Joint Proposed Rule Filing by FINRA and SEC Hoping for More Transparency

by Brian Heit

The Financial Industry Regulatory Authority (“FINRA”) has filed with the Securities Exchange Commission (“SEC”) proposed rule changes that are intended to facilitate greater consumer and industry access to disciplinary and other relevant information.

Under the current disciplinary complaints and disciplinary decisions rule, FINRA releases information to the public regarding disciplinary decisions. However, the disciplinary information available is limited by the publicity threshold under this rule. The proposed rule would remove the restrictions and allow FINRA to release a public copy of the information with respect to any disciplinary complaint or disciplinary decisions issued by FINRA.

FINRA believes the changes would provide valuable guidance and information to members, associated persons, regulators, and investors.  More specifically, FINRA explained the releasing of a public copy as opposed to “information” would “serve to deter and prevent future misconduct and … improve the overall business standard in the securities industry.”  The rule allows investors to consider firms’ and representatives’ disciplinary track record when deciding whether to engage in business with them. Also, firms may use the information as a resource to educate their associated persons with compliance matters and highlight potential violations.

Furthermore, FINRA asserts that this will better align its publication standards with the practices of the SEC and other regulators, which will help avoid confusion between those looking to regulators for information. Although this proposed rule change requires more transparency regarding disciplinary actions, FINRA believes the rule is fair to members because any complaint that is dismissed or withdrawn will be accompanied by the order.  In addition, in certain circumstances and at FINRA’s discretion, it may find the potential harm to a firm outweighs any investor protection benefit, and will choose to not release information.

Whether this proposed rule serves as a regulatory trend is yet to be determined. The possible expansion of FINRA’s regulatory scheme, coupled with the complexity of political and public considerations, may require changes in brokerage-firms business choices.

FINRA Issues Investor Alert Detailing “What an Interest Rate Hike Could Do to Your Bond Portfolio”

by Gabriela Piranha

FINRA warned investors that an increase in interest rates may adversely affect bond funds that hold long-term bonds. FINRA highlighted the importance of a bond’s duration risk – the risk associated with a bond price’s sensitivity to a one percent change in interest rates. In particular, “the higher a bond’s duration, the greater its sensitivity to interest rate changes.” However, FINRA warned that a low duration does not mean that a bond or bond fund is risk-free.

Gerri Walsh, FINRA’s Vice President of Investor Education, warned that “with interest rates hovering near all-time lows, investors should make sure they know their duration numbers. Whether investors own individual bonds or bond funds, they need to understand that outstanding bonds with a low interest rate and high duration may experience significant price drops if interest rates rise.”

Investors should look at a bond fund’s Fact Sheet under Bond Holding Statistics to find the duration of their bond fund. Additionally, to determine an individual bond’s duration investors may refer to their investment adviser, the bond’s issuer, or other materials, such as prospectuses, issued by the issuer.

FINRA provided the following example: “a bond fund with a 10-year duration will decrease in value by 10 percent if interest rates rise one percent” and vice versa. However, it is important to note that the aforementioned assumes an exact inverse correlation between bond price and interest rate; however, such an assumption cannot be made with more complex instruments.

Accordingly, based on economists’ prediction that interest rates are likely to eventually rise, FINRA encourages investors to be cognizant of the duration risk associated with their bonds and bond funds.

FINRA Bars Financial Advisor who lost over $40 million for his NFL Player-Clients

by Josh Brandsdorfer

Just a few weeks ago, FINRA took action against a Broward County financial advisor who persuaded current and former NFL players to make high-risk – and now worthless – investments in a failed Alabama casino. Jeffery Rubin, a financial advisor from Lighthouse Point, was found to have “taken advantage of the professional athletes who placed their trust in him,” according to FINRA’s executive vice president and chief of enforcement, Brad Bennett. Rubin’s actions resulted in FINRA barring him from the securities industry.

Rubin’s clients include many high profile athletes with South Florida ties, such as Fred Taylor, Terrell Owens, Santana Moss, and Samari Rolle. Rolle was one of the first athletes to complain about Rubin and later filed documents against Rubin with FINRA. “Many unsuitable and misrepresented investments and services were provided by” Rubin, according to Rolle. FINRA supported Rolle’s claim, further alleging that Rubin had made “unsuitable recommendations” to invest in “illiquid, high-risk securities issued in connection with the now-bankrupt casino in Alabama.”

Even worse, Rubin breached his fiduciary duty to his clients after he received a 4% ownership stake and $500,000 from the project promoter for the referral investments from the NFL players. Rubin recommended that the players invest in the Center Stage Alabama entertainment complex for more than three years, until the casino filed for bankruptcy while owing $68 million in 2011.

While current professional football players continue to turn to Rubin for investment advice, Jacob Zamansky, a New York securities fraud attorney said that the companies Rubin was working for at the time of the alleged investments can be held responsible as well for the huge losses incurred by the football players even though Rubin did not tell his former bosses about the casino investments. Zamansky acknowledges the need for accountability on behalf of both Rubin and his employer in instances such as this one because many of the players cannot go back to the NFL and earn back the money that they lost due to the short earning career of a professional athlete.

Players lose $40M, thanks to Broward adviser, investigators say – Sun Sentinel

Uniform Fiduciary Standard Becoming More Probable

by Svitlana Vodyanyk

Studies have shown that consumers are generally unable to distinguish between investment advisers, whose primary purpose is to provide advice about securities, and stockbrokers, whose advice is considered incidental to the sale of financial products. Most investors are unaware that stockbrokers and investment advisers are held to different standards.

Investment advisors are regulated by the Securities and Exchange Commission (“SEC”) under the Investment Advisers Act of 1940 as fiduciaries, and a fiduciary standard of care is applied to the advice given to their clients, whereas stockbrokers are regulated by the Financial Industry Regulatory Authority (“FINRA”) under the Securities Exchange Act of 1934. Unlike investment advisors, stockbrokers are not fiduciaries. Their recommendations must be suitable, but they are not held to the same standard of care. However, some states do impose a common law fiduciary standard on stockbrokers providing services to clients.

The SEC is concerned that few investors realize that the standard of care they receive depends on the type of investment professional they use, and that often investors do not know whether they are working with a stockbroker or investment advisor. Many broker-dealers refer to their stockbrokers by terms such as “financial planner” or “financial consultant,” suggesting their services include planning or consulting services that involve the provision of expert advice.

In response, the SEC is considering imposing the same fiduciary obligations on stockbrokers that investment advisors are required to follow. This would require that stockbrokers act in their client’s best interest and make recommendations that do the same.

On March 1, 2013, the SEC published a “request for data and other information, in particular quantitative data and economic analysis, relating to the benefits and costs that could result from various alternative approaches regarding the standards of conduct and other obligations of broker-dealers and investment advisors.” This request will help the SEC determine whether to harmonize the fiduciary obligations of stockbrokers and investment advisors when providing personalized investment advice about securities to customers.

Supporters of imposing a fiduciary standard on stockbrokers argue that the requirement would force stockbrokers to offer retail customers the lowest-cost alternative, to stop pushing proprietary products, to charge asset-based fees, and to monitor their client’s accounts.

While the SEC is particularly interested in receiving empirical and quantitative data, all interested parties are encouraged to submit comments, including qualitative and descriptive analysis of the benefits and costs of potential approaches, and guidance. Commenters should only submit information that they wish to make publicly available. The public comment period will remain open until early June 2013.

Full Text of the SEC Request

Student Loan Securities Selling Faster Than Students Can Pay

by Chris Ivory

Despite increasing default rates on student loans, student loan securities continue to be a hot buy for investors.

Student loan debt has increased tremendously over the past years and is showing no signs of slowing down. In the first quarter of 1999, $90 billion in student loan debt was outstanding. As of the second quarter of 2011, that balance was $550 billion – a 511% increase over a decade. This should come as no surprise given that the cost of a four year college degree has increased over 1000% since 1980.

Investor demand is driving the sales of student loan securities. In the last week of February 2013, SLM Corporation, the largest U.S. student lender, sold $1.1 billion of securities backed by student loans. This year through February, other dealers have sold $5.6 billion of student-loan-backed securities, more than triple the figure for the same period in 2012, accord to Asset-Backed Alert.

Investors are seemingly attracted to the potential returns of these risky investments as interest rates for most securities linger near record lows. Portfolio manager at Thornburg Investment Management, Jeffrey Klingelhofer, says “[i]t’s a reach for yield.” Contrary to investors’ hopes, yields on securities backed by student loans, which move in the opposite direction of prices, have been plunging, according to Money & Investing.

This yield dip is due to borrowers’ increasing difficulty in repaying their student loans. A February 28 report by the Federal Reserve Bank of New York concluded 31% of people paying back student loans were at least 90 days late at the end of the fourth quarter. This is up from 24% in the fourth quarter of 2008 (both federal student loans and loans issued by private lenders were included in the report).

As former students continue to struggle repaying their loans, investors should be weary of the substantial risk of losing money in student loan securities.

Student-Loan Securities Stay Hot – Wall Street Journal