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Securities Compliance Sentinel

Analysis of cutting-edge securities industry issues

FINRA Enforcement in the First-Half of 2015

Posted in Compliance and Supervision, FINRA Compliance, FINRA Enforcement

Last month, Sutherland Asbill & Brennan published data revealing FINRA’s first-half fine total for 2015.  The good news: FINRA’s $37.5 million in first-half 2015 fines is down from $42.4 million for the same time period last year.  Projected for the full year, a total of $75 million for 2015 fines imposed by FinesFINRA would be a 44% drop from the total fines that FINRA reported in 2014 ($135 million). The bad news: the projected $75 million in fines would still be a banner year for FINRA, as it would be the second-highest amount of fines imposed by the regulator since the financial crisis.

Sutherland’s report also noted the “Top Enforcement Issues” for FINRA for the first-half of 2015, which was aggregated from fines reported in FINRA’s monthly Disciplinary and Other FINRA Actions reports and News Releases:

  1. Trade Reporting: $7.6 million in fines (72 cases);
  2. Short Selling: $4.2 million in fines (21 cases);
  3. Anti-Money Laundering: $2.4 million in fines (20 cases);
  4. Best Execution: $2.3 million in fines (25 cases); and
  5. Suitability: $2.2 million in fines (30 cases).

While the drop in fines to start the year is certainly a welcome sight, FINRA is clearly still very active in imposing fines.  Firms should continue to closely monitor their policies and compliance, particularly in the above areas.  Brian L. Rubin, head of Sutherland’s Washington litigation practice group, suggested that, to avoid FINRA sanctions, “firms should continue to focus on nuts and bolts issues, such as disclosure, suitability, AML and trade execution.”

Who wants to know five compliance trouble areas for state-based advisors

Posted in Books and Records, Compliance and Supervision, Conflicts of Interest, Financial Industry Trends, Investment Adviser Regulation, State Enforcement

As recently reported in the Investment News, the North American Securities Administration Association (NASSA) reported on the results of state coordinated examinations. The relative good news was that there were 30% fewer deficiencies from 2013 to 2015.

These examinations revealed, however, five areas of particular concern for state based investment advisors. These issues are:money and calculator

  1. Not adequately documenting the suitability of investment recommendations being the biggest concern.
  2. Failing to adequately explain fees in contracts.
  3. Inconsistencies in the FORM ADV Parts 1 and 2.
  4. Charging fees not as outlined in the Form ADV.
  5. Improper client invoices for direct-fee reduction.

If you are a state-based advisor, you should be asking yourself if you have any of these deficiencies. If your conduct falls within any of these areas of deficiency, you should take action now to correct them, or face regulatory exposure in the future.

So who wants to know what FINRA has proposed to do about elder clients

Posted in Broker-Dealer Regulation, FINRA Compliance

I have blogged in the past about the thorny issues confronted by broker-dealers and financial advisors when it comes to dealing with elder clients. FINRA has, for one, proposed rulemaking to address one important situation.

Under the proposed rulemaking, a firm will be able to place a temporary hold (although it will have no duty to do so) on an account of investors aged 65 or older “where there is a reasonable belief of financial exploitation.” This proposal will also amend FINRA’s customer account information rule to require firms to make a reasonable effort to obtain the name and contact information for a “trusted contact person” when an account is opened.money.jpg

Of course, this proposed rule will not work if the “trusted contact person” is the person trying to steal the elder client blind. Nevertheless, this proposed rule is a step in the right direction.

Throughout the many years that I have represented broker-dealers and investment advisors, I have frequently witnessed the unfortunate reality of financial exploitation by family members and friends. This proposed rule will provide a safe harbor for broker-dealers who place a temporary hold on a suspected account.

This proposed rule will be subject to a period of comment before it can be adopted. Either way, it is a step in the right direction. All too often, family members look at the broker-dealer to explain how it let someone exploit an elderly family member and customer when the firm had nothing to do with it.

Under this rule, a firm can at least take some action, albeit on a temporary basis, to stop suspected financial exploitation. Hopefully, that will insulate broker-dealers who are not complicit in the exploitation from being handed the bill of the fraudster.

* photo from freedigitalphotos.net

So who thought that the SEC was not serious about cybersecurity

Posted in Books and Records, Breach of Fiduciary Duty, Cyber-Security, Federal and State Criminal Activities, SEC Compliance, SEC Enforcement

In a recent blog post, I noted that the SEC is undertaking another cybersecurity exam priority. If that was not enough to get your attention about your own cybersecurity program, you need not look any further.

The SEC just sanctioned a registered investment advisor for failing to adopt proper cybersecurity policies and procedures prior to sustaining a data breach. In doing so, the SEC fined (and censured) the firm $75,000.00; it sustained a breach and the records of approximately 100,000 individuals were compromised.19196909_s

Although the firm took proper steps after it realized it sustained the breach, the firm failed in its pre-breach conduct. Specifically, the SEC concluded that the firm failed to entirely adopt written policies and procedures reasonably designed to safeguard customer information. Among other things, firm:

  1. Failed to conduct periodic risk assessments.
  2. Failed to implement a firewall.
  3. Failed to encrypt PII on its server.
  4. Failed to maintain a response plan for cybersecurity.

Fortunately for the firm, there was no indication of any client suffering financial harm as a result of the breach. If there would have been customer harm, I suspect that the penalty and censure would have been greater.

This case, together with the SEC exam priority and a recent investor alert, should serve as lessons to everyone. The SEC is focused on and acted upon data security issues. Ask yourself, do we have proper plans and procedures to prevent and address any data breaches. If the answer is no, you need to act fast or suffer the repercussions surrounding a data breach.

What you need to know about the SEC cybersecurity exam priority.

Posted in Books and Records, Cyber-Security, SEC Compliance, SEC Enforcement

In a recent risk alert, the SEC announced that it was instituting a second exam priority focused on cybersecurity at broker-dealers and registered investment advisors. The SEC decided to conduct this second targeted exam due to its findings from an earlier cybersecurity exam priority.

This new initiative will focus on the following areas:

  1. Governance and risk assessment: does a registrant have adequate governance and risk assessments processes and policies in place to address the following points.
  2. Access rights and control: does a registrant have basic controls to prevent unauthorized access to the systems and information.19196909_s
  3. Data loss prevention: does a registrant have an adequate program to monitor electronic data that is sent out of the firm by employees or through third parties; are there unauthorized transfers being made.
  4. Vendor management: does a registrant have practices and controls related to vendor management, such as due diligence as to vendor selection, oversight and contract terms.
  5. Training: does a registrant have an adequate training program for those employees and vendors who could put the firm’s data at risk.
  6. Incident response: does a registrant have established policies, assigned roles, assessed system vulnerabilities, and developed plans to address possible future events.

What is the take away from this initiative? If you do not realize that cybersecurity is critical for your existence, then you have been asleep for the past few years.

The real lesson is that the SEC is giving you a guidepost for your own internal review to ensure that you are focused the SEC’s topics of importance. Once this exam priority is completed, you should anticipate that the SEC will start issuing heavy sanctions upon non-compliant firms.

Act now, don’t wait for the SEC to pay you a visit. Protect your firm, protect your clients, and avoid the wrath of the SEC. The SEC has painted a picture for you. You would only have yourself to blame if you do not act now before you hear from the SEC.

What an amended FINRA Rule 8312 may mean to you.

Posted in Books and Records, Broker-Dealer Registration, Broker-Dealer Regulation, FINRA Compliance, FINRA CRD, FINRA Enforcement

FINRA has released for comment its proposed amendment to Rule 8312, otherwise known as the BrokerCheck Disclosure rule. As it currently stands, FINRA waits for 15 days before it releases information reported on Form U5. This delay was meant to give a registered representative adequate time to comment.

FINRA has proposed to change the waiting period to three business days. In those circumstances where a representative submits a Form U4 from a new firm before the expiration of the three business days, the Forms U5 and U4 will be released simultaneously under the amended rule. So what does this mean practically speaking?confusion.jpg

FINRA thinks that three days is more than enough time to comment to avoid potential customer harm that may arise if the registered representative files his Form U4 before the Form U5. In that situation, FINRA wants to avoid a customer only seeing the information on the U4, which may not accurately reflect the facts and circumstances of the departure.

Even if a registered representative could not submit comments within the proposed three day window, that person could still file a Form U4 through a new firm and state in it that he/she intends to respond more fully in an amended Form U4 to the information in the U5.

FINRA also noted that a registered representative could always sue his/her prior member firm if it releases inaccurate information on the Form U5. In my experience, even if that suit is successful, the best you will likely get is an amended U5. In other words, the bad stuff is still out there, just clarified or softened.

Considering that the underlying premise for this rule change is to avoid customer harm, it is safe to assume that this rule change will happen. When faced with the decision (whether yours or not) to leave one firm and go to another, try to reach an agreement on the Form U5 language. If not, use your three days wisely.

* Photo from freedigitalphotos.net

Why therapeutic neglect and an 8210 request do not go hand in hand

Posted in Books and Records, Broker-Dealer Regulation, Compliance and Supervision, FINRA Compliance, FINRA Enforcement

In first of a series of articles on FINRA enforcement and the disciplinary process, Scott Matasar gave some sage advice on dealing with an 8210 request. The biggest take away is that ignoring the request or providing a half-assed response is not the way to make friends at FINRA.money and calculator

First, ignoring an 8210 request will result in your registration being suspended. If you don’t respond after being suspended, just throw your registration in the garbage because you could likely face permanent exclusion.

Second, get your assets working for you. Make sure your firm knows; it may provide assistance, including a lawyer. If not, make sure you have adequate representation with a knowledgeable lawyer.

Third, respond fully and completely to the request whether it is for documents or written answers. FINRA may already have the documents it seeks, but may want to see if you will share the same materials. Don’t try to outsmart the process; you will lose.

Fourth, if appropriate, use the response to frame the issues as you see them. You may be able to convince FINRA that it is looking down a rabbit hole with no carrot at the end of the tunnel.

An 8210 request is not the end of the world, but you must act fast and take the process seriously. Cover you bases, get the help you need and keep your head up. You may have nothing to worry about.

SEC Reduces Registration Statement Filing Fees Again

Posted in SEC Compliance, Securities Registration

Last week, the Securities and Exchange Commission announced that effective October 1, 2015, filing fees that public companies and other issuers pay to register their securities with the Commission will be reduced to $100.70 per million dollars (from money and calculator$116.20 per million dollars).  The reduction applies to fees paid under Section 6(b) of the Securities Act of 1933 and Sections 13(e) and 14(g) of the Securities Exchange Act of 1934, which the SEC is required to annually adjust.  According to the National Law Review, this year’s decrease of approximately 13% is up from last year’s 10% reduction of registration statement filing fees.  This is obviously a nice trend that saves public companies money, which will hopefully continue annually.

FINRA’s New EB-5 Disclosure Requirements re: Foreign Finders

Posted in Broker-Dealer Registration, FINRA Compliance, FINRA Enforcement

New FINRA Rule 2040 became effective late last month, requiring broker-dealers who sell EB-5 securities disclose to investors the amount of finder fee payments to non-registered foreign persons and receive written acknowledgement from the investors that they are aware of the fees paid.

Additionally, FINRA only permits member firms to pay transaction-related compensation to non-registered foreign finders where the finders’ sole involvement is the initial referral, and the member firm complies with the following conditions:

  1. the member firm has assured itself that the finder who will receive the compensation is not required to register in the United States as a broker-dealer nor is subject to a disqualification as defined in Article III, Section 4 of FINRA’s By-Laws, and has further assured itself that the compensation arrangement does not violate applicable foreign law;
  2. the finder is a foreign national (not a U.S. citizen) or foreign entity domiciled abroad;
  3. the customers are foreign nationals (not U.S. citizens) or foreign entities domiciled abroad transacting business in either foreign or U.S. securities;
  4. customers receive a descriptive document, similar to that required by Rule 206(4)-3(b) of the Investment Advisers Act of 1940, that discloses what compensation is being paid to finders;
  5. customers provide written acknowledgment to the member firm of the existence of the compensation arrangement and such acknowledgment is retained and made available for inspection by FINRA;
  6. records reflecting payments to finders are maintained on the member firm’s books, and actual agreements between the member firm and the finder are available for inspection by FINRA; and
  7. the confirmation of each transaction indicates that a referral or finders fee is being paid pursuant to an agreement.

Michael Gibson believes that this rule “could transform the EB-5 visa industry from one of non-disclosure and non-transparency concerning agent compensation agreements if complied with” and suggests that investors may be “very upset when they learn how much their agents are being compensated”.  Despite this risk, however, FINRA member firms should make every effort to comply with Rule 2040 to prevent even greater consequences from federal regulators, including having to possibly rescind the offering, refund investor’s capital, civil and criminal penalties.

What do you need to know about the latest FINRA sweep exam

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

FINRA recently sent out targeted exam letters focused compensation practices. The intent of this targeted exam is to assess how firms identify, mitigate and manage conflicts of interest when it comes to compensation paid to registered representatives.

This limited examination is designed for information gathering purposes and to determine best practices around the sale of certain products to further focus on whether there are certain incentives for the sale of certain products. In order words, does the compensation arrangement around a particular product create a conflict of interest where the representative has a financial incentive that may outweigh his/her the best interests of the client.whistle

So what does this limited exam mean? It is unlikely that any enforcement actions will come out of this limited exam. Nevertheless, the results of the exam will surely set the table for FINRA taking a harder and broader look at firm compensation practices for conflicts of interest.

Considering that FINRA has highlighted product specific compensation practices as an area of interest, now is as good a time as any for you to review how you compensate your registered representatives. Although defining a “conflict of interest” is a murky task, this is a worthy exercise, particularly if there is a substantial variation in compensation for the sale of certain products. Take preventative steps now to avoid an enforcement proceeding later.