Options Trading Before Merger and Acquisition Announcements Indicate Pervasive Insider Trading

Professors at McGill University and New York University released a study investigating unusual trading activity that occurs before mergers and acquisitions announcements. Equity options in approximately 25% of target firms had abnormal trading volumes on a level that was statistically significant. Continue reading

Professors at McGill University and New York University released a study investigating unusual trading activity that occurs before mergers and acquisitions (M&A) announcements. The study looked at trading activity in equity options for the 30 day period prior to M&A announcements. Equity options in approximately 25% of target firms had abnormal trading volumes on a level that was statistically significant, showing that insider trading likely occurred. Abnormal trading was especially common in call options and out-of-the-money options.

The study’s results suggest that insider trading is pervasive. The study states that the odds of observing such unusual trading activity by chance is extremely low – “about three in a trillion.”

The study indicates that the SEC only investigates a fraction of the instances of insider trading occurring in the markets. The SEC tends to focus on cases with large target companies and cases with foreign acquiring companies. The SEC brings litigation much more frequently when the deals are actually seen through to completion – “a withdrawn or rumored deal is about 22 times less likely to be investigated.”

Sources:

Informed Options Trading prior to M&A Announcements: Insider Trading?

“Study Asserts Startling Numbers of Insider Trading Rogues”

Exam Alert: FINRA Revises Series 26 Exam

Effective June 16, 2014, FINRA will modify the outline for the Series 26 exam. The changes affect the structure of the outline, the distribution of the exam questions, and the content tested on the exam. The total number of scored and unscored questions and the score required to pass remain unchanged. Continue reading

Effective June 16, 2014, FINRA will modify the Series 26 exam. The changes affect the structure of the outline, the distribution of the exam questions, and the content tested on the exam. The total number of scored and unscored questions and the score required to pass remain unchanged.

The structure of the new outline places topics into three “functions” (job responsibilities of an investment company and variable contracts products principal). These functions are then broken down into specific tasks as subsections. This is in contrast to the old outline, which has five broad sections and had subsections based on topics and/or rules.

The question distribution for the exam will change alongside the outline format. There is less of a focus on hiring and qualification and training of representatives. There is an increased focus on supervision, sales practices, and business processing and recordkeeping rules. According to FINRA, “the questions on the revised Series 26 examination place greater emphasis on key tasks such as supervision of registered persons, sales practices and compliance.” FINRA states that this adjustment “better reflects the key tasks performed by an Investment Company and Variable Contracts Products Principal.”

New content that may be tested on the revised exam includes the USA PATRIOT Act and associated anti-money laundering rules, the Fair and Accurate Credit Transaction Act of 2003 (FACT Act) and associated anti-identity theft rules, the Office of Foreign Assets Control (OFAC) Specially Designated National List (SDN), and Federal Deposit Insurance Corporation (FDIC) disclosures. Several new FINRA and SEC rules are on a wide range of topics may also be tested. These topics include disclosures during registration, deferred variable annuities, networking arrangements, proxies, business continuity plans, and holding customer mail, among others.

While some content that was listed on the old outline is not explicitly included on the new outline, test takers should still learn the material. For example, while the new outline does not specifically mention 529 plans or retirement plans, test takers will still be expected to know the rules regarding those products so that they may properly supervise individuals that sell such products.

Source: FINRA Regulatory Notice 14-18: FINRA Revises the Investment Company and Variable Contracts Products Principal (Series 26) Examination Program

This alert applies to the Series 26.

Solomon’s Industry News: May 5, 2014 Edition

Solomon Exam Prep is happy to release this month’s edition of “Solomon’s Industry News.” Continue reading

Solomon's Industry News Header

Solomon Exam Prep is happy to release this month’s edition of “Solomon’s Industry News.” Every month we will send out industry updates from the past month, so you can stay current and up-to-date on everything that is happening here at Solomon and in the industry.

Check out this month’s edition here: Solomon’s Industry News 05/05/2014

To be added to our monthly mailing list, please click here.

Exam Alert: Federal Agencies Implement Volcker Rule

Effective April 1, 2014, five federal agencies will implement a provision of the Dodd-Frank Act known as the Volcker rule. This rule prohibits a bank from making short-term trades in financial instruments for its own account. The rule also limits the relationships a bank can have with hedge funds and private equity funds. Continue reading

Effective April 1, 2014, five federal agencies* will implement a provision of the Dodd-Frank Act known as the Volcker rule. This rule prohibits a bank from making short-term trades in financial instruments for its own account. The rule also limits the relationships a bank can have with hedge funds and private equity funds.

The rule provides exemptions for certain activities, including underwriting, market making, hedging risk, trading in certain government securities, trading in a fiduciary capacity, and riskless principal trading. Foreign banks are exempt if the trades meet certain requirements. Insurance companies are exempt when trading for their general or separate accounts.

The rule requires banks engaging in the activities covered by the rule to put in place a compliance program. The level of detail of the compliance program depends on the size of the bank, with larger banks needing more detailed compliance programs.

*The five agencies are the Board of Governors of the Federal Reserve System, the Office of the Comptroller of the Currency, the Federal Deposit Insurance Corporation, the Securities and Exchange Commission and the Commodity Futures Trading Commission.

Source: SEC Release 2013-258: Agencies Issue Final Rules Implementing the Volcker Rule

This alert applies to the Series 6, Series 7, Series 24, Series 55, Series 62, and Series 79.

Solomon’s Industry News: November 25, 2013 Edition

Solomon Exam Prep is happy to release this week’s edition of “Solomon’s Industry News.” Continue reading

Solomon's Industry News Header

Solomon Exam Prep is happy to release this week’s edition of “Solomon’s Industry News.” Every week we will send out industry updates from the past week, so you can stay current and up-to-date on everything that is happening here at Solomon and in the industry.

Check out this week’s edition here: Solomon’s Industry News 11/25/13

To be added to our weekly mailing list, please click here.

Solomon’s Industry News: November 18, 2013 Edition

Solomon Exam Prep is happy to release this week’s edition of “Solomon’s Industry News.” Continue reading

Solomon's Industry News Header

Solomon Exam Prep is happy to release this week’s edition of “Solomon’s Industry News.” Every week we will send out industry updates from the past week, so you can stay current and up-to-date on everything that is happening here at Solomon and in the industry.

Check out this week’s edition here: Solomon’s Industry News 11/18/13

To be added to our weekly mailing list, please click here.

Exam Alert: SEC clarifies supervisory liabilities of legal and compliance personnel

On September 30, 2013, the Division of Trading and Markets of the SEC put out an FAQ detailing when legal and compliance personnel would or would not be held responsible for failing to supervise a broker-dealer employee that commits a violation. Continue reading

On September 30, 2013, the Division of Trading and Markets of the SEC put out an FAQ detailing when legal and compliance personnel would or would not be held responsible for failing to supervise a broker-dealer employee that commits a violation. Legal and compliance personnel are not, by default, considered supervisors, so they are not held responsible unless their position places them in a supervisory role. This can be determined by considering whether the personnel has the “requisite degree of responsibility, ability or authority to affect the conduct of another employee.” The Division lists several questions that can be used to ascertain whether the personnel has such responsibility, ability, or authority, but key elements are:

  • whether the company is structured in such a way that the personnel is clearly designated with responsibility,
  • whether the personnel can hire, reward, punish, or fire the employee, and
  • whether the personnel knew or should have known that he or she was responsible for preventing the violation.

Source: Frequently Asked Questions about Liability of Compliance and Legal Personnel at Broker-Dealers under Sections 15(b)(4) and 15(b)(6) of the Exchange Act

Further reading: United States: When Legal Or Compliance Personnel May Be Subject To Failure To Supervise Liability Under The Securities Laws

This alert applies to the Series 24, Series 26, Series 62, and Series 82.

Exam Alert: SEC changes broker-dealer financial responsibility rules

On October 21, 2013, the SEC will put into effect amendments to its financial responsibility rules for broker-dealers. These amendments include changes to the customer protection rule, net capital rule, books and records rules, and notification rule. Continue reading

On October 21, 2013, the SEC will put into effect amendments to its financial responsibility rules for broker-dealers. These amendments include the following changes:

Customer Protection Rule (Rule 15c-3-3)

-Carrying broker-deals that maintain customer securities and funds will be required to maintain a new segregated reserve account for broker-dealer accounts.

-The reserve requirement to protect customer cash will exclude cash deposits at affiliated banks and limit cash held at non-affiliated banks to no more than 15% of the bank’s equity capital.

-The rule will require disclosure, notice, and affirmative consent from the customer when their cash is “swept” to a money market or bank deposit product.

Net Capital Rule (Rule 15c3-1)

-The rule will require a broker-dealer to include liabilities assumed by a third party in the broker-dealer’s net worth if the third party is reliant on the broker-dealer to pay the liabilities.

-The rule will require a broker-dealer to count as a liability any contributed capital that may be withdrawn by an investor. Contributed capital that is withdrawn within a year of contribution must also be treated as a liability, unless the broker-dealer receives written permission for the withdrawal from its designated examining authority.

-Broker-dealers will be required to deduct from net capital the excess of any deductible amount over the amount permitted by SRO rules.

-Insolvent broker-dealers will be required to cease conducting a securities business.

Books and Records Rules (Rules 17a-3 and 17a-4)

-Large broker-dealers will be required to document their risk management controls.

Notification Rule (Rule 17a-11)

-The rule will establish new notification requirements for when a broker-dealer’s repurchase and securities lending activities exceed a certain threshold. Alternatively, a broker-dealer may instead report such activity monthly to its designated examining authority.

 

Source: SEC Release 2013-140: SEC Adopts Amendments to Financial Responsibility Rules for Broker-Dealers

 

This alert applies to the Series 24, Series 26, Series 7, Series 99, Series 82, Series 79, and Series 55.

Study Question of the Week: October 2, 2013 Edition

This week’s study question from the Solomon Online Exam Simulator question database is now available. Relevant to the Series 24 and Series 79. –ANSWER POSTED– Continue reading

This week’s study question from the Solomon Online Exam Simulator question database is now available.

Question (Relevant to the Series 24 and Series 79)

An issuer of publicly offered securities must file:

Answers:

A. Five copies of the preliminary prospectus with the SEC no later than the date that it is first sent to investors

B. Ten copies of the preliminary prospectus with the SEC no later than the date that it is first sent to investors

C. Five copies of the preliminary prospectus with the SEC at least 10 days prior to the date that it is first sent to investors

D. Ten copies of the preliminary prospectus with the SEC at least 10 days prior to the date that it is first sent to investors

Correct Answer: A

Rationale: An issuer of publicly offered securities must file five copies of the preliminary prospectus with the SEC no later than the date that it is first sent to investors.

Weekly study questions are from Solomon’s industry-leading Online Exam Simulator.

Exam Alert: SEC requires financial institutions to implement identity theft programs

On April 10, 2013, the SEC announced that it and the CFTC were implementing rules to require broker-dealers, mutual funds, investment advisers, and certain other entities to adopt programs to prevent identity theft. Continue reading

On April 10, 2013, the SEC announced that it and the CFTC were implementing rules to require broker-dealers, mutual funds, investment advisers, and certain other entities to adopt programs to prevent identity theft.

 

The programs should be designed to identify relevant red flags, and to detect and respond to such red flags. The programs must also be updated periodically. Staff should receive adequate training. Financial institutions must exercise appropriate and effective oversight of service provider arrangements.

 

The rules will become effective 30 days after publication in the Federal Register. The compliance date for the rules will be six months after their effective date.

 

Source: SEC Release 2013-57: SEC Adopts Rules to Help Protect Investors from Identity Theft

 

This alert applies to Series 24, Series 26, Series 65, Series 66, and Series 99.