The Law, et al


Financial services legal news and updates from around the globe.

Information on the latest in regulation, legislation, and related current events for financial services auditors.

Securities Fraud Charged Filed Against Officials in San Diego

Five former San Diego, Calif., city officials face securities fraud charges, filed by the Securities and Exchange Commission (SEC) on April 7 for their role in inadequate municipal securities disclosures for 2002 and 2003. The SEC charges that the former officials failed to disclose to the public that the city's municipal bonds were funding problems with the city's pension and retiree obligations, which had put significant financial strains on the city. The compliant alleges that officials were aware of under funding of the city's pension obligation to increase benefits while deferring associated costs. For more information, visit the SEC's Web site.

Banks Lobby for Shift in Data Breach Risk to Retailers

Following security breaches such as that of TJX Companies, Inc., which is estimated to have effected over 46 million credit and debit card holders, financial institutions in the United States and Canada are pushing for legislation that would shift the financial risk associated with such incidents to retailers. In May 2007, the state of Minnesota became the first state to enact legislation making retailers and other merchants liable to banks for costs associated with data breaches. The legislation provides that recoverable costs include those:

  • Related to providing cardholders with notification of the breach.
  • Incurred in cancelling and reissuing cards.
  • Associated with the closing or reopening of accounts and with any steps taken to stop payments or block payments on accounts.
  • Refunds paid to cardholders in respect of unauthorized transactions charged to their accounts.
  • Damages paid by the financial institution to cardholders as a result of the security breach.

Other states, including California, Connecticut, Illinois, Massachusetts, and Texas have introduced similar legislation. Canadian lawmakers have also begun a five-year examination of the Personal Information Protection and Electronic Documents Act, although it is uncertain what if any change may be enacted as a result of the review.

Nevertheless, increased concern over data security issues in both Canada and the US, and the legislative trends south of the border, bear close scrutiny.

2008 Exam Priorities for FINRA and SEC

Financial Industry Regulatory Authority (FINRA) and the Securities and Exchange Commission (SEC) recently released guidance to broker-dealers outlining focus areas and priorities for examination programs in 2008.

Recently both FINRA and the SEC issued guidance to broker-dealers identifying focus areas and priorities of their respective examination programs in 2008. In particular, on March 24, 2008, FINRA issued a letter to all FINRA member firms to "highlight new and existing areas that are of particular significance" with regard to its 2008 exam priorities.1 In addition, on April 1, 2008, Lori Richards, OCIE Director, spoke at the annual SIFMA Compliance and Legal Division Conference regarding current SEC examination priorities.

In this alert we outline some of the issues identified by FINRA and the SEC as examination priorities in 2008.

FINRA Examination Priorities for 2008

  • Senior investors will be the subject of targeted exams where FINRA has significant concerns.
  • Whether firms are adequately supervising the sale of deferred variable annuity products in compliance with new NASD Conduct Rule 2821.
  • AML compliance programs, particularly implementation of due diligence procedures regarding foreign banking relationships under Section 312 of the USA PATRIOT Act.
  • Similar to the SEC's examinations priorities, FINRA will focus on customer asset and information protection.
  • Supervision is a core element of all FINRA examinations.
  • FINRA continues to be concerned about firms' processes for new product development and their related marketing and sales.
  • FINRA will be examining what actions firms have taken in light of the FPA decision.
  • Transaction reporting.
  • FINRA has initiated a special review of information barriers.
  • Regarding bank sweep programs.
  • For firms that engage in agency lending.
  • FINRA issued reminders to firms regarding Regulation NMS.

SEC 2008 Examination Priorities

  • Valuation issues
  • Controls related to firms' material, non-public information
  • Retail sales practices,
  • Firms' implementation of appropriate supervisory procedures related.
  • Procedures regarding net capital computation and controls for timely identification of related deficiencies.
  • Compliance with trading rules, specifically focusing on best execution, Regulation NMS, and Regulation SHO.
  • Fixed income securities, particularly issues related to pricing, mark-ups, suitability, and pay-to-play arrangements involving municipal securities.
  • Conflicts of interests
  • Firms' controls and procedures related to protection of customer assets and information
  • Examinations of credit rating agencies.

To learn more about either of these organization's exam priorities, visit their respective Web sites:

Financial Industry Regulatory Authority

Securities and Exchange Commission