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Archive for June, 2010


SEC to Decide Fiduciary Standard

Legislators finally reached a compromise on the fiduciary standard bill late Thursday after fierce last-minute wrangling over its contents.

While the House’s version pushed for the Securities and Exchange Commission to create a fiduciary standard, the Senate preferred instead to have the SEC study differences between its fiduciary standard and the suitability standard many brokers are held to by FINRA, without giving the SEC the power to do anything about it.

The final bill contained elements of both—the SEC is charged with studying differences in fiduciary and suitability standards over the next six months, and then potentially create rules that fill any gaps, although the language of the bill doesn’t make this mandatory. Currently, registered investment advisors are held to a fiduciary standard under the Investment Advisers Act of 1940, whereas investment advisors who hold securities licenses report to FINRA, which requires advisor recommendations to be “suitable” to a client’s needs. RIAs have long complained that the suitability standard is not good enough and that anyone selling investment products should do so only when it is in a client’s best interests.

Banks, in particular, could be hurt by a blanket fiduciary standard, which could hypothetically put an end to platform programs if a new rule stipulated that investors pay a flat fee for anything they buy because many bank clients have fewer assets to invest. Heywood Sloane, managing director of the Bank Insurance and Securities Association notes that the bill’s current language suggests proprietary products, commissions and selected lists of products aren’t off the table, but he remains wary of what the SEC might decide. “As the SEC works through this, it has to allow people to provide services in a way that earns them a living,” he says. “If not, you’ll see only high-net-worth individuals taken care of because the margins will be too tight on smaller accounts.”

Looks Like a Loss for Credit Susse in Auction-Rate Securities Cases

Last month, a Financial Industry Regulatory Authority (FINRA) arbitration panel awarded $9.8 million to Catalyst Health Solutions in its auction-rate securities case against Credit Suisse Securities, meaning that more institutional investors are coming out on top in their cases involving auction-rate securities.

Catalyst Heath Solutions, which manages prescription drug benefits, is just one of many institutional investors to take legal action against Credit Suisse after the ARS market came to an abrupt standstill in February 2008. Following the market’s collapse, institutional and retail investors alike were left financially hammered, unable to liquidate their supposedly liquid investments.

Ultimately, regulatory settlements were reached with a number of broker/dealers that marketed and sold auction-rate securities to investors. Most of the agreements, however, benefited retail ARS holders, not institutional investors.

In 2009, another institutional investor, STMicroelectronics NV, also successfully won its case against Credit Suisse when a FINRA arbitration panel ordered the brokerage to pay STMicroelectronics NV more than $406 million to settle claims that it misled the semiconductor maker into buying auction-rate securities.

On May 27, 2010, FINRA again ruled in favor of an investor’s arbitration claim against Credit Suisse. This time, the panel found Credit Suisse liable to Luby’s Inc. Specifically, FINRA ordered Credit Suisse to buy back the auction-rate securities at par and to pay interest on them at the par purchase price of 6% per annum from and including May 29, 2010, through and including the date the award is paid in full. According to Luby’s Feb. 10, 2010, quarterly filing, the company held $7.1 million par value or $5.2 million fair value in auction-rate securities.

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