatory functions into a single SRO. FINRA indicated that the creation of this single rulebook will be accomplished in phases, with substantial completion during the next year.

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SEC Fires Another Warning Shot over Insider Trading Policies and Procedures

PDF version   For well over a year, SEC enforcement and examination officials have emphasized the staff’s focus on insider trading, particularly by securities industry professionals. This focus has proceeded largely on two fronts. The first involves high-profile cases in which industry employees have been charged with engaging in illegal insider trading. The second takes a more preventative approach to insider trading enforcement, and involves cases against broker-dealers and investment advisers that, even in the absence of actual insider trading, have failed to adopt or enforce insider trading policies and procedures. Although this second line of attack has received less attention in the press, a recent SEC enforcement action against Chanin Capital LLC and its chief compliance officer demonstrates that legal and compliance staff should be paying close attention to the effectiveness of their policies and procedures that are designed to prevent insider trading.

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SEC Proposes “Naked” Short Selling Anti-Fraud Rule

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On March 17, the U.S. Securities and Exchange Commission (SEC) issued its formal proposal to adopt an anti-fraud rule under the Securities Exchange Act of 1934 (Exchange Act). The rule would address failures to deliver securities that have been associated with “naked” short selling. The SEC stated that the proposed rule is intended to highlight the liability of persons that deceive certain specified persons about their intention or ability to deliver securities in time for settlement, including persons that deceive their broker-dealer about their locate source or ownership of shares, and that fail to deliver securities by settlement date. Comments will be due to the SEC 60 days after the proposal is published in the Federal Register, which should occur by March 25.

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SEC Staff Extends Relief Allowing Broker-Dealers to Rely on Investment Advisers to Perform Customer Identification and Verification

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On January 10, the SEC’s Division of Trading and Markets issued a letter to the Securities Industry and Financial Markets Association (SIFMA) that extends no-action relief allowing broker-dealers to fully rely on SEC registered investment advisers to perform some or all of their Customer Identification Program (CIP) obligations. The SEC extended the no-action relief for two years, or until such time as investment advisers become subject to an anti-money laundering rule.

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FINRA Amends NYSE Rule 342.13: Eliminates Cut-Off Date for Recognition of Series 24

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Today, FINRA issued Regulatory Notice 08-02, which informs member firms that FINRA has amended NYSE Rule 342.13 to eliminate the requirement that the General Securities Principal Examination (Series 24) be passed after July 1, 2001 in order to be recognized as an acceptable alternative to the General Securities Sales Supervisor Qualification Examination (Series 9/10). The amendment became effective on November 28, 2007.

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FINRA Issues Guidance Regarding Review and Supervision of Electronic Communications

PDF version   Last week, the Financial Industry Regulatory Authority (FINRA) issued guidance regarding the review and supervision of electronic communications. The guidance sets forth principles for member firms to consider when developing supervisory systems and procedures for electronic communications that are reasonably designed to achieve compliance with applicable federal securities laws and self-regulatory organization (SRO) rules. FINRA’s guidance is in substantially the same form set forth in a proposal issued in June 2007.

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What Turns Legal Conduct into Market Manipulation? A District Court Answers That Bad Intent Is Enough, But Only Where It Is the Sole Intent

PDF version   A decision by the Southern District of New York in SEC v. Masri, 04 Civ. 1584 (S.D.N.Y. Nov. 21, 2007) (RJH), granting summary judgment and dismissing claims against a broker, seeks to clarify the intent necessary to prove a violation of Section 10(b) of the Securities Exchange Act for market manipulation when the alleged manipulative conduct is otherwise legal. An investor and a broker, who allegedly sought to raise prices in a thinly traded stock by placing a large buy order near market close (“marking the close”), argued that a market transaction unaccompanied by other deceptive or fraudulent conduct cannot, as a matter of law, support a finding of market manipulation. Although the court disagreed, holding that the SEC need not prove other deceptive or fraudulent conduct, it required the SEC to prove that but for the manipulative intent, a defendant would not have conducted the transaction. At the same time, the court held that there was no set of circumstances in which a jury could conclude that the broker had manipulative intent or knowledge of the investor’s manipulative intent. Thus, it granted the broker’s motion for summary judgment. In so doing, the court sought to strike a balance where brokers would not be “at risk of liability for market manipulation every time they executed a sizeable order in thinly traded stock at the end of the day.”

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MSRB Issues Guidance Regarding Revisions to Its Supervisory Rules

PDF version   On November 8, 2007, the Municipal Securities Rulemaking Board (MSRB) issued Notice 2007-32 with guidance pertaining to amendments to its supervision rule, Rule G-27. The Notice stated that the amendments, which become effective on February 29, 2008, are intended to ensure a coordinated regulatory approach with, and facilitate inspection and enforcement in the area by, the Financial Industry Regulatory Authority (FINRA). The amendments to Rule G-27 incorporate most of the requirements of NASD Rules 3010 and 3012, which are now rules of FINRA.

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Speaking Engagement - The 2007 NSCP National Membership Meeting

Morgan Lewis partners John Ayanian, Steve Stone, Ben Indek, and Anne Flannery will will participate in the 2007 NSCP National Membership Meeting in Washington, D.C.

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SEC Review of Executive Compensation Disclosures

PDF version   In 2006, the Securities and Exchange Commission (SEC) adopted broad reforms to the disclosure rules regarding executive compensation. The new rules resulted in significant changes in the manner in which public companies prepared and presented executive compensation disclosure information in their proxies and 10-Ks.

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Speaking Engagement - SIFMA Research Management Conference

Morgan Lewis Partner John Ayanian will speak on "Research Regulation - Interpretations, New Rules, and Future Plans."

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SEC Adopts Interim Rule to Provide Limited Principal Trading Relief and Proposes Interpretive Rule Clarifying the Application of the Advisers Act to Broker-Dealers

PDF version At an open meeting yesterday, the Securities and Exchange Commission (SEC) addressed questions raised by the securities industry in the aftermath of Financial Planning Association v. SEC.

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The D.C. Circuit’s Remand of the SEC’s Order Sustaining an NASD Disciplinary Proceeding Puts Focus on the Standard for SEC Review of Sanctions Imposed by SROs

PDF version A recent opinion by the D.C. Circuit in PAZ Securities, Inc. v. SEC, No. 05-1467 (D.C. Cir. July 20, 2007), has dealt yet another blow in what had been, until a mere 18 months ago, the NASD’s and other SROs’ virtually routine practice of barring individuals and expelling members for refusing to provide information in the course of examinations and investigations. PAZ involved an NASD member firm’s appeal of a Securities and Exchange Commission (the Commission) order affirming the firm’s expulsion and its president’s bar from the industry for failing to comply with various examination requests. In overturning the Commission’s order, the D.C. Circuit held that the Commission should have considered certain mitigating factors and identified the remedial—as opposed to punitive—purpose served by the NASD’s sanctions.

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SEC Exam Staff Issues Its First ComplianceAlert

PDF version   On June 14, 2007, the SEC’s Office of Compliance, Inspections, and Examinations (OCIE) issued a ComplianceAlert, the first in what it has indicated will be a series of periodic updates that will summarize select areas that SEC examiners have found during examinations of brokerdealers, investment advisers, and investment companies. Legal and compliance departments at such firms can use the ComplianceAlert to help identify those deficiencies that the SEC staff has noted in the past and that may need to be addressed. >>> continued