The Beck Law Firm, LLC Blog

FINRA Exam Focus Areas - Atlanta BD/IA Continuity Group

Dave Paulukaitis, a Managing Director with Mainstay Capital Markets Consultants, Inc. in Atlanta attended last week’s Atlanta BD/IA Continuity Group meeting hosted by KPMG.  I couldn’t attend, but Dave agreed to let me share his notes with my readers:

 

At the meeting, Dan Stefek, the District Director for the Atlanta District Office of FINRA, spoke about current examination procedures and focus areas.  He noted that FINRA maintains its historic 1, 2 and 4 year exam cycles but now they conduct risk analyses twice a year on every firm to figure out whether that cycle should be moved up.  He noted that FINOP and sales practice analyses are done independently, which means, for example, that a FINOP exam might be pushed up and the sales practice exam kept on the normal cycle.  He also explained that FINRA is normally giving 30 days advance notice on exams, but in some instances, they give 60 days advance notice.  When giving a 60-day notice, it’s usually because they are collecting information in order to conduct extra branch office exams, Stefek explained. 

 

Stefek also spoke about exam focus areas and noted that, among other things, the primary focus areas on exams are: WSPs, supervisory systems and supervisory controls; AML and the adequacy of independent testing; sales to seniors; customer “wealth events” (i.e., retirements, inheritances, etc.) and how firms handle the investment of new found wealth; and, sales of variable annuities.  Additionally, Stefek stated that the regulators were concerned about firms that hire brokers from “problem firms.”  When questioned about how broker-dealers could identify such “problem firms,” he was unable to provide any clear guidance.  Finally, he noted that while FINRA had not historically focused on a broker-dealer’s supervision of the investment activities of independent representatives who are also registered as investment advisor representatives, they are going to be reviewing such supervision now (See NTM 94-44).

 

Thanks to Dave for filling me in on what I missed, and letting me share this information with readers of BDLawBlog.com. 

BDLawBlog Welcomes New Readers from Cape Securities, Inc.

Last Friday I had the opportunity to speak at the annual meeting for Cape Securities, Inc., a broker-dealer headquartered n McDonough, Georgia.  I met many of their brokers from across the country, and shared with them some risk management methods designed to protect themselves from claims, complaints, arbitrations and regulatory matters.  So, to all my new Cape friends, thanks for giving me the opportunity to speak, and welcome to BDLawBlog.com.  I hope you'll find it to be a valuable resource for you. 

Consumer Financial Protection Agency Bill in Congress

Last week draft legislation to create the Consumer Financial Protection Agency began circulating.  The bill, being put together in the House Financial Services Committee, would create a new federal agency with a director appointed by the president and confirmed by the senate, who's mission would be to stand up for the consumers with respect to financial markets regulation.  Among other things, the draft legislation would require the new agency to coordinate with existing regulators such as the SEC and the CFTC, as well as to maintain a central database of customer complaints relating to financial products and services, and to track the resolution of those complaints.  For a more thorough overview of the proposed legislation, which still apparently has some kinks to work out, check out this WSJ article, as well as the excellent overview of the bill at Jim Hamilton's World of Securities Regulation. 

The Post-Madoff SEC Era

Following the massive Madoff fraud, securities regulators have been under fire for their mistakes, misses and lack of regulatory response to signs of fraud in the securities industry.  Some heads have rolled and new leadership installed in various departments, and the battle cry of more regulation has sounded.  A BusinessWeek article on the SEC's Inspector General report relating to the Madoff fraud explains that the SEC's failures to catch the fraud, despite opportunity, stemmed from a combination of "inexperienced staff, inadequate preparation, bureaucratic inaction, and the simple failure to ask the right questions."  SEC Chairman Mary Schapiro, commenting on the report, said, "His report makes clear that the agency missed numerous opportunities to discover the fraud. It is a failure that we continue to regret, and one that has led us to reform in many ways how we regulate markets and protect investors."

Apologies now out of the way, we can expect increased regulatory zeal from the SEC, and likely from other regulators as well.  Robert Khuzami, the new Director of Enforcement for the SEC, recently touted recent statistics on enforcement activities in a speech before the New York City Bar Association.  He stated that, "Comparing the period from late January to the present to roughly the same period in 2008, the Division has opened 10% more investigations (approximately 525, compared to 475); has been granted 118% more formal orders (which grants us subpoena power) (275, compared to 126); has filed 147% more TROs (52, compared to 21); and has filed nearly 30% more actions (397, compared to 306)."  Khuzami then also addresses some changes within his department, including the creation of some specialized units, and on their goals of being swift to respond to regulatory matters.  His speech outlines many regulatory initiatives underway, and is a good read for industry legal and compliance personnel. 

FINRA Announces Additional Settlements in Auction Rate Securities Cases

On September 2nd, FINRA announced additional settlements with three firms relating to sales of auction rate securities to customers.  Settling with FINRA was Northwestern Mutual Investment Services, LLC (fined $200,000), City Securities Corporation ( fined $250,000) and Fifth Third Securities, Inc. (fined $150,000).  In addition to the fines, each firm must  Further, according to the release, "All three firms agreed to initiate or complete offers to repurchase ARS sold to their customers where the auctions for the ARS had failed — approximately $103 million for Northwestern Mutual, about $13.1 million for City Securities and approximately $11.9 million for Fifth Third Securities."