BD Law Blog - by Georgia Securities Lawyer Joel Beck

Alphabet Soup - FINRA's Professional Designation Directory

CLU, CFA, CFP, BCE, CAC, CTEP, RFC, RIS, WMS.  What in the world are all of these, and how do you know.  A useful tool is FINRA's professional designation index that can be found online here.  For each of the alphabet soup designations, FINRA's index provides information on the issuing organization, examination type, continuing education requirements, investor complaint process, public disciplinary process, and ways to check the individual's status online.  This is a great tool for compliance folks and investors alike in making some sense out of some of the lesser known designations, particularly given FINRA's caution to firms against allowing brokers to use designations that don't exist, or where the broker does not have the requisite skill and experience. 

FINRA Launches Webcast on Supervisory Concerns for Working with Senior Citizens

This week, FINRA launched a new webcast dealing with supervisory concerns when working with senior citizens.  The webcast is about 11 minutes in length, and I watched it last night.  What bothers me is that, while FINRA states that the rules governing sales of securities to seniors are the same that are applied universally to all people, it seems to me from this webcast and other emphases in this area that FINRA may believe that firms and brokers are held to a higher standard of compliance when dealing with seniors.  I simply just can't agree with that, as the cornerstone of the securities regulations we have is to treat all people fairly.  The bottom line, as I see it, is that the suitability rule (Rule 2310) applies to all customers, and that brokers and firms must ensure that their recommendations to all of their clients are suitable for each client, each time.

Having climbed down from my soapbox now, let me point out a couple of the highlights from the webcast:  FINRA notes that there are potential problematic areas when dealing with senior citizens, including deferred variable annuities, equity indexed annuities and DPP products such as REITs and LLPs.  They also identified other issues warranting scrutiny such as mortgaging home equity for investing, using retirement savings in high-risk investments, and participating in life settlements.  FINRA cautions against using net worth as the sole criteria when determining whether an investment is suitable for a client, even when the client is an accredited investor. 

The webcast also cautioned against improper communications between brokers and clients, such as false or misleading statements, and sales literature and advertisements, and referenced the recent "free lunch" examination sweep that found several problems in this area. 

Finally, FINRA warned against allowing brokers to use professional designations where they don't exit or convey expertise in an area that the broker does not have.  FINRA maintains a database online describing many professional designations and information about each of them (see the other post today for information on that).  And, FINRA also provided information on dealing with customers of diminshing capacity.

Compliance folks and supervisors should take the 11 minutes to review this webcast.  While you may not necessarily agree with all of the information presented, it will give you an understanding of FINRA's thoughts on these issues, and perhaps an insight into what examiners will be reviewing, since we know that senior citizen issues continue to be a hot topic to all securities regulators this year.  Forewarned is forearmed. 

What's the Message?

I was driving to a meeting last night and got stuck at a red light.  While waiting, a car passed in front of me and caught my attention.  On the side of the car were magnetic  "ribbons" of various colors, in support of various causes or sentiments.  From what I could tell, the side of the car had about 12-13 of these ribbons on it.  I then saw another 2-3 ribbons on the back of the car before it drove out of sight.  Of the 15-16 ribbons on the car, I couldn't tell what a single one stood for or supported.

Is your compliance program like this car?  Think about these questions:  Does your compliance program have a non-unified and scrambled message that it sends to brokers, employees and customers?  Can your brokers tell what their compliance roles and responsibilities are from  the information they receive and are exposed to?   Do  employees at the firm have a stake in the firm's compliance efforts, or do they simply wear the compliance "ribbon magnet" on the side of their car (cubicle or office)? 

New Legal and Compliance E-Newsletter

We're pleased to announce that The Beck Law Firm, LLC will soon be rolling out a new legal and compliance newsletter for the broker-dealer and investment adviser communities.  You'll want to be sure to go ahead and sign up now so as not to miss a single issue! 

To sign up, simply insert your email address in the box to the left that says "Join our Email List."  Rest assured that we won't sell your email address to anyone, anytime. 

Editorial Calls for SRO for Advisers

Investment News has published an editorial calling for an SRO for investment advisers.  See that editorial here.

Dealing with Volatility

On this "Black Tuesday" as many media types called it this morning, the DJI futures were down 500+ points in early morning trading, but, following an announcement of a key interest rate cut by the Federal Reserve, came back up to being down 206 points (1.7%) an hour before trading begins.  Trading will likely be somewhat volatile today.

With this volatility, brokers and investment advisers may be facing frantic phone calls from clients, and, if some clients have taken a hit, claims -both legitimate and those without merit - of unsuitable recommendations, unauthorized trading, and so on.  What can brokers, advisers, and compliance folks do to deal with this situation?  Here's a couple of pointers:

First, respond to the clients.  In my days at NASD, I often saw customers make regulatory complaints because they could not get a response from their broker or brokerage firm.  If you don't respond to your clients, they will go somewhere to get a response, and oftentimes that will be the regulators.  Don't bring a regulatory examination on yourself.  Talk to the client and handle the situation.

Second, in that same vein, don't play hide the ball from clients, and don't lie to them.  If they are sitting on a loss, tell them.  If there is bad news that needs to be told, tell them.  Consider calling the client before they call you.  It is my belief that many clients can absorb bad news and information, but will be infuriated with a broker or adviser who conceals information - or worse - gives them false information and lies to them.  Making misrepresentations or lies may satisfy the client for a very short time, but will invite regulatory issues and civil litigation when the client learns the truth. 

Finally, most clients are invested for the long term, but sometimes they need to be reminded of that.  Use these times as an opportunity to have a discussion with the client about their goals, investment objectives and financial situation.  And importantly, document these discussions with a client profile update.

Notes from the SIFMA-CL Atlanta Breakfast

Yesterday I attended the Atlanta Topical Breakfast Meeting put on by the fine folks at the SIFMA Compliance and Legal Division.  We heard from two representatives from FINRA - Mike Rufino (Sr. VP Member Regulation, Sales Practice Review) and Dan Stefek (District Director, Atlanta District Office), as well as the securities commissioners from Georgia and Alabama, Robert Terry and Joseph Borg. 

Mr. Borg informed us that NASAA has added an anti-money laundering unit to its exams as a result of the Treasury Department asking states to include an AML component in its exams.  He also noted that they have found an increase in selling away activities.  Mr. Terry explained that Georgia currently has no securities examiners, but that should change next month.  As they restart their exam program, Georgia's focus will be towards independent offices, investment advisers, and those not regularly examined by other regulators, he said. 

Mr. Rufino commented that FINRA is working hard to consolidate the NYSE and NASD rules into one rulebook, and hope to have the bulk of this work done by July.  For the 2008 exam program, he explained that dual-member firms (NYSE & NASD) should see a consolidated and coordinated exam, receiving one exit conference, 1 disposition letter, etc.  He also noted that firms should expect to see an increase in branch office examinations this year as well.

Mr. Stefek explained that FINRA has been making changes to the cycle of routine exams for firms, keeping some firms on the same cycle (of being reviewed either annually, every two years, or every four years) but changing others.  He explained that this decision is driven by the review of risk factors before setting the cycle, and noted that the following are some of the risk factors that FINRA considers: customer grievance items (customer complaints, arbitrations, terminations, Form U-4 filings), disciplinary history of the firm and personnel.  Mr. Borg commented that a large change in product mix is a risk factor that his state considers.   Stefek echoed Rufino's comment that branch office inspections would increase, and would be handled, in many cases, as part of a firm's routine examination, as opposed to separate exams.

As to FINRA's 2008 exam priorities, Mr. Stefek noted that firms should expect to see more detailed AML reviews, and that examiners will focus on data integrity issues (filing of complaints, U-4, U-5, etc.), the storage and retention of electronic books and records and the supervision of that, transaction reporting, variable insurance products, and overall supervision of the firm.  Finally, he noted that they will also be reviewing sales to the elderly/senior citizens, and that both the Member Regulation examiners and Enforcement attorneys will work to expedite cases where they find abuses in that area. 

Finally, he commented on some often seen deficiencies from exams over the past year or so.  He explained that FINRA is finding that many firms have deficiencies in the following areas:  AML, inadequate written supervisory procedures and supervisory controls; electronic storage issues; MSRB transaction reporting; Regulation SP; and business continuity planning. 

FINRA's NAC Ups the Ante for Bad Supervision

A securities principal appealed a FINRA Office of Hearing Officers decision to FINRA's National Adjudicatory Council.  The original decision found that he failed to adequately supervise by failing to respond to a red flag that representatives were possibly making unsuitable sales, and that he improperly delegated responsibility for supervision and compliance for 100+ reps. to an unexperienced person. For the violations, the hearing panel suspended the principal in all capacities for 6 months. In the NAC's Decision,released this month, FINRA affirmed the violations and modified the sanctions by eliminating the 6-month all capacity suspension and instead barring the man in all principal capacities.

As we've addressed before, supervisors don't have to effect perfect supervision, but supervision must be reasonable, and it must be tailored to the business of the firm.  Here, the NAC again tells us that supervision cannot be reasonable if its delegated to inexperienced individuals, and red flags cannot be ignored. 

An SRO For Investment Advisers?

Follow the SEC's release of the RAND Report on the financial services industry, SIFMA calls for a self-regulatory organization for the investment adviser industry, according to an article in Investment News.
As you might expect, investment advisers are likely to oppose such a move - and understandably so.      

   

FINRA Sanctions 19 Firms for Overstating Trading Volume

Last week FINRA announced that is fined 19 firms a total of $2.8 Million for overstating advertised trading volume.  The inaccurate reports, made in August 2006, were made to third-party service providers that in turn prepared inaccurate rankings and reports, including rankings of the most active BDs by security.  FINRA also found that the firm, prior to September 2006, had inadequate written supervisory procedures dealing with this area.   

According to FINRA's press release:

In the actions announced today, eight firms were fined $200,000 each (Broadpoint Capital, Inc., CIBC World Markets Corp., Lehman Brothers, Inc., Merrill Lynch, Pierce, Fenner & Smith, Inc., Needham & Company, LLC, Robert W. Baird & Co., Inc., Thomas Weisel Partners, LLC and UBS Securities, LLC). Six firms were fined $150,000 each (Bear, Stearns & Co., Inc., BMO Capital Markets Corp., Cowen and Company, LLC, Deutsche Bank Securities, Inc., Leerink Swann & Company, Inc. and RBC Capital Markets Corp.). Four firms were fined $50,000 each (Friedman, Billings, Ramsey & Co., Inc., Jefferies & Company, Inc., JMP Securities, LLC and Pacific Crest Securities, Inc.).

The fine for one firm, Piper Jaffray & Co., was reduced to $100,000 because the firm conducted its own extensive internal investigation and then voluntarily provided the results to FINRA.

All of the firms settled without admitting or denying the allegations but consented to FINRA's findings.