Source: https://www.floridabar.org/the-florida-bar-journal/florida-financial-reform-after-madoff/
Timestamp: 2020-04-01 15:55:42
Document Index: 526877371

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Florida Financial Reform After Madoff – The Florida Bar
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Executive Directions
Florida Financial Reform After Madoff
Vol. 84, No. 9 November 2010 Pg 22 James F. McAuley and Richard A. White Featured Article
The Bernard Madoff scandal sent an estimated $50 billion shock wave through the financial markets in late 2008 with national credit markets already near freefall after the Lehman Brothers bankruptcy. Madoff displayed the image of a highly successful investment advisor while creating the largest Ponzi scheme in U.S. history. The Florida Legislature took swift action to improve financial regulations with the passage of House Bill 483 in June 2009.1 Governor Charlie Crist, the cabinet, and the Florida Legislature recognized and acted upon the immediate need for improving investor protection.
HB 483 amended Ch. 517, the Florida Securities and Investor Protection Act (FSIPA), which is administered by the Office of Financial Regulation (OFR), an agency supervised by the Financial Services Commission.2 OFR is statutorily tasked with regulating under the FSIPA and bringing action against violators of the FSIPA.3 Under the FSIPA, the OFR regulates securities offerings, investment advisers, broker-dealers, and their associated persons doing business in Florida.4
HB 483 bolstered protection for investors from Madoff-like Ponzi schemes by incorporating additional licensing and enforcement authority to the existing regulatory framework. The bill’s sponsor, Representative Tom Grady, recognized the importance of updating Florida’s laws, saying, “[by] increasing the tools available to the state to prosecute violators of our securities laws, we protect investors and foster needed trust in the system.”5 HB 483 improves existing investor protections in various ways, one of which provides incentives to whistleblowers for original information regarding money laundering.6 The bill also expands the role of the Office of Statewide Prosecution and the statewide grand jury by adding criminal violations of the Florida Money Laundering Act and the FSIPA to the list of offenses that may be addressed by the statewide grand jury and prosecuted by the Office of Statewide Prosecution.7 In addition, the bill allows for the OFR to impose an emergency suspension in circumstances when a broker-dealer, investment adviser, associated person, or issuer of securities fails to provide books and records requested by the OFR pursuant to its statutory authority.8 The amended FSIPA also brings additional state legal resources to bear on violations of securities laws by authorizing the Florida attorney general, with permission from the OFR, to investigate and bring securities fraud charges of either criminal or civil nature for violations of the anti-fraud provisions of the FSIPA. The OFR and the AG each have the ability to seek injunctive relief, obtain restitution for victims, and obtain civil money penalties and attorneys’ fees.9 The legislation also amends F.S. §517.191(6) and clarifies that the OFR may pursue both administrative sanctions and civil actions against any person who violates the FSIPA, but states the person shall not be subject to both civil money penalties and administrative fines for the same acts.
Perhaps the single most comprehensive change enacted through HB 483 is the creation of new licensing and disciplinary guidelines under F.S. §517.1611 (2009). This section of the new law authorizes the Financial Services Commission to adopt, by rule, disciplinary guidelines that “shall specify a range of penalties based upon the severity and repetition of specific offenses.”10 These disciplinary guidelines will be “applicable to each ground for disciplinary action that may be imposed by the office.” Thus, HB 483 has mandated that the OFR will establish guidelines for imposition of fines, suspensions, and restrictions of registration for brokers, investment advisers, and associated persons with a record of violations. This new rule and associated matrix takes into account severity and repetition of offenses.11
F.S. §517.1611 also mandates that the commission adopt by rule “disqualifying periods” to establish when “an applicant will be disqualified from eligibility for registration.”12 & #x201c;Disqualified from eligibility for registration” is a new term introduced by the legislature. In as much as the OFR had statutory authority to deny an applicant registration under F.S. §517.161, prior to this new law, the plain language of the new licensing provisions would indicate that upon a determination of disqualification from eligibility, an individual subject to the provisions of the statute and OFR rule will be disqualified from registration by the office during the applicable statutory term. The disqualifying period has been established by the legislature as 15 years for a felony and five years for a misdemeanor.13 In F.S. §517.1611(2)(b), the legislature specified these disqualifying periods to be based upon “crimes involving moral turpitude or fraudulent or dishonest dealing.” The legislature did not define the phrase “moral turpitude” in F.S. §517.1611(2), but instead directed the Financial Services Commission, through the OFR, to promulgate rules, which give specific meaning to “crimes involving moral turpitude.” The commission noticed Rule 69W-600.0021, Florida Administrative Code, for development in the Florida Administrative Weekly on August 21, 2009. The rule became final on March 2, 2010.14
Rule 69W-600.0021 establishes a list of crimes that OFR has categorized as Class A and B, with Class A including the more serious offenses. Class A crimes (15-year disqualifying period) includes felonies “involving any type of fraud” as well as crimes of moral turpitude, while Class B (five-year disqualifying period) consists of misdemeanor offenses based upon the same statutory standard. The enumerated disqualifying periods may be shortened by certain “mitigating factors” set forth in the rule. Rule 69W-600.0021 is designed to create what can be termed up-front protection for investors, as each seeks to screen out applicants with a criminal history directly involving fraud or moral turpitude. Moral turpitude has been defined by the Florida Supreme Court as associated with “conduct of inherent baseness and depravity in the private social relations or duties owed by man to man or by man to society.”15
Given the limitations imposed by federal law, as discussed herein, these enactments are designed to prevent licensing individuals with a documented history of fraud or “moral turpitude” and, thus, represent an appropriate legislative response to the fraud perpetrated by Bernard Madoff. However, Madoff is not the only perpetrator preying on the investing public. A recent survey by the North American Securities Administrators Association (NASAA), a state regulatory umbrella group, and AARP revealed that nearly six million Americans ages 55 and up attended a free lunch or dinner seminar in the past three years.16 AARP data also reveals that o ver a quarter of invitees (27 percent) have received 10 or more invitations to these free lunch seminars.17 These “free lunches” are attractive to seniors, not because of the free lunch, but because of the desire for safe investments. Florida’s elderly population is especially vulnerable to such seminars that, according to NASAA and other regulatory authorities, often provide a “common setting for fraudsters to engage with their victims.”18 These seminars are also common venues for salesmen to encourage retirement age individuals to invest, often in various unsuitable products, including specific types of annuities.19
Suitability Concerns
Suitability is a concept long recognized as a necessary guideline and principle of the securities industry. It has been adopted by the OFR in its rules as well.20 An in-depth discussion of suitability is beyond the scope of this article, as “suitability” is infused with regulatory and judicial interpretations. adopting Conduct Rule 2310 (Recommendations to Customers), the OFR endorses the guidelines established by the former NASD.21 This rule calls upon FINRA members to evaluate customers’ needs based upon specific factual information keyed to the financial sophistication and background of individual customers, including their other security holdings, financial situation, and needs. A distinction is drawn between “institutional” customers and “noninstitutional” customers.22 Application of the conduct rules for suitability will also depend upon whether a “recommendation” has been made by a broker or investment adviser. Suitability is also regulated by the OFR in the context of municipal securities by adoption of guidelines of the Municipal Securities Rulemaking Board (MSRB).23
A Synopsis of State Investor Protection
State securities regulators have a long history of providing protection and leadership on issues of real concern to Main Street investors. In fact, state securities regulation predated federal regulation by almost a quarter century. The first regulation by a state occurred in Kansas in 1911, and these regulations became known generically as “blue sky laws.”24 Florida first enacted its securities regulation in 1913.25 Florida’s courts also have a long history of jurisprudence supporting state statutes focused on investor protection.26
The securities regulations of most states share four elements: 1) they require registration of securities to be offered or sold within the state, unless they fall within specific exemptions from registration; 2) they require registration and licensing of firms and individual brokers that will sell securities within the state; 3) they require registration of investment advisers and investment adviser representatives; and 4) they include anti-fraud provisions that create liability for inaccurate or misleading statements and failures to disclose required information (omission of a material fact). These four elements have stood the test of time and continue to protect investors today — albeit limited by federal preemption, discussed below — at a time when the Securities and Exchange Commission (SEC) faces scathing public and congressional criticism relating to admitted failings in detecting large-scale frauds like Madoff.
New York’s blue sky law, known as the Martin Act,27 represents an application of the anti-fraud element of state securities laws, and has been employed by the New York attorney general’s office in policing Wall Street misdeeds, notwithstanding the existence of an overlay of federal regulation. Beyond the New York actions, during the 2008-09 economic meltdown, state securities regulators, in concert with NASAA, have achieved large settlements following the collapse of the auction-rate securities marketplace. One example of the fruits of that coordination was the states’ settlement with Wells Fargo Bank, which resulted in the return of approximately $1.3 billion to the firm’s clients who had their funds frozen in the auction-rate securities market.28 NASAA has maintained a working group of states, including Florida, in pursuit of other auction-rate matters.29 In total, auction-rate state settlements, according to NASAA, resulted in return of nearly $61 billion to investors.30 These cases, as well as others, such as the “Global Research Analyst Settlements” earlier in the decade (2003), demonstrate the importance of state securities regulation to investor protection.31 Without these state enforcement efforts, the investing public plainly would be without much of the monetary relief produced to date. These results have been produced because the states have demonstrated initiative in actively pursuing restitution to victims. Also, unlike private class actions, which involve compensation of class counsel, multi-state regulatory actions accomplish recovery for investors without this cost. In addition, the regulatory power of states to impose licensing sanctions on licensees associated with wrongdoing inhibits licensees from raising frivolous litigation defenses.
However, there are limits to state actions. The most obvious of these limits is the limitation of jurisdiction. Florida law contains an express statement of the scope of its jurisdiction.32 In addition, the limited financial resources of any one state underscore the need for cooperation between states through organizations such as NASAA. Even with cooperation between states, congressional restrictions via federal preemption have led to judicial controversy, both in the state and federal courts, over the scope of preemption. The results from these decisions have real implications for Florida courts. These implications are discussed below, after briefly addressing the scope of preemption in federal statutes.
Concurrent Regulation and its Jurisprudence: A Prelude to Florida’s Current Regulatory Environment
Congress enacted the federal scheme largely to fill regulatory gaps that the states could not fill because of jurisdictional limits on their authority.33 Federal regulation began during the economic crises of the 1930s.34 First enacted was the Securities Act of 1933, which requires registration with the Securities Exchange Commission of all securities that do not qualify for exemption, before trading is allowed.35 This landmark legislation was followed the very next year with another piece of congressional “New Deal” legislation, the Securities Exchange Act of 1934.36 The 1934 Act extended federal regulation to almost all aspects of the securities industry, including trading in securities already issued and outstanding. These federal acts and savings clauses contained therein deliberately set up a system of dual regulation.37
The U.S. Supreme Court has, at various junctures, traced the view of the federal courts on the role of the federal government and that of the states in securities regulation. One of the earliest federal cases supporting states’ authority in securities regulation is found in Hall v. Geiger-Jones, Co., 242 U.S. 539 (1917). The Geiger-Jones decision presented an early test of the states’ authority to regulate securities offerings under the so-called “blue sky” laws.38 The high court’s opinion in Geiger-Jones rejected constitutional challenges to Ohio state securities laws requiring approval of such offerings under Ohio law. The court rejected challenges on the basis of equal protection under the 14th Amendment, as well as a commerce clause challenge.39
The Supreme Court has also emphasized that Congress did not intend to exclude states from “concurrent regulation” of the securities industry: “Congress intended to subject the exchanges to state regulation that is not inconsistent with the federal [a]ct.”40 This approach to securities regulation was in harmony with Supreme Court doctrine stating that the states’ police powers were not subject to preemption under the Supremacy Clause, unless it was Congress’ clear intent to supersede state law.41 Naturally, under the Supremacy Clause, in the case of a direct conflict, federal law preempts state regulation.42 In addition, U.S. Supreme Court precedent has required, as a condition of preemption, that compliance with both state and federal law was a physical impossibility or that state law presented an obstacle to the accomplishment of the purpose of the federal law.43
The NSMIA and Limitations on State Regulation
The Congressional balancing act of fostering “concurrent” federal and state regulation of securities ended in 1996 because of industry concerns over inefficiency in state regulationsand a desire to promote capital formation.44 The respective roles of the states and federal government in regulating securities markets changed significantly after the enactment of the National Securities Markets Improvement Act of 1996 (NSMIA).45 This act affirmatively preempted certain state regulation of national securities issues, thus eliminating much of the original system of dual regulation.46
Section 102(a) of the Capital Markets Efficiency Act of 1996, a part of the NSMIA, amended the 1933 Act by eliminating the necessity of registering most securities with both state and federal governments. Congress did so by amending §18 of the act, which, prior to amendment, provided that nothing in the act “shall affect the jurisdiction of the securities commission…of any [s]tate…over any security or any person.”47 Through the amendment, Congress prohibited the states from enacting or enforcing existing state laws and or regulations dealing with the “registration or qualification of securities, or registration or qualification of securities transactions” on any “covered” security.48 The term “covered security” is defined to include four separate and diverse categories of securities:49 1) exchange listed securities; 2) securities issued by investment companies;50 3) offers and sales to “qualified purchasers” as defined by the SEC;51 and 4) certain specified securities that are identified as exempt securities under federal law.52 As academic commentators have observed, the exact scope of preemption as to the third category is still unsettled.53 However, the SEC has addressed the issue through a series of releases.54
Notwithstanding the significant impact of these preemptive enactments by Congress upon the states and state courts, the role of the states remains important, even in a post-NSMIA regulatory era, because NSMIA’s preemption of state regulation was not complete. In fact, it was explicitly never intended to preclude states’ abilities to address fraudulent activity or abusive sales practices.55 Indeed, as described earlier, coordinated multistate enforcement efforts have relied upon exceptions to federal preemption to react to the massive losses sustained by investors spread across many different states in the auction-rate, and other securities cases.56
Regulation D and its Role in Preemption by Exemption
The 1933 Act prohibits the offer or sales of a security in the United States unless the offer and sale are registered with the SEC or are exempt from registration. Because registering a security with the SEC is expensive and time-consuming, few early-stage companies can afford to satisfy the legal requirements associated with securities registration. This limitation to raising capital has been commonly dealt with by smaller or “start-up” companies through offerings that meet the registration exemption provisions of the 1933 Act. The most common mechanism to accomplish capital formation for newly formed companies and small to mid-size companies is SEC Regulation D.57 In 1982, the SEC adopted 17 C.F.R. §§230.501-508, otherwise known collectively as Regulation D.58 Regulation D includes three exemptions from registration under the 1933 Act.59 The exemptions are contained in Rules 504, 505, and 506.
Why does Reg. D matter with respect to state regulation? Reg. D, Rule 506 is an exemption favored by issuers of large offerings because it allows an unlimited dollar amount of sales to an unlimited number of investors who satisfy the definition of accredited investor.60 A Reg. D offering is exempt from registration under the 1933 Act (and for the reasons discussed below will also be preempted from state regulation) if it meets the requirements set forth in this regulation, including, but not limited to, situations in which 1) the seller does not use general solicitation or advertising to market the securities; 2) the securities are sold to an unlimited number of accredited investors and up to 35 nonaccredited, but still sophisticated, investors; 3) purchasers receive “restricted” securities that cannot be traded freely in the secondary market after the offering; and 4) nonaccredited investors receive disclosure documents specified in the rule.61 NSMIA increased the importance of these federal exemptions because it included Reg. D offerings within the definition of a “covered security.”62 After enactment of NSMIA, such an offering, if properly constructed, is free from state securities review and exempt from traditional federal registration oversight.
Before the burst of the economic bubble in 2008, free market proponents would see these offerings as the best of both worlds. Following 2008, many senior Wall Street executives and those involved in state regulation have taken a different tack, calling for a more active regulatory function.63 Most recently, these calls found their way into the Senate bill, preceding the enactment of the Dodd-Frank Wall Street Reform and Protection Act.64 Unlike the Senate bill, the Dodd-Frank Act does not eliminate Reg. D preemption. Instead, it authorizes the SEC to issue regulations for the disqualification of offerings and sales of securities made under Reg. D, Rule 506 by certain specified persons (issuers, officers, owners, promoters, etc.), who have certain specified state or federal disciplinary backgrounds.65 However, this approach does not resolve controversy over claims of preemption through Reg. D. The application of this exemption as a basis for preemption has placed additional importance on these regulations because of the dual function placed on the exemption. The role of Reg. D as a “covered security” has been referred to as “preemption by exemption.”66 This view follows directly from a 2006 federal district court in Colorado holding a defendant must prove preemption by proving exemption.67 While Reg. D, Rule 506 is undoubtedly an effective tool for efficient capital formation, the coupling of the Reg. D, Rule 506 exemption with preemption of state securities registration authority has been revealed, through the crucible of litigation, to be a statutory model subject to manipulation, and, at worst, fraud. An evaluation of claims of preemption through exemption suggests room for improvement in federal law. A brief consideration of state and federal court Reg. D opinions, arising through claims of “preemption by exemption,” demonstrates this point.
A National Controversy Arising from Florida’s Courts
Judicial interpretations of the application of Reg. D, Rule 506, beginning with a highly controversial decision arising from the Southern District of Florida in 2002, demonstrate that federal preemption, in reliance on Reg. D, Rule 506, creates the potential for abuse.68 A key to understanding the legal controversy related to this exemption is found in Temple v. Gorman, 201 F. Supp. 2d 1238 (S.D. Fla. 2002). It is noteworthy that the Temple casearose out of a private, rather than a regulatory, cause of action. Perhaps the absence of a federal or state regulatory voice in the case left unspoken important, unforeseen regulatory consequences. The decision arose from a private action under the 1933 Act, which included a claim for violation of Florida law (Ch. 517) for the sale of an unregistered security.69 In the opinion, the Southern District rejected plaintiff John Temple’s arguments that a flawed private placement under Reg. D, Rule 506 resulted in a loss of the exemption, thus, supporting a state law claim. In rejecting the plaintiff’s arguments, the court found that NSMIA still preempted state law and hence preempted the private cause of action under F.S. Ch. 517. In essence, the judge reviewed the legislative history of the NSMIA and broadly concluded that Congress intended to preempt state law whenever securities are “offered or sold pursuant to a Commission rule or regulation adopted under such section 4(2).” Under this broad interpretation, it was sufficient that the security was offered pursuant to a Reg. D, Rule 506 SEC exemption by the following reasoning:
Plaintiffs have alleged that Defendants’ private placement of securities “purported to be exempt from registration pursuant to Rule 506 of Regulation D promulgated by the SEC.” Construing this allegation in Plaintiffs’ favor, the Court finds that the securities in this case were “offered or sold pursuant to a Commission rule or regulation adopted under section 4(2).” Regardless of whether the private placement actually complied with the substantive requirements of Regulation D or Rule 506, the securities sold to Plaintiffs are federal “covered securities” because they were sold pursuant to those rules.70
This holding eliminated the plaintiff’s ability to bring his or her state law claim for violation of the registration provisions of F.S. Ch. 517, without requiring proof of a legitimate Reg. D, Rule 506 exemption. As later observed by other state and federal courts, it does not take a great leap in imagination to foresee why the court’s reasoning could be used for less than high-minded ends.71
In contrast, the Alabama Supreme Court, in 2006, voiced a very different opinion on the same issue in a case arising out of Alabama state law in Buist v. Time Domain Corp, 926 So. 2d 290, 294-295 (Ala. 2005). In Buist, the defendant also claimed preemption of Alabama’s securities laws based upon Reg. D., Rule 506. The Alabama court, relying upon a well-established principle of federal and state securities law, ruled that the defendant was required to bear the burden of proof of a claim to exemption under Reg. D, Rule 506. The Alabama Supreme Court, after lengthy explanation of the operation of Reg. D, Rule 506, expressed the view that “under Rule 506 exemption and preemption are functionally equivalent.”72 Ultimately, this ruling led the court to an examination of the record of proof produced in the trial court concerning the claim of exemption under Reg. D, Rule 506, and concluded that no exemption existed under Reg. D. Having found that the record did not contain evidence to support compliance with the exemption, the court found that no federal preemption existed. Consequently, the Alabama Supreme Court reversed and remanded a lower court decision dismissing the suit based upon preemption of the Alabama securities laws.
Arkansas and Colorado federal district courts have also rejected the reasoning of Temple,73as has the only federal circuit to reach the issue, in Brown v. EarthBoard Sports USA Inc., 481 F.3d 901 (6th Cir. 2007). The Sixth Circuit’s opinion in the EarthBoard Sports case is the most important and persuasive to date because of its extensive consideration of the issue of preemption through NSMIA. In its opinion, the Sixth Circuit explicitly recognized that the proposition underlying the Temple decision was fraught with the potential for abuse saying:
The Temple court read language into the statute that does not appear there. A security is covered if it is exempt from registration…. Nowhere does the statute indicate that a security may satisfy the definition if it is sold pursuant to a putative exemption. If Congress had intended that an offeror’s representation of exemption should suffice it could have said so, but did not. Such an intent seems unlikely, in any event; that a defendant could avoid liability under state law simply by declaiming its alleged compliance with Regulation D is an unsavory proposition and would eviscerate the statute.74
The unsavory proposition referred to in the Sixth Circuit opinion plainly addressed the Southern District’s ruling in Temple,75 which indicated that an entity could establish a defense of preemption under federal law by simple claim to exemption, as if a kind of magic incantation had occurred.
Precisely this type of concern was also present in two recent appellate state court decisions from Ohio and California, each rejecting the Temple approach. Each involved the claim of preemption as a shield against legal actions by the attorney general or a regulatory agency, in which the claim of Reg. D, preemption was presented as a defense precluding state regulatory action against the defendant. The earlier of these is a case from the Ohio state appellate courts, In re Blue Flame Energy Corporation, 871 N.E.2d 1227 (Ohio App. Ct. 2006). The Ohio state appellate court, relying upon the federal district court opinion in Grubka v. WebAccess Int’l, Inc., 445 F. Supp. 2d 1259 (D. Colo. 2006), recognized the potential for unsavory behavior, stating: “If all that was required for preemption was a bald-face statement that the offering was made under Rule 506, then any con artist could avoid state registration by telling the investor that the offering was a private placement under Rule 506.”76
The other state appellate court to address the issue was the California Court of Appeals in Consolidated Management Group, LLC v. Department of Corporations, 162 Cal. App. 4th 598 (Cal App. 1st Dist. 2008). There the court stated:
Petitioners contend that the Department, as a state agency, lacks authority to interpret a federal exemption, but a similar argument was persuasively rejected in the Blue Flame case. The offeror in Blue Flame argued that the NSMIA was implicitly intended to make the SEC sole adjudicator of whether a security is a covered security. (Blue Flame, supra, 871 N.E.2d at p. 1247.) However, state tribunals generally have authority to decide questions of federal law, including questions of federal preemption, “unless Congress intends a federal forum to be the exclusive jurisdiction in an area….” (Id. at p. 1248.) The NSMIA expresses no such intention and “merely designate[s] a choice of federal law over state law.”77
A majority of courts now hold that if a transaction fails to comply with the requirements of Reg. D, Rule 506, then federal preemption does not apply, and the states may enforce state regulations against the issuer in their respective jurisdictions using state laws.78
Given the limited scope of the amendments in the Dodd-Frank bill (federal financial reform) that affect the utilization of Reg. D, Rule 506, it is very likely that the last word has not yet been written in a judicial opinion concerning its use in a “preemption by exemption” application. Recently, the current president of NASAA testified before Congress advocating complete removal of preemption with respect to Reg. D, Rule 506 transactions.79 Even without reaching complete removal of preemption for Reg. D offerings, future congressional legislation mandating actual and complete compliance with Reg. D requirements would improve investor protection by clearly providing state regulatory authority over offerings that do not comply with Reg. D, Rule 506.
Congressional action as set forth in the Dodd-Frank legislation moves in the right direction by placing Reg. D beyond the reach of “bad actors.”80 However, requiring actual and complete compliance with current SEC requirements as a condition precedent to preemption of state law would answer conclusively the “preemption by exemption” controversy the federal and state courts have debated, while saving time and money in court battles. It is a legal skirmish which, when fought, has significant cost implications for both investors and regulatory authorities, with the potential for an outcome characterized by the federal Sixth Circuit as “unsavory.”81
Florida state courts have not yet addressed the key regulatory issue presented in EarthBoard and Temple, but these costs can best be avoided through a clarification of federal law. Notwithstanding the existence of a federal overlay through the NSMIA, Florida’s action to strengthen its licensing and enforcement functions reinforces traditional methods of protection for investors by providing a screening mechanism to avoid licensure in circumstances of individuals with a criminal record of fraud, and those whose conduct presents a history of “moral turpitude.” In cases when fraud is detected or abusive sales practices are revealed, additional legal resources are now available to seek restitution and penalties commensurate with the wrongdoing.
1 CS/CS/HB 483.
2 Fla. Stat. §20.121(3) (2009).
3 See Fla. Stat. §20.121(3)(a) (2009).
4 As of the end of fiscal year 2009, the Office of Financial Regulation had the following licensed registrants: 3,668 securities dealers with 11,241 branch offices and 236,503 licensed associated persons; 4,381 investment advisers with 44 branches and 26,301 associated persons. It is very likely the number of investment advisers subject to state regulation will grow significantly during 2010, based upon changes in federal regulation.
5 See Office of the Attorney General, Legislators, Attorney General Unveil Legislation to Strengthen Florida Investor Laws (Feb. 11, 2009), available at http://myfloridalegal.com/newsrel.nsf/newsreleases/FDFA9551C679F1038525755A0055C3CC.
6 CS/CS/HB 483 creates Fla. Stat. §896.108. This provision empowers the Florida Department of Law Enforcement to enter into agreements and pay rewards.
7 See §15 of the bill, amending Fla. Stat. §905.34.
8 See Fla. Stat. §517.121(3) (2009).
9 See Fla. Stat. §§517.191(4) and (5) (2009).
10 Proposed Rule 69W-1000.001 contains these guidelines. See Florida Office of Financial Regulation, Proposed Disciplinary Guidelines, http://www.flofr.com/Securities/Rules-Proposed/rules-dos.htm.
11 See Fla. Stat. §517.1611(1)(a) (2009). See also Ch. 2009-242, §10. L.O.F. The proposed rule is denominated as 69W-1000.001, F.A.C. A copy of the rule is available through the Secretary of State’s office and on the OFR website at http://www.flofr.com/Securities/Rules-Proposed/rules-dos.htm.
12 Rule 69W-600.0021, F.A.C., http://www.flofr.com/securities/Rules-Proposed/69W-600.0021.pdf. Disqualification from eligibility for registration will be based upon criminal convictions, pleas of nolo contendere, or pleas of guilt, regardless of whether adjudication was withheld, but said convictions and pleas must relate to either crimes of moral turpitude, fraudulent or dishonest dealing, or directly related to a violation of securities laws.
14 Rule 69W-600.0021, F.A.C., available at https://www.flrules.org/gateway/ruleNo.asp?id=69W-600.0021.
15 State ex rel. Tullidge v. Hollingworth, 146 So. 660 (Fla. 1933).
16 Lona Choi-Allum, Protecting Older Investors: 2009 Free Lunch Seminar Report, AARP (November 2009), http://www.aarp.org/work/retirement-planning/info-11-2009/freelunch.html.
17 Id.
19 Responding to a significant increase in consumer complaints relating to annuity products, and recognizing sales of these annuity products to seniors is very often inappropriate or considered unsuitable for an elderly investor, the legislature on January 1, 2009, enacted Ch. 08-237, L.O.F., which amended Fla. Stat. §627.4554, strengthening the suitability standards for the sale of annuity products to “senior consumers” (a person 65 years of age or older) by setting forth certain information that must be obtained in making a suitability determination, and providing the Department of Financial Services with authority to promulgate a suitability form. The form was adopted by Rule 69B-162.011, F.A.C., on Dec. 25, 2009. Additionally, §11 of Ch. 08-237, L.O.F., specified that the OFR shall regulate the sale of variable annuities.
20 See Rule 69W-600.013, F.A.C., NASD Rule 2010, and NASD Conduct Rule 2310.
21 Financial Industry Regulatory Authority (FINRA), NASD Rules, http://finra.complinet.com/en/display/display.html?rbid=2403&element_id=605.
22 FINRA Rule 2310(c) distinguishes an “institutional customer” as one who qualifies under Rule 3110(c)(4).
23 Rule 69W-600.013(1)(h)5., F.A.C.
24 Thomas Lee Hazen, The Law of Securities Regulation at 367 (2d ed. 1990); see also Hall v. Geiger-Jones Co., 242 U.S. 539 (1917).
25 Laws 1913, c. 6422.
26 State v Beeler, 530 So. 2d 932 (Fla.1988); Nichols v. Yandre, 9 So. 2d 157 (Fla. 1942).
27 The Martin Act, 23-A NY Gen. B.L. at 352-359, is a 1921 piece of legislation in New York that gives extraordinary powers and discretion to an attorney general fighting financial fraud.
28 See North American Securities Administrators Association (NASAA), State Securities Regulators Announce $1.3 Billion Settlement with Wells Fargo Investments in Auction Rate Securities Investigations (Nov. 18, 2009), available at http://www.nasaa.org/NASAA_Newsroom/Current_NASAA_Headlines/11514.cfm.
29 Id. See also NASAA, State Securities Regulators Coordinate Ongoing Auction Rate Securities Investigations (Apr. 17, 2008), available at http://www.nasaa.org/NASAA_Newsroom/Current_NASAA_Headlines/8627.cfm.
30 Id. See also Robert Steyer, The Daily Walk of Shame: Auction Rate Securities, The Motley Fool (December 2009), http://www.fool.com/investing/general/2009/12/23/the-daily-walk-of-shame-auction-rate-securities.aspx?source=isesitlnk0000001&mrr=1.00.
31 See NASAA, Ten of Nation’s Top Investment Firms Settle Enforcement Actions Involving Conflicts of Interest Between Research and Investment Banking (Apr. 28, 2003), available at http://www.nasaa.org/NASAA_Newsroom/News_Release_Archive/1561.cfm.
32 See Fla. Stat. §517.12(1) (2009); see also Skurnik v. Ainsworth, 591 So. 2d 904 (Fla. 1991).
33 See Federal Securities Act: Hearings on H.R. 4314 Before the House Comm. on Interstate and Foreign Commerce, 73d Cong., 99 (1933), reprinted in 2 Legislative History of the Securities Act of 1933 and Securities Exchange Act of 1934 at 99 (1973) (Dep’t of Commerce Study of the Economic and Legal Aspects of the Proposed Federal Securities Act).
34 The Securities Act of 1933, 15 U.S.C. §§77a-77aa (1994 and Supp. IV 1998), and the Securities Exchange Act of 1934, 15 U.S.C. §§78a-78kk (1994 and Supp. IV 1998); see also Ernst & Ernst v. Hochfelder, 425 U.S. 185, 194-195 (1976).
35 15 U.S.C. §§77a-77aa.
36 15 U.S.C. §§78a-78kk.
37 Former §18 of the 1933 Act, codified at 15 U.S.C. §77r (1994), provided, “[n]othing in this subchapter shall affect the jurisdiction of the securities commission (or any agency or office performing like functions of any [s]tate or [t]erritory of the United States, or the District of Columbia, over any security or any person.”
38 Geiger-Jones, 242 U.S. at 548-9.
39 Id.
40 Merrill Lynch, Pierce, Fenner & Smith v. Ware, 414 U.S. 117, 137 (1973).
41 CSX Transportation v. Easterwood, 507 U.S. 658, 664 (1993).
42 Id.
43 Pacific Gas & Electric Co. State Energy Resources Conservation and Development Comm’n, 461 U.S. 190, 204 (1983).
44 H.R. Rep. No. 104-622. at 16 (1996), reprinted in 1996 U.S.C.C.A.N. 3877-78.
45 Public Law No. 104-290; 110 Stat. 3416 (1996) (codified as amended in scattered sections of 15 U.S.C).
46 See 15 USC §77r (a)(1996).
47 15 U.S.C. §77r (1994).
48 15 U.S.C. §77r(a); see also H.R. Rep. No. 104-622 at 16 (1996), reprinted in 1996 U.S.C.C.A.N. 3877-78.
49 15 U.S.C. §77r(b).
50 Id.
51 Id.
52 Id.
53 Gilbert W. Warren III, Reflections on Dual Regulation of Securities: A Case for Reallocation of Regulatory Responsibilities, 78 Wash. U.L.Q. 497, 502 (2000).
54 Release No. 33-8999 (July 2009), Release No.33-8442.
55 National Securities Markets Improvement Act of 1996, Pub. L. No. 104-290, 110 Stat. 3416 (1996); see also 15 U.S.C. §77r(c)(1).
56 See notes 28-31.
57 See U.S. Securities and Exchange Commission, Q&A: Small Business and the SEC, http://www.sec.gov/info/smallbus/qasbsec.htm.
58 SEC Release No. 33-6389 (Mar. 8, 1982); see also Interpretive Release No. 33- 6455.
59 Id.
60 See 15 U.S.C.A. §77r; see also 17 CFR §230.506.
61 See 17 C.F.R. §230.501 (e)(1)(iv); 17 CFR §§230.502 and 230.506.
62 Id.; 15 U.S.C. §77r(b)(4)(D).
63 Louis Uchitelle, Elders of Wall Street Favor More Regulation, NY Times, February 16, 2010, available at http://www.nytimes.com/2010/02/17/business/17volcker.html; see also NASAA, NASAA President Identifies Deregulation and Preemption of State Regulatory Authority as Significant Factors in Severity of Financial Meltdown (Jan. 14, 2010), available at http://www.nasaa.org/NASAA_Newsroom/Current_NASAA_Headlines/11904.cfm.
64 Committee on Financial Services, Dodd-Frank Act of 2010, http://financialservices.house.gov/singlepages.aspx?NewsID=3&RBID=775. See also §926 S.B. 3217, Restoring American Financial Stability Act (S.B. 3217 contained a provision that would have eliminated the preemptive effect of Reg. D if the SEC did not review a filing within a 120-day time frame or make specific findings).
65 See Public Law111-203, H.R. 4173, Dodd-Frank Wall Street Reform and Consumer Protection Act.
66 Jeffrey D. Chadwick, Proving Preemption by Proving Exemption: The Quandary of the National Securities Market Improvement Act, Univ. of Richmond L. Rev. (Jan. 2009).
67 Grubka v. Webaccess International, Inc. 445 F. Supp. 2d 1259 (D. Colo. 2006).
68 Temple v. Gorman, 201 F. Supp. 2d 1238 (S.D. Fla. 2002).
69 The trial court did not have the benefit of intervention by the Office or the Attorney General of the State of Florida regarding the effect of its ruling on regulatory actions, nor did the opinion address such a circumstance.
70 Temple, 201 F. Supp.at 1243 (emphasis added).
71 Brown v. Earthboard Sports USA, Inc., 481 F.3d 901 (6th Cir. 2007); In re Blue Flame Energy Corporation, 871 N.E. 2d 1227 (Ohio App. Ct. 2006).
72 Buist, 926 So. 2d at 294-295.
73 Temple, 201 F. Supp. 2d at 1243-1244.
74 Earthboard Sports, 481 F.3dat 911 (emphasis added).
75 Temple, 201 F. Supp. 2d at 1243.
76 In re Blue Flame Energy Corporation, 871 N.E.2d at 1244, quoting Grubka, 445 F. Supp. 2d at 1270; 12 Long, Blue Sky Law (2006), Section 3:81, fn. 7. See also id., citing Cohn, Securities Counseling for Small and Emerging Companies (2006), Section 6:24.50 (“Unless courts require at a minimum a bona fide effort to comply withrule 506, the mere assertion of form would control, and sham rule 506 offerings would be exempt from state registration or exemption laws.”).
77 Consolidated Management, 162 Cal. App. 4th at 608.
78 See Chadwick, Proving Preemption by Proving Exemption: The Quandary of the National Securities Market Improvement Act, Univ. of Richmond L. Rev. (Jan. 2009); see also, e.g., Buist v. Time Domain Corp., 926 So. 2d 290 (Ala. 2005); Brown v. EarthBoard Sports USA Inc., 481 F.3d 901 (6th Cir. 2007).
79 See Testimony of Denise Voigt Crawford, Commissioner, Texas Securities Board and President North American Securities Administrators Association, Inc., Before the United States Financial Crisis Inquiry Commission (Jan. 14. 2010), available at http://www.nasaa.org/content/Files/Crawford_FCIC_Testimony011410.pdf.
80 Public Law111-203, §926.
81 Earthboard Sports, 481 F.3dat 911.
James F. McAuley is the chief counsel for securities in the Office of Financial Regulation, State of Florida. He is board certified by The Florida Bar in state and federal government and administrative practice law. He thanks Special Counsel Lisa Raleigh in the Office of the Attorney General for her review of endnotes.
Richard A. White is the managing member of Turris Consulting, LLC, based in Tallahassee. Turris Consulting provides a broad range of securities regulatory services including regulatory consulting for broker dealers and investment advisers, litigation consulting, and the development of consumer outreach and education materials. Mr. White has over 25 years of experience as a securities regulator with the State of Florida, Office of Financial Regulation. From 2003 to 2009, Mr. White was the director of the Division of Securities.
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