BD Law Blog - by Georgia Securities Lawyer Joel Beck

How Can Broker-Dealers Manage Social Media Compliance?

Be sure to check out my guest blog post, How can Broker-Dealers Manage Social Media Compliance, over at FinancialSocialMedia.com.  This is part two in a series on social media and legal/compliance issues for broker-dealers that is being featured there.  And check back there often.  Next in the series will be a post on top compliance concerns in that area.  Thanks again to Amy McIlwain for featuring these posts on her blog!

The Limits to FINRA Rule 8210?

Earlier this month, my friend and former colleague at NASD, Alan Wolper, published a short article on the limitations of FINRA Rule 8210 (formerly NASD Rule 8210), together with his partner Martin Jaszczuk.  The article, To Infinity and Beyond, FINRA's Efforts to Expand the Scope of Rule 8210, is worth a read by all legal and compliance folks who deal with FINRA Rule 8210 request letters, notwithstanding the fact that the article title conjures images of Buzz Lightyear in my mind.  

Alan discusses a proposed change to Rule 8210 that might seek to broaden the scope of the rule, as well as FINRA staff's apparent pushing of the boundaries of the rule to attempt to obtain documents and information that he believes are not subject to the rule itself.  He also focuses on an area in which Rule 8210 seems to be increasingly used: FINRA's efforts to obtain documents and information from non-member entities, such as broker-dealer affiliates or other entities or organizations.  Alan articulates what most of us regulatory law practitioners well understand: that firms and reps. often comply with overly invasive and over broad requests for documents and information because of the big stick swung by the regulators, and the risk of a firm or rep. being barred of expelled for failing to cooperate, even when solid arguments can be made that FINRA is simply not entitled to the information or documents it seeks.  He is also correct in noting that at some point, firms and reps. will stand their ground and roll the dice with the enforcement process.  We'll have to wait and see what happens with the proposed rule change, and find out if the SEC will impose some limits on this rule.  

FINRA Seeks Comments on Proposed Rules for Markups, Commissions, & Fees

FINRA has issued Regulatory Notice 11-08, seeking comment relating to its proposal to consolidate NASD & NYSE rulebooks in the area of markups (and markdowns), commissions, and fees.  Among other things, the proposed consolidated rules will eliminate reference to the 5% policy, and will eliminate the "proceeds provision" wherein a liquidation and a subsequent purchase with those proceeds were treated as a singular transaction for commission/markup purchases.  Under the proposed new rule, each transaction would be treated individually.  

This proposal will effect all broker-dealers that do retail and institutional trading, so firms should review this rule consolidation proposal carefully, and, where appropriate, submit comments.  The comment deadline is March 28, 2011.  

What to Do When Your Firm Says No! Info. for Brokers and Advisers on Social Media Use

My guest post, What to Do When Your Firm Says No, is up and available over on the blog at FinancialSocialMedia.com.  Thanks to Amy McIlwain for inviting me to blog there (and check out her guest post below here at BDLawBlog.com on archiving solutions for firms).  I'll be offering up a few more guest posts there discussing compliance and supervisory issues, so be sure to look for them.

Guest Post: Amy McIlwain on The Best Social Media Products for Financial Professionals

BDLawBlog.com is featuring guest blogger Amy McIlwain today.  Amy is a professional speaker on social media and president of Financial Social Media, an online marketing firm specializing in the financial industry. She can be reached through her website at www.financialsocialmedia.com and on Facebook, LinkedIn, and Twitter.  Joel will also be guest blogging on Amy's blog as well, with posts relating to legal and compliance matters for social media, so be sure to look for those.  For now, BDLawBlog.com is pleased to present you Amy's post:

The Best Social Media Compliance Products for Financial Professionals

As a financial advisor compliance can be a nightmare...especially when it comes to social media. The question is, how do you successfully manage your social networks while remaining compliant?  There are myriad products that give you the ability to organize, manage and execute a winning strategy.  In addition to our handy Social Media Compliance Guide (www.financialsocialmedia.com) we’ve done our research and have found the top three social media compliance products that will help your business succeed.  Here’s the breakdown:

"Willfulness." One Little Word, So Much Havoc. FINRA Panel's Decision Could Disqualify Firm From Business.

I was reading recent disciplinary decisions from FINRA's Office of Hearing Officers this morning, and read a case involving a Florida broker-dealer that had been charged with some somewhat mundane violations. No fraud, no theft of funds, and no customer losses were involved in this case.  Rather, FINRA charged the firm with: 1) doing business not authorized in their membership agreement, 2) not having adequate supervisory procedures for that business, 3) with failing to maintain emails, and 4)  failing to keep curent P&S blotters for direct application business.  In sum, the hearing panel found that the firm committed each of the violations, and fined it $18,500.  

But, as a result of the decision, the firm might be forced out of business. You see, the panel found that, with respect to the books and records violations (email retention and blotters issue  - both of which were charged as violations of Section 17(a) of the Exchange Act, along with NASD Rule 3110), the firm's violations were "willful."  Willful in this context does not mean that the firm intended to commit the violations.  Rather, as the panel explained, "The definition of willfulness is very broad. Under the securities laws, willfulness means “intentionally committing the act which constitutes the violation,” and does not require proof of an intent to violate the laws or rules."  

Is Confession Good for the Broker-Dealer Soul? New Reporting Requirements for Broker-Dealers Effective July 1, 2011.

FINRA announced that the SEC has approved new FINRA Rule 4530, which will become effective July 1, 2011.  Text of the new rule and FINRA's explanation are found in Notice 11-06.  This new rule incorporates much of former NASD Rule 3070, as well as portions of NYSE Rule 351.  Importantly, however, the new rule requires firms to report to FINRA (confess) certain instances where it finds violations of industry rules or laws by the firm or associated persons.  Dan Jamieson at Investment News wrote about the new rule, giving us input from industry observers, including yours truly.  

Ultimately, whatever we think of the rule at this point, it is set to become effective July 1st.  Firms should prepare before then.  Among other things, firms should consider how it will handle the self-reporting issues and make sure that it revises its procedures appropriately.  Firms also ought to consider what person will be given the authority to make the decisions on whether to report findings or not, and then determine how those decisions might be documented in case the regulators later allege that the firm failed to self-report certain violations.  

Thoughts from Today's SEC CCOutreach Program

I sat in online to some of today's CCOutreach program sponsored by the SEC and FINRA.  The program, aimed at compliance officers of broker-dealers, sought to let CCOs hear from regulators about topics of the day.  

We learned today that the regulators are still focused on private placement cases, and are investigating issues relating to them such as suitability, advertising, supervisory procedures relating to their sale, and due diligence processes.  We'll continue to see regulators seek to bring enforcement cases against firms for alleged violations relating to private offerings, even in cases where the offering did not go bad, but where the firm had other issues in its supervision and oversight.  We also heard that the number of cases involving misuse of confidential information is on the uptick.  

The panel session I was most looking forward to was the one that most disappointed me: social media.  This panel consisted of two regulators and two industry compliance folks (one large firm, one smaller firm).  Now don't get me wrong - all of the folks seemed like fine people, and I'm sure they do their jobs very well.  But both industry panelists - speaking on the topic of social media - came from firms that essentially prohibit use of social media for business purposes.  So, instead of compliance folks hearing a good discussion of how to best manage and supervise social media in various forms, we were largely told the these folks had found supervising social media too difficult, so it was prohibited instead.  Certainly, supervision of social media (that might include things like blogs, facebook, twitter, linked in, and others) is complicated, and compliance can be problematic (and expensive).  But social media can also serve a useful and legitimate business purpose - not only for lawyers like me, but also for financial industry professionals.  

QA3 Financial Corp. Reported to Close this week; Brokers left to find new homes.

Investment News reports that QA3 Financial Corp., an independent broker-dealer, will be closing its doors this week.  The closure comes on the heels of an adverse arbitration award.  QA3 has been reported to be a respondent in numerous arbitration cases relating to private placements, including Medical Capital and Provident Royalties.  Although it appears that its investment advisor firm will remain open, those QA3 brokers must now find a new broker-dealer with which to register.  

For those brokers now forced to change firms, as well as for others looking at making a change, here are a few things to consider:

*  Do you have a forgivable loan with your current firm?  What's the balance on that, and how will you pay it back?

*  Does that loan agreement forbid you from soliciting clients to a new firm until paid?
*  What about covenants not to compete and no solicitation clauses?  Do you know what's in the registered rep. agreement or contract you signed?
*  What's changed that may require you to update my Form U-4?  (Always a question to ask whether moving firms or not.  Remember, under the rules,  you have an obligation to keep this current)

* What client information, if any, can you take to a new firm?  What information must you leave behind?

* What's the current status of legal actions/regulatory actions against the firm you are considering joining?  Are they going to be around for awhile, or will you just wind up having to change firms again in the near future?

*  If you go to an independent firm, what are the costs and fees that you'll be charged?  Don't focus just on the higher payout percentage.
*  What support will you receive?  How easy is it to work with the firm's departments - operations, compliance, etc.?
*  Do you need to form your own company for business and accounting purposes?  What type?  How to do it?  What are the advantages and disadvantages of each type?  How do you maintain the company to protect your assets as much as possible?

* What's involved in registering as an investment adviser?  Do you need state or federal registration?  What about registration in the various states and a de minimus exemption for a small number of clients?

These are just some of the issues involved in making some major career changes.  If you're considering making a change, including going out on your own with an independent broker-dealer, or even starting your own RIA, consider consulting with a lawyer experienced in this area, such as The Beck Law Firm, LLC, as well as a CPA to help you make a plan, then successfully execute it.

 

Taking Confidential Customer Information to New Firm, Broker Sanctioned for Violation of Reg. S-P

FINRA's National Adjudicatory Council recently issued its decision in the case of a broker who was charged with violating NASD Rule 2110 by violating SEC Regulation S-P relating to non-public customer information he took from his former firm to his new broker-dealer.  In this case, a former Banc of America Investment Services broker downloaded customer information such as customer names, account numbers, net worth information and telephone numbers, onto a flash drive at the time he left the firm.  He did so, allegedly in violation of his agreements with the firm regarding confidential treatment of firm information, as well as in alleged violation of Reg. S-P. Although the broker only had about 200 clients, the download process resulted in his obtaining data for about 36,000 clients, information which the broker then transmitted to his new firm.  

The NAC affirmed findings of violation by the initial hearing panel, finding that the broker misused confidential customer information and therefore violated Rule 2110 by violating Reg. S-P.  The NAC suspended him in all capacities for 10 business days and fined him $10,000.  He was also assessed costs.  (In the appeal, FINRA Enforcement sought that the NAC suspend the broker for 30 days).  

What's the lesson here for brokers changing firms?  Brokers must consider the nature of the information they wish to seek, and have a clear understanding of whether doing so complies with Regulation S-P.  I expect that we will continue to see cases such as this, now that the NAC has set precedent in this area.