BD Law Blog - by Georgia Securities Lawyer Joel Beck

FINRA, SEC Ponder Changes to Forms U-4 and U-5

The SEC is now taking comments on a proposal by FINRA to change the Forms U-4 and U-5.  The significant changes add additional questions or language to existing questions to require additional reporting of customer complaints and arbitration claims involving a broker.  The major change would require reporting of arbitrations and civil litigation involving allegations of sales practice violations by a representative even though the representative is not named as a party in the arbitration or lawsuit.  Currently, if an investor only sues the broker-dealer and not the broker, the broker does not report the case on his or her Form U-4.  The proposed changes also increase the threshold for reporting settlements of customer complaints from $10,000 to $15,000.  And, the proposed changes add more questions regarding the existence of any statutory disqualification.  Because of these additional questions, if the changes are approved, all firms would be required to resubmit Forms U-4 on all of their representatives. 

FINRA Exam Priorities for 2009

In a letter released to member firms on March 9th, FINRA announced many of its exam priorities for the 2009 exam cycle.  While FINRA is not limited to  only focusing on compliance in these areas during a routine exam of the firm, the fact that they're letting firms know some things they view as important should be cause for firms to review their compliance in these areas before the regulators come in. 

The list includes the typical items such as variable annuities, net capital, senior investor issues, anti-money laundering and overall supervision.  It also includes some areas that get higher scrutiny during a turbulent economy, including alternative investments, cash alternatives, the foreign corrupt practices act, unregistered sales of restricted securities (including penny stock liquidations), etc. 

Compliance officers and supervisors should take a few moments and review the list of priorities for this year.  Forewarned is forearmed. 

SEC Speaks on Compliance Issues to Investment Advisers

Last week at the IA Compliance Best Practices Summit in Washington, DC, Lori Richards, the Director of the SEC's Office of Compliance Inspections and Examinations (OCIE) spoke on steps that investment advisory firms need to take now to ensure their compliance programs are effectively dealing with many of the issues in today's environment.  When the SEC senior staff speaks on issues such as this, you can believe that these are issues that the examiner staff will be reviewing.  Here is a summary of Ms. Richards' four key areas, but compliance officers for RIAs ought to take 4 minutes and read her speech:

1.  Disclosure.  The SEC is reverting to the main focus of securities regulation: disclosure.  Here, RIAs should be careful that all disclosures are made to their clients, including any conflicts of interests.
2.  Custody.  Are your advisory clients' assets safe?  How do you know?  With recent headline-grabbing articles on ponzi schemes and other fraudulent conduct, Ms. Richards indicated that SEC examiners will be focusing on controls over custody of assets.
3.  Performance claims.  Are yours accurate?  They better be.
4.  Resources.  Does your compliance program have adequate resources devoted to it to ensure that the RIA carries out an effective compliance program? 

Forewarned is forearmed.  Don't wait until state or SEC examiners are in your firm asking questions about these issues.

Sometimes You Just Gotta Fight

When FINRA or the SEC initiates a disciplinary action against a broker-dealer, many firms go ahead and settle the matter without going to hearing.  The reasons are many and include wanting to put the matter behind them, going with a known result as opposed to an unknown result, or even a belief that by settling they will not upset the regulators more.  While nothing is wrong with settling a case, and indeed many cases should be settled, firms are wise to review the case with counsel and review all of their options.  It also may be worthwhile to litigate a case simply to seek to reduce the sanctions that the regulators seek. In some instances, the existence of a violation may be clear, but the sanctions the regulators seek in settlement are too harsh. Firms may then be better served, both as to sanctions and public relations, by putting up a fight and not accepting bad sanctions.

Since he left NASD (n/k/a FINRA)  where we both worked for several years, Brian Rubin at Sutherland has published an annual roundup (I believe its annual) on whether it pays to litigate against the regulators.  Brian's most recent study covers the period of October 2007 to September 2008, and is a good read.  It again shows what defense counsel have long known: there is often a "litigation discount" as to sanctions when firms go to a hearing.  Brian's study, co-authored with Christian Cannon, breaks down results of getting charges dismissed, obtaining lower sanctions, and more.  Firms, and individual brokers, faced with cases against them by the SEC and FINRA should seriously consider whether it is in their best interest to settle a matter or to litigate, and should consult with experienced counsel to assist in making such a decision. 

SEC Warns of Imposters Posing as Examiners

Last week the SEC warned investors and broker-dealers and investment adviser firms of impostors posing as SEC employees and examiners seeking to obtain confidential information.  Firms should be mindful not to disclose confidential information, including confidential customer information, to persons without verifying their status and a valid, lawful need for the information.

According to the SEC's press release, firms should:

Always verify the identity of someone claiming to be from the SEC. Ask for the caller's name, the SEC office in which they work, and their telephone number. Then verify the caller's identity by calling the SEC's personnel locator at 202-551-6000 and asking to speak directly to that SEC staff member.

If contacted by someone unfamiliar to you claiming to be an SEC employee, please report it to the SEC by calling 800-732-0330 or e-mailing: help@sec.gov. If a caller claiming to be an SEC examiner is found not to be a member of the SEC's staff, please report the incident to the SEC's Examination Hotline at (202) 551-EXAM.

Most importantly, if the caller is suspicious and can't be verified, do not share any information. Similarly, if the caller resists providing proof of identity, or efforts to reach the caller through a published SEC telephone number are unsuccessful, do not give the caller any information.