Monthly Archives: May 2013

Will Spotlight Be Placed on Dark Pools?

The Financial Industry Regulatory Authority (FINRA) is considering new rules that would require additional reporting requirements for dark pool trades made by broker-dealers.  This announcement was made recently by Richard G. Ketchum, chief executive officer of FINRA, largely in response to Credit Suise Group AG’s decision to stop sharing data on the volume of its trades.  Credit Suisse currently operates the largest U.S. dark pool.

“Dark pools” is the name given to networks that allow traders to buy or sell large orders off of an exchange, and without the prices being revealed publicly, until after trades are completed.   Dark pools allow traders to avoid moving stock prices by keeping their intentions quiet.  However since trades done inside and between other dark pools are not immediately disclosed, and the identities of the parties involved are not revealed, there is concern that this practice allows traders to manipulate stock prices and causes inefficiency of pricing in traditional stock exchanges. 

Under current reporting rules, FINRA is not able to identify trades that happen in a particular dark pool with any certainty.  This is due to the fact that brokers operating dark pools use a single identifier for all activity.  FINRA had allowed such reporting to be made voluntarily, but the lack of reporting activity is forcing FINRA to consider mandatory rules.  If passed, the proposed rules would implement requirements that brokers distinguish trades that occur in dark pools from ones that don’t by assigning separate identifiers to indicate trades filled in dark pools.  Doing so would allow FINRA to publish figures for how much trading occurs in every dark pool.  This type of rule would need approval by the Securities and Exchange Commission (SEC) before taking effect, and as such, FINRA is expected to submit their proposal to the SEC this summer.

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

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FINRA Levies Heavy Fines Against LPL for Failure to Maintain and Supervise Emails

This week, LPL Financial LLC (“LPL”) was fined $7.5 million by The Financial Industry Regulatory Authority (“FINRA”) who cited LPL for thirty-five (35) separate email system failures.  FINRA asserted that these actions were a violation of the record keeping provisions of the federal securities laws and FINRA rules, as well as supervisory requirements under FINRA rules.  According to FINRA, these failures prevented LPL from accessing hundreds of millions of emails and reviewing tens of millions of other emails.  Additionally, LPL made material misstatements to FINRA during its investigation of the firm’s email failures (LPL was also ordered to establish a $1.5 million fund to compensate brokerage customer claimants potentially affected by its failure to produce email).

According to FINRA, the rapid growth of LPL and its failure to devote sufficient resources to update its email systems caused significant failures to those systems preventing LPL from capturing and retaining emails.  As a result, these emails were not subject to supervisory review and could not be produced upon request by FINRA investigators.  While LPL neither admitted nor denied the charges, Brad Bennett, the Executive Vice President and Chief of Enforcement for LPL, stated “as LPL grew, it did not expand its compliance and technology infrastructure; and as a result, LPL failed in its responsibility to provide complete responses to regulatory and other requests for emails. This case sends a strong message to firms to make sure your business does not outgrow your compliance systems.”

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

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Understanding Who Speaks for Your Company

It’s a phrase often heard in business, “know who speaks for your company.”  On its face, it sounds like a simple question, whose answer is easily ascertained.  However, all too often, a business finds itself committed to an unwanted agreement; or liable for upholding promises made by one of its agents whom the firm did not realize had the power to bind the company.  The law of agency describes the relationship between two parties, where one is a principal and the other is an agent who represents the principal in transactions with a third party.  Understanding when an agent acts within the scope of authority granted by the principal when dealing with third parties, and therefore can bind the company, requires further discussion.  The following is a short summation of the different ways an agent may obtain authority:

  1. Actual Authority – Often broke into two subsets – “express actual authority” and “implied actual authority.”  Express actual authority occurs when the principal has expressly conferred authority on the agent.  Implied actual authority arises when an agent has authority by virtue of that authority being necessary to carry out the express authority given by the principal.  
  2. Apparent Authority – This authority arises when the words or conduct of the agent would lead a reasonable person to believe that the agent was authorized to act, even if the principal had never discussed it with the agent.  Note that what is important here is the reasonable belief of the third party. For example, a business card or firm letterhead that confers an officer title on the agent may be sufficient grounds for a person to form a reasonable belief of the agent’s authority.  As such, it’s important for principals to know how their agents are being held out to the public, who their agents are speaking with, and the topics of those discussions.
  3. Inherent Authority – Authority to take an action that a reasonable person in the principal’s position should have foreseen the agent would be likely to take.  This is closely related to apparent authority in that no actual authority had ever been given by the principal to the agent.
  4. Ratification – The affirmance by a principal of a prior act by the agent which did not bind the firm initially, but which was done or professedly done on the firm’s account.  Ratification requires acceptance of the results of the act by the principal with intent to ratify, and with full knowledge of all the material circumstances surrounding any transaction or agreement.

As seen, it is not always cut-and-dry as to who “speaks for the company.”  As a principal, or an owner of a company, communication is key, and understanding the roles and activities of the firm’s agents can help define roles and authority of those in the firm.  For further information about this, or other related topics, please contact us at (619) 298-2880, or at info@jackolg.com.

 

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Extra, Extra, Read All About It: Guidance on Registration Requirement for Publishers of Newsletters

Oftentimes the question arises as to whether or not the publisher of an investment newsletter is required to register as an investment adviser.  Section 202(a)(11) of the Investment Advisers Act of 1940 (the “Act”) broadly defines an investment adviser as “any person who, for compensation engages in the business of advising others, either directly or through publications or writings, as to the value of securities or as to the advisability of investing in, purchasing, or selling securities, or who, for compensation and as part of a regular business, issues or promulgates analyses or reports concerning securities.”  On first reading this definition, it may appear as though a publisher would fall within this general definition.  However, specifically excluded from the definition is “the publisher of any bona fide newspaper, news magazine or business or financial publication of general and regular circulation.”  This exemption is often referred to as the “publisher’s exemption,” and its purpose is to ensure First Amendment protection of financial and investment publications.  

In Lowe v. Securities and Exchange Commission, the US Supreme Court allowed the petitioners to publish investment advice and commentary in newsletters without registering as investment advisers so long as:

  1. The publication only offers impersonal advice, not tailored to individual needs of a specific client or group;
  2. The publication is “bona fide,” meaning it is a “genuine” publication in that it contains disinterested commentary and analysis as opposed to promotional materials disseminated by a “tout”; and
  3. The publication is published regularly, and not just in response to events affecting the securities industry.

While the Lowe case establishes the basis of the “publisher’s exemption,” other cases have further limited the scope of the exemption.  For instance, In the Matter of Weiss Research Inc., the SEC argued that Weiss Research was precluded from relying on the exclusion because they effectively had investment discretion on behalf of its auto-trading subscribers.  Furthermore, in SEC v Yun Soo Oh Park, the SEC alleged that a website operator was an adviser due to (1) his “touting” of stock in which he had an interest, (2) the defendant’s use of individualized emails, and (3) the website being geared towards a particular category of individuals rather than the general public.

As seen, while the publisher’s exemption may allow certain publishers from having to register as advisers, each case is fact specific and requires scrutiny.  For further information about this, or other related topics, please contact us at (619) 298-2880, or at info@jackolg.com.

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