Monthly Archives: February 2013

Arbitration Agreements by Investment Advisers Receiving Criticism – At Least in One State

This week William Galvin, Massachusetts Secretary of the Commonwealth, sent a letter to the Securities and Exchange Commission (“SEC”) urging them to disallow the use of arbitration agreements by registered investment advisers.  Such agreements are common in contracts between investment advisers and their clients, and typically specify such items as the process of arbitration, what governing body will administer the arbitration proceedings, and the jurisdiction in which arguments will be heard. 

According to Mr. Galvin’s letter, the use of such agreements is “inconsistent with the fiduciary duty that investment advisers owe to their clients,” and the SEC should “commence a study of the issues raised by these provisions.”  Whether or not the SEC will take action remains to be seen.  In an e-mail, SEC spokesman John Nester wrote: “We look forward to receiving the letter and hearing [Mr. Galvin’s] views.”  JLG will continue to monitor any developments made in this area.

For further information on this, or other related topics, please contact us at info@jackolg.com or (619)298-2880.

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Thanks to New FINRA Program, Mediation Resolution is Just a Phone Call Away

Recently, the Financial Industry Regulatory Authority (“FINRA”) launched a new pilot program offering parties in small claims cases free or low-cost telephone mediation.  This program is voluntary and open to all cases involving claims of $50,000 or less. 

According to FINRA, mediators would serve on a pro bono basis on cases involving claims of $25,000 or less in damages.  There would also be a “reduced-fee” mediation cost ($50 per hour) on cases with damage claims between $25,000.01 and $50,000.  Furthermore, FINRA says it will not charge any administrative fee for these cases.

FINRA has long provided a forum for arbitration resolution for industry disputes involving broker-dealers.  Additionally, FINRA has recently opened its arbitration forum to registered investment advisers as well (more information on this at JLG’s blog posting dated October 26, 2012).  With this move, FINRA believes that this lower-cost alternative will benefit dispute resolution forum users by eliminating the travel and preparation costs typically associated with in-person mediation, provide greater convenience and flexibility, and is a practical alternative for all parties involved.  Parties interested in participating in the pilot can notify FINRA by visiting www.finra.org/arbitrationmediation/smallclaims.

For further information on this, or other related topics, please contact us at info@jackolg.com or (619)298-2880.

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Recent SEC Action Exemplifies Alternative Method of Insider Trading

On January 25, 2013 the Securities and Exchange Commission (“SEC”) charged a financial adviser in Florida with illegally “tipping” his friend about inside information he acquired regarding the upcoming sale of a pharmaceutical company in exchange for $35,000 and a jet-ski dock.  The friend (along with another individual whom the friend informed of the sale) made $708,327 in illicit insider trading profits in just two days.  The SEC is alleging that the financial adviser learned this information from his supervisor, who in turn was informed by a client of the advisory firm who served on the pharmaceutical company’s board of directors.  The SEC is seeking disgorgement of all ill-gotten gains with prejudgment interest, a financial penalty, and a permanent injunction against the financial adviser.  Additionally, the U.S. Attorney’s Office for the District of New Jersey announced that it will seek criminal charges in a parallel action against the adviser. 

This recent action shows that an individual need not purchase securities directly upon receiving inside information in order to violate insider trading rules.  Under a theory commonly referred to as the “misappropriate theory,” it is not the insider himself trading on the information (the “tipper”), but rather, someone that he tips (the “tippee”).  Liability attaches if the tipper/insider breaches a duty by passing on the information, and the tippee knows, or has reason to know, that the tipper/insider would benefit personally from the tip (for more information on this and other insider trading rules please review JLG’s August 2012 Legal Risk Management Tip).  Here the adviser, or tippee, breached the fiduciary duty he owed to the advisory firm’s client by disclosing the inside information to his friend.  Conversely the friend, or tippee, knew that the adviser would benefit from the tip by receiving cash and a jet-ski dock.  Thus, assuming the allegations are true and can be proved, liability for insider trading under the misappropriate theory will attach in this instance.

For those in the financial industry, having effective insider trading policies within the organization is mandatory.  It is important to remember that training and education on these policies should extend to all employees in order to protect both the firm, and it’s clients.  For further information on this, or other related topics, please contact us at info@jackolg.com or (619) 298-2880.

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