BD Law Blog - by Georgia Securities Lawyer Joel Beck

Japan Proposes Market Reforms

Jim Hamilton, at the aptly named Jim Hamilton's World of Securities Regulation reports that Japan has proposed broad market reforms for the markets involving regulations regarding the country's securities, banking and tax laws.  Mr. Hamilton explains that, "Proposed legislation would also revamp the firewalls among banking and securities. For example, the ban on interlocking officers and employees would be lifted. Similarly, the restrictions on the sharing of undisclosed corporate customer information between banking and securities businesses would be relaxed. At the same time, foreign fund managers would be encouraged to participate in Japanese markets by removing taxation risk in carrying out business through independent agents in Japan."

New FINRA Webcast on Gifts and Gratuities

A few days ago, I posted a reminder about ensuring compliance with the gifts and gratuities rule this holiday season.  Today, FINRA announced a new webcast on this very topic.  The webcast, reported to be about 8 minutes in length, focuses on compliance with the rule.  I have not viewed this yet, so how about posting a comment and giving me a review?  The webcast can be viewed at FINRA's website at this link.

GAO Finds Opportunities for Improvement with SEC Oversight

The US Government Accountability Office (www.gao.gov), the federal group that serves as Congress' watchdog over federal agencies and operations, recently released a report on the SEC's oversight of securities industry self-regulatory organizations (SROs) such as NASD, NYSE (now FINRA) and other, smaller organizations and exchanges. 

The report (that can be found here) recommends that the SEC establish a written framework for conducting SRO enforcement activity inspections, expand their use of the SROs' internal products and systems, and strengthen its information systems technology to allow the SEC to track and analyze SRO implementation of inspection recommendations and referral data. 

Are Your Holiday Gifts Compliant?

Ah, Christmastime.  I have the tree put up, the decorations all out, and my kids are anxiously awaiting December 25th.  Others folks celebrate other holidays this time of year, and there is typically that sense of excitement in the air (but not necessarily on the congested roads near the shopping malls).  While its nice to celebrate things this time of year, registered and associated folks need to be mindful of regulatory rules, and their own firms' policies, regarding gifts. 

FINRA Rule 3060 deals with giving gifts to many types of folks, and caps the annual limit for such items at $100 per year.  This $100 annual limit was set in 1993 when the regulators raised it from $50 at that time.  I don't recall exactly what $100 would buy in 1993, but I know it doesn't have near the purchasing power today that it did then.  Gifts and gratuities has been a focus of regulators in recent years, and it should continue to be an area that compliance and legal folks at firms review.  As broker-dealer folks buy holiday gifts for clients, they should be reminded of the applicable rules, and should review their own firm's procedures that may impose additional limitations or reporting requirements.  An article outlining some gifts being given by brokers this year was published recently by the folks at Registered Rep. The article can be found here.

MSRB Plans 529 Compliance Seminars

The MSRB has announced that is has scheduled two compliance seminars to discuss MSRB rules applicable to the sale of 529 college savings plans.  The seminars will be held in May 2008 in Chicago and in Washington DC.

FINRA releases guidance on supervision of electronic communications

FINRA today released Regulatory Notice 07-59 relating to the review and supervision of electronic communications.   While this guidance does not theoretically impose new requirements upon firms or make any new rules or regulations, it gives firms insight into what the FINRA staff may consider when conducting examinations into the reasonableness of a firm's supervisory system. 

If There Was a Book on How NOT to Supervise...

then I believe that this SEC Case  would be in it.  The SEC recently released this Commission opinion in the matter of Stephen Horning, former president, compliance director and FINOP of Rocky Mountain Securities and Investments, Inc.  The firm ceased operations in 2003 and the SEC brought charges against Horning for alleged supervisory violations.  In this Opinion, the Commission upheld the administrative law judge's findings that Horning failed to supervise reasonably, and upheld sanctions including a supervisory bar, and a bar from any association with a broker-dealer for 12 months. 

The Opinion is worth a quick read for compliance and legal folks.  One interesting point to me was that Rocky Mountain's auditor had noted in the firm's annual audit for decades that there were weaknesses in the firm's internal controls, but the Opinion notes that the firm did not make any changes as it did not have money to fund additional staff and that "the system worked fine as it was."  This fine-tuned system apparently didn't work well at all, as the Commission noted that:

Horning's failure to supervise continued over a ten-month period and occurred fourteen months after Horning learned that [two employees] had engaged in similar misconduct which resulted in an $800,000 discrepancy in Rocky Mountain's books and records and a $600,000 loss to Rocky Mountain. Horning's conduct resulted in the illegal taking of $4.5 million in customer funds, the appointment of a trustee under SIPA, and SIPC's advancing more than $5 million to the estate of Rocky Mountain in order to settle customer claims.

The take-away here is that you can't ignore the red flags.  That seems like common sense, but in situations like this where you know employees have acted dishonestly, you have to step up your supervision and do more than cursory 10 second reviews of books and records that are so superficial that the regulators find them to be meaningless.

Check the List. Check it Twice.

As 2007 draws to a close, remember to check your list.  Maybe you should check it twice.  Not the naughty and nice list for clients and brokers - we can leave that to Santa.  We're speaking instead about the yearly compliance to-do list.  Make sure that you've completed those things that must be done annually. 

For example, have you:
    Conducted the annual compliance meeting?
    Completed required OSJ, branch and non-branch location inspections?
    Completed the needs analysis for continuing education?   
    Conducted required continuing education programs?
    Completed the internal inspection of the businesses the firm engages?
    Performed the annual AML independent testing?
    Made the annual certification of compliance and supervisory processes?
    Done those things you're WSPs say you'll do this year?

There are more things on your list, no doubt.  So go check it, and check it again.

Michigan Repeals New Tax on Investment Advice

Investment News reported  today that on Saturday, Michigan lawmakers repealed the controversial new tax set to take effect this month on the provision of investment advice. The 6% tax on investment advice, and taxes on other areas, was stricken from the lawbooks during a weekend legislative session, according to the reports.