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Archive for the ‘NASAA’ Category


Energy related investment fraud on state regulator’s radar

In the North American Securities Administrators Association’s (NASAA) most recent enforcement report, oil and gas investments were the fourth most common product involved in state securities enforcement cases, with nearly 40% of responding jurisdictions reporting energy-related faud cases.

“Many of these investments are highly risky and illiquid and therefore are not appropriate for many investors,” said Heath Abshure, NASAA President and Arkansas Securities Commissioner. “It is not unusual for unscrupulous promoters to use the lure of current events or innovative technologies to take advantage of unsuspecting investors by engaging in fraudulent practices.”  Abshure said promoters sometimes prey on investors interested in socially responsible products by labeling them as “green energy” investment opportunities. The phrase “green energy” implies that the products are ecologically friendly. In some cases, the promoters may be operating a fraudulent shell company and not producing anything.

Energy-related investments can take many forms: as a private placement purchased through a subscription agreement, a limited or general partnership, or as a joint venture. Issues are also offered as common stocks, bonds and ETFs.

Mandatory arbitration in the news again

The system of mandatory arbitration of disputes between brokerage firms and customers is again in the news.  This time the North American Securities Administrators Assocation, Inc. has been lobbying the SEC to act on its authority under Dodd-Frank to end or limit the use of pre-dispute mandatory arbitration agreements included in virtually all customer agreements used by Wall Street.

Heath Abshure, Arkansas’ securities commissioner and NASAA president, used an example of an investor whose individual retirement account totals $27,000.  “If he’s got a mandatory arbitration provision with a Charles Schwab class action waiver, that means he’s going to arbitration. That’s the only alternative he has. Find the securities lawyer who is going to take a $27,000 class action fraud case…”  He added that the way things are currently set up, “The [arbitration system] really presents an absolute prohibition and an impossibility for small investors to seek redress for securities fraud.”

Ira Hammerman, senior managing director and general counsel at SIFMA, countered that the arbitration process, which is administered by FINRA, is the fairest and most efficient way to help small investors.

“It is one where customers who have small claims can go and have those claims resolved. A customer can literally fill out in handwriting a piece of paper … and even in that $27,000 account can have their so-called day in court, where if it were a real court, there’s no way that anyone could pursue that case,” Mr. Hammerman said at the InvestmentNews event.

The defendants in arbitration cases also have misgivings. Among independent broker-dealers, there has been a growing “disenchantment” with the system over the last year, according to Dale Brown, president and chief executive of the FSI.

NASAA: Reform arbitration or add court option

The securities arbitraiton system should be refored or else investors should be given the option of taking their disputes to court, according to a group that represents state securities regulators.

“We think it needs to be reformed,” said Joseph Borg, director of the Alabama Securities Commission in Montgomery and president of the North American Securities Administrators Association Inc. “Absent that we may have to consider making it optional.”

As part of its 2007 legislative agenda, Washington-based NASAA is calling for the new Democratic Congress to review the arbitration system.

But it isn’t clear whether the congressional committees that oversee financial services will take up arbitration soon.

“Financial services is a big world,” and House Financial Services Committee Chairman Barney Frank, D-Mass., hasn’t added the subject to his agenda so far, said committee spokesman Steve Adamske.

Among issues that need to be reviewed, Mr. Borg said:
• How arbitration panels are selected.
• Whether arbitrators are properly trained.
• Whether explanations of awards are sufficient.
• Whether the system is cost efficient.

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