That is the question that the SEC has essentially posed for registered investment advisers in a National Exam Program Risk Alert. In doing so, the SEC has stated that it will be “examining compliance oversight and controls of registered investment advisers that have employed or employ individuals with a history of disciplinary events . . . .”

The SEC will essentially be examining the investment advisers business and compliance practices, particularly focused on higher risk individuals. Does this mean that you should not hire or retain someone who may have a disciplinary past?Core Values

Of course, not. Instead, this alert should be telling you that such people, if you do decide to hire (or retain) them, should come under some form of heightened supervision for a period of time, if not forever. But be forewarned that the SEC is going to check up on you by reviewing certain information, including the following:

  1. Your compliance program , including the practices surrounding the hiring and ongoing reporting obligations of investment adviser representatives.
  2. The firm’s disclosures (i.e., Form ADV) that it makes to its customers to ensure that they are accurate.
  3. The conflict of interest that the firm discloses.
  4. The firm’s marketing.

By reviewing these areas, the SEC believes that it can better understand how firms are handling and representing advisers with a past to their customers. If you decide to hire or retain such advisers, you should focus on what you are saying to the public about them through your words and actions before you are in the SEC doghouse following an examination.

Given the start of the NFL season and the post-Labor Day last leg of the presidential campaign season, it reminded me of a blog entry that I posted in August 2012, regarding picking a winner for the then presidential race based upon the conference of the team that won the Super Bowl in the year of the election.  I have re-published the blog below for your amusement.

I blogged on this topic because it involved 3 things everyone in the securities industry seems to argue about:  politics, football, and statistics.  In any event, my blog proved to be prophetic.  The New York Giants defeated the New England Patriots because of a lucky catch with some assistance from the referees who happened to leave their seeing eye dogs at home during the 4th quarter– yes, I am still slightly bitter at the result.  Based upon my statistical analysis, such a result foretold President Obama’s re-election, and he did win pretty handily.

Now, this year’s Super Bowl was won by the Denver Broncos, yet again with the assistance of Roger Goodell’s band of incompetent zebra looking and optically challenged referees, who permitted Aqib Talib to put on Rob Gronkowski’s jersey while he was still wearing it in the end zone during the final drive of the AFC Championship Game thereby depriving the better team from prevailing.  Poor “I am not a Lawyer” Roger promised a thorough investigation, but, since it would not benefit any team other than the Patriots, he quickly backtracked and forgot about it.

However, I digress so let’s get back to my model.  If the statistics are to be believed, the NFL’s machinations– ensuring Peyton Manning winning his final Super Bowl– dictate that the Republican nominee, Donald Trump, will win the presidential election.  Of course, if you do not like this prediction, you should take comfort with another NFL axiom, “anything can happen on any given Sunday,” and get out and vote to prove it wrong (or, if you do like the model, get out and vote to prove it right) since that is the only true measure of any election, not some fancy statistical metric.

Yes, this blog is quite different than what you are used to reading, but it is a Friday in August so please take it in that vein.  Here goes.

Undoubtedly, many know the securities industry loves to use statistics.  Statistics are used for everything, including, among other things, to make predictions.  However, the securities industry is not alone in using statistics to predict the world to come.  For example, given this time of year with both NFL training camps and the presidential campaign in full swing, statistics and the resulting predictions are being dispensed like Pez candy.  Really, how many more NFL pre-season or swing state predictions can they come out with???!!!

Although statistics may be the norm in the political field, some political wonks are using an odd, novel method, most notably, cockroaches to predict the outcome of the presidential race.  Although I have heard a number of politicians in my life called cockroaches, until today, I have not heard of them being used for polling purposes.  However, I digress.

In any event, I started to think if there was some statistical correlation between the NFL and presidential politics.  Eerily (of course, when you use statistics in this manner, it is always eerie), there is!!  Apparently, the connection is with the winner of the Super Bowl in the year of the presidential election.

Now, since 1980, there have been 8 presidential elections.  Over that time, the Democrat has won 3 times while the Republican has won 5 times—more on that below when we discuss 2000—yes, you always have to discuss 2000!!  Of the 8 Super Bowl winners, 3 were from the AFC (Steelers, Raiders and the Patriots), and 5 were from the NFC (Redskins-2x, Dallas, Rams, and the Giants).  You are probably thinking, okay, whenever the AFC wins the Democrat wins, and, when the NFC wins, the Republican is the victor.  Not so fast, as your mother probably told you, do not jump to quick conclusions!!

In fact, it is the exact opposite.  In 1992, 1996, and 2008, an NFC team won the Super Bowl along with the Democrat candidate, while, in 1980, 1984, and 2004, the AFC team won along with the Republican.  Two elections remain: 1988 and 2000.

You are probably thinking, okay, the NFC team won both years along with the Republican so any predictive benefit falls apart.  However, the eeriness continues.  Let’s go back to 1988, that year the Redskins defeated the Broncos in Super Bowl XXII.  Some may recall that the Redskins’ quarterback was Doug Williams.  Williams would lead the Redskins over the Broncos, and win the Super Bowl MVP.  As many may also recall, Williams was the first African-American quarterback to play in the Super Bowl.  Is this an omen for President Obama, who happens to be the nation’s first African-American president?  Who knows?  One other point on the 1988 Election, George H.W. Bush, the Republican, defeated Democrat Michael Dukakis—a Massachusetts governor!!!!  Hmm, should former Massachusetts Governor Romney be worried???

Similarly, in 2000, the spooky coincidences continue.  The 2000 Super Bowl was won by the Rams, a NFC team, okay, based upon what we are talking about a Democrat should win.  Well, did he?  This is not the place to go through the tortured history of that excruciating presidential election, but Democrat Al Gore did win the popular vote while Republican George W. Bush, won the Electoral College and the presidency.  Of course, this game was famous for coining the phrase “One Yard Short,” http://en.wikipedia.org/wiki/Final_play_of_Super_Bowl_XXXIV, the final play of the game where the Titans were driving, but Titans receiver Kevin Dyson was tackled one yard short of making a game tying touchdown.  Some people are still suggesting George W. Bush really came up one yard short as well, but, unlike him, the Titans could not appeal to the United States Supreme Court.

Okay, what does this all mean for the 2012 election?  The New York Giants won the Super Bowl.  That means, if re-elected, President Obama will have none other than Tom Brady of the New England Patriots to thank for missing his favorite receiver, Wes Welker, thereby, ensuring the NFC’s victory and the President’s victory in November.  However, a word of advice for the President (like he really needs my advice!!), if he wants to send Tom a present, I do not think he likes cockroaches!!!

 

 

The SEC has repeatedly included issues around social media in its annual exam priorities for investment advisers. With the SEC’s recent release of a final rule on the subject, the SEC has taken that “exam priority” to the next level.

Under this new rule, investment advisers will have to complete an additional component to their annual Form ADV filed with the SEC. In doing so, investment advisers will have to disclose their addresses for Twitter, Facebook and LinkedIn. So what’s the point?

By requiring this disclosure, the SEC can better focus on each examined firm’s use of social media. Undoubtedly, the SEC will use this information when framing its examination of individual firms.

The SEC can also use this information on an ongoing basis to assess what firms are putting out there on social media. The industry has to assume that the SEC will be doing more with this information than just tucking it away for examination purposes.Core Values

This new rule should incentivize you to review your social media policy, assuming that you have one. If you do not have one, you need to have one prepared.

You should also monitor the information that your firm is putting out there on social media. Does it confirm with SEC rules? Rest assured. If you are not minding the store, the SEC will.

Every time that I start a FINRA arbitration, I find myself having the same internal debate; did we pick the right person to serve as the arbitration chair. Unfortunately, you will not know the answer to that question until after your arbitration begins, or, more likely, after the award is issued. FINRA has proposed a rule change to open up the filed for chair arbitrators.Conference Room

Under the proposed rule, attorneys can serve as public arbitrator chair with less experience than they were required to have in the past. Pursuant to this proposal, attorneys would only need to have served on at least one arbitration that went to an award and the complete chair training.

FINRA’s stated purpose for the rule is to “protect investors and the public interest” by increasing the pool of eligible chairpersons. This way, chairs would ideally no longer have to travel to serve as a chair.

In theory, this all makes sense. If there are more available chairs, then investors and the industry will be better served. But will this work?

In my view, much still falls on the parties to critically review the CVs of potential chairs and do your due diligence. Call other lawyers who have had arbitrations with that person. Do some research of the professional backgrounds of the potential chair. After all, just because a lawyer passes FINRA’s vetting processing does not mean that you would want that person as your chair.

Over the years that I have defended broker-dealers and investment advisors on customer-initiated claims, I have seen many things that would make any compliance officer cringe. One spine tingling (not in the good way) type of conduct is when an advisor engages his/her client when the client makes an informal complaint, instead of routing the complaint to compliance/supervision.whistle

So why is engagement against the rules of engagement? The most important reason is that engagement (aka arguing) may only make a simple customer service issues into a formal complaint. Rather than engage, my experience suggests that it is better to get the complaint (assuming it is in writing) to the proper person in compliance/supervision.

Dealing with an oral complaint is a little trickier because you are put on the spot. Nevertheless, the best course, as hard as it may be, is to try to defuse the situation by expressing that you understand the issue that is being raised, you will look into the issue and, finally, will respond further as soon as possible.

By defusing instead of engaging, you give all sides the opportunity to let cooler heads prevail. Many times a customer service issue can be easily addressed by taking a little time to consider the issues and formulate a response/course of action instead of blurting out the first thing that comes to mind; that is invariably the worst thing to say.

If you get a complaint; don’t jump to respond. Use your resources and formulate a well-reasoned response. Sometimes the client is wrong, but arguing with the client gets you nowhere except guaranteeing litigation.

When faced with a customer complaining through a letter or email, it is human nature to try to appease the customer with a conciliatory response or no response at all. I have seen this “human nature” all too often when defending brokers and advisor from customer complaints.

In almost all instances, the complaining customer now claims that the conciliatory comment or non-response is the functional equivalent of an admission by the broker/advisor that he/she did something wrong. In turn, the broker denies that he/she made any admissions by being conciliatory or silent. While I generally agree with the advisors, it is always an issue that must be overcome.whistleblower

So what should an advisor do when confronted with a nasty/accusatory email/letter? Most important, forward the communication to the person/persons who are designated in your company to handle customer complaints regardless if you “think” this person is just blowing smoke.

Someone should always respond to such a communications. The responding communication does not have to be the functional equivalent of beating up baby seals with a bat. Instead, it should be nice, but be firm at the same time.

If a client claims that you misrepresented an investment that you recommended, the response should remind the client in detail what was discussed, and why the investment falls within the client’s overall investment objectives, goals and tolerance for risk. Ideally, prior written communications on the subject will be sent back to the customer as part of this “reminder.”

Although nothing will ultimately keep a client from suing you if he/she is really inclined to do so, avoid potentially making it worse by not responding or being too conciliatory to a complaining email/letter. The last thing you want to have do is explain away the poor response (or absence of any response) to an arbitrator or jury who may not really understand you were just trying to be nice.

Back in April, the Securities and Exchange Commission sought public comments on modernizing certain business and financial disclosure requirements in Regulation S-K.  In their Concept Release, the SEC noted that some investors and interest groups have “expressed a desire for greater disclosure of a variety of public policy and sustainability matters, stating that these matters are of increasing significance to voting and investment decisions.”

48936020 - man pointing at the brown picture of oil industry components and green eco energy arranged in circle, earth in the centre, concept of environmentIn response to the SEC’s request for comment, numerous environmental groups pressed the SEC to require disclosure of environmental, social, and governance risks in companies’ public filings.  According to Law360’s Juan Carlos Rodriguez, last week the Sierra Club, Greenpeace, Friends of the Earth and several other groups urged the SEC to create uniform environmental, social, and governance (“ESG”) disclosure requirements for companies, which would enable investors to identify companies that reflect their values.

However, as Rodriguez noted in his article, there were others who cautioned the SEC against going too far with ESG disclosures.  For example, the American Fuel & Petrochemical Manufacturers advised the SEC that “Such supplemental discussion beyond the bounds of mandated disclosure enriches the public discussion of ESG issues, but may not be material and should not be conflated with disclosures made pursuant to Regulation S-K according to the longstanding principles of financial relevance and materiality upon which the securities markets rely.”

The takeaway here is that the SEC will likely begin to require ESG disclosures from companies in their public filings.  Rodriguez explained that the SEC’s investor advisory committee has noticed a “significant and growing” number of investors who rely on sustainability and other public policy disclosures to better understand a company’s long-term risk profile.  Thus, while it is unclear what those ESG disclosure requirements will be, it is likely that some additional regulations and disclosures will be forthcoming, so plan accordingly.

To read more, please visit: http://www.law360.com/environmental/articles/820522

The SEC recently created a new position associated with cybersecurity; senior adviser to the chair for cybersecurity (Christopher R. Hetner). Mr. Hetner has an extensive background in information technology and, in particular, cybersecurity.

19196909_sAccording to the SEC, Mr. Hetner will be responsible for (i) coordinating cybersecurity efforts across the SEC; (ii) engaging with external stakeholders; and (iii) enhancing SEC mechanisms for assessing broad-based market risk. This appointment could have a wide-ranging on the industry.

As we know, the SEC has made cybersecurity an exam priority over the last few years. The SEC is also actively conducting cybersecurity investigations and undertaking enforcement actions where appropriate. According to Chairperson White, the SEC is looking to bolster its risk-based approach. So what does this mean on a day-to-day basis?

Understand that the SEC has just upped the stakes. By retaining an industry expert who is solely focused on data-security related issues, the industry must be prepared for the SEC and FINRA to come after firms regardless if the firm sustains a breach or clients suffer harm as a result. Firms with weak or no data-security programs will surely be targeted.

Are you prepared to handle this even more focused mission of the SEC? If not, you need to more fully review you systems and procedures, both internally and externally facing. Are you testing your systems and procedures on a regular basis? If not, you better start.

The SEC is prepared; are you?

If you thought the SEC and FINRA were serious about elder issues, welcome to the Alabama, Indiana and Vermont. Each has focused on elder abuse issues.

These states will have mandatory reporting to state officials in instances involving the disabled or those over 65 years of age. They will also allow advisors to cease disbursing funds from clients and providing advisors with immunity associated with doing so. So what does this all mean?

For one, states are starting to run on the coattails of federal regulators who have made elder issues an examination priority in recent years. In addition, such state laws should be a wake-up call for brokerage and advisory firms who service elder clients.money and calculator

The actions of these states should force you to ask yourself; what is my firm doing to prevent, detect and report elder abuse. Although a FINRA proposed rule does not require reporting, its goal is the same because it would allow advisors to designate a third-party to who they can inform of suspected problems.

In the absence of reporting requirements, firms should consider having clients aged 65 or above designate a trusted family member or friend when the advisor suspects that the client may be the subject of some abusive conduct. At that point, you may have a group approach to address suspected abuse.

Firms may also want to consider requiring these elder clients to designate a trusted family member or friend to receive copies of account statements. This way, someone who is “independent” can check an account for irregular activity as well.

Whether you are required to address elder abuse or not, firms should make sure that they are taking special care with their elder clients. Federal regulators and now states are focused on the issue. Are you doing anything to make sure your firm does not get into an elder abuse nightmare?

If you cannot answer this question, you may have an issue when you have your next FINRA exam. After all, firm culture is a FINRA exam priority. Does your firm have a culture of compliance?

This question only leads to another; what is a culture of compliance. For one, this is something that has to resonate from the top down. If senior management ascribes to uphold firm compliance, that should promote the “culture of compliance.”CEO tree

For example, does senior leadership enforce the firm’s written supervisory processes and procedures? In doing so, does senior management hold everyone accountable the same way, or are exceptions made for the “big producers”. If exceptions are made, you are not promoting a culture of compliance.

Does senior management ensure that there is adequate training of all personnel? There should be a robust and mandatory training program to account for changes to the rules and to make your personnel aware of risks and how to avoid them; one of the biggest being data security.

These are only two of many considerations for assessing whether there is a culture of compliance. The key in it all is leadership from the top. After all, people cannot follow a leader who does not lead. Be a leader.