FINRA established the BrokerCheck program – then known as the Public Disclosure Program – in 1988.  Over the years, FINRA has made significant improvements to BrokerCheck – e.g., improved reports are available instantly online, and more information currently is available, pursuant to FINRA Rule 8312:

• registrations brokers hold and the exams they’ve passed;
• disclosure information re: criminal, regulatory,customer dispute, termination and financial matters
• current and former FINRA-registered brokerage firms and brokers are covered.

FINRA’s CRD and SEC’s IAPD. In 2010,the SEC expanded the Investment Adviser Public Disclosure (IAPD) database – which had previously only included information on investment adviser firms – to include information on investment adviser representatives.  FINRA’s BrokerCheck (“CRD”) and IAPD have many similarities, and several differences in the information available, the presentation format and the manner in which individuals may obtain information from the systems.

In January 2011, SEC staff released a study and recommendations on improving investor
access to IA and BD registration information, following a mandate of the Dodd-Frank Reform Act.  SEC staff offers 3 near-term recommendations for improving investor access to registration information through BrokerCheck:

• unify search returns for BrokerCheck and the IAPD databases;
• add the ability to search BrokerCheck by ZIP Code or other indicator of location;  and,
• add educational content to BrokerCheck, including investor-appropriate links and definitions.

While Dodd-Frank implementation deadlines have come and gone, its important to know that FINRA is required to implement BrokerCheck changes within 18 months of the SEC study – i.e., by July 2012.   Once that’s completed, FINRA will address this intermediate-term recommendation from SEC staff:

• FINRA should continue to analyze the feasibility and advisability of expanding BrokerCheck to include additional information available in the CRD system
• e.g., the reason for and comments related to a broker’s termination, scores on industry qualification exams, formerly reportable information, as well as the method and format of publishing BrokerCheck content.  SEC staff notes that  investor input could be valuable in this context.

FINRA’s Initiates In-Depth Review. Following the above suggestions, FINRA kicked off a thorough review of BrokerCheck by engaged a market research consultant to understand what investors think about the program – conducting focus groups and surveying investors.

Comment Topic -  Report Design, Format and Content.   In response to a search request, BrokerCheck initially provides a user with a summary report for the requested broker or brokerage firm. For brokers, this summary report provides basic information regarding qualifications, registration and employment history, and existence of disclosure events. With respect to brokerage firms, the summary report contains information pertaining to location, profile, history, operations and the existence of disclosure events.  Users have the option of requesting a detailed BrokerCheck report, which provides additional information about the broker or brokerage firm.

• What changes, if any, should be made to the design, format or content of the BrokerCheck summary report and/or the full detailed report?
• Would it be helpful to include in the summary report a concise summary of a broker’s or brokerage firm’s disclosure events – e.g., a matrix setting forth the number and types of disclosure events – if any?
  
• If so, what would be the best format for the summary?  What information should it contain?

Comment Topic – Investor Awareness of BrokerCheck. During focus groups with investors, the consensus among participants was that investors should use BrokerCheck when considering whether to work with a new broker or brokerage firm. These participants stated that it was important for BrokerCheck to be more widely known among investors.

• How can FINRA best increase investor awareness of BrokerCheck?
• Should FINRA make basic BrokerCheck info – e.g., registration status, employing firm, employment location – available in such a way that would enable an investor to enter a broker’s name in an Internet search engine, see the basic information in t the search results, and be directed to BrokerCheck for more detailed information?
• Should changes be made to FINRA Rule 2267 to further increase investor awareness of BrokerCheck?
• If so, should such changes involve the items of information disclosed, the frequency and/or manner of distribution of information, and/or the member firms covered by the rule?  Should any other changes be made?

Comment Topic -  Commercial Use. Some for-profit companies have established, or are contemplating establishing, websites or services that enable users to verify or obtain information about brokers and other financial industry professionals.  These companies’ products and services likely would be targeted to fulfilling the needs of businesses and individual (i.e., retail) investors.

• Should FINRA provide BrokerCheck info to for-profit companies for commercial use?
• What are some of the benefits/concerns of such action? If FINRA were to provide BrokerCheck info to such companies, what conditions or limitations on use should FINRA consider imposing?

FINRA Staff Contacts. Direct questions to:  Richard Pullano, VP, Chief Counsel, Registration and Disclosure – (240) 386-4821; or,  John Nachmann, Ass’t Chief Counsel, Registration and Disclosure – (240) 386-4816.

For further details, go to:   [FINRA RegNote 12-10, February 2012].

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Here are Comments Submitted to FINRA by Investor Fraud Alliance:

Investors tell us that they find the information regarding arbitrations and disciplinary actions helpful. but complain that it is formatted in the Broker‐check report in a confusing way. Many have said that the same ‘action’ appears over many pages, with the redundant reporting by FINRA, by the Broker‐dealer, or by others, making it appear that one reportable event could be misconstrued as two or even three, what with the detail taking up so many pages.

We had one customer tell us they were astonished when checking the disciplinary history of one of the top 5 NYSE Broker‐dealers to find that over 2,000 pages were necessary to cover the firm’s record of reportable events dating back just 15 or so years.  Perhaps a summary report with an opportunity to explore the detail would be less intimidating to those who have tried to use the service but were turned off by its near‐unreadability.

Also, included in Notice 12‐10 was a comment that some regulatory entity had suggested including candidates’ exam scores in Broker‐check. If FINRA or the SEC have data that show a clear correlation between exam score and professionalism, performance, and ethics on the job, let those data be made public so we can all make a decision about the relevance to an investor of such a metric. If such a correlation exists, the next step will be Complainant’s Attorneys using exam performance to help make their clients’ cases against RRs accused of wrongdoing. It looks like a bad idea for many reasons, though we admit it would be fun to know how some current and former NYSE and NASD personnel scored when they took their Series 7 examination, as well as how the many investment company portfolio managers scored on their Series 65 adviser examination.

[Click here to access:  IFA's Comment Page, 2/22/12]

The investigation, codenamed Tabernula – Latin for ‘little tavern’ – and probing into whether the men engaged in front-running of block trade orders entered by their respective firm’s corporate clients.  The FSA have arrested 2 more suspects – one last year, and a ninth last week.  The latter was a trader with the investment management affiliate of insurer Legal & General Group Plc.

Others Charged with Insider Trading. The FSA secured the longest-ever U.K. sentence for insider trading one year ago when former Dresdner Kleinwort banker Christian Littlewood was sentenced to 40 months in prison after he admitting to illegal trading over a 10-year period.  His wife and another accomplice were charged in the case, as well.   Another group of 7 people who were charged in 2010 with trading on insider information are scheduled to go to trial next week.  They allegedly made $4 million in illicit profits, based on data leaked from London printers’  Some of the seven were employed with UBS AG and JPMorgan’s Cazenove unit at the time of their arrests.   [Bloomberg, 2/21/12]

Changing Market. While European banks have had to operate under difficult conditions since the start of the global credit crisis, the most recent couple of years have been exceptionally brutal.  Under the weight of the flagging economy in their own countries, and throughout the entire European community, analysts had been expecting these banks to unload their U.S. assets – as early as 2 years ago.

Yet, only a handful of small deals have gone through.  Allied Irish Banks sold a 22% stake in M&T Bank in late 2010, and HSBC Holdings dumped its U.S. credit-card portfolio and some branches – much to the chagrin of potential buyers from Canada and Japan looking to fatten its U.S. layers.

Recently, France’s BNP Paribas reportedly rejected offers from at least 2 North American banks for its U.S. subsidiary, the SF-based Bank of the West.  The bank’s reason was that the offers were too low. Bank of the West has a valuable infrastructure, with roughly 650 branches in 19 Western and Midwestern states, and $62 billion in assets on deposit.

Then, there are the positive industry indicators.  The number of souring loans is declining, banks are beginning to issue new loans, and the industry’s capital levels, while still under pressure, are firming up.   And why would a foreign financial institution look to unload its most stable and secure assets – U.S. banking operations undoubtedly offset the higher risks  of businesses closer to home.

Finally, foreign banks that do look to sell its assets may find that few of major U.S. banks are willing to bid, knowing that U.S. regulators would look unkindly on big domestic banks bulking up through acquisitions.

So, while there may be interest, today there is no sale. [NY Post, 2/17/12]

Prior to becoming an assistant U.S. attorney, Furman worked at New Haven-based Wiggin & Dana and had clerked for Supreme Court Justice David Souter.  He graduated from Harvard University and earned his law degree from Yale Law School.  [C-I: A quite impressive background.]

Furman is the second Obama nominee to be confirmed as a federal judge last week – Adalberto Jordan was confirmed by a Senate vote of 94-5 on Wednesday.  He will serve on the 11th Circuit Court of Appeals.  Obama’s judicial nominations have frequently been a source of political tension in the Senate, particularly after Obama made several recess appointments in January that Republicans criticized as being improper.    [Reuters, 2/17/12]

Cioffi’s disgorgement of $700,000 … reflects losses he avoided by redeeming $2mn from a Bear Stearns fund in 2007 without telling his investors, the SEC said in a letter yesterday to U.S. District Judge Frederic Block, who has been delegated the task of approving (or disapproving) the settlement.

Tannin’s disgorgement of $200,000 … in ill-gotten gains, reflecting part of that $750K bonus he received in 2007 for helping the company unwind the portfolios of its failed funds.

Attorneys for the SEC and both defendants filed letters with Judge Block expressing support for the settlements, which include fines of $100,000 for Cioffi and $50,000 for Tannin.  In November 2009, a federal jury found Cioffi and Tannin not guilty of conspiracy and securities and wire fraud in the first criminal trial stemming from a federal probe of the collapse of the subprime-mortgage market.  Both men managed 2 hedge funds that filed for bankruptcy in July 2007.

Block, who requested letters from lawyers on both sides … before he rules, asked why the settlement was relatively small compared to the $1.8 billion the SEC said the funds’ investors lost.  The SEC can obtain only disgorgement of ill-gotten gains and civil penalties, not typically damages, the SEC lawyers said.  The disgorgement amounts were within the range of what they probably would recover if they tried the case, they said.  “Proof of losses by victims of a defendant’s securities fraud is not an element of an SEC enforcement action.”

The case:  SEC v. Cioffi, 08-cv-2457, U.S. District Court, Eastern District of New York (Brooklyn).

For further details, go to:   [Bloomberg, 2/22/12].

Kyle Rote, Jr. The son of former NY Giants running back Kyle Rote, Sr., Junior became a soccer star in his own right – was the 1st American to lead the league in scoring – and founded Athletic Resource Management, a major sports agency that had represented Scottie Pippen and now represents Tim Tebow and Michael Oher, the Baltimore Ravens defensive player of “The Blind Side” fame.  Rote then left that business and worked for Morgan Keegan.  Through his contacts at the firm, Rote invested in two of Morgan Keegan’s investment funds run by one-time star manager James Kelsoe, Jr.  – both of which funds collapsed from over-exposure to subprime mortgage-backed securities.

Morgan Keegan. Former parent Regions Financial Corporation sold the firm in January 2012 to Raymond James Financial.  For Morgan Keegan, the case with Kyle Rote is the latest blow to the firm that has had to defend itself against a flood of lawsuits and arbitrations stemming from the collapse of its 2 investment funds, mentioned above.

Last year, Morgan Keegan agreed to pay $200 million to settle SEC charges that the firm had been overvaluing mortgage-backed bonds purchased by the 2 funds, and falsely marketed these funds to investors as conservative.  As part of the settlement, fund manager James Kelsoe agreed to a lifetime ban from the industry.  In a 2007 interview with Bloomberg News, Kelsoe said he had suffered from an “intoxication” with once-highflying subprime investments.

Arbitration Statement of Claim. According to his Statement of Claim, Mr. Rote regularly ran into Mr. Kelsoe, a fellow Morgan Keegan employee, at the firm’s headquarters in Memphis.  Based on raves about the performance of the two funds, the RMK Select Intermediate Bond Fund and the Select High Income Fund, Rote invested nearly $1.2 million in the vehicles in 2005 and 2006.  The funds’ documents repeatedly noted that their aim was to preserve capital and that they held a “conservative credit posture.”  But by mid-2007, more than half of the funds were invested in subprime-mortgage-backed securities, and almost a year later, both funds had to be marked down by more than 90%.  It was claimants’ contention that the investments violated their own respective risk and diversification rules, which limited investing in mortgage loans to a quarter of the funds’ assets.

However, central to Mr. Rote’s case was the theme that even Morgan Keegan employees were left in the dark about the true nature of the funds’ investments.

Respondent’s Defense. Lawyers for Morgan Keegan, in turn, argued that Mr. Rote’s investments in the two funds were only a portion of his total investment in the firm’s offerings, and that over all, he had earned more than $800,000 from his investments since 1998.

Impact of the Award. While expressing his clients’ disappointment with the relatively small award, lawyer Peter Mougey noted his belief that the award would open the door to further action by other Morgan Keegan fund investors – and many of Mougey’s other clients who have outstanding claims in excess of $100 million against Morgan Keegan.

A spokesperson for Morgan Keegan said in an e-mail that the firm disagreed with the panel’s ruling, and would most likely appeal – he also pointed to 3 arbitration cases against the firm decided recently in which claimants won no money.

For further details on the arbitration settlement and the story, respectively, go to:  [FINRA Arb Award Notice to Kyle Rote Jr] and  [Dealbook, 2/22/12].

The SEC Connection. According to the SEC’s complaint filed in U.S. District Court for the Southern District of New York, Puda Coal entered the U.S. capital markets through a reverse merger in July 2005.  Puda Coal’s common stock was listed and traded on the NYSE from September 2009 until August 2011.

SEC Findings and Allegations. Chairman Zhao is alleged to have secretly transferred Puda Coal’s controlling interest in Shanxi Coal to himself, and then sold a substantial portion to a fund controlled by what is reported to be China’s largest state-owned financial firm.  All the proceeds went into Zhao rather than to the company, Puda Coal.

It goes without saying that the pair, presuming they committed the crime, failed to disclose these transactions in Puda Coal’s periodic reports to the SEC.  And, they or the firm continued to raise funds from U.S. investors through 2 public offerings that purportedly was raising capital for the Shanxi Coal unit to acquire additional coal mines.  Unbeknownst to investors, Puda Coal no longer had an ownership stake in that company.

The SEC began an investigation, though it’s unclear how the SEC was tipped off about the possible crime – not explained in the press release.  Zhao and Zhu responded to the SEC with a forged letter from the Chinese financial firm that purchased the controlling interest, purporting to say that Puda Coal investors weren’t harmed by the asset transfers.  In reality, Puda Coal, at that point, was a shell company with no ongoing business operations.

“The massive fraud perpetrated by Zhao and Zhu wiped out hundreds of millions of dollars in shareholder value and was compounded by their brazen obstruction of the SEC’s investigation.” – George Canellos, SEC NYRO Director.

Further Details into the Allegations. The scheme allegedly began in September 2009, just weeks before Puda Coal announced that Shanxi Coal had received a highly lucrative mandate from the provincial government authorities to become a consolidator of smaller coal mining companies.  Zhao quietly transferred Puda Coal’s 90% stake in Shanxi Coal to himself.  Nearly a year later, in July 2010, Zhao transferred a 49% equity interest in Shanxi Coal to CITIC Trust Co Ltd., a Chinese private equity fund controlled by state-owned investment firm CITIC Group.  CITIC Trust placed the 49% stake in a trust and then sold interests in the trust to Chinese investors.

Chairman Zhao also caused Shanxi Coal to pledge the remaining 51% of its assets to CITIC Trust as collateral for a loan of RMB 3.5 billion – the Chinese currency, renminbi which, in this transaction, was equivalent to $516 million – from the trust to Shanxi Coal.  In exchange, CITIC Trust gave Zhao more than 1.2 billion preferred shares in the trust.

To cover up their fraud, Zhao had Zhu forge a letter purportedly from CITIC Trust falsely stating that no funds had actually been loaned to Shanxi Coal and disclaiming any interest in Puda Coal’s or Shanxi Coal’s assets.  Zhao’s counsel provided the forged letter to the SEC’s investigative staff and Puda’s audit committee.  After Puda Coal disclosed the letter in an SEC filing and further misled shareholders about the ownership of Puda Coal’s assets, Zhu admitted forging the letter and resigned as CEO.  Zhao remains the chairman.

SEC Charges. Zhao and Zhu are charged with violating Section 17(a) of the Securities Act of 1933, Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5, as well as violating the proxy solicitation rules and various corporate reporting, recordkeeping and internal controls provisions of the Exchange Act.

The SEC seeks to disgorge the pair of their ill-gotten gains, apply prejudgment interest, impose financial penalties, bar them from acting as officers or directors of a public company, and permanently enjoining them from committing future violations of these provisions.

SEC NYRO Staff Credits. Investigation, which continues, conducted by:  Sheldon Pollock, Scott York, George Stepaniuk, with support from Neil Hendelman, Desiree Marmita. The SEC’s Cross Border Working Group, which has representatives from each of the SEC’s major divisions and offices and focuses on U.S. companies with substantial foreign operations, assisted the New York Regional Office enforcement staff in the investigation.

For further details, go to:  [SEC PR 12-31, 2/22/12].

And, firms in the U.S. and abroad employed various ways to limit their expenses, such as:  curbing pay, or changing compensation formulas – e.g., offering less cash and more stock, or deferring a greater percentage of total pay.

The information in this chart was compiled by Bloomberg News.     See Link below.

For further details, go to:   [Bloomberg, 2/21/12].

“We are gradually shrinking the footprint that Fannie and Freddie will have in the mortgage market.  Lawmakers are still going to have to come to some consensus about the role of the government and government guarantees.” — Edward DeMarco, FHFA Acting Director.

The FHFA has outlined its proposed changes in a 21-page plan that took over a year to prepare.  The plan is intended to be a temporary remedy for the housing market – i.e., until Congress and the administration put in place a lasting framework for housing finance.  [Good luck!]

Conservatorship. Back in 2008, Fannie Mae and Freddie Mac were placed in government conservatorship as mounting mortgages losses threatened their solvency.  In spite of their fragile financial position, Fannie and Freddie have dominated the housing finance system since lending tightened during the financial crisis and recession.  Since the government seized the 2 firms, they have bought or guaranteed nearly 3 out of every 4 U.S. mortgages in the country.  Of course, it’s taken about $169 billion in taxpayer funds to accomplish this feat.

“Conservatorship is not meant to go on forever,” according to FHFA Acting Director Edward DeMarco, who added, “By putting this out, this will certainly foster some public discussion, including discussion by members of Congress.”

FHFA anticipates building a single mortgage securitization platform to replace the current systems the government-sponsored enterprises use to support the credit business.  This would take some time to implement, according to DeMarco.  Once completed, there would be a single mortgage-backed security (MBS) issued by the GSEs, replacing the method Fannie and Freddie use to pool loans into packages and sell them to investors.

Currently, the GSEs buy loans from lenders and bundle them as securities for investors, which they then guarantee.

Increasing Private Market Risk. FHFA’s plan would place increased risk on the private market, taking steps that include increasing the fees the entities charge lenders as a way to wean them off the government’s backstop.  This might also result in an expansion of the use of mortgage insurance, and changing loss-sharing arrangements that require private investors to bear all or some of the credit risk.

Under its strategic plan, the FHFA said it will continue to pave the way for successful anti-foreclosure efforts, that would include a planned program to convert foreclosed government-owned properties into rental units.  The FHFA has been actively overseeing government programs to help troubled homeowners, and has worked on the administration’s effort to allow more borrowers to refinance.  At the same time, it has resisted any steps that would be too expensive for Fannie and Freddie, and thus saddle taxpayers with further losses.

For further details, go to:   [Reuters, 2/21/12]

Edward Willems was the former deputy head of fixed income markets at Credit Agricole’s corporate and investment banking unit.  He claims bonuses in 2010 and 2011 were “inappropriately low” because of the whistle blowing, his lawyer Tom Croxford told an employment tribunal on Tuesday, without describing the conduct he reported.

Under U.K., employees are protected from being fired or punished if they reveal malpractice in the public interest, including “improper, illegal or negligent behavior by anyone in the workplace,” according to a guidelines published on a British government website. Jean-Yves Hocher, the CEO of the firm’s investment banking unit, and Guy Laffineur, the former global head of fixed income markets, are set to appear as witnesses during the 11-day trial.

For more details, go to [Bloomberg, 2/21/12].