This week’s newsletter highlights recent developments in United Kingdom regulatory bodies, and contains staff guidance from the SEC concerning well-known seasoned issuers and satisfaction of legend requirements, as well as industry developments in leveraged loans and crowdfunding fraud. Winston & Strawn LLP’s “Insights” discusses how FINRA amended its background check requirements and why directors and officers should focus on cybersecurity.
FINRA: Expanded Background Check Requirements Submitted to SECfor Approval. The Financial Industry Regulatory Authority (“FINRA”) amended its supervision rule, which as approved by FINRA’s Board of Governors would require member firms to verify the completeness and accuracy of information appearing on an applicant’s Form U4.(Representatives of broker-dealers, investment advisers and issuers must complete the Form U4 to become registered in appropriate jurisdictions and/or SROs.) The amendment applies the heightened standards to both first-time applicants and transfers. Under the changes, member firms must also adopt written compliance procedures. In addition, FINRA announced that it will search public financial records for all registered representatives, and publicly-available criminal records for all registered individuals who have not been fingerprinted within five years, to assess the accuracy and completeness of, and compliance with, reporting requirements.
FINRA’s chairman and CEO, Richard G. Ketchum, said that the more robust standards are meant to “ensure that firms are meeting their obligations” and address “reporting failures,” perhaps the most noteworthy of which was a report in the Wall Street Journal earlier this month revealing that over 1,600 brokers had unreported bankruptcy filings or criminal charges. (See Wall Street Journal.)
The financial industry greeted the amendment with mostly silence. The Securities Industry and Financial Markets Association, an industry association representing hundreds of asset managers, banks and securities firms, has not yet taken a position on the amendment.
It is unclear whether the new amendment will impact how investors choose brokers. FINRA revealed that only 15% of investors used its BrokerCheck database to evaluate their brokers during 2009. Last year, a FINRA analysis revealed that focus group participants remained “unaware of the existence of BrokerCheck.”
The SEC must first approve the amendment before it goes into force.
Cybersecurity: Directors and Officers Need to Understand How Their D&O Policies Address Cyber Threats. In Winston & Strawn LLP’s Financial Services Update from March 31, 2014 (Vol. 9, No. 13), we highlighted how cybersecurity is becoming a growing concern for government regulatory agencies. Now directors and officers of public companies should focus on cybersecurity. Several well- publicized class-action lawsuits and derivative actions brought by shareholders in the wake of data breaches at public companies revealed that the D&O insurance policies covering the directors and officers of those companies might not actually cover liabilities related to the actions.
Typically, D&O policies limit coverage for directors and officers to actions only wherein those directors and officers are personally named. However, a new trend in shareholder actions is to allege that directors and officers breached their fiduciary duties in the wake of data breaches – but to only name the company, not individual directors and officers. (See “Defending the Breaches,” below.)
D&O policies can be crafted to address this growing litigious strategy, so directors and officers should review their policies to determine if they adequately respond to these types of cybersecurity-related actions.