FINRA Chief Comments On Issues Relating To Unification Of NASD and NYSE Enforcement

Keywords

FINRA, Susan Merrill, new structure, NASD and NYSE Enforcement Entity, subprime mortgages, senior investors, hedge funds, broker dealers, insider trading, operational deficiency cases, Regulation SHO, markups, variable annuities, fee-based accounts, Financial Industry Regulatory Authority

On September 20, 2007, the DC Bar sponsored a luncheon program entitled "Learn What You Need To Know About FINRA From The New Enforcement Director Of This Combined NASD And NYSE Enforcement Entity." The featured speaker at the discussion was Susan L. Merrill, Executive Vice President, Chief of Enforcement, at the Financial Industry Regulatory Authority (FINRA), who previously served as Chief of Enforcement at the NYSE from 2004 to 2007. Merrill explained FINRA's new structure and discussed key issues being addressed by FINRA.

FINRA Priorities

Merrill identified a number of priorities for FINRA for 2007 and beyond:

Subprime mortgages. Merrill stated that FINRA was investigating valuation issues related to CMOs and CDOs, particularly whether members' internal valuation of these products differed from valuations being provided to customers, and the variation in written quotes provided to customers. The investigations are focused on whether members valued products differently in an attempt to avoid showing weakness in the market for subprime securities.

Senior investors. Merrill noted the recently publicized FINRA sweep concerning potentially abusive practices involving senior investors. She observed that 75 percent of all assets are managed by households headed by a person over the age of 50. Moreover, 30 percent of investment scams targeted senior investors even though seniors represent only 15 percent of the population. These numbers evidenced a need to ensure that representationsdirected to seniors were not misleading. FINRA is particularly concerned about the use of professional designations used by members, such as the term "senior experts." FINRA is investigating how its members earned these professional designations,including whether they were required to attend courses and the experience level required. Merrill highlighted, as an extreme example, programs that issue certifications for a fee without requiring any coursework.

Merrill noted that FINRA recently posted Regulatory Notice 07-43 on its web site.1 The Regulatory Notice provides guidance to members on best practices relating to senior investors. For example, members should consider the investor's age and life stage, not just their liquidity needs.

Hedge funds. Merrill stated that FINRA was investigating the relationship between hedge funds and the broker dealers who service hedge funds. Merrill noted that when servicing hedge funds, broker dealers may be tempted to give hedge funds special treatment. She added that FINRA was investigating potential insider trading, soft dollar arrangements, so-called "hedge fund hotels" (where the broker dealer provides a hedge fund with office space but provides no other...