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FINRA invites comment on rules that will govern limited corporate financing brokers

FINRA (the Financial Industry Regulatory Authority) is soliciting public comment on a proposed rule set (LCFB Rule 14-09) for firms that meet the definition of “limited corporate financing broker” (LCFB). An LCFB is a firm that engages solely in any one or more of the following activities:

  • Advising an issuer, including a private fund, concerning its securities offering or other capital raising activities
  • Advising a company regarding its purchase or sale of a business or assets or regarding its corporate restructuring, including a going-private transaction, divestiture or merger;
  • Advising a company regarding its selection of an investment banker
  • Assisting in the preparation of offering materials on behalf of an issuer
  • Providing fairness opinions
  • Qualifying, identifying or soliciting potential institutional investors

The rationale behind LCFB Rule 14-09 is that while LCFB firms may receive transaction-based compensation as part of their services, they do not engage in many of the types of activities typically associated with traditional broker-dealers. An LCFB firm would be prohibited from maintaining customer accounts, handling customer funds or securities, exercising investment discretion on behalf of a customer, or engaging in proprietary trading of securities or market-making activities.…

The Top 10 Most Intriguing Federal Securities Litigation Stories in 2011 (Part 1 of 2)

Today and tomorrow, the Federal Securities Litigation Blog will take a break from discussing the most recent events and, with a larger-than-usual entry, examine the Top 10 securities litigation stories that were the most intriguing in 2011. Undoubtedly, others will be preparing similar lists and this is not intended to be a definitive or complete version. Instead, these are the stories that piqued my interest. Half of the list will be discussed today and the other half tomorrow.

Here’s a quick headline look at the bottom half of the Top 10:

10. The D.C. Circuit Vacates SEC Exchange Rule 14a-11 Regarding Shareholders’ Rights to Include Board Nominee on Proxy Materials.

9. The Jenkins Litigation: Settlement Negotiations in Clawback Case Collapse, But Are Ultimately Resolved.

8. The SEC’s Director of the Division of Enforcement Now Has Authority To Issue Witness Immunity Orders.

7. Where is That File? The SEC Addresses Issues Related to the Destruction of Documents and Discovery Issues Relating to their Notes.

6. The FCPA Sting Case: One Hung Jury, One On-Going Trial, A Conspiracy Count Dismissed and More to Come.

These five stories are discussed in greater detail after the jump.…

SEC Finds That FINRA Altered Documents and Orders It To Undertake Remedial Measures

On Thursday, October 27, 2011, the SEC entered a Cease-and-Desist Order against FINRA, which, according to the SEC’s Press Release, included a finding that "certain documents requested by the SEC’s Chicago Regional Office during an inspection were altered just hours before FINRA’s Kansas City District Office provided them." FINRA consented to hire an independent consultant and undertake other remedial measures.…

Second Circuit Rules That FINRA Does Not Have The Authority To Bring Court Actions To Collect Disciplinary Fines

On Wednesday, October 5, the U.S. Court of Appeals for the Second Circuit ruled that FINRA lacks the authority to bring court actions to collect disciplinary fines it has imposed. Fiero v. FINRA, No. 09-cv-1556, slip op. (2d Cir. Oct. 5, 2011). The decision is the latest development in a case which can be traced back to 1998. Significantly, the ruling appears to extend to all "self-regulatory organizations" ("SROs"). However, the Court hints that, under Section 19(b) of the Exchange Act, an SRO can potentially address this issue by filing a proposed rule change with the SEC, who must publish notice of the proposed rule change and give interested individuals an opportunity to comment prior to either approving or disapproving the rule (something which FINRA failed to do in this situation).…

FINRA Rule 6490 Imposes Fees on Issuers of Over-the-Counter Securities

Enforcement of a relatively new rule of the Financial Industry Regulatory Authority (FINRA) has resulted in significant fees in 2011 for small issuers with securities traded over-the-counter. FINRA Rule 6490 requires issuers to provide notice to FINRA of certain company-related actions, such as dividends and stock splits, or face a $5,000 fee, which some might characterize as a fine.

FINRA’s ability to charge issuers is new as of 2010, and is a significant departure from FINRA’s historically ministerial role with respect to issuers. FINRA primarily oversees broker-dealer member firms, but it also performs certain functions for issuers of over-the-counter securities. For example, it reviews and processes requests to announce or publish certain actions by issuers of OTC securities and maintains the symbols database for OTC securities.

Many small issuers do not realize they may be subject to the jurisdiction of FINRA or SEC Rule 10b-17, which requires notification of certain corporate actions by issuers with securities that are “publicly-traded.” Presumably, FINRA views any securities that are quoted on the OTC markets as “publicly-traded” under Rule 10b-17. Unfortunately, many non-exchange listed issuers with no SEC reporting requirements and a small volume of shares traded over-the-counter have never heard of FINRA. It is understandable considering such corporations do not take any steps to have their shares listed or traded; rather, the shares are listed by market makers that apply to quote the issuer’s securities.

FINRA Rule 6490 requires advance notice to FINRA of the following corporate actions:

  • dividends or other distributions

Revised Discovery Guide and Document Production Lists for FINRA Customer Arbitration Proceedings Take Effect on May 16, 2011

On Monday, May 16, 2011, the revisions to FINRA’s Discovery Guide (“Guide”) and Document Production Lists (“Production Lists”) for customer arbitration proceedings take effect. These revisions will apply to all customer cases filed on or after May 16. FINRA first adopted the Guide in 1999 for use in customer arbitration proceedings and last revised the Guide in 2007. The Guide supplements the discovery rules contained in the FINRA Code of Arbitration Procedure for Customer Disputes. (See Rules 12505-12511.)

FINRA’s revisions to the Guide expand the guidance FINRA gives to parties and arbitrators on the discovery process. This expanded guidance is particularly important because of the growing prevalence and raising costs of electronic discovery (“e-discovery”). The revisions to the Guide also replace the current fourteen Production Lists with just two Production Lists of presumptively discoverable documents. One Production List will specify which documents firms/associated persons should produce. The other Production List will specify which documents customers should produce.

The revised Discovery Guide makes clear that it applies to e-discovery. The revised Guide  expressly states that “electronic files” are “documents” within the meaning of the Guide. The revised Guide also empowers the arbitrators to decide any dispute regarding the form in which a party produces a document. The form of production continues to be a hot topic in-e-discovery. Parties can get into numerous disputes over the form of production, including whether “native” electronic files should be produced and whether metadata should be included with the production.

Importantly, the revised Guide provides that a party may object to producing documents on a Production …

FINRA Issues Regulatory Notice Reminding Firms of FCPA Obligations


On Friday, March 18, 2011, FINRA issued Regulatory Notice 11-12 entitled "FINRA Reminds Firms of Their Obligations Under the Foreign Corrupt Practices Act" (available here). The Notice, which provides a brief review of the FCPA, discusses the application of the Act’s prohibitions to member firms.

As stated in the Notice, the FCPA not only makes it "unlawful to bribe foreign officials to obtain or retain business in a foreign country," but "[t]he accounting provisions generally require each company considered to be an ‘issuer’ under the FCPA to make and keep books and records that accurately and fairly reflect the company’s transactions and to devise and maintain an adequate system of internal accounting controls."

The Notice advises firms "to review their business practices to ensure they are complying with all of their obligations under the FCPA." The Notice further warns that a "member firm’s failure to comply with its FCPA obligations will be considered conduct inconsistent with high standards of commercial honor and just and equitable principles of trade in violation of FINRA Rule 2010 (Standards of Commercial Honor and Principles of Trade)."

FINRA’s Notice is just the latest statement reflecting the increased focus on FCPA enforcement. In remarks made in November 2010 (available here), Assistant Attorney General Lanny A. Breuer stated that firms had a "right to be more concerned," because "we are in a new era of FCPA enforcement; and we are here to stay." Last week, Mark Mendelsohn, the former Deputy Chief of …

FINRA Fairness Opinion Rules

Brokerage firms that issue fairness opinions regarding corporate transactions have new disclosure obligations that will likely require changes to form documents used to draft the opinions and the internal procedures that govern the process. The Financial Industry Regulatory Authority (“FINRA”) has established a new Rule 2290 that requires disclosure of potential conflicts of interest between firms that render fairness opinions and the parties to the corporate transactions that are the subject of the fairness opinions. The rule is designed to alert shareholders that a fairness opinion regarding a potential transaction is not necessarily rendered by a completely independent third party. FINRA is concerned that shareholders may not be aware that the firm issuing a fairness opinion is often an advisor to a party to the transaction whose compensation may be contingent upon the success of the deal.

The new rule addresses this concern by requiring specific disclosures if a member firm issuing a fairness opinion knows or has reason to know that the fairness opinion will be provided or described to the company’s public shareholders. Even if an opinion is prepared only for use by the board of directors of a client, shareholders of the client will now be made aware of potential conflicts of interest – including contingent compensation arrangements – because fairness opinions are usually included in materials provided to public shareholders.

FINRA Rule 2290 Disclosure Requirements

The following new disclosures are required by Rule 2290:

• whether the member firm has acted as a financial advisor to …