Financial Services Litigation & Investigation Monitor : Financial Services Lawyer & Attorney : Perkins Coie Law Firm : Government Investigations, Class Actions

In response to various crises that have besieged the financial services industry in recent years, will the government create more governmental regulation or expand the role of SROs, such as Finra, to bolster public confidence in financial institutions? This topic is addressed in an article recently published in InvestmentNews by Perkins Coie partner Pravin Rao and Howard Rosenburg, general counsel and chief regulatory officer of the Chicago Investment Group LLC. The article, entitled “Forecasting Finra's Future,” features an in-depth discussion of Finra’s current jurisdiction and likely changes that would need to take place should the government further expand Finra’s authority.  Among the recommendations provided by the authors are: consolidating oversight of broker-dealers and investment advisers and adopting uniform fiduciary standards for these investment professionals; revising Finra’s internal operating procedures to allow for greater transparency in decision-making and financial management processes; and increasing coordination with other regulatory authorities, including the CFTC, the Federal Reserve, and the SEC.

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The Financial Industry Regulatory Authority (FINRA) has announced that the SEC approved a major expansion of  FINRA's BrokerCheck service — to make records of final regulatory actions against brokers permanently available to the public, regardless of whether they continue to be employed in the securities industry.  Under current rules, a broker's record generally becomes unavailable to the public two years after he or she leaves the securities industry and is no longer under FINRA's jurisdiction.

BrokerCheck is a an online service through which investors can reviewthe employment, qualifications and disciplinary history of more than 650,000 brokers under FINRA's jurisdiction. FINRA estimates there are more than 15,000 individuals who have left the securities industry after being the subject of a final regulatory action and whose disciplinary history is not currently available on BrokerCheck.

Disclosure records for former brokers will become available on November 30 and will include any final sanction (such as bars, suspensions and fines) imposed by the SEC, the Commodity Futures Trading Commission, any federal banking agency, the National Credit Union Administration, any other federal regulatory agency, any state regulatory agency, any foreign financial regulatory authority or any self-regulatory organization (such as FINRA).

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Two former managers who ran a Bear Stearns hedge fund that invested in subprime bonds and derivatives were found not guilty of securities fraud charges by a Brooklyn jury.  According to a report in the Wall Street Journal, the government alleged that the two men, Ralph Cioffi and Matthew Tannin, lied to investors about the condition and value hedge funds filled with subprime bonds. The funds collapsed in 2007, shortly before the pinnacle of the mortgage crisis that eventually doomed Bear Stearns.  WSJ noted that the acquittals are a setback for New York's U.S. Attorney's Office, which is also involved in investigating other Wall Street players for possible criminal wrongdoing stemming from the credit crisis, including at Lehman Brothers Holdings Inc. and AIG.

In a press release, U.S. Attorney Benton J. Campbell said "Of course, we are disappointed by the outcome in this case, but the jurors have spoken, and we accept their verdict.  Honesty and integrity are the principles upon which our financial markets function. Enforcing and protecting those principles will continue to be one of the principal efforts of this Office."

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Sen. Dodd rolled out his vision of consumer financial services regulatory reform this week and, among other things, it threatens to further consolidate oversight of banks into a single federal agency.
 

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Maloney-Frank bill will implement credit card reforms immediately upon enactment

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The New York Times reports that  Bernard. Madoff’s longtime accountant pleaded guilty to three counts of obstructing the administration of the federal tax laws carrying a prison sentence of up to 114 years .  The accountant, David G. Friehling, admitted that for nearly 20 years he had "rubber-stamped" audits that allowed Madoff to conceal his  Ponzi scheme from regulators.  Friehling essentially conceded that he had never properly conducted an independent audit of the Madoff operation. Despite this lack of independence, he produced the purported independent audits that helped to enable the Madoff scheme for several years.  Friehling also acknowledged that he had prepared tax returns for Madoff and "others," who remained unnamed.  Legal experts suggest that the "others"  are Madoff family members, who may be the next targets of the government's continuing investigation.

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In a 39-29 vote, on October 22, 2009 the House Financial Services Committee approved legislation (H.R. 3126) establishing an independent federal agency charged with overseeing financial products and services. Under the legislation, the Consumer Financial Protection Agency (CFPA) would be an independent agency headed by a Presidentially-appointed and Congressionally-approved Director appointed to a five year term.  The CFPA's responsibilities would include rulemaking, examination and enforcement of financial institutions that provide consumers with financial products and services.  The rulemaking authority of the Federal Reserve Board and other Federal banking regulator agencies under current consumer banking laws would transfer to the CFPA.

A press release from Committee Chairman Barney Frank states that, in addition to having enforcement and broad examination powers, "the agency will closely monitor the marketplace for any new financial products or services that could potentially harm consumers as well as the larger economy. Once the agency identifies these threats or abuses, it will have the power to write rules that can regulate, restrict or ban them. It will also have the power to establish guidelines so that companies issue clear and fair disclosures to customers on products such as credit cards and mortgages. "

The proposed CFPA includes an Office of Fair Lending and Equal Opportunity responsible for enforcement of the Equal Credit Opportunity Act (ECOA), the Home Mortgage Disclosure Act (HMDA), and coordinating with other federal agencies regarding fair lending matters.

The Committee vote is only the first step in what is likely to be a long process towards the creation of a new consumer financial services oversight agency.  Many issues remain, including exemptions for small banks, the remaining scope of the Federal Reserve Board's authority, enforcement powers, and preemption.  The CFPA also faces strong opposition from many corners, including from the American Bankers Association.

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On October 12, 2009, MERSCORP, Inc. (MERS) and Interthinx announced the launch of a national fraud prevention database that will help lenders seek, identify, and share suspected fraudulent activity in loan applications from the point of origination. MERS FraudALERTSM, powered by Interthinx, will allow lenders to identify potential mortgage fraud through the sharing and reporting of data among the more than 62 million loans currently registered on the MERS® System, according to a MERS press release. Lenders using FraudALERTSM will submit loan application data and incident reports with suspected or confirmed fraudulent activity to a centralized database. The system will then notify other lenders who have loans that may have connections to the data, alerting them to possible fraudulent transactions in their pipelines.  FraudALERTSM will be released during the fourth quarter 2009. 

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United Security Bancshares Inc., Thomasville, Ala., entered into a settlement agreement with the Department of Justice's Civil Rights Division to resolve allegations that its subsidiary First United Security Bank violated the Fair Housing Act and the Equal Credit Opportunity Act when dealing with African-American borrowers.  According the the Justice Department's press release, the Complaint alleged that the bank charged African-American borrowers higher rates than similarly-situated white borrowers on home mortgage-related loans. The complaint also alleged that the bank engaged in unlawful "redlining" by failing to provide its lending products and services on an equal basis to majority African-American areas in west central Alabama.

Under the Consent Order, which remains subject to court approval, First United Security Bank will invest more than $600,000 to open a new branch in an African-American neighborhood in west central Alabama and take other steps resolve allegations that it engaged in a pattern of discrimination on the basis of race.  The additional steps include investing $500,000 in a special financing program, and spending more than $110,000 for outreach to potential customers, promotion of its products and services and consumer financial education in the redlined areas.

The lawsuit originated from a referral from the Federal Deposit Insurance Corporation (FDIC), according to the DOJ press release.

This is the first Fair Lending case regarding mortgage lending filed by the Justice Department in over a year, and comes on the heals of the FFIEC's release of 2008 HMDA data that, according to  a Wall Street Journal article summarizing the HMDA report, shows that African-Americans and Hispanic whites were far more likely than non-Hispanic whites to be denied last year in applying to refinance.

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