About a week ago, FINRA released a Special Notice detailing a new portal for stakeholders to signal their willingness to serve on FINRA’s board and other important committees.  The new portal creates a way for FINRA to increase engagement from key stakeholders, specifically including retail investors, consumer groups, and institutional investors.  Persons with an interest in serving on FINRA’s committees, advisory boards, or Board of Governors can use this new portal to get their information to FINRA.

FINRA has drawn criticism in the past for bypassing investor and consumer advocates in favor of appointing persons with deep industry ties to serve as “Public Governors” on its governing Board.  In a recent op-ed, Andrew Stoltmann and I pointed out that credibly signalling commitment to FINRA’s stated investor protection mission means that it should have investor advocates on its board.  In a report issued by the Public Investors Arbitration Bar Association (PIABA), we discussed our governance concerns in more detail and suggested that the FINRA Board consider a number of investor advocates with knowledge of the securities industry for future Public Governor seats.  FINRA has now created a process for bringing a broad array of candidates into its nominating process.

Some…

Earlier this week the SEC announced that it had halted another fraudulent initial coin offering (ICO). AriseBank claimed to have raised about $600 million and that it had purchased an FDIC-insured bank.  AriseBank had promised investors that it would allow them to access FDIC-insured bank accounts and other consumer banking products.  The SEC alleges that these representations were false.  It also alleges that AriseBank omitted to disclose the criminal background of key executives.  A gripping American Banker article has more color on the ICO:

The agency said AriseBank’s initial offering of AriseCoin is illegal because there’s no registration filed with the SEC. It also said the offering materials “use many materially false statements and omissions to induce investment in the ICO,” such as AriseBank’s earlier claim that it had bought a commercial bank and could offer FDIC-insured accounts.

The SEC further said in its complaint that AriseBank “omitted to disclose the criminal background of key executives — most notably, Rice, who is currently on probation for felony theft and tampering with government records.”

This particular initial coin offering also obtained celebrity endorsements.  Most notably, Evander Holyfield endorsed AriseBank through social media. 

Boxing legend and Hall of Famer Evander Holyfield

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If you write about regulated industries or securities and banking topics, it can be challenging to keep track of developments in the regulatory space.  There is a startup that I’ve found useful for seeing new developments. It’s called  Compliance.ai.  Mostly, I now use it to track of news from FINRA and the SEC.  They have been reaching out to law schools and offering training and access to students and faculty.  They also allow users to track news from the CFPB, DOJ, Treasury, NYSE, DOL, and a bunch of other regulators.

I haven’t yet seen anything on it that I could not find elsewhere.  Much of the material can be found in the federal register, on the websites of self-regulatory organizations, or on the SEC’s website.  Instead of constantly canvasing all these websites, Compliance.ai allows users to put together a feed from the regulators they want to follow.  It’s also made it easier for me to see things like enforcement actions as they come out.  For example, two days ago FINRA published Letter of Acceptance, Waiver, and Consent NO. 2016051672301.  This fascinating AWC details how Paul Martin Betenbaugh consented to a three month suspension for:

In September and October 2015, on three

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Ponzi schemes recur with an astounding regularity.  The latest comes from the Woodbridge group of companies.  The $1.2 billion scheme ran for about five years.  It took advantage of about 8,400 investors, many of them elderly. 

Like many other Ponzi schemes, commission-hungry sales agents brought fresh infusions of capital to the scheme.  Interestingly, the scheme allowed sales agents to pick how much they would receive in commissions:

The sales agents were paid well. According to the SEC complaint, “Woodbridge offered its [mortgage] product to its external sales agents at a 9% wholesale rate, and the agents in turn offered the [mortgage notes] to their investor clients at 5% to 8% annual interest — the external sales agent received a commission equivalent to the difference,” the SEC asserted.

In total, Woodbridge may have paid out over $64 million in commissions to sales agents.  Some of these sales agents had been kicked out of the securities industry.  The Investment News details some of the sales claims that enabled the scheme:

For example, one insurance salesman and former broker, James H. Gilchrist, promoted the loans at dinners in Jensen Beach. The invitation encouraged potential attendees to “learn how to earn 6% fixed interest”

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The New York Times recently covered the puzzling persistence of high mutual fund fees.  The article focuses on Baron Funds, a mutual fund family led by Ronald S. Baron. It points out that Baron’s fees exceed the industry average by 54 percent.  Despite the high fees and finishing ahead of their indexes this year, the funds lag behind their benchmarks over a five year period. Baron argues that investors should take a broader view.  According to Baron, an investor that bought his flagship fund in 1994 would have roughly doubled the return otherwise obtainable from holding the S&P 500 over the same period. 

Notably, and not addressed by the Times, the content of Baron funds has changed since their launch.  Investors should not expect today’s large Baron funds to replicate their early performance.  Although Baron funds once made concentrated bets on small companies, the funds have changed as they have grown.  One 2012 article, pointed out that Barons changed its investment policies after a large stake in Sotheby’s imploded.  Baron changed the rules so that “no new investment can account for more than 10 percent of any of [the] funds.”  

Mutual funds get away with high fees for a variety of…

Most Americans now struggle to save for retirement.  The ones fortunate enough to have some savings set aside often don’t have much.  For help allocating those savings, many turn to commission-compensated stockbrokers.  In many instances, these stockbrokers give their clients “suitable” advice.  The advice might not be the best, but decent, suitable advice often helps substantially.

Of course, not all stockbrokers give suitable advice.  Sometimes, a financial adviser decides to chase a bigger commission and pushes a client into a direction that isn’t in his or her best interest.  One financial adviser coined Brown’s Law of Broker Compensation to explain the dynamic.  In short, the worse a product is for clients, the more a broker will be paid to sell it to clients.

Access to representation shifts with the amount of damages in play.  Clients with big problems can often find a eager lawyer.  Clients that suffer $15,000 in damages may struggle to find representation.  These cases are complex.  They require substantial skill and diligence to resolve.  The potential compensation for these relatively smaller cases may not motivate the private bar to provide representation.

Securities arbitration clinics provide an option.  These relatively rare clinics take on a few of…

Thank you to the BLPB for the chance to write some for the platform. Reading the BLPB has informed my work, and it has kept me up to speed on breaking developments.  For readers that don’t know me, I’m at the University of Nevada, Las Vegas.  My teaching and scholarship focus on business, securities, and professional responsibility issues.

On that note, the Financial Industry Regulatory Authority (FINRA) now considers a live securities and professional responsibility issue.  It has a request for comment out about whether non-attorney representatives (NARS) should continue to represent persons in FINRA’s arbitration forum.  States approach unauthorized practice in different ways.  Florida has vigorously policed the unauthorized practice of law.  New York, on the other hand, has allowed NARS to represent persons in arbitration. 

There may be good reason to be concerned about representation quality from non-attorney advocates.  The New York Times covered the issue in 2010, profiling Stock Market Recovery Consultants, an outfit that represents investors in securities arbitration.  The Times pointed out that one of the firm’s principals “pleaded guilty in 2004 to insurance fraud in a million-dollar scam involving jewelry.”  Another one of the firm’s principals suggested that the Times speak with an attorney…