Securities Industry Commentator by Bill Singer Esq

Supreme Court Says Disgorgement Not Exceeding Wrongful Net Profits Is Permissible Relief (BrokeAndBroker.com Blog)

Federal Court Says Put A Fork In It 'Cause This Lawsuit Against FINRA is Done! 

Scottsdale Capital Advisors Corporation, Appellant, v. Financial Industry Regulatory Authority, Appellee (Judgment, DCCir)

Securities and Exchange Commission and Justice Department's Antitrust Division Sign Historic Memorandum of Understanding (SEC Release)

Justice Department's Antitrust Division And The Securities And Exchange Commission Sign Historic Memorandum Of Understanding (DOJ Release)

Modernizing U.S. Equity Market Structure (Speeches by SEC Chair Clayton and SEC Director/Division of Trading and Markets Brett Redfearn)

There's nearly $5 trillion parked in money markets as many investors are still afraid of stocks (CNBC by Jesse Pound)

Credit Suisse raises stock market forecast, sees downside risks as 'less ominous' (CNBC by Jesse Pound) 

FINRA Imposes Partial Restitution and Suspension for Rep's Excessive Trading In Customers' Accounts.

In the Matter of Frank VentureIli, Respondent (FINRA AWC)

Port Orchard, Washington, woman charged with wire fraud for scheme to embezzle from company she founded and sold / Money that was supposed to be used to grow the business was used for personal expenses and purchase of Aruba estate (DOJ Release)

[T]he district court properly applied the Thunder Basin test to determine that the securities laws divest it of jurisdiction over Scottsdale's suit. " 'Given the painstaking detail with which' Congress set forth the rules governing the court of appeals' review of" FINRA and SEC action, " 'it is fairly discernible that Congress intended to deny' " aggrieved FINRA members " 'an additional avenue of review in district court.' " Jarkesy, 803 F.3d at 17 (quoting Elgin v. Dep't of Treasury, 567 U.S. 1, 11-12 (2012)). Each of the factors that Thunder Basin instructs us to consider at step two, see 510 U.S. at 212-16, weighs against district court jurisdiction over Scottsdale's suit. Adjudication of Scottsdale's claims through the regular statutory process would not deprive Scottsdale of meaningful review. All of the policies Scottsdale seeks to challenge in district court may eventually be challenged in a court of appeals. See J.A. 159 (petitioning the SEC for a rulemaking on FINRA's board composition and use of guidance, which Scottsdale may challenge in a court of appeals if its petition is denied, see 15 U.S.C. § 78y(a)(1)); J.A. 71 n.29 (asserting its ultra vires argument in a FINRA disciplinary proceeding, which Scottsdale may also raise in a court of appeals if the SEC rejects the argument, see 15 U.S.C. § 78y(a)(1)). The FINRA actions that Scottsdale challenges are neither wholly collateral to the statutory review scheme nor outside FINRA and the SEC's expertise. See Thunder Basin, 510 U.S. at 212.

We agree with the district court that Scottsdale's breach of contract claim is an impermissible attempt to short-circuit the detailed statutory scheme of administrative and judicial review of FINRA action. Accepting Scottsdale's argument would render that scheme largely superfluous and make nearly any disputed FINRA action subject to challenge in district court. Having now failed to evade the statutory review scheme for a second time, see Scottsdale Capital Advisors Corp. v. FINRA, 844 F.3d 414, 422-24 (4th Cir. 2016) (rejecting Scottsdale's nearly identical Thunder Basin argument), it should be clear to Scottsdale that it cannot sue FINRA in federal district court for FINRA's alleged failure to comply with the Act.

Thunder Basin Coal Co. v. Reich, Secretary of Labor, et al. (Opinion, United States Supreme Court, January 19, 1994.

https://tile.loc.gov/storage-services/service/ll/usrep/usrep510/usrep510200/usrep510200.pdf

Split In The Circuits Widens As Jarkesy Challenges SEC (BrokeAndBroker.com Blog / October 1, 2015)

http://www.brokeandbroker.com/2913/jarkesy-sec/

A Brief History of Scottsdale and FINRA

The Securities and Exchange Commission and the Department of Justice's Antitrust Division have signed an interagency Memorandum of Understanding (MOU) to foster cooperation and communication between the agencies with the aim of enhancing competition in the securities industry. Assistant Attorney General Makan Delrahim of the Antitrust Division announced the first-ever MOU between the Antitrust Division and the SEC, which was executed with SEC Chairman Jay Clayton, before a discussion on equity market structure hosted by MIT's Golub Center for Finance and Policy this afternoon.

"As competition is embedded in our securities laws, there are many policy areas where the missions of the SEC and DOJ's Antritrust Division align, but where our respective areas of expertise differ," said SEC Chairman Jay Clayton. "By formalizing the exchange of knowledge between our agencies, we aim to foster even greater collaboration and cooperation to ensure that we maintain the efficient and competitive markets that American investors rely on."

"The Antitrust Division and the SEC have prioritized close cooperation with one another in recent years to promote competitive conditions in the securities industry, benefitting both agencies' enforcement missions," stated Assistant Attorney General Delrahim. "This MOU institutionalizes a strong working relationship between our two agencies. I expect that it will lead to even more robust, comprehensive analyses incorporating both competition and securities laws concerns, resulting in stronger, healthier markets yielding enhanced consumer benefits."

Key provisions of the MOU facilitate both communication and cooperation between the agencies. In particular, the MOU establishes a framework for the SEC and the DOJ's Antitrust Division to continue regular discussions and review law enforcement and regulatory matters affecting competition in the securities industry, including provisions to establish periodic meetings among the respective agencies' officials. The MOU also provides for the exchange of information and expertise the agencies believe to be potentially relevant and useful to their oversight and enforcement responsibilities, as appropriate and consistent with applicable legal and confidentiality restrictions.

The Department of Justice's Antitrust Division and the Securities and Exchange Commission have signed an interagency Memorandum of Understanding ("MOU") to foster cooperation and communication between the agencies with the aim of enhancing competition in the securities industry. Assistant Attorney General Makan Delrahim of the Antitrust Division announced the first-ever MOU between the Antitrust Division and the SEC, which was executed with SEC Chairman Jay Clayton before a discussion on equity market structure hosted by MIT's Golub Center for Finance and Policy this afternoon.

"The Antitrust Division and the SEC have prioritized close cooperation with one another in recent years to promote competitive conditions in the securities industry, benefitting both agencies' enforcement missions," stated Assistant Attorney General Delrahim. "This MOU institutionalizes a strong working relationship between our two agencies. I expect that it will lead to even more robust, comprehensive analyses incorporating both competition and securities laws concerns, resulting in stronger, healthier markets yielding enhanced consumer benefits."

"As competition is embedded in our securities laws, there are many policy areas where the missions of the SEC and DOJ's Antritrust Division align, but where our respective areas of expertise differ," said SEC Chairman Jay Clayton. "By formalizing the exchange of knowledge between our agencies, we aim to foster even greater collaboration and cooperation to ensure that we maintain the efficient and competitive markets that American investors rely on."

Key provisions of the MOU facilitate both communication and cooperation between the agencies. In particular, the MOU establishes a framework for the Antitrust Division and the SEC to continue regular discussions and review law enforcement and regulatory matters affecting competition in the securities industry, including provisions to establish periodic meetings among the respective agencies' officials. The MOU also provides for the exchange of information and expertise the agencies believe to be potentially relevant and useful to their oversight and enforcement responsibilities, as appropriate and consistent with applicable legal and confidentiality restrictions.

Clayton: Clearly, given the diversity of views, the Commission has a compelling regulatory responsibility to analyze concerns about the fairness and reasonableness of exchange fees for proprietary data.  I believe there is a clear need for prompt diligent effort, resourcefulness, and collaboration regarding ways for the Commission to fulfill this statutory responsibility in the most efficient and effective manner.

For example, the exchanges have offered various rationales and economic theories for their assertions that competitive forces discipline their proprietary data fees.  As these fees continue to come under review in the various procedural contexts, I expect the Commission will be open to any reasonable framework for demonstrating sufficient competition.  In addition, in a complex market, it is unlikely that any one metric would be dispositive.  I expect that the exchanges will be forthcoming in presenting meaningful data and other factual support to meet their burden of demonstrating that the fees are consistent with the Exchange Act.  I have also asked the staff to focus on these issues and report back to the Commission on potential approaches that could be adopted to fulfill its statutory responsibilities for exchange fees.  There are many different approaches that economists have taken to show competition, here at the SEC and at the DOJ Antitrust Division and elsewhere.  I look forward to using the new MOU with the DOJ Antitrust Division to work in coordination where necessary to benefit from the views of the DOJ staff on certain competitive theories to assess whether they are consistent with Exchange Act obligations. 

. . .

Redfearn: [I] want to focus first on the proposal to lower the round lot size for many higher-priced securities.  Currently, the round lot size for nearly all NMS stocks is 100 shares, regardless of its price.  This means, for example, that the best available quote for an NMS stock with a price of $10 must have a quoted dollar value of at least $1,000, while the best available quote for an NMS stock with a price of $500 must have a quoted dollar value of at least $50,000.  Further, the quoted spreads currently visible in NMS market data for higher-priced stocks do not include significant quotation information of smaller lot sizes that is visible only in certain proprietary data feeds.  NMS quotations are therefore less representative and significantly wider than they would be if smaller dollar-sized quotations were included.

As noted, exchange proprietary data feeds typically include all odd-lot quotes and thereby provide better and more thorough information than is available in the NMS market data feeds.  For example, the proposal includes empirical analysis showing that, for stocks priced over $1000, the proposal to lower the round lot size could improve quoted spreads in NMS market data 92 percent of the time and narrow the width of such spreads by more than half.[28]  Today, the many retail investors that use NMS market data cannot see the better prices available to those who can pay the much higher fees for exchange proprietary data.  Furthermore, execution quality statistics, as provided under Rule 605, also only use the wider 100 share round lot quotations, which can affect the view of price improvement.  Enhancing the quote information in NMS market data would be quite useful to retail investors in assessing the quality of executions obtained by their broker-dealers.

To this end, the proposal would establish five tiers of round-lot quotes.  NMS stocks with prices of $50 or less would retain the 100-share round lot, while NMS stocks with prices higher than $50 would have four progressively lower tiers of round-lot sizes to maintain a relatively consistent dollar size for the inclusion of quotes in NMS market data, regardless of stock price.  A key objective in formulating these tiers was achieving the right balance of, on the one hand, capturing additional liquidity to improve the usefulness of quote information in NMS market data and, on the other hand, avoiding unnecessary complexity with too many tiers. 

The coronavirus sell-off sent investors fleeing into money market funds, which ballooned well above $4 trillion, surpassing the peak of the financial crisis, according to research by LPL Financial. The flood into money markets pushed the sector's assets to the highest on record, peaking at $4.672 trillion during the week of May 13, according to Refinitiv Lipper, and even recent net outflows have left more than 90% of that increase intact.

[V]enturelh engaged in quantitatively unsuitable trading in the accounts of customers AR, LK, and RK. Venturelti recommended the trading in the three customers' accounts and they followed his recommendations, As a result, Ventureili exercised de facto control over the three customers' accounts.

Venturelli's trading of the three accounts resulted in high turnover rates and COSMOeqnity ratios as welt as significant tosses, as set forth below.

• AR's account exhibited a turnover rate of 60,57 and a cost-to-equity ratio of 146,53%. AR's account incurred losses of $96,985 and paid $57,355 in commissions and fees. 
• LK'S account exhibited. anannualized turnover rate of 30.29 and an annualized cost-to-equity ratio of 88.18%. LK's account incurred losses of $133,748 and paid $49,641 in commissions and fees. 
• RK's account exhibited an annualized turnover rate of 40.,06 and an annualized cost-to-equity ratio of 105.89%. RK's account incurred losses of $142,493 and paid $62,807 in commissions and fees.

Venutrelli's trading in the accounts of AR, LK, and RIC was excessive and unsuitable given the customers' investment profiles, and it was virtually impossible for any of these customers to earn a profit. As a result of Venturelli's excessive trading, the three customers suffered collective losses of $373,226 and paid $169,803 in commissions and fees. 

[D]ORAN was the major shareholder and CEO of My YearLook, Inc., a start-up business that was designing a web portal to collect, store, and share school yearbooks in digital form.  In February 2015, a Texas company, American Achievement Group Holding Corporation ("AAC") purchased a majority stake in My YearLook by paying approximately $1.3 million into company accounts.  The purchase agreement specified that the money was to be used to grow the company.  DORAN was retained as the CEO at an annual salary of $160,000. 

Within days of the Texas company transferring the money to the My YearLook accounts, DORAN began transferring the money into accounts she controlled and used it for her personal expenses such as payments to a horse training and boarding facility, purchase of a motorcycle and a recreational vehicle, and purchase of a property in Aruba.  DORAN altered some of the transfer records to hide the embezzlement from the financial staff at the Texas parent company.  The scheme unraveled in November 2015 when the financial team in Texas realized DORAN had multiple bank accounts and had falsified bank statements and records.  She was fired in February 2016, and the parent company recovered the last $240,000 in the My YearLook accounts.

• Securities Industry Commentator
• Bill Singer