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Securities Compliance Sentinel

Analysis of cutting-edge securities industry issues

So why is that you want to be a CCO

Posted in Compliance and Supervision, Investment Adviser Regulation, SEC Compliance, SEC Enforcement

Recent SEC enforcement actions suggest that being a CCO is not all that it’s cracked up to be; the SEC recently sanctioned two CCOs. SEC Commissioner Gallagher’s dissents and his recent comments regarding those dissents have really framed the issue.

The SEC Rules only provide that an “adviser” must have and implement written supervisory procedures. Yet, the SEC sanctioned CCOs even though they are not the “advisers”. By doing so, Commissioner Gallagher sees this as an improper opening of the door for CCO liability because the SEC has not provided any guidance on the meaning of the applicable rule.pointing.jpg

Commissioner Gallagher’s objections are well-noted. All a CCO can do is provide the written supervisory procedures to the advisers who have to follow/enforce them. If they fail to do so, the CCO has no ability to fire or sanction that failure, only a supervisor would have that authority. So what should CCOs do?

Without further guidance from the SEC, a couple of scenarios are possible. You may see that qualified people no longer want to serve in this capacity. Alternatively, you may see very detailed paper trails to avoid having the SEC look at the CCO for a failure to supervise issue.

Neither result is all that palatable. In the absence of some real SEC guidance, the best thing CCOs can do is well document their actions. Hopefully with that sort of “paper trail” the SEC will not sanction the CCO when someone at the firm violated the supervisory rules governing the firm.*

* photo from freedigitalphotos.net

So who really thinks the SEC is not focused on elder investors

Posted in Breach of Fiduciary Duty, Broker-Dealer Regulation, Compliance and Supervision, Conflicts of Interest, FINRA Compliance, FINRA Enforcement, SEC Compliance, SEC Enforcement

If there is any question that the SEC is focused on elder investor issues, look no further than its recent program announcement. The SEC initiated a program designed to examine retirement planning guidance.

Under this program, the SEC intends to explore whether the compensation advisers receive presents a conflict of interests and, if so, how those conflicts are managed. The SEC is also going to scrutinize whether the adviser’s marketing materials are accurate, and assess whether adviser due diligence on investments is adequate. Finally, the SEC is going to review investment recommendations, especially those that entail selling assets held in an employment retirement plan and the rolling over of those assets into an individual retirement plan.idea.jpg

This program should come as no surprise because the SEC and FINRA have made elder investment-related issues a target in their exam priorities. In reality, however, the core focus of this examination program should have always been on your front-burner.

With the graying of our society, advisers need to make sure that they conduct heightened due diligence when it comes to older clients, especially where a retirement plan is at issue. The SEC has given you a road-map of the areas on which you need to focus. The failure to do so will surely result in an unpleasant experience with the SEC.*

* photo from freedigitalphotos.net

Twitter: More than just Social Media

Posted in Financial Industry Trends, Social Media

Since Al Gore invented the internet, we have had an unprecedented amount of information and data right at our fingertips.  However, given the immeasurable quantity of this information, it has always been a challenge to quickly and efficiently gather intel and perform research on the internet, especially in the context of a securities practice.  While search engines like Google and Yahoo have helped, they do not always provide the up-to-the-second results that are demanded in the securities world.

To describe the securities industry as “fast paced” is a gross understatement.  In a world where high frequency trading has become acceptable and securities respond almost instantaneously to breaking news, it is critical to have up-to-the-second access to news, information, and search results.  For the most part, news sites and search engines fail in this regard.  However, there is one online tool, which is often overlooked, that does provide moment-by-moment news and information:  Twitter.

For those who have never accessed Twitter before, you may just think of it as another social media tool, like Facebook or LinkedIn.  However, unlike those sites, Twitter provides its users access to ALL of the information that is being posted on its site in an up-to-the-second streaming and searchable fashion.  When news breaks, users tweet about it.  They share information, data, links, photos, and even on-the-ground details about what is happening.

No other forum on the internet exists with so many sources of information (236 million users and counting) and provides short, concise, and instantaneous updates about anything you are interested in knowing about.  Importantly, Twitter has been adopted almost universally by reporters and news outlets, which will often tweet out breaking news before it even hits their own websites.  However, it is often the average Joe, who may just be in the right place at the right time, to first to share the news on some major happening; and if he or she is on Twitter, that is where the news will break.

So if you are not already familiar with the streaming news and search functions of Twitter, you should get familiar with it.  Whether you are in the securities industry or catering to its demands, you need information as fast as you can get it.  In today’s internet, the best place for that is Twitter, and there is no rival.

The Film Don’t Lie When You Are Defending Yourself

Posted in Arbitration, Books and Records, Intra-Industry Arbitrations, Securities Litigation

When you are faced with a customer complaint, the single most important thing in my expense is the content of the file. If it is not there, it will not exist in the mind of the factfinder. If it is there, the so-called “film” generally does not lie.

Over the years that I have defended brokers and investment advisors, I frequently hear things along the line of, “I really talked with the client once a week”. Yet, in many instances there is nothing in the file, such as contemporaneous notes or a follow-up email or letter, to substantiate this claim.

Factfinders sometimes are of the mind that the calls never happened if the “film” is not there. So what should you do to avoid this unfortunate prejudice at the time of a trial?

For one, slow down. In this age of multitasking and instant messaging throughout the day, don’t forget a little CYA may go a long way.idea.jpg

After any communication you have with a client, make a brief note of the call electronically or, dare I say, hard copy form. Send an email to the client confirming the substance of the call, or send a letter.

Taking these simple steps serves two purposes. First, it gives you some (better than none) protection if you are ever questioned about advice you may have given to a client. Second, it protects the client from themselves. If you confirm what the client agreed to, for example, that same client will be hard-pressed to legitimately complain and, at the same time, has a reference for what you are doing with the client’s account.

Take your time, Take notes, or confirm discussions in writing. Taking this simple step may mean all the difference to successful defense.*

* photo from freedigitalphotos.net

You just suffered a cyberattack, now what

Posted in Cyber-Security, Financial Industry Trends, FINRA Compliance, Registered Representatives, Securities Fraud, Social Media

A recent Investment News article highlighted the pervasive problem associated with cyberattacks and offered some guidance in the event of an attack. Before visiting that guidance, understand how pervasive these attacks are.

The SEC recently conducted a sweep on cyberattacks. This sweep revealed that 88% of broker-dealers and 74% of advisors have experienced some form of cyberattack, either directly or indirectly through a vendor. These statistics suggest that it is a matter of when, not if you will sustain some form of cyberattack.

Accepting this reality, the SEC has urged firms to be proactive and develop and deploy cybersecurity plans that address what should be done in the event of a breach. The SEC has found that most broker-dealers and advisors have such plans, which include periodic system assessments, encryption and proper backup.fraud.jpg

So what do you do in the event of an attack? Some action steps include the following:

  1. Each adviser should change all of his/her passwords.
  2. Fully investigate what happened across systems and seek proper assistance (which should include determining what your state law is on cybersecurity breaches) before contacting the impacted parties. We have an app known as Data Breach 411 that can help you determine the state law where you are located.
  3. Notify those impacted, including what you are doing to ensure that it does not happen again.

We are living in a challenging world when it comes to cyber-crime. Make sure your systems are up to date and as secure as possible. Have a cybersecurity plan. If the event you are a victim, deploy your plan of action to minimize the impact.*

* photo from freedigitalphotos.net

Who Wants Additional Guidance On Dealing With Customers With Diminished Capacity

Posted in Compliance and Supervision, Financial Industry Trends, FINRA Compliance, SEC Compliance

On June 2, the SEC published an investor Bulletin on Planning for Diminished Capacity and Illness (the “Bulletin”). Previously, the SEC and FINRA issued a National Senior Investor Initiative. Clearly, FINRA and the SEC think that senior issues, such as diminished capacity, require a heightened focus by firms and individual advisors when it comes to advanced planning for diminished capacity.

Although the Bulletin is directed to consumers, the guidance provides you with an opportunity to better service your clients. Among other things, the SEC has recommended that this planning include the following:

  1. Organizing important documents such as: bank and brokerage statements, mortgage and credit information, insurance policies, pension and other retirement benefit summaries, and social security payment information.bankinchains.jpg
  2. Assembling contact information for financial and medical professionals in one location.
  3. Providing emergency contact information to the financial professional.
  4. Considering the possibility of having a durable power of attorney prepared.
  5. Obtaining the assistance from a trusted family member or friend.
  6. Keeping all of your important financial information (i.e., bank and brokerage account information and contact people) up to date.
  7. Speaking out if something wrong happens.

Your client’s implementation of each one of these action items can only protect you from a possible future claim that you took advantage of someone with diminished capacity. Work with your clients to make sure that they have adequately planned to address the possibility of diminished capacity. Either do it now, or pay for failing to do so later.*

* photo from freedigitalphotos.net

Does FINRA Really Want To Make It Easier To Communicate With The Public

Posted in Broker-Dealer Regulation, Financial Industry Trends, FINRA Compliance, FINRA Enforcement

In FINRA Notice to Members 15-16, FINRA has solicited comments to its proposal that would make communications with the public a bit easier. FINRA proposes to change Rule 2210 (communication with the public), 2214 (requirements for the use of investment analysis tools), and 2213 (requirements for the use of bond mutual fund volatility ratings).

All of these rule changes will make it easier for broker dealers to communicate with the public. So you may ask why would FINRA do such a thing when communications with customers are being subject to further scrutiny in both the civil and regulatory contexts.

For one, FINRA has noted that these rules need to be updated to “better align the investor protection benefits and the economic impacts.” FINRA also plans to release guidance and administrative measures in conjunction with the rule changes.spying.jpg

The biggest change comes in the form of the timing of when a member firm must file certain communications with FINRA. In the past, member firms would have to file certain communications at least 10 days prior to use. Under the proposed rule changes, a member firm can file certain communications with FINRA within 10 days of first use. In other words, that firm can file either 10 days before or 10 days after the first use.

What does this all mean for member firms? FINRA believes that these changes will result in a cost savings for firms in the form of filing fees, as well as an overall decrease in the scope of certain filing requirements. At the same time, these rule change may make it easier for firms to communicate information (such as educational information about mutual funds) to the public.

Overall, it appears as though the proposed rule changes could save firms money and enhance the customer experience. The comment period ends on July 2. Hopefully, you will be able to realize these contemplated benefits of these changes before the end of the year. *

* photo from freedigtalphotos.net

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.