Now that summer has come to its unofficial end, it seems as though the SEC forgot to check its calendar back I May because it has been conducting exams at a breakneck pace as reported in the Investment News.  These exams have focused, in part, on those investment advisors who have never been examined. 

You may recall at the beginning of the year that the SEC made it an exam priority to focus on investment advisors who, for one reason or another, have never been subject to an examination.  The SEC has targeted about 1,000 of those entities, which should represent about a quarter of the 15% of all investments advisors who have never been examined. 

What should be the take away from the SEC’s focus on investment advisors being examined for the first time? buyholdsell.jpg

For one, it is a clear message that you should jump start the review of your operation.  Are your WSPs up to date?  Have you reviewed your policies and procedures regarding AML, custody of client funds, use of social media, and avoidance of insider trading? 

If the answer to any of these questions is no, now is the time to take preventative action and revisit these, among other issues, to make sure that your house is in order.  Either you do it now, or have the SEC do it for you later.   The decision is yours.

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As we all know, the SEC and FINRA have made cyber-security an exam priority in 2014, but what does it mean when the audit of your regulator shows that it is susceptible to a data breach.  A recent audit of the SEC found that its cyber-security was far from perfect. 

I am sure that there are some who rejoice in the fact that the SEC is having these types of issues.  In reality, however, this should be a valuable lesson to everyone in the industry.   robber.jpg

If the SEC (who has some of the most sophisticated systems) has a cyber-security weakness, what does that say for your systems.  The issues found during the SEC audit should serve as yet another wakeup call for the industry. 

Undoubtedly, no systems are perfect when it comes to cyber-security.  Nevertheless, you need to do all you can to ensure your systems are as protected as they can be. 

You should be asking yourself, when was the last time you had your systems audited for cyber-security weaknesses.  If it has been more than a year, it has been too long. 

Don’t be a victim.  Take affirmative action now to do what you can to secure your systems and the client information that you hold so dear.  Otherwise, expect to see your name in the paper as yet another victim of a data breach.  What will our clients think then?

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The SEC and three other regulators requested comment on a proposed policy statement that would establish joint standards for assessing the diversity policies and practices of the entities they regulate.

The diversity measures are required by Section 342 of the Dodd-Frank Wall Street Reform and Consumer Protection Act.  In a joint release, the agencies said the proposed assessment standards would cover four key areas: (1) Organizational commitment to diversity; (2) Workforce profile and employment practices; (3) Procurement and business practices; and (4) Practices to promote transparency of organizational diversity.

Comments are still being accepted.

In an Investment News article written by Mark Schoeff, he reported that the push for a uniform fiduciary standard for broker-dealers and investment advisors has become a bit stagnant. In fact, it was reported that the prospects for such a uniform rules have waned over the years notwithstanding the general consensus that there should be such a standard.

Considering that there does not appear to be a uniform fiduciary duty standard looming in the immediate future, should retail broker-dealers even care any further. I think that the answer is still a resounding yes.

For one, in my experience, arbitration panels still struggle with the fact that broker-dealers are not subject to a fiduciary duty. As such, you may be held to that standard without really knowing it.

Where you do business is also of import. Depending upon the level of control you have over a customer’s account, some jurisdictions may impose a fiduciary duty on you as a matter of law. So where does this leave retail broker-dealers?buyholdsell.jpg

For one, you need to stay up on your compliance policies and procedures; promote a culture of compliance from the top down. Second, know where your clients are to be certain that you may not be considered a fiduciary without knowing it.

Although the uniform fiduciary duty appears to be stayed for now, do not lose your vigilance when it comes to your compliance and customer relations. Otherwise, you may be held to be something that you are not.

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According to the SEC, the Dodd-Frank Act does not require the SEC to bring an enforcement action within 180 days of issuing a Wells Notice.  See

Although the Dodd-Frank Act amended the Securities and Exchange Act of 1934 Section 4E(a)(1) to require the SEC to bring the action within 180 days, the SEC said it was not applicable since Congress never said what the consequences if it failed to do so.  The SEC claims to be relying upon precedent from other admiminstrative agencies.

We do not believe this issue is over, and either the courts or Congress will weigh in on this issue.  That means, stay tuned!!

The Dodd-Frank Act directed the SEC to study whether broker-dealers should be held to a fiduciary duty standard rather than the lower “suitability” standard.  Advocates for the fiduciary standard claim that customers are often under the misconception that they are dealing with a professional obligated to put their interests first.  Many broker-dealers have argued that the creation of the new standard would increase compliance and liability costs and could end up hurting lower and middle income investors. 

Broker-dealers opposed to the new standard claim that the higher costs may prompt brokers to drop commission based accounts altogether in favor of more lucrative accounts that charge a WRAP fee, leaving lower and middle income investors without anyone to turn to for investment advice.  Critics also claim that a universal fiduciary standard could limit the range of products offered to customers. 

The concerns over a universal standard have caught the attention of the SEC.  Last March, the SEC issued a public request for comment, including an assumption that a fiduciary duty would permit broker-dealers to continue to receive commissions and the mere offering of a limited range of products wouldn’t in and of itself be a violation of the fiduciary standard.  At least one SEC commissioner has publicly indicated that, while the issue remains open, the SEC is concerned that a universal standard would limit options for customers.  Further complicating the issue for broker-dealers and customers is that the Labor Department is working on a separate proposal that could establish a fiduciary standard for brokers who give advice on retirement investing.

The SEC is expected to issue a proposed rule by the end of the year.  While it seems certain that new standards are coming, the SEC is leaning against issuing a universal standard.  Nevertheless, the new SEC and Labor Department rules regarding the standard may end up further complicating the issue for customers and broker-dealers.

What’s good for the goose is apparently not so good for the gander, as the SEC warns in-house attorneys against whistleblower contracts. 

The SEC has been financially incentivizing whistleblowers to bring securities fraud complaints to the agency’s attention for years, with increasing success.  The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 empowers the SEC to reward whistleblowers who provide original information that leads to an SEC enforcement action in which more than $1 million in sanctions is ordered.  In such instances, the whistleblower reward can range from 10% to 30% of the total money collected.  The Act also established the SEC Office of the Whistleblower, which takes in, evaluates and, pursues whistleblower complaints.

The number of complaints to the Office of the Whistleblower has increased in recent years as large whistleblower rewards are publicized.  According to the 2013 Annual Report to Congress on the Dodd-Frank Whistleblower Program (, “[t]he number of whistleblower tips and complaints the Commission receives annually increased from 3,001 in the 2012 fiscal year to 3,238 in the 2013 fiscal year.”  The 2012 number was also up from 334 tips and complaints in the last four months of 2011, when the Dodd-Frank whistleblower program began.

In recent comments, the SEC’s whistleblower chief, Sean McKessy, said the Commission was receiving an average of 9 or 10 tips a day.  Commodity Futures Trading Commission whistleblower chief Christopher Ehrman also recently stated that tips into the CFTC have increased about 50 or 60 percent over the past year. 

This number is only expected to increase, as larger awards are publicized.  For example, the SEC announced on October 1, 2013 that it awarded over $14 million to a whistleblower – the SEC’s largest whistleblower award to date – who provided information that led to an SEC enforcement action that recovered substantial investor funds.

Naturally, securities compliance attorneys are actively brainstorming creative solutions to guard against the growing number of whistleblower complaints.  As in-house attorneys weigh their options, however, they should consider avoiding contracts that offer incentives for employees to keep whistleblower complaints in-house.

At remarks before the Georgetown University Law Center Corporate Counsel Institute last Friday, March 14th, the SEC’s whistleblower chief, Sean McKessy, warned lawyers that they may be disciplined for creatively drafted contracts attempting to incentivize company whistleblowers from bringing alleged company wrongdoing to the SEC’s attention:

“Be aware that this is something we are very concerned about.  If you’re spending a lot of your time trying to come up with creative ways to get people out of our programs, I think you’re spending a lot of wasted time and you run the risk of running afoul of our regulations. . . .  And we are actively looking for examples of confidentiality agreements, separates agreements, employee agreements that . . . in substance say ‘as a prerequisite to get this benefit you agree you’re not going to come to the commission or you’re not going to report anything to a regulator.’”

McKessy noted that securities compliance attorneys should know the risk of drafting such contracts, reminding those in attendance that the agency has the power to revoke attorneys’ ability to appear before the commission:

“And if we find that kind of language, not only are we going to go to the companies, we are going to go after the lawyers who drafted it . . . We have powers to eliminate the ability of lawyers to practice before the commission. That’s not an authority we invoke lightly, but we are actively looking for examples of that.”

In light of this strong language from the SEC’s McKessy – who appeared alongside Commodity Futures Trading Commission whistleblower chief Christopher Ehrman and the Government Accountability Project’s legal director, Tom Devine – general counsel and securities compliance attorneys should be cautious when drafting employment contracts to avoid including language that could be interpreted to offer incentives for employees to keep potential securities fraud whistleblower complaints in-house.

Attribution:  Brian Mahoney reported on McKessy’s recent remarks in Law360:

The DOL is working to redefine the definition of the term “fiduciary” for retirement plan purposes, including individual retirement accounts.  The SEC’s recent request for data on a possible rulemaking effort to impose a fiduciary standard seems to fail to take into account the DOL’s ongoing reform efforts.

The DOL project is broader while the SEC is examining the standards of conduct and other obligations of the broker-dealers. It is not possible to determine the effects of possible SEC reforms without taking into account the interaction with possible DOL reforms that may impact the IRA market.  In January 2011, in a study mandated by Dodd-Frank Wall Street Reform and Consumer Protection Act, the SEC staff recommended rulemaking to impose a uniform fiduciary duty for broker-dealers and investment advisers that offer personalized retail financial advice.  There may be an overlap between the SEC and DOL initiatives regarding investment services for IRA owners. The DOL’s redefinition of “fiduciary” would impose Employee Retirement Income Security Act of 1974 rules on broker-dealers and investment advisers, and could materially impact disclosure requirements.

In short, this bureaucratic mess will engender great debate as it moves forward.

The SEC Division of Investment Management, is reviewing the applications of private fund advisers, and focusing on two particular areas: advertising and the Form ADV.

The Division’s review will be “informed” by the questions and concerns raised by private fund advisers regarding the Investment Advisers Act of 1940 application to their practices and business models. The Dodd-Frank Act, among other changes, required mid-sized investment advisers to shift from SEC to state registration.  The statute also directed advisers to hedge and private equity funds with more than $150 million in assets to register with the SEC. This change resulted in more than 1,500 new registrants in 2012.  Private fund advisers now account for almost 40 percent of the SEC’s registered advisers.

In its rules to implement Dodd-Frank, the SEC directed that new registrants provide in their Form ADV’s information about each private fund they manage, including the size and ownership of the fund, and the services provided to the fund. However, the Form ADV may not be designed to take into account the sometimes complex structure of private funds. The advisers also had to provide other information, including identifying certain “gatekeepers” in their business, and business practices that could present significant conflicts of interest. The Advisers Act Rule 206(4)-1 bars registered advisers from using any advertisement that contains untrue or misleading statements.  The rule also bars advisers from using or referring to testimonials in their advertisements.

Accordingly, RIAs must update Form ADVs and comply with advertising rules or face sanctions.

The SEC has been routinely criticized for not completing its administrative work under the Dodd-Frank Act.  Despite this criticism, the SEC stated that it had only 4 remaining initiatives it must complete. and

The SEC must, now, reorganize the Offices of Administrative Services, Financial Management, and Human Resource, as well as create the Office of Chief Data Officer.  The SEC evaluated how its operations could be restructured to improve its use of resources and internal communications, key technological systems and employ staff with “high-priority skills” to enhance its ability to police markets and protect investors.

The SEC believes it has responded to these concerns, and claims to continue to improve its operations.