SEC Grants Industrywide Relief from Confirmation Disclosure and Delivery Requirements

PDF version   On May 24, 2007, for the second time in less than four weeks, the SEC granted an industrywide exemption relief from the confirmation delivery requirements of Rule 10b-10 under the Securities Exchange Act of 1934 to all dually registered broker-dealers and investment advisers (Dual Registrants) offering wrap-fee programs in which the Dual Registrant acts as fiduciary in managing its clients’ accounts on a discretionary basis (Programs). [1] The exemption permits Dual Registrants to omit from periodic statements sent to Program clients in lieu of trade-by-trade confirmations information that previously could be omitted from periodic statements sent to Program clients where the investment adviser is a separate legal entity from the broker-dealer sponsor of the wrap-fee-program (BD Sponsor). In addition, the SEC staff granted industrywide no-action relief, permitting BD Sponsors to obtain the consent of Program clients to receive periodic statements in lieu of trade-by-trade confirmations without obtaining a separate signature, provided specified conditions are met.

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SEC Files with D.C. Circuit to Seek Four-Month Stay of Implementation of Fee-Based Brokerage Ruling

PDF version   On May 14, 2007, the SEC announced that it filed a motion with the D.C. Circuit to stay, for 120 days, its ruling vacating Rule 202(a)(11)-1. Absent the stay, the court’s mandate would have issued in the next seven days and, in any event, by May 21, 2007. Even if the court does not grant the SEC’s request, the order will remain stayed until the court acts on the SEC’s motion. >>> continued

NASD Announces Move to Electronic Processing of New Membership Applications for Broker-Dealers

PDF version   Recently, the NASD issued Notice to Members (NTM) 07-20 regarding electronic filing of new membership applications. Specifically, NTM 07-20 states that, effective May 31, 2007, recently approved amendments to the NASD Rules 1012 and 1013 will require new member applicants to electronically complete and submit new membership applications by using online Form NMA and the Electronic Filing System (EFS). NTM 07-20 further indicates that new member applicants may begin voluntarily using online Form NMA and EFS for electronic completion and submission of new membership applications on May 7, 2007. >>> continued

SEC Grants Industrywide Exemption from Confirmation Delivery Requirements for Internally Managed, Discrectionary Programs

PDF version   On April 30, 2007, the SEC granted an industrywide exemption from the confirmation delivery requirements of Rule 10b-10 under the Securities Exchange Act of 1934 to all dually registered broker-dealers and investment advisers (Dual Registrants) offering programs in which the Dual Registrant acts as a fiduciary in managing its clients’ accounts on a discretionary basis (Programs). [1] The exemption followed a 2005 clarification to the scope of industrywide relief granted to the Money Management Institute and the Securities Industry Association (now the Securities Industry and Financial Markets Association) in 1999. [2]

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Implications of the D.C. Circuit’s Decision Vacating Rule 202(a)(11)-1

As widely reported, on March 30, 2007, a divided panel of the U.S. Court of Appeals for the D.C. Circuit vacated Rule 202(a)(11)-1 under the Investment Advisers Act of 1940 (Advisers Act). The Financial Planning Association (FPA) had challenged the rule, arguing that the SEC had overstepped its authority in exempting brokerdealers from the definition of “investment adviser” when offering fee-based brokerage accounts. The court vacated the rule in its entirety, including provisions clarifying when a broker-dealer would and would not be deemed to be an investment adviser, even though these other provisions of the rule were not challenged by the FPA. [1]

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The New York Court of Appeals Rules That an Employer’s Statements on an

On March 29, 2007, the New York Court of Appeals held in Rosenberg v. MetLife, Inc., USCOA, 2 No. 23 (Mar. 29, 2007), that an employer’s statements on an NASD employee termination notice (Form U-5) are protected by an absolute privilege in defamation lawsuits, resolving a conflict among the New York Appellate Divisions.

NASD member firms are required by the rules of the NASD to file an accurate Form U-5 when a registered person’s association with the broker-dealer is terminated. Despite this complete candor requirement, the courts of some states leave former employers vulnerable to suits for defamation based on information provided on the Form U5 because they only protect such statements with a qualified privilege. Under the laws of most states, including New York, statements subject to a qualified privilege are still actionable if a plaintiff can demonstrate that the statements were made with malice. “In contrast, an absolute privilege immunizes a communicant from liability.” This absolute privilege, however, is “generally reserved for communications made by individuals participating in a public function, such as executive, legislative, judicial, or quasi-judicial proceedings.” In extending absolute immunity to Form U5 reporting, the Rosenberg decision recognizes the public function of the Form U5 reporting requirement and the need to encourage complete candor in such reporting.

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Interagency Proposal for Model Privacy Form Under the Gramm-Leach-Bliley Act

On March 20, 2007, eight federal regulators (the Board of Governors of the Federal Reserve System, the Commodity Futures Trading Commission, the Federal Deposit Insurance Corporation, the Federal Trade Commission, the National Credit Union Administration, the Office of the Comptroller, the Office of Thrift Supervision, and the Securities and Exchange Commission (collectively, the Agencies) requested comment on a model privacy form (the Model Form) that financial institutions, including registere  investment advisers, registered investment companies and brokerdealers, may use for their privacy notices to consumers, as required by the Gramm-Leach-Bliley Act (the GLB Act).

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SEC Issues Proposal to Amend Financial Responsibility Rules for Broker-Dealers

On March 9, 2007, the SEC issued a proposal to amend numerous aspects of its financial responsibility rules for broker-dealers, including the following rules under the Securities Exchange Act of 1934: Rule 15c3-1 (the net capital rule), Rule 15c3-3 (the customer protection rule), Rules 17a-3 and 17a-4 (the books and records rules), and Rule 17a-11 (which requires brokerdealers to notify regulators regarding certain aspects of their capital compliance and recordkeeping). A number of the proposals are highly technical and, if adopted, could create operational issues for many broker-dealers. Comments will be due to the SEC 60 days after the proposal is published in the Federal Register, which will likely be sometime during the week of March 12, 2007.

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NASD Issues Guidance Regarding Portability of Investments

NASD recently issued Notice to Members (NTM) 07-06, which provides guidance to member firms regarding recommendations by newly associated registered representatives to replace existing mutual funds and similar holdings with other investments. In particular, NASD addressed issues relating to “nonportable” assets that customers may not be able to transfer from one member firm to another. NTM 07-06 provides that member firms should have procedures in place that are specifically designed to review and evaluate investment recommendations made by newly associated individuals to existing customers relating to mutual funds and variable products.

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NASD Issues Notice to Members Regarding Research Analyst Rules

On January 24, 2007, NASD issued Notice to Members (NTM) 07-04 regarding the amendments to NASD Rule 2711 that were filed with the SEC for immediate effectiveness on September 27, 2006. In large part, the amendments codify existing interpretive guidance that had been set forth in joint interpretive memoranda issued by NASD and NYSE. However, the amendments also included requirements regarding third-party research reports, which had not been included in the joint memoranda. NTM 07-04 provides guidance on the requirements regarding supervisory review and approval of third-party research reports, and it contains two additional interpretations of Rule 2711 relating to the prohibitions on research analysts from participating in the solicitation of investment banking business and road show presentations.

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White Paper - 2006 In Review: SEC, NASD, and NYSE Regulation

Selected Enforcement Cases and Developments Regarding Broker-Dealers

This Morgan Lewis White Paper focuses on selected U.S. Securities and Exchange Commission (SEC), NASD, and NYSE Regulation cases and developments in 2006 regarding broker-dealers. The number of disciplinary actions against broker-dealers varied by regulator in 2006. The SEC brought fewer cases this year than it did in 2005; NYSE Regulation initiated a slightly higher number of actions; and the NASD has not yet released statistics for 2006, but indications are that the number of cases it brought during the year may have declined compared to the number of cases brought in 2005.

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SEC Proposes New Regulation R to Implement GLBA

On December 13, 2006, the SEC voted to propose Regulation R, which would implement the Gramm-Leach-Bliley Act (GLBA) provisions governing bank brokerage activities. Regulation R results from the Financial Services Regulatory Relief Act of 2006 (Regulatory Relief Act), which directed the SEC and the board of governors of the Federal Reserve System (FRB) to propose rules to implement the GLBA provisions. The FRB is scheduled to vote on the proposal on December 18, 2006, with a 90-day comment period to follow publication.

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