Archives: Registration; Exchange Act; SEC

While many brokers breathed a sigh of relief when FINRA withdrew its proposal requiring members to include a “prominent description of and link to” BrokerCheck on their web sites and social media pages, this is probably not the end of this matter.

Many firms complained about the proposal because it presented many administrative nightmares; such as coordinating with all of their social media.  Indeed, FINRA withdrew the proposal due to industry feedback. 

Brokers should not think for a moment that FINRA is going to give up on finding a way to promote enhanced access to BrokerCheck.  After all, Dodd-Frank directed the SEC to find ways to make brokers’ backgrounds more accessible to investors.  

I think that firms should expect a revised proposal that will give a middle ground.  For example, firms may expect FINRA requiring a link to BrokerCheck on the firm’s web page, but not on social media because social media is too difficult to adequately manage.  Either way, you should be prepared to have to promote BrokerCheck in some form.

robber.jpgHardly a day goes by without hearing horrible stories of a person having their identity stolen and their finances ruined as a result.  The SEC is now stepping into this hornet’s nest by adopting new rules for financial advisors who have the authority to move client funds to third parties. 

The new rules require firms to set up red flag files to track their movement of money and to watch out for identity theft.  Advisory firms must specify the red flags that they use, and how they propose to respond when such red flags are found. 

If firms do not move client funds to third parties, they will still be required to periodically review whether this status has changed, which would require implementation of the red flags.  The SEC noted some basic things that advisors can look for when it comes to possible identity theft. 

Such red flag conduct includes, among others, instructions coming from a client with a new email address; a client saying he has changed an address; a client who wants to invests in a place where he has never invested before; or a client who has requested many credit reports. 

The easiest response by any firm is to call the client to confirm the instructions.  Do not hide behind an email because the email may be bogus.  If the situation is extreme, you may need to contact law enforcement. 

Putting aside the new SEC rules, it is a worthy venture for all firms to look into their policies and procedures when handling client funds to avoid the tragedy that could result from identity theft.  Develop protocols to look for and react to possible identity theft.  Your clients will expect you to do so.

* Photo from freedigitalphotos.net

buyholdsell.jpgIn a recent speech, FINRA CEO, Richard Ketchum, told broker-dealer compliance officers that, although firm compliance programs have improved, there must be heightened supervision when it comes to complex products.  In light of these comments, you must assume that the supervision over the sale of complex products will be a focus of your next examination.

Ketchum noted certain products that should be subject to heightened supervision.  Those products include: structured products, closed-end funds, private REITs, private placements and “exotic ETFs.  If you offer any of these products, now is the time to revisit your supervision over their sale.

You may ask why such heightened supervision is required.  According to FINRA, it does not believe that many in the investing public understand these products, and that there is a lack of available information about some of them.

Take Ketchum’s comments as a warning.  Revisit your supervision if you sell complex products, or face certain exceptions on your next examination.

pointing.jpgAt a recent conference held by the SEC, a panel highlighted the importance of compliance and ethics for broker-dealers.  The big take away from the conference was that a strong compliance program must have a solid ethical foundation.

In other words, a compliance program is not simply making sure that your representatives check the right boxes on applications.  It has to start with a culture of compliance and leadership from the top down, not the other way around.

It is imperative that upper management set the tone for a culture of compliance by fostering an ethical culture at the firm for others to follow.  Once you set the tone at the top, you can impress that tone throughout your organization, and, hopefully, avoid compliance issues going forward.

* photo from freedigitalphotos.net

This past week, members of the North American Securities Administrators Association lobbied Congress to do away with mandatory arbitration provisions from customer agreements.  In a speech before this group, SEC Commissioner Aguilar expressed that mandatory arbitration agreements must go.  Would this be a bad thing?

Arbitration has be seen as the preference of the industry because of the perception that it is quicker, more cost effective, and likely to be a more favorable forum than a court.  In the hundreds of customer arbitrations that I have handled, this has certainly not always been the case.  Plus, FINRA arbitrations are now being skewed in favor of the claimants.

In arbitration, there is no meaningful way to challenge frivolous claims like you would in a court.  I can think of one arbitration hearing that I had (which lasted 44 days) where being in a court would have been a better course.  At least there I could have gotten some of the claims that were without merit dismissed.

So where does this leave us?  I think that the likely result will be a change, not an outlaw of arbitrations.  Brokers will likely have to provide their customers the option of being in court or arbitration.

From my perspective, this may not be a bad thing.  When faced with bogus claims, which are many, I would always want to be in a court where I have a meaningful way to challenge those claims.  Let me know your perspective.

A magistrate judge in the Northern District of Illinois recently ruled that Section 15(a) of the Exchange Act does not apply extraterritorially even if a foreign transaction was facilitated by a broker-dealer in the United States.  In the case, unregistered broker-dealers conducted a foreign stock transaction on a foreign exchange from the United States.  The SEC brought proceedings against the unregistered brokers-dealers and argued that Section 15(a) applies to any person who facilitates a stock transaction in the United States.  The broker-dealers argued that Section 15(a) and Section 10(b) have the same regulatory purpose, and whether a transaction is subject to Section 10(b) depends on whether it was domestic or foreign.  The Court agreed with the broker-dealers and noted that Section 15(a)’s title reveals a focus on national domestic exchanges.  The Court dismissed the SEC’s complaint.

The SEC may be surprised by the Court’s decision.  If the decision is not overturned on appeal, and other Courts throughout the country take a similar approach, it could lead to unregistered and unregulated broker-dealers conducting transactions from within the United States.