Dodd-Frank; Is It Doomed To Fail?

Posted by Joshua Horn on April 15, 2012

Much has happened in nearly one since since the Dodd-Frank Act became effective, and much more remains.  According to the recent thoughts of one commentator, Kyle Colona of Compliance EX, Dodd-Frank may be doomed to fail as it faces it first year of existence.

Colona noted five factors working against the full implementation of the law: (1) the CFTC and SEC are far behind schedule; (2) the regulatory authority under the Act is shared by too many entities; (3) recent comments from the Federal Reserve Bank suggest that the Volcker Rule may not become law because of its impossibility to implement; (4) the financial services industry has unleashed a full-scale effort to defeat the full implementation of the Act; and (5) certain banks are trying to influence the public that implementation of the Volcker Rule would be bad.

I think that there is now a sixth factor that may work against the full implementation of the Dodd-Frank Act; namely, a presidential election this fall.  With the politicalclimate becoming more and more focused on the election, it is only natural that there would be less attention devoted to a law that the financial services industry is committed to pealing back or doing away with altogether.  If the President loses the election, there are some who believe that Dodd-Frank may be in trouble.  Even if the President prevails, it is unlikely that there will be full implementation because attention will surely be focused elsewhere.

Although it is unlikely that there may ever be full implementation of the Act, we need to still anticipate that many provisions of the Act will come to pass.  For example, at some point, the SEC will finally commit to the adoption of the uniform fiduciary duty rule and there will be a decision on who will serve as the SRO for investment advisors.  Dodd-Frank is not dead; it just may limp along for the next year.

FINRA Is Centralizing Its Membership Application Program

Posted by Ernest E. Badway on March 19, 2012

FINRA’s membership application program (“MAP”) is changing.  FINRA’s review of initial membership and continuing membership applications for broker-dealers will now be centralized in the MAP.

Further, as part of MAP, continuing membership applications will be transitioned to an electronic format, just as new applications are treated.  FINRA is currently finalizing the MAP, but it has already implemented certain aspects, including, among other things, a centralized work flow.  That is, a party submitting a FINRA Rule 1017 application is assigned an examiner based upon FINRA’s work flow, and that examiner may not be in the same district as the member firm. 

FINRA hopes this process will streamline its ability to respond to changes in membership activity, and utilize its resources more efficiently.

The SEC's Large Trader Reporting Rule Is Now On-Line

Posted by Ernest E. Badway on March 09, 2012

The new SEC Rule 13h-1, the large trader reporting rule, became effective. 

Starting on April 30, 2012, broker dealers will be required to maintain records of large trader trading, similar to records maintained relating to the electronic blue sheet system.  Further, supplemental information will also be required.

This new large trader rule could implicate investment advisers, banks, broker dealers, insurance companies and foreign entities.  All may be required to self-identify by filing a Form 13H with the SEC, and provide unique information to the SEC.  Broker dealers will also be required to maintain information relating to these trading records supplemented with the time of order, execution and the trader’s ID number if the SEC so requests.  Broker dealers will also be required to file a Form 13H if they are large traders.

Although the definition of a large trader is enunciated in the rule, there is some factual assessment that goes into it.  That is, it relates to any person, who directly or indirectly, exercises investment discretion over one or more accounts through NMS securities and registered broker dealers in a certain activity level.  The large trader must file an initial Form 13H promptly after it crosses the trading thresholds, and it has been considered that promptly means within ten days.  There are also annual filings that must be done within 45 days after each calendar year.  Confidentiality was also critical in assessing this information, and the SEC expects firms to realize that it will maintain the confidentiality of said information.  However, it may have an obligation to disclose it to Congress, other federal agencies and pursuant to a federal court order. 

Accordingly, firms should be aware that these issues may arise, and should be ready to file and maintain the appropriate records.

MSRB Rules Changes Allow For Risk-Based Exams

Posted by Ernest E. Badway on February 29, 2012

The SEC approved a number of rule changes promulgated by the MSRB to facilitate risk-based examinations for participants in the municipal securities industry.  These municipal securities industry participants are, generally, FINRA members. 

In particular, the new rules, G-9 and G-16, relate to record preservation and periodic examinations, respectively.  It is believed that these new rules will allow FINRA to focus on the municipal securities industry participants who pose the greatest risk to the market.  FINRA will now be allowed to examine these participants every four years as well as require that certain records be maintained for four years rather than three. 

The new periodic examinations were immediately effective while the changes to record keeping are effective June 16, 2012.

FINRA's Risk Control Assessment Survey

Posted by Joshua Horn on February 28, 2012

FINRA recently announced that, in the first quarter, it will issue a risk control assessment survey to all member firms.  Although this is a voluntary program, member firms should strongly consider their participation.  Your efforts on the front-end may alleviate the work you would otherwise perform during an examination.

The purpose of the survey is for FINRA to better understand member firm business models, the risks attendant with those models and the controls intended to manage those risks.  According to FINRA, responses to this survey will afford it the ability to conduct more focused examinations.  In other words, the program will give examiners a better understanding of your firm before arriving on site and allow the examiners to streamline the examination.

According to FINRA, firms who do not participate will not suffer negative consequences.  However, those non-participating firms should expect FINRA to spend more time during an examination.  FINRA plans to conduct this survey on an annual basis; the content will change as new risks emerge and as priorities evolve.

Even though answering the survey will take time to complete, streamlining the examination process is a laudable goal.  If the time spent on completing the survey results in a more focused and shorter examination, it seems to me that the decision to participate in the survey should be a forgone conclusion.

PSST!!! Want to Save Money on Your Legal Bills? Read on. . .

Posted by Ernest E. Badway on February 27, 2012

Late last week, one of my colleagues sent me an e-mail where he copied 8 other people, half of them I could not identify if my life depended upon it.  I then heard about the person who had a Twitter account with over 17,000 follwers, and was now being sued by his former employer over ownership of the account-- really, does anyone think the person knows 17,000 people?  Firms and persons working in financial services industries generate trillions of e-mails every year, encompassing the mundane to the critical. 

These firms and their employees also seem to be involved in numerous civil, regulatory and criminal investigations and litigations.  Much of the vast amount of money in legal fees paid to defend these firms and their employees (sums that sometimes greatly exceed the GDP of several developing countries) often relate to e-mail review and production.  General counsels and firm management looking for ways to save money on these bills should, initially, read my article that was published in the New Jersey Law Journal, outlining the "CC" problem and ways of clamping down on this terrible plague afflicting our society, http://www.foxrothschild.com/newspubs/newspubsArticle.aspx?id=4294970187.

Once read, please do your part in stopping this madness because the dollar you save maybe your own!!

BrokerCheck Expansion, The Good, The Bad And The Worst

Posted by Joshua Horn on February 27, 2012

BrokerCheck is a publicly available tool that FINRA offers for the public to learn about member-firms and their registered representatives.  Over the years, the information available to the public has expanded.  The fallout from the financial crisis has resulted in more and more information being made available to the public, with additional categories of information being made available by July 2012.  Now, FINRA is seeking public comment for the release of reasons for termination and scores from industry qualifying examinations, but there is a potential unappreciated downside to the release of this information.

 Making information available to the public about a registered representative’s reason for termination can be seen as another way to smoke out those individuals who should not be in the industry in the first place.  This disclosure will provide the public greater protection against rogue brokers fleeing one firm for another.

 One commentator has noted that there is a downside from the dissemination of all this information; namely, identity theft.  The more and more personal information that becomes available, the more likely for there to be identity theft.  In light of the SEC’s recent alert on investment scams through social media, FINRA may be inadvertently helping the promulgation of such scams.

 In the end, I suspect that the reasons for termination and test scores will become available through BrokerCheck.  As such, member-firms and registered representatives will have to be even more diligent to ensure that they are not subject to the improper use of this information.  One potential tool is the frequents internet searching of the names of registered representatives to test for improper use, but this will come at a cost in time and resources.  Similarly, FINRA will have to critically review instances of purported financial fraud to ensure that the perpetrator is who the public thinks she or he is.  Otherwise, BrokerCheck will become a tool for fraudsters as opposed to protecting the public.

FINRA's 2012 Regulatory Initiatives

Posted by Ernest E. Badway on February 21, 2012

In late January, FINRA informed member firms' chief compliance officers of key issues facing the securities industry.  In particular, FINRA noted that it was updating and improving its regulatory programs, focusing on risk based examinations, investigations and enforcement.  FINRA indicated that it will continue to collect data and review this data to ensure that it appropriately uses its enforcement regulatory and examination resources in the upcoming year.

FINRA announced that its examination priorities were set against the economic environment that investors have faced since 2008.  As a result, it will focus on the increased risk of aggressive yield chasing, inappropriate sales practices and product offerings, unsuitability, misappropriation and fraud.

One FINRA’s primary sales practice and business conduct focuses will concern retail customers over a number of different products, including mortgage-backed and commercial mortgage-backed securities, uncommon non-traded REITs, municipal securities, exchange traded products, variable annuities, structured products as well as private placement securities and unregistered securities, among others.  Interestingly, FINRA will also focus in on various church bonds and promissory notes that are issued as well as life settlements.  FINRA will continue its efforts to stamp out micro cap fraud that it has seen in a number of the markets that it regulates.  Reverse mergers will also continue to play a part in both FINRA as well as the SEC’s enforcement programs.  As many know, Chinese issuers have been the target in these reverse merger cases, and the SEC and FINRA will continue their heightened enforcement approach.

FINRA will continue to monitor when firms permit their registered representatives to engage in private securities transactions and outside business activities.  Moreover, FINRA will assuredly review supervision integrity and internal controls.  Information technology and cyber security will also be prime elements of review as is outsourcing and fees coupled with the use of foreign finders.

FINRA will also consider branch office inspections to be a critical aspect of its examination program.

 

FINRA is also very concerned about social media and electronic communication and will continue to monitor this aspect of broker dealer operations in the future. 

Interestingly, there are a number of initiatives relating to FOCUS information as well as leverage and liquidity that FINRA examiners will review when analyzing firm balance sheets and financials.  Of course, examinations of rogue trading will continue given certain newsworthy events, and FINRA will look for internal controls and risk management systems to stop this type of practice from going forward.  FINRA will also review the pricing of illiquid or hard to value securities as well as margin lending practices and the custody of assets relating to collateralizing margin loans.

Net capital expense sharing arrangements, withdrawal of capital, inaccurate books and records and protection of customer funds and securities will also be reviewed as well.  SEC Exchange Act Rule 15c3-3 will also be and examination priority for the upcoming year as will be SEC Exchange Act Rule 15c3-5, the market access rule, and its application to broker dealers and customers, who engage in an exchange or alternative trading system.

FINRA exams will also focus in on member firms’ information barriers, and if those barriers are being followed to safeguard customer and material non-public information.  Additionally, FINRA will look at fixed income securities and focus on high frequency trading strategies as well as market maker quoting obligations, OATS issues, and the appropriate coding of orders.  Further, FINRA will review the oversight and redemption process for exchange traded products as well as municipal securities and conflicts of interest in the sale and marketing of complex investments.

Finally, FINRA believes that, by publishing these key risk areas, it will enhance its enforcement and examination programs as it moves forward in the new year.

No Fiduciary Duty, But More Analysis

Posted by Joshua Horn on February 12, 2012

The SEC's delay in adopting an uniform fiduciary duty will only be prolonged but yet another analysis that the SEC will commission.  Chairman Schapiro recently announced plans to issue a public request for information regarding "retail financial advice and the regulatory alternatives".  With respect to the adoption of the uniform fiduciary duty standard, the SEC suggested that it was still in the information gathering stage of rule-making.  Interpretation; the SEC is no closer to adopting a uniform fiduciary duty standard.  Although the SEC has not ruled rule-making for 2012, it is not likely.

The SEC has advised the House Financial Services CapitalMarkets subcommittee that it has three economists working on the initiative.  Among other things, the economists have reviewed available market information for the retail financial advice market, including the differences between broker-dealers and registered investments advisers.  Notwithstanding the work of the economists to date, the SEC noted that the rule-making associated with the uniform fiduciary duty will require an analysis of information that may not be publicly available such that it will be particularly important for the SEC to solicit the public to provide information and/or empirical data.

Of the information that the SEC will seek in its public request for information, broker-dealers should expect that some of the data sought will cover a cost-benefit analysis of whether the adoption of a uniform standard will outweigh the cost of doing so.  Although delayed, the SEC is, it appears, trying to have a full and complete analysis to ultimately justify a uniform fiduciary duty.  In light of the manner in which many courts and arbitration panels treat broker-dealers, this whole exercise could be seen as making something "official" that has already been in place for many years.  The question that remains is whether the cost to make the standard an "official" one is worth it considering the prevailing view of many that it may already exist.

Registered Representatives; No "Fiduciary" Duty For Now

Posted by Joshua Horn on January 21, 2012

A year ago, the SEC published its study commissioned under Dodd-Frank and recommended the implementation of a uniform fiduciary duty standard.  Much debate has prevailed since that announcement.  Will registered representatives be subject to the same fiduciary duty as investment advisors?  Will registered representatives be subject to some form of hybrid fiduciary duty standard?  According to a recent SEC announcement that went without much fanfare, in 2012, at least, the answer will be none of the above.

The SEC has punted once again on making a definitive conclusion regarding the implementation of a uniform fiduciary duty standard.  Broker-dealers should not assume that there will never be such a standard, only that a formal adoption will be at least another year away.  In that time, the SEC will surely complete the long-debated cost benefit analysis of the need for such a standard.  Indeed, the SEC may ultimately conclude that the adoption of FINRA Rule 4530 and the changes to the suitability and know your customer standards were more than adequate such that there may be no need to have a formal standard.  Registered representatives may already be effectively subject to their own fiduciary duty.  Indeed, depending upon where you reside, courts have already concluded that you are subject to a fiduciary duty.

Regardless of what happens in 2013, once thing is for certain.  FINRA is increasing its enforcement efforts and will surely focus on conformity with its new rules.  The safest course for broker-dealers is to make sure you have adequate compliance programs to address this heightened regulatory environment, or you will be totally unprepared when there is a formal uniform fiduciary duty standard.

FINRA And Social Media, Is Its Latest Proposal Anything To Blog About

Posted by Joshua Horn on January 16, 2012

For anyone reading this post, you appreciate the value of social media.  It looks as though FINRA is finally prepared to do so as well.

FINRA recently proposed changes to its rules governing communications with investors.  In doing so, FINRA has proposed easing its requirements of pre-approval for a broker-dealer's use of social media.  Chief among the proposed changes would be the authorization of registered representatives communicating with clients via social media without a supervisor's prior approval.  Without pre-approval, a registered representative could engage in interactive , real-time communications with customers via a social media site.

Assuming this proposal is adopted, this is a positive step for FINFRA.  Nevertheless, I think that broker-dealers and registered representatives still must be wary of using social media to communicate in real-time with their clients.  First, the member firm will surely still be required to maintain copies of these communications consistent with its record retention obligations.  Keeping track of the potential volume of such communications creates a record-keeping nightmare.  Second, broker-dealers should consider restricting their registered representatives from making investment recommendations through interactive social media because of suitability concerns.  The risk of an investment recommendation being disseminated via social media is that anyone accessing that source could argue that it was an investment recommendation made by the firm and pursue a claim against the firm in the event of a loss. 

In my experience defening member firms and registered representatives, the types of claims asserted are only limited by the creativity of the lawyers.   Do not be a victim.  If FINRA specifically endorses inter-active communciations via social media without pre-approval, be certain that you have meaningful policies, procedures and protocols to maintain proper records and avoid open-ended recommendations to the public.

New BD Inspection Guidelines

Posted by Ernest E. Badway on January 05, 2012

The SEC and FINRA issued new broker-dealer branch inspection guidelines to securities firms so as to improve their supervision systems.

In particular, the SEC and FINRA have advised broker-dealers to use risk analysis to identify if individual, non-supervising branches should be inspected more frequently.  The SEC and FINRA will be using risk analysis to identify such requirements for future inspections.  Currently, FINRA requires a minimum three year cycle, but may conduct more frequent branch inspections. 

Firms are required to conduct re-audits when routine inspections reveal a high level of repeat deficiencies or serious deficiencies.  In many cases, these inspections will then allow for audits or cause examinations. 

Securities firms should use surveillance reports, as well as technology and investigative techniques to identify the risks.  Both the SEC and FINRA recommend custom approaches for these inspections, and comprehensive check lists developed from previous findings, trends and internal reports.  Further, the SEC and FINRA advised that firms should conduct unannounced branch inspections either randomly or based on risk factors.  These surprise exams may result in a more realistic picture of the firm’s systems and reduce the risk of certain individuals, who may try to falsify, conceal or destroy records. 

The firm should also use qualified senior personnel for these examinations, and make branch office inspection findings part of management information or risk management systems.  Additionally, the results should be placed in a comprehensive compliance database so as to be helpful in supervision, especially as it relates to independent contractor registered representatives in national firms.  Branch and compliance managers should also be provided with these findings, and they should be required to take and document any corrective action.  The firm should also track all corrective action in response to these findings. 

Finally, the SEC and FINRA are recommending that firms elevate the frequency of branch inspections, and their scope, particularly, where registered personnel conduct business activities other than broker-dealer associated person activities.  Essentially, if the firm permits activity, or business  away from the firm, its supervisory systems should be more vigilant.

These new guidelines demonstrate the focus for SEC and FINRA investigations in the upcoming year.  As such, firms should prepare and consider their response now before it is too late.

Investment Advisors and Broker-Dealers Use of Social Media - Beware!!

Posted by Ernest E. Badway on January 03, 2012

Although the use of social media has been embraced by many industries, it is of particular concern for investment advisors and broker-dealers.

In many situations, the use of these outlets touch upon several areas.  For investment advisors and broker-dealers, the advertising requirements under the Investment Advisors Act of 1940 and certain Securities Exchange Act of 1934 provisions may be implicated when one uses social media, including various features on Linked In or Facebook.  Additionally, recordkeeping is a critical function required by both acts since this information must be maintained.  Further, it is likely that those who work for either and use social media sites, may require supervision.  Additionally, when one uses these types of communications, there are various regulations that require the firms to monitor these third party communications to ensure that, among other things, non-public information is not disclosed.  Firms would also be required to apply their audit function to these media policies and procedures internally, to determine if the procedures are effective.  Moreover, the SEC, FINRA and the states may begin to regulate these types of social media in amore forceful manner. 

As such, although social media venues may present certain benefits, the risk is palpable.

FINRA'S Proposed Private Stock Offering Rule

Posted by Ernest E. Badway on November 18, 2011

FINRA proposed a rule for SEC approval that would require FINRA’s membership, involved in a private stock offering, to provide detailed information on the transaction to investors prior to the sale, as well as to file such information with FINRA 15 days before the first sale.

This proposed Rule 5123 would require that offering materials used in these offerings, as well as the amount and type of compensation provided to a variety of people, be filed with FINRA.  Further, any amendments would have to be filed with FINRA within 15 calendar days after the date the document is provided to a current or prospective investor.  This new rule is also to be used in conjunction with Rule 5122, requiring certain disclosures in private placement offerings issued by the FINRA member or its affiliates.  Nonetheless, the proposed Rule 5123 would exempt certain types of private placements sold to certain purchasers, including, but not limited to, institutional accounts, qualified purchasers, qualified institutional buyers under the Securities Act of 1933, Rule 144(a), and investment companies.

In sum, FINRA is taking an aggressive approach on reviewing private placements, thus, this or some variation of this new rule is likely to be approved by the SEC.

FINRA'S New Cross Market Surveillance System

Posted by Ernest E. Badway on November 16, 2011

FINRA, recently, announced that it was developing a cross market surveillance system that will allow it to detect and stop improper conduct.  This was reported by FINRA Chief Executive Officer, Richard Ketchum. 

This new system will expand FINRA’s surveillance and enforcement of the New York Stock Exchange, as well as its own order audit trail system to include New York Stock Exchange data.  FINRA believes that, with the combination of both, it will be able to effectively monitor equity trades and data to allow it to see patterns ahead of or in conjunction with the market, as opposed to reviewing it after the fact.  Ketchum suggested that this new surveillance system would possibly assist FINRA in achieving the SEC’s goal for a consolidated audit trail system. 

This new system may significantly reduce FINRA’s expenditures on examinations, and bring to light unscrupulous activity in the market in time to protect those effected.

SIFMA Tells its Membership Be Careful with Expert Networks

Posted by Ernest E. Badway on November 11, 2011

The Securities Industry and Financial Market Association (“SIFMA”) indicated to its membership that those who engage expert networks – entities referring paid industry professionals to third parties for fees – should have in place policies, procedures, and training for their employees or others who engaged those services.  These expert networks have drawn regulatory attention, especially in insider trader investigations. 

These expert networks have found themselves in certain insider trading cases where it was alleged they tipped hedge funds or other investors in return for a cash payments.  Of course, this is more the breach than the rule, and the vast majority of expert networks would never do such a thing.  However, expert networks have become important in the financial system since they assist broker-dealers to design or implement investment strategies.  Nonetheless, broker-dealers should take precautions, as well as devise procedures to ensure that there is not even an appearance of impropriety. 

In sum, SIFMA believes that its membership should have policies to find and detect “red flags.”  These red flags will allow broker-dealers to ensure that their policies are being followed, especially, regarding material non-public information.  See Best Practices for Use of Expert Networks at http://www.sifma.org/uploaded files uploadedfiles/issues/legal_compliance_and_administration/expert_networks/expert-network-policy-bestpractices.pdf.

Josh Horn's Ponzi Scheme Response Road Map

Posted by Ernest E. Badway on November 08, 2011

My colleague, Josh Horn, has written an amazing article that should be on every compliance officer’s desk.  It details methods for investigating and responding to ponzi schemes. 

In this day and age, we are met with another Ponzi scheme occurring or being uncovered almost every day.  Josh’s article is an exceptional primer since it details the steps for a proper investigation, as well as, disseminating the investigation results to the appropriate authorities.  Further, Josh lays out an approach to avoid litigation, and, if litigation does strike, responding to it.  This article appeared in the September – October 2011 Special Edition for the National Society of Compliance Professionals, in its publication, N.S.C.P. Currents, and may be viewed at www.foxrothschild.com/newspub/newspubArticle. aspx?id=4294970030.

I hope everyone considers it.

Securities Podcast with Ernest Badway

Posted by Ernest E. Badway on October 28, 2011

Thought you might be interested in a recent podcast I did concerning my securities law practice.  http://web.me.com/cordpar/Client_Development_Tips/Law_Consulting_Coaching_Podcast/Entries/2011/10/28_Developing_a_Securities%2C_White_Collar_and_Complex_Litigation_Practice.html

Court to FINRA: "I don't think so"

Posted by Joshua Horn on October 07, 2011

The Second Circuit Court of Appeals has ruled that the Financial Industry Regulatory Authority (“FINRA”) cannot seek to enforce a monetary fine through a judgment with the court.  What does this mean for broker-dealers?

In 1998, NASD, FINRA’s predecessor, brought an enforcement proceedings against a broker-dealer.  After a hearing, a panel concluded that the firm engaged in illegal short selling and market manipulation.  It expelled the broker-dealer and imposed a fine.  After the firm refused to pay the fine, FINRA pursued the fine through the federal court, which upheld FINRA’s right to collect its fines through a judgment against the broker-dealer.

On appeal, the Second Circuit determined that Congress did not intend to authorize FINRA to enforce its fines through judicial proceedings.  If FINRA wanted the ability to do so, FINRA would have to have pursued proper rule-making, which it failed to do.  FINRA has stated that it is weighing its options, which would include an appeal to the Supreme Court.

This decision is significant in as much as FINRA is without judicial process to enforce a fine against a broker-dealer who refuses to pay, but this does not mean that FINRA is without recourse.  First, FINRA will, in all likelihood, will attempt to pursue rule-making to enable it to seek judicial relief.  Second, FINRA has the threat of additional sanctions against member firms for failing to pay a fine, such as the ultimate sanction of expulsion; a sanction that the panel already imposed in this case.  As such, the  absence of judicial recourse should not provide broker-dealers with a rationale for not paying a fine.  If you do, you may wind up being much worse off.

Joint SEC and FINRA Probe Into Secret Trade Data and Algorithms

Posted by Ernest E. Badway on September 29, 2011

Reuters recently reported that the SEC and FINRA were asking trading firms specific details regarding their trading strategies and/or their secret computer codes. 

This new effort by the SEC and FINRA is part of a joint investigation into suspicious market activity as well as to examine compliance with securities regulations.  The specific requests relating to computer code, obviously, have irked many in the industry since the requests have to do with targeting stock trading firms and hedge funds.  These inquiries relate to trading information and computer coding information that may have been shared or “borrowed” with others, and used for illegal activity.  Clearly, the SEC and FINRA are focusing on this information to better understand the trading markets, but, of course, if they find anything of an illegal nature, it may result in enforcement examinations.

FINRA executives, recently, told a SIFMA conference that FINRA did not make these requests “lightly.”  However, this worries many since the information is privileged and proprietary, and may find its hands into competitors.  Although, the SEC and FINRA both have policies in place to protect such information, once the information is out, companies may find themselves in a predicament.  Counsel should certainly handle these particular issues.

A Framework Proposed for the Uniform Fiduciary Duty

Posted by Joshua Horn on August 08, 2011

In January 2001, the Securities and Exchange Commission (“SEC”) recommended the implementation of a uniform fiduciary duty standard for broker-dealers and registered investment advisors. Significant debate has followed regarding the potential parameters and scope of such a duty. Recently, the Securities Industry and Financial Markets Association (“SIFMA”), a lobbying group for large broker-dealers, proposed a framework for a uniform fiduciary duty.

Although SIFMA reiterated its support for such a standard, it also recommended against applying the fiduciary duty found in the Investment Adviser Act of 1940 to broker-dealers, stating that it would adversely impact “choice, product access and affordability of customer services”. Among other things, SIFMA proposed a new fiduciary duty for broker-dealers to accommodate broker-dealer conduct that would otherwise be in violation of the 40 Act.

In doing so, SIFMA recommended that, in its rulemaking, the SEC “provide the necessary rule-based guidance regarding when the fiduciary duty begins and ends and what disclosures and consents, if any, are necessary to satisfy the duty where a broker-dealer gives “advice involving principal trading, structured products, hybrid accounts, complex investment strategies, concentrated positions, and receipt of commissions and differential loads for different products.” To implement this standard, SIFMA proposed that it be articulated in the initial customer agreement. SIFMA also recommended that the fiduciary duty apply on an account-by-account basis.

By implementing a new fiduciary duty standard unique to broker-dealers, SIFMA believes that the SEC will properly take into account the distinctions in the law between registered investment advisers and broker-dealers while taking customer service into account. It remains to be seen if SEC heeds this call to action, or if the SEC simply rubbers stamps the 40 Act fiduciary duty standard to broker dealers.