Nearly a year ago, FINRA adopted Rule 2165 (Financial Exploitation of Specified Adults) and amended Rule 4512 (Customer Account Information). This new rule and amended rule were ways to address the myriad of issues dealing with senior clients.

With nearly a year gone by, FINRA has now published responses to frequently asked questions involving Rules 2165 and 4512. The responses to the FAQs are broken down into the following categories.

  1. Placement of temporary holds.
  2. Extensions of temporary holds.
  3. Trusted contact.
  4. Disclosure.

For anyone who has any senior clients, a review of these FAQs is necessary because they reflect FINRA’s ongoing focus of senior clients. Reviewing the FAQs will only take a few minutes, defending yourself in a lawsuit brought by a senior will take years. How would you rather spend your time?

The SEC recently put out an Investor Bulletin on wrap fees. Although this guidance is steered toward consumers, there are lessons to be learned by firms who offer such programs.

The SEC specifically posed the question of what does the fee cover. Included in that list of possibilities are:

  1. Investment advice.
  2. Brokerage costs.

    24752961 – grunge rubber stamp with text disclosure,vector illustration
  3. Administrative expenses.
  4. Other fees and expenses like those associated with mutual funds.
  5. Third party service provider costs and trading away.

So what can a firm take away from this bulletin? For one, now is as good a time as any to make sure that your wrap fee disclosures are complete and up to date.

In the first instance, do you even have written disclosures that you can provide customers? If you do, do they detail the services being provided and the fees being charged. If the answer to either question is no, you have work to do.

FINRA recently issued a report regarding its examination findings. FINRA issued this report so that firms can gain insight from the work of FINRA’s examination of other firms.

Among the FINRA’s findings are the following areas that need additional attention:

  1. Cybersecurity, including access management, risk assessments, vendor management, branch office security, segregation on internal duties and data loss prevention.
  2. Outside business activities and private securities transactions, including failure to provide notice to firms, notice reviews and post private securities transaction approval conduct.
  3. Anti-money laundering compliance programs, including maintaining adequate policies and procedures for suspicious activities, responsibility for AML monitoring, exclusions from data feeds used for AML monitoring, resources for AML monitoring and independent testing for AML monitoring.
  4. Product suitability, including unit investment trusts, multi-share class and complex products and training.
  5. Best execution.
  6. Market access controls, including establishing pre-trade financial thresholds, implementing and monitoring aggregate financial exposures, tailoring erroneous or duplicative order controls, implementing effective fixed income financial controls, reliance on vendors for fixed income financial controls, and effective testing for fixed income financial controls.

This list and the items in it should provide other firms with the benefit of hindsight. Review the report and then self-critique your firm. Do you have any of these issues? If so, implement modifications and adjustments to address them.

In Notice to Members 17-38, FINRA has put out for comment a change to Rule 3110 that would allow the remote inspection of certain “qualifying offices” as that term is defined by FINRA. In its Notice to Members, FINRA highlighted the point that technology and a changing industry mandate reconsideration of requiring mandatory, in-person inspections.

A “qualified office” is an office that meets the following conditions:

  1. A location where there are no more than three associated persons that conduct business for the firm.
  2. A location that is not held out to the public as an office of the firm.
  3. The associated person at that location conducts business for the firm solely through the firm’s authorized electronic systems.
  4. All required books and records are maintained by the firm other than at the location.
  5. No customer funds or securities are handled at the location.
  6. The location is either (i) not required to be annually inspected; (ii) designated as an OSJ solely because of supervisory activities described in Rule 3110(f)(1)(D) through (G); or (iii) designated as a branch office solely because of supervisory activities described in Rule 3110(f)(2)(B).
  7. No registered person at the location has a disciplinary history and no associated person at the location is subject to statutory disqualification.

Although there are a number of conditions to satisfy the exception to in-person branch office inspections, this proposed change is a start in the right direction. Compliance and supervision take substantial overhead, and the proposed change is just an acknowledgement of reality that inspections can be performed without the need of boots on the ground. Time will tell if this rule change happens.

 

The SEC recently upheld a statutory disqualification that FINRA imposed where the representative filed a false U-4 and falsely answered compliance questionnaires. It appears as though the registered representative failed to disclose tax liens and a bankruptcy on his U-4. So is statutory disqualification the proper punishment for this misdeed.

According to FINRA and the SEC, the answer is a resounding yes and, unfortunately for the registered representative, this makes sense. After all, the U-4 is the lynchpin of what must be disclosed to FINRA and members firms. The answers serve as the basis for whether a registered representative will be hired, retained and supervised.

24752961 – grunge rubber stamp with text disclosure,vector illustration

Similarly, firms use compliance questionnaires to determine if there are compliance issues that need to be addressed. The firm cannot satisfy that purpose when the responses are a lie.

The moral of the story, do not lie on your U-4 and compliance questionnaires. It is only a matter of time before you are caught, and you will be caught. Why throw away your career when the true answers may not have had any impact on the person’s career or position with the member firm.

The SEC recently announced an enforcement initiative that will target retail investor harm. The agency’s task force will use data analytics to find widespread problems regarding fee disclosures and unsuitable investment recommendations. In addition to data analytics, the SEC will rely upon tips, complaints and referrals that come into the SEC.

This heightened analysis of the retail investor market should be a wake-up call to firms who service the retail investor space. There are a few questions that you should be asking as you move forward:

  1. Do I have a rigid supervisory system to make sure clients are receiving suitable investment advice for the fee being paid?
  2. If my firm does not have a robust supervisory system over retail investment advice, what is the firm doing to develop and deploy such a system?
  3. What does you supervisory system provide if it finds unsuitable investment recommendations?

There are certainly additional questions that firms can ask themselves, but the point is made. What are you doing to make sure the SEC does not have an issue with the retail investment advice that you are giving to your clients? If you cannot answer that question, you had better go back to the drawing board.

It is almost axiomatic that the SEC “enjoys” bringing enforcement actions against lawyers.  The SEC believes that lawyers have a special duty to protect and police the securities markets, and, when a lawyer fails, the SEC is right there to pounce.

In fact, the SEC fined and barred an attorney from practicing before the Commission because the attorney failed to conduct proper due diligence when acting as underwriter’s counsel in misleading municipal bond offerings.  See https://www.sec.gov/litigation/admin/2017/33-10335.pdf.  The SEC claimed that the lawyer prepared erroneous documents regarding on-going disclosure obligations. The SEC stated the lawyer never went beyond relying upon the issuer’s claims, and ignoring red flags concerning the inaccuracy of the disclosure.

If you are lawyer, you cannot outrun the long-arm of the SEC, please take precautions!

Ernie Badway is scheduled to co-host a webinar discussion on new developments in AML and training requirements on Wednesday, September 13, 2017 at 1:00 p.m.  See http://mailchi.mp/e5dd1d2898b8/webinar-sample.  Details are below:

New Developments in AML and Training Requirements

New Developments in AML and Training Requirements
Date: Wednesday, September 13, 2017
Time: 1:00pm ET / 12:00pm CT / 11:00am MT / 10:00am PT / 9:00am AT

Webinar Description:
With numerous high profile incidents reported on a regular basis, it is little wonder that FINRA, FinCEN and the SEC continue to focus on AML, cybersecurity and the relationship between the two. For the last three years, FINRA has listed AML and cybersecurity in its annual priorities letter and FinCEN released an advisory on cyber-enabled crime late last year. With their relationship to terrorism and national security, these topics remain near the top of the list.
Join Matt Wadley, General Manager USA for GRC Solutions and Ernie Badway, Partner with Fox Rothschild as they discuss recent developments in AML, cybersecurity and specifically how your company can optimize training in this area.
The webinar will highlight recent developments related to AML and what they mean with respect to compliance obligations and training. The attendees will learn about:

  • Proposed rules requiring registered investment advisers to establish AML programs;
  • The need to tailor AML training to your specific needs, based on your company’s size and activities; and
  • The increasing focus on cybersecurity and how it relates to AML.