BD Law Blog - by Georgia Securities Lawyer Joel Beck

Going to the SIFMA CL Annual Meeting Next Week?

If so, and you'd like to get together and chat for a few minutes, shoot me an email to joel@thebeckfirm.com and lets look for a time to get together for a moment while in Orlando.   

FINRA's 2008 Exam Priorities Letter

Two days ago, on March 24th, FINRA released its now annual examination priorities letter  from the departments of Member Regulation and Market Regulation.  Not to be outdone by the SEC's top 10 list for RIA exams (see my post from yesterday), FINRA lists 15 areas that are "priorities" in routine examinations. 

Also of note was an announcement in the manner in which exams will be changed with respect to the exit conferences.  According to the letter, member firms will no longer have to respond to an exit conference report, but will now respond to an "Examination Report" within 30 days of receipt of the report.  According to a source, FINRA is now following the former NYSE Regulation's procedure of having firms respond to exam findings.  So, examiners will apparently no longer scramble to complete an exit conference report while on site.  The exit conference will still be held, but, following completion of the field work of the exam, the staff will return to the office, review their data and information gathered, draft an examination report with findings that will be provided to the firm, and ask the firm to respond.  Following receipt of the response, FINRA will determine how to dispose of each matter, through a matter being filed without action, a letter of caution, compliance conference, or referral to the Enforcement Department.  If the issues are to be handled through a Letter of Caution, the firm will not have to respond to the same issue again.  This sounds like a welcome improvement in the process, and hopefully it will lead to less frustration on the part of the members.

Since forewarned is forearmed, I encourage compliance and legal folks, as well as management of each firm to review the letter.  In summary fashion, here's the 15 priorities cited in the letter:

1  Senior investor issues - including sales of life settlements, use of professional designations, and 72(t) transactions.

2  Sale of deferred variable annuities - including compliance with new Rule 2821 - of which most provisions become effective on 5/5/08.

3  Anti-money laundering compliance.

4  Protection of customer information - including compliance with Regulation S-P.

5  Supervision - including MSRB Rule G-27 requiring designation of certain OSJs as Municipal OSJs.

6  Sales of new products - including suitability of new product sales.

7  Fee-based accounts - In light of recent court case finding that fee-based accounts are not advisory accounts under the Investment Advisers act.

8  Transaction reporting.

9  Information Barriers - procedures to prevent misuse of material, non-public information and insider trading.

10  Bank sweep programs - FINRA will review practices of firms sweeping customer credit balances into deposits at banks to ensure net capital requirements are met and customer funds are safeguarded.

11  Short-interest reporting.

12  Agency lending disclosures

13  Inventory valuations.

14  OATS compliance. 

15  Reg NMS Compliance.

Keep in mind that every area still may be examined, and each exam is somewhat tailored to the business of the particular firm, but these are FINRA's stated priorities.

SEC's OCIE Director Details "Top 10" Focus Areas for RIA Examinations

Lori Richards, the Director of the SEC's Office of Compliance Inspections and Examinations (OCIE), spoke on March 20th at the IA Compliance Best Practices Summit 2008.  In her speech, Ms. Richards provided some background information on the Commission's risk-based approach to examining investment advisers, and then detailed their current "Top 10" focus areas for examinations of investment advisers registered with the SEC.  Since forewarned is forearmed, it might be worthwhile to review her brief speech and these 10 areas.

1  Controls over valuations of securities

2  Controls over non-public information / personal trading / Code of Ethics

3  Dealing with senior citizen investors (but as an avid reader of BDLawBlog.com you knew that would be on there, right?

4  Compliance and Supervision - seeing that firms actually implement their review procedures and proper supervision is performed.

5  Portfolio management - is it consistent with the adviser's disclosures and the client's investment objectives?

6  Brokerage arrangements and best execution

7  Allocation of trades

8  Performance advertising / marketing / fund distribution activities

9  Safety of Clients' and Funds' assets - appropriate policies for safeguarding assets, custodian arrangements.

10  Information processing and protection - books and records issues, disclosures, filings.

SEC Seeking Comments on Regulation S-P Proposal

Earlier this month I posted about the SEC's vote regarding proposed changes to Regulation S-P.  In the Commission's news release they indicated that the changes involved "more detailed standards for information security programs" as well as an exemption to provide limited disclosure of information in cases where a broker or advisor leaves his or her firm to go to another firm.  At the time of the posting, the SEC had not published its draft of changes on the web.  They have since published them, both on their site, and in the Federal Register, and the comment period is now open.  The SEC will receive comments on this through May 12, 2008.  The text can be found here  (Click on Release 34-57427, March 4, 2008). 

Why should you care?  The information security requirements may impose a burden on small firms.  According to the draft release, each firm would be required to have written policies and procedures to address proper disposal of personal information and document the proper disposal of such information.  Further, each firm will have to implement an information security program to protect personal information and unauthorized access to it, and provide notice to the SEC after it is aware of an incident of unauthorized access to or use of personal information in certain identified information.  Along the lines of the AML programs, firms will have to designate a person responsible for the information security program. 

Granted, the SEC has some good ideas here, but the proposed regulation may be too much.  No one wants their personal information misused or stolen.  But, there may be better ways to address the security of this information, that don't impose needless regulations and costs on broker-dealers and investment advisers.  So, I urge your firm to review the proposal and speak up now, before its too late. 

SEC and FINRA Announce CCO Conference Schedule

The CCOutreach program sponsored by the SEC and FINRA will be held at various locations across this country this year, the regulators announced Friday.   Registration is available now, and is apparently limited to folks from broker-dealers, with preferences given to CCOs.  Find out more here.

Revisions Coming to Reg. S-P?

Yesterday the SEC voted to propose revisions to Regulation S-P, which deals with safeguarding of customer information, including non-public information.  The text of the proposed revisions are not available on the SEC's website yet, but the press release heralds an important move for BDs and RIAs -

The proposed amendments also would permit a limited transfer of information without the required notice and opt out when personnel move from one broker-dealer or registered investment adviser to another.

Such an amendment would certainly be welcome by most in the industry due to the uncertainty and grey area of the current regulation with regards to brokers and advisers moving from one firm to another, and attempting to have their customers move with them.  We'll watch for the proposed amendments and see how this might shape up. 

FINRA Dealt Blow In Collection of Fine

Last month, FINRA (formerly NASD) was dealt a blow in a court case aimed at collecting a fine it imposed upon a broker for NASD rule violations.  My friend Marc Dobin  posted about this at his blog, The Law Planet.  Marc tells us that FINRA had filed an enforcement action against John Fiero and his broker-dealer Fiero Brothers and obtained a $1 Million fine in the matter, in addition to barring Fiero.  The enforcement action included claims that the respondents engaged in a manipulative bear raid to drive down the price of 10 NASDAQ securities.  As Marc correctly notes, normally this fine would be uncollected with minimal attempts to collect it, but FINRA took the case to a New York state court to enforce the action.  FINRA won at the trial level, but on appeal, the victory goes to Fiero. Last month, the New York Court of Appeals held that the state courts had no jurisdiction over the matter, that the issue is governed by the Exchange Act, which granted jurisdiction to US District Courts.  The NY Court of Appeals tossed the complaint (read their decision here.) 

But that's not the end of the story.  Morningstar reports that Fiero has now sued FINRA, seeking a declaratory judgment that they have no viable claim against him, including a finding that FINRA's claim is now time-barred. 

Marc notes that this has ramifications for regulatory defense lawyers, who may have typically advised clients that FINRA won't really collect a fine (or try to do so) on someone out of the industry.  That may not be the case anymore - time will tell.  It may also lead to additional claims of inability to pay a fine (so called Reed claims, based upon In re Toney Reed, Exch. Act Rel 37572 (8/14/96) where the SEC held that NASD must consider a respondent's ability to pay a fine where such issue is raised by the respondent). 

FINRA Releases New Webcasts for Variable Annuity Sales

In advance of the May 2008 implementation of FINRA Rule 2821 dealing specifically with sales of variable deferred annuities, FINRA has unveiled two new webcasts, one for representatives and one for supervisors.   Each is about 8-9 minutes long.

I think its safe to assume that once the rule becomes effective later this year, FINRA examiners will be focusing on ensuring firms are complying with the requirements of the rule, which should be explained in these webcasts.  Forewarned is forearmed.