I attended the SIFMA Regional Seminar on September 30, 2013 in Charlotte, NC. Among the panels presented at the conference was one entitled “Hot Topics in Securities Enforcement.” Headlining the panel was Matthew T. Martens, the Chief Litigation Counsel of the Enforcement Division at the U.S. Securities and Exchange Commission. Mr. Martens is fresh off acting as lead trial counsel in the SEC’s high-profile prosecution of “Fabulous” Fabrice Tourre, which resulted in Mr. Tourre being convicted by a Manhattan jury of six counts of securities fraud relating to his role in allegedly misleading investors about a complex security that caused three financial firms to lose $1 billion. In addition to sharing insights on that case, Mr. Martens also provided other insights regarding the SEC’s current priorities, which include the following:
(1) At the direction of new SEC director Mary Jo White, the SEC will begin seeking more admissions in settlements. Although the SEC will still accept “no admission” settlements in certain cases, the SEC will demand admissions in those cases where it would serve the public interest. The SEC is prepared for the possibility that this will lead to more defendants refusing to settle and is in the process of hiring four new trial attorneys.
(2) The SEC is determined to bring cases against individuals – as opposed to simply firms – whenever possible, and will look inward for individual liability before looking outward to the firm. Susan Axelrod, Executive Vice President of Regulatory Operations at FINRA, who was on the same panel, also stated that FINRA was “laser focused” on individual accountability and was “lock-step” with the SEC in this regard.
(3) With the “financial collapse” cases beginning to wrap up, and no “next big thing” having yet overwhelmed the SEC’s attention, the SEC will focus on the following “high risk” areas: (a) investment advisor activity at hedge funds and other private funds; (b) accounting fraud in financial disclosures; (c) insider trading; and (d) fraud in the micro cap area.
New SEC Customer Protection Rule to Take Effect Shortly
Christopher A. Grgurich
Known as the “Customer Protection Rule,” the SEC adopted Rule 15c3-3 in 1972 in response to a congressional directive to strengthen the financial responsibility requirements for broker-dealers that hold securities and cash for customers. Rule 15c3-3 was designed “to give more specific protection to customer funds and securities, in effect forbidding brokers and dealers from using customer assets to finance any part of their businesses unrelated to servicing securities customers; e.g., a firm is virtually precluded from using customer funds to buy securities for its own account. To meet this objective, Rule 15c3-3 requires a broker-dealer that maintains custody of customer securities and cash (a “carrying broker-dealer”) to take two primary steps to safeguard these assets. The steps are designed to protect customers by segregating their securities and cash from the broker-dealer’s proprietary business activities. If the broker-dealer fails financially, the securities and cash are readily available to be returned to the customers. In addition, if the failed broker-dealer is liquidated in a formal proceeding under the Securities Investor Protection Act of 1970 (“SIPA”), the securities and cash would be isolated and readily identifiable as “customer property” and, consequently, available to be distributed to customers ahead of other creditors.”
According to some commentators, recent amendments to Rule 15c3-3, which are slated to go into effect in October 2013, are the most sweeping in 40 years. According to the Commission, the three primary changes to the rule involve:
- Closing a “gap” between the definition of “customer” in Rule 15c3-3 (which does not include broker-dealers) and the definition of “customer” under the Securities Investor Protection Act (which includes broker-dealers). It does this by requiring “carrying broker-dealers” that maintain customer securities and funds to maintain a new segregated reserve account for account holders that are broker-dealers.
- Placing restrictions on cash bank deposits for purposes of the requirement to maintain a reserve to protect customer cash under Rule 15c3-3. The rule is amended to exclude cash deposits held at affiliated banks and limit cash held at non-affiliated banks to an amount no greater than 15 percent of the bank’s equity capital, as reported by the bank in its most recent call report.
- Establishing customer disclosure, notice, and affirmative consent requirements (for new accounts) for programs where customer cash in a securities account is “swept” to a money market or bank deposit product.
Only time will tell how and to what extent the new changes will affect firms and affiliated banks. But it would be time well spent now to review the amendments to determine their ramifications on existing business practices.