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Securities Compliance Sentinel

Analysis of cutting-edge securities industry issues

Enforcement Settlements All Wrapped Up in a Bow

Posted in Municipal Securities, SEC Enforcement

Last year, the SEC’s Division of Enforcement launched the “Municipalities Continuing Disclosure Initiative” offering “favorable settlement terms” to municipal issuers and underwriters who self-report continuing disclosure violations.  At that time, it was claimed that there were a lot of problems and that it was expected there would be more such settlements in the future.  See http://www.sec.gov/divisions/enforce/municipalities-continuing-disclosure-cooperation-initiative.shtml.

Despite the fanfare, the SEC has used pre-packaged settlements in the past, and will most likely continue to do so.  Thus, not really, a year later, much to get excited about.

Who You Gonna Call? FINRA!

Posted in Financial Industry Trends, FINRA Compliance, FINRA Enforcement

Last month, FINRA launched a toll-free FINRA Securities Helpline for Seniors at 844-57-HELPS (844-574-3577) to provide older investors with assistance from FINRA staff related to concerns they have with their brokerage accounts and investments, such as:

  • understanding how to review your investment portfolio or account statements;
  • concerns about the handling of a brokerage account; and
  • investor tools and resources from FINRA, including BrokerCheck®

Since then, hundreds of calls from all over the world have come pouring in, according to Matthias Rieker of the Wall Street Journal.  While many seniors have called FINRA for more information about various investment products, some seniors have already used the hotline to report broker misconduct.

As the FINRA Securities Helpline for Seniors is clearly being utilized by seniors, firms and brokers may want to consider educating their older customer base and developing more senior-friendly customer service materials, so that these calls come in to the firm or broker, rather than FINRA.  That way firms and brokers can address these issues directly, if possible, rather than getting FINRA involved.

So You Think That You Really Know Your Customer

Posted in Arbitration, Compliance and Supervision, Registered Representatives

If the recent National Senior Investor Initiative of the SEC and FINRA taught us anything, it was the tremendous importance to know your customers. This takes on more significance when you are working with seniors.money.jpg

You may ask why does “knowing your customer” take on any more significance for these clients. For one, an investor’s goals, objectives and tolerance for risk may change over time. What may have been suitable when your client was in her thirties may not when the same client is in her 60s.

By the same token, as our society grays, there may be more issues with cognitive impairment. Getting in front of your clients as they age will then take on an even bigger significance, especially if you detect cognitive issues.

Best practices would suggest that you have a face-to-face meeting with your clients at least once a year. At those meetings, you should undertake that know your customer analysis as if the client was new to the firm. Although this may seem like needless work, there is a benefit.

First, any time you are in front of your client you have the opportunity to generate new business. Second, it shows your clients, particularly as they age, that you have a vested interest in them as people, than just AUM. Third, it provides you with a possible risk avoidance tool. The more you know, the less likely you will be faced with a suitability claim in the future.

Take the time every year to make sure you still know your customer. Otherwise, place yourself at risk of being a target in the future. The choice is yours.

* photo from freedigitalphotos.net

So What Does The SEC Think About Cybersecurity

Posted in Breach of Fiduciary Duty, Broker-Dealer Regulation, Compliance and Supervision, Cyber-Security, FINRA Compliance, Investment Adviser Regulation, Investment Company Regulation, SEC Compliance

At the end of last month, the SEC provided a guidance update on cybersecurity for registered investment companies and registered investment advisors. This guidance is equally instructive for broker-dealers and registered representatives.
Cyber threats are numerous and ever changing with technology. The SEC provided the guidance to highlight the importance of having a robust cybersecurity program because the failure to do so is just too risky for you and your clients.robber.jpg

The SEC identified a number of things that firms can do to make sure that they have an adequate cybersecurity program. These include, among others, the following:

  1. Periodic assessments of (1) the nature, sensitivity and location of information the firm collects; (2) internal/external threats; (3) current security processes and controls; (4) the potential impact of a compromise; and (5) the effectiveness of firm governance over cybersecurity.
  2. Creation of a cybersecurity strategy designed to prevent, detect and respond to the threats associated with cybersecurity.
  3. Implementation through written policies and procedures and training to provide guidance from the top to the bottom of the corporate tree concerning threats, measures designed to prevent and detect and to respond to such threats.

Teenagers playing on their computer are not the only threat to infiltrate a firm’s systems. Organized crime and foreign nations are engaged in this industry as well. Assess your cybersecurity systems on a regular basis throughout the year consistent with the SEC’s guidance, and don’t be a victim.

* photo from freedigitalphotos.net

What The Heck Is A Senior Designation

Posted in Broker-Dealer Regulation, Compliance and Supervision, Conflicts of Interest, FINRA Compliance, FINRA Enforcement

That is one of the questions FINRA sought to answer in its recent National Seminar Investor Initiative. FINRA confirmed that many representatives use such designations, but some of them are bogus or no better than a certificate you find as a prize in a cereal box.

The problem is that some representatives use these bogus designations to pray on seniors. Some seniors, unfortunately, get lulled into believing the “senior” alphabet soup next to their broker’s name really means the person has some special skills when it comes to helping seniors.

This is not to suggest that there are not real senior designations or people particularly skilled to help seniors. Instead, it is a caution to firms that retain such individuals.fraud.jpg

To address the senior designation issue, firms have a few possible options:

  1. Prohibit the use of senior designations.
  2. Require that senior designations have a verified curriculum, a continuing education element, and accreditation from a recognized independent organization.
  3. Mandate supervisory approval prior to the use of such designations.

If you decide to let your representatives use senior designations that are properly accredited, the use of such designations have to be properly supervised. If you do not supervise this activity, you – like an unknowing senior – may become the victim of a fraud.

* photo from freedigitalphotos.net

Why Reverse Churning Does Not Create Cream From Butter.

Posted in Arbitration, Broker-Dealer Regulation, Compliance and Supervision, Financial Industry Trends, FINRA Compliance, FINRA Enforcement, Public Customer Arbitrations, Registered Representatives

For years, firms have been using wrap products to charge an annual fee based upon the value of assets under management regardless of the number of trades, as opposed to fees per trade. In other words, wrap accounts were an effective tool to avoid churning claims because the customer theoretically could trade daily and only be charged an annual fee. These accounts are, however, giving way to a new type of customer complaint and regulatory oversight.

The new claim is known as reverse churning. In that situation, the client is placed into a wrap account, but trades very infrequently. As a result, the client winds up paying more in wrap fees than she would have with a straight brokerage, pay per trade account. idea.jpg

You can avoid these types of claims and potential regulatory headache by doing some simple due diligence when the account is opened and over the life of the account. As part of the “know your customer” intake process, you need to make proper inquiry to get a sense from your new client how frequently that client may want to execute trades in the account.

If your prospective client is looking for an active trading strategy, then the wrap account is probably the right way to go, and vice versa. It is equally important to review your accounts on a regular basis, at least annually, to see if the account activity justifies the fee structure. If the fees are out of whack when judged against the trading volume, then recommend a change in a formal written communication.

Unfortunately, reverse churning does not change butter into cream. To avoid what it can create, do your due diligence during your initial and subsequent know your customer analysis. Make sure your client is in the right type of account and avoid the stomach upset associated with a churn.

* photo from freedigitalphotos.net

Fox’s Frank Razzano Publishes New Securities Article in Securities Regulation Law Journal

Posted in Securities Litigation

Our partner, Frank C. Razzano, has recently published an article, entitled “What Lies Ahead: Halliburton v. Erica P. John Fund, Inc.,” in the Securities Regulation Law Journal (Spring 2015).  It is a great article discussing a recent United Supreme Court decision dealing with class actions.  Kindly let us know if you would like a copy for your review. 


The DOL Proposes A Fiduciary Duty Rule; Is This The Beginning Of The End

Posted in Uncategorized

The Department of Labor delivered on a longstanding but controversial promise when it recently proposed a fiduciary duty rule for all brokers who work with retirement accounts. The primary purpose of the proposed rule is avoidance of conflicts of interest.

If the proposed rule becomes final in its current form, it will have the following impact:money.jpg

  1. Anyone who is paid for providing individual advice to a plan sponsor, a participant in a retirement plan or an IRA for consideration of investments will be a fiduciary.
  2. It will continue to be acceptable for a plan sponsor and providers to continue educating investors in workplace plans and IRAs without being considered a fiduciary.
  3. Any fiduciary adviser must provide investment advice that is impartial and in the best interests of the client.
  4. Under what is called the “best interest contract exemption”, firms and individual advisers operating in conformity with the exemption can receive commissions and revenue sharing, but have to act in the clients’ best interests, and disclose potential conflicts and hidden fees.

This rule is a long way from becoming final, and, for that matter, may never become final. Nevertheless, the trend is set. Maybe the SEC will be next. . . .

* Photo from freedigitalphotos.net

So Who Wants To Give A Vendor Access To Your IT Systems

Posted in Books and Records, Cyber-Security, Federal and State Criminal Activities, Financial Industry Trends, FINRA Compliance, FINRA Enforcement

At one time or another, member firms will likely need the services of an outside vendor. This may be particularly true for smaller member firms. Outside vendors have their place, but FINRA’s Report on Cybersecurity Practices details that level of vigilance needed when it comes contracting with vendors who have access to your IT systems.

The first thing that firms must do to protect themselves is to perform due diligence on the prospective vendor. When it comes to cybersecurity in particular, FINRA has noted that vendors should have a number of controls in place when it comes to, among other things, limits on data access by vendor employees, virus protection, and encryption of data while at rest and in transit to name a few. The key for firms is to make sure that these controls are covered in your vendor contract.robber.jpg

FINRA noted that a number of firms that were reviewed had language in their contracts that included provisions on the following subject areas:

  1. Non-disclosure agreements/confidentiality agreements.
  2. Data storage, retention and delivery.
  3. Breach notification policies.
  4. Right to audit clauses.
  5. Vendor employee access limitations.
  6. Use of subcontractors.
  7. Vendor obligations upon contract interpretation.

Best practices would certainly dictate including these areas in any contract with a vendor, especially those who have access to your IT systems. If your contracts do not cover these areas, it is time to revisit your vendor contracts and bring them up to date to account for cybersecurity.

* photo from freedigitalphotos.net