U.S. Securities and Exchange Commission (SEC)

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!

Despite numerous warnings, some people just do not get it.   The SEC barred a broker from the industry because the broker used personal email and text messages to obtain client investments.  See the Commission’s website.

The SEC found these personal communications were never submitted to the firm for review.  As a result, the broker aided and abetted his firm’s books and records violations.  Further, the broker also made numerous other violations as well.

This scenario demonstrates the critical requirement to only use firm sponsored media for client communications.

fraud.jpgThe outside business activities of registered persons have the potential for causing your firm significant liability, especially where those activities are unknown to the firm, involve firm customers and constitute a fraud.  FINRA 3270 only requires the registered person to provide notice to the firm before engaging in the activity, but should the firm do more.

The short answer is, absolutely.  First, the firm should either approve or disapprove of the proposed activity.  Standing silent is no longer an option.

Second, if approved, review that activity with the registered representative as part of the normal compliance review, as well as suprise reviews.  Part of this review process should also include an objective review of the registered person’s lifestyle; if they are living beyond their means, there may be a problem.

Third, monitor all correspondence (including electronic), as well as Internet use (including social media).  Many times bad brokers are sloppy covering their tracks.

Finally, do not be afraid to say no to a proposed activity.  Remember, your obligation is to the firm and its customers.  They should never be sacrificed to an outside business activity.

confusion.jpgAt a regulator’s round table during a recent National Society of Compliance Professionals meeting, the regulators framed out those issues that are keeping them up at night.  The issues include:

  1. The increasing complexity of investment products.
  2. Social media beyond things like Twitter or LinkedIn.
  3. Cyber security.
  4. Cyber fraud; i.e. hacking into customer accounts.
  5. AML issues where broker-dealers are connected to banks.

This panel also noted that one of the more common deficiencies being seen is the lack of suitability analysis when it comes to complex products.  In addition, they noted that there have been more exceptions when it comes to proper supervision.

It almost goes without question that, if the regulators are focused on certain areas, you need to share that focus.  Revisit your WSPs and practices and procedures.  Make the necessary changes, and avoid sleepless nights.

idea.jpgThe Financial Industry Regulatory Authority (FINRA) recently announced that it expects to send a proposal to the SEC to make it easier for registered representatives to clear their record of black marks.  Up until now, the process for expungement has been drawn out and extremely limited in application.

The primary issue FINRA is attempting to address are the adverse marks of customer claims that are only brought against the firm.  As currently framed, a registered person’s U-4 must be marked even if not a party, but named in the body of the complaint.  I suspect that FINRA is looking to change this aspect of the reporting requirement.

This practical proposal would address those unfair situations where the registered person sold an investment that the firm promoted as safe, which later turned out to be untrue; i.e. auction rate securities.  In other words, the registered person should not be punished for selling the product his or her firm recommended.

The proposal is sure to meet opposition from groups who represent claimants in arbitrations.  Nevertheless, I believe that the proposal will gain some traction because it fairly balances the interests of registered persons unfairly having their record marked and, at the same time, reporting of those who are named parties in claims.

Recently, FINRA publicized penalties against three companies and associated individuals for failing to implement adequate anti-money laundering procedures.  These fines should serve as a warning to the industry as a whole that FINRA is very focused on AML policies and procedures.

In its announcement, FINRA noted that the firms failed to implement adequate procedures to detect and monitor suspicious transactions.  Key to each finding was that the firms failed to identify red flags of money laundering activities and, in doing so, failed to investigate suspicious activity or file suspicious activity reports.  The fines were in the hundreds of thousands of dollars and individuals were suspended.

So what does this mean for you?  For one, you should take this warning to heart.  FINRA is taking a very strict look at firm AML policies and procedures.

Revisit your policies and procedures now.  Ask yourself this question; do my policies and procedures have those key components designed to identify red flags to detect and prevent money-laundering activity.   If the answer is no, you have work to do, and we can help.


money.jpgThe SEC recently announced that its top priority is to increase the number of investment adviser examinations it conducts on an annual basis.  Considering that the SEC only examined 8% of all investment advisers in 2012 (where 40% have never been examined), the SEC could only increase the number of such examinations.

The talk, for the moment, has moved away from the uniform fiduciary duty and designating an SRO for investment advisers.  Instead, the focus is on increasing the budget for the SEC to fund, among other things, its examination process.

The shift in focus back to examinations is only logical.  The debate on the SRO and uniform fiduciary duty standard has taken much time and produced no results.  A reinvigorated examination process will shift the view of the SEC from being do-nothing to do-something.

So what should you expect?  It is likely that the SEC will receive increased funding.  In turn, investment advisers should expect more that 8% being examined in any given year.  

Where that number goes is anyone’s guess, but now is as good a time as any to revisit your compliance policies and procedures.  Make sure your house is in order now, or pay for it later now that the SEC will have the funding and will surely act with a purpose in the examination process.

*photo from freedigitalphotos.net

This has been the week of scandals.  With political forces, lobbyist and lots of deep pockets, our government is a breeding ground for scandals.  The SEC has certainly not been immune.  A few years ago, the SEC made headlines because several of its employees were watching pornography during working hours.  Recently, the former chief inspector in the Inspector General’s office filed a whistleblower lawsuit alleging he was terminated because he raised concerns over two senior officials sleeping together.  The whistleblower also alleged that several officials handed out SEC contracts to friends at influential consulting firms. 

While nothing can eliminate scandals completely, an article on FoxBusiness.com argues that the SEC could fund itself, rather than seek yearly Congressional appropriations.  According to the article, the settlements, penalties and fines collected by the SEC has exceeded its budget in recent times.  For example, between 2005 and 2009, the SEC collected $7.4 billion in transaction and registration fees, while Congress appropriated just $4.5 billion to the agency during that period. 

Changing the nature of the SEC’s funding could certainly insulate it from political pressures of Congress and deep pocketed regulated entities.  It would also insulate the SEC from attempts by some in Congress to defund regulatory agencies, or from budget cuts, like sequestration.  While changing the way the SEC is funded may not prevent sex scandals, it is certainly worth considering for an agency that regulates many entities that are politically connected and active.

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 websites 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