From the September 2009 issue of Investment Advisor • Subscribe!

Broker/Dealer News

The Securities and Exchange Commission announced a settlement August 3 against Bank of America for misleading investors about billions of dollars in bonuses that were paid to Merrill Lynch executives after BofA acquired the brokerage giant last year. The SEC says that Bank of America has agreed to settle the SEC's charges and pay a $33 million penalty. However, that settlement is in jeopardy after U.S. District Court Judge Jed Rakoff refused to approve it in a public hearing in New York on August 10, saying neither the bank nor the SEC had convinced him that the settlement was fair to shareholders and U.S. taxpayers. Rakoff, who oversaw the SEC's accounting fraud suit against WorldCom in 2003, said in the hearing that the $33 million penalty was "strangely askew," and that it represented only a "tiny, tiny fraction" of the bonus money that was paid out. The judge gave BofA and the SEC until August 24 to present their arguments on the deal, and promised to rule on the matter by September 9. The SEC had alleged that in proxy materials soliciting the votes of shareholders on the proposed acquisition of Merrill, "Bank of America stated that Merrill had agreed that it would not pay year-end performance bonuses or other discretionary compensation to its executives prior to the closing of the merger without Bank of America's consent." In fact, the SEC says, "Bank of America had already contractually authorized Merrill to pay up to $5.8 billion in discretionary bonuses to Merrill executives for 2008." According to the SEC's complaint, "the disclosures in the proxy statement were rendered materially false and misleading by the existence of the prior undisclosed agreement allowing Merrill to pay billions of dollars in bonuses for 2008."

SEC Chairman Mary Schapiro said recently that the Commission will consider a rulemaking banning "flash" orders, which she described as trades that "flash in milliseconds to only a select group of market participants which can disadvantage other investors." Schapiro said the SEC earlier this year undertook a review of flash orders, and since that review, she has asked SEC "staff for an approach that can be quickly implemented to eliminate the inequity that results from flash orders." Meanwhile, the SEC also levied in August its first enforcement action against two options traders and their broker/dealers for "naked" short selling, charging them with violating the locate and close-out requirements of Regulation SHO.

The Financial Industry Regulatory Authority (FINRA) recently fined NEXT Financial Group, Inc., headquartered in Houston, $1 million for supervisory violations that primarily involved the failure to supervise its approximately 130 OSJ branch managers. While FINRA notes that OSJs typically supervise transactions and sales activity for individual brokers or branches within a particular region, and that the branch managers' transactions and sales activities are then supposed to be supervised by another registered principal designated by the firm, it charged NEXT with allowing its OSJ branch managers to self-supervise their own handling of customer accounts without adequate review between January 2005 and November 2006.

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