Don’t Vote Proxies

Many Advisers are under the impression that voting proxies is no big deal; you receive the ballot and you either throw it away or you cast your vote and mail the ballot back. This could not be further from the truth.

Voting proxies is much more than casting a vote and dropping the proxy ballot in the mail. The Securities and Exchange Commission (“SEC”) take proxy voting seriously. They expect that the individual casting the vote take the time and effort necessary to research the issue(s) at hand to determine how they are going to vote and why. And just conducting due diligence of the issues is not enough. You will be expected to maintain documentation to evidence what research you conducted and why you voted the way you did.

If you are an SEC registered investment adviser, and you have opted to vote proxies on behalf of your clients, you can expect the SEC to conduct a thorough review of your proxy voting files during their next audit, which you had better be maintaining. When the auditor(s) start asking why you voted this way or that, the auditor(s) will expect you to be able to provide documentation evidencing your research and how you determined to vote the way you did; “I just did”, or, “I guessed” will not be an acceptable answer. If you are a state registered investment adviser, do not think that voting proxies for your clients will be any easier. Rest assured, if the SEC thinks it is a big deal, most states will follow the SEC’s lead.

If you are registered, or registering, as an investment adviser, and feel very strongly about wanting to vote proxies for your clients, take a look at services like ISS Proxy Voting Services, or Broadridge Institutional Proxy Voting. The cost for this service may be more than you want to pay, but it would be much better to pay for a service than to pay the regulator(s) a fine and have a disclosable event on your ADV and U4.

Most registered investment advisers probably aren’t investing in products, or in amounts, that would allow them to influence the product with their vote. And many of you are probably trying to figure out why it is such a big deal. Please refer to this article published by Securities Regulatory Daily.

Tougher rules for Social Security claiming strategies

With the signing of the Bipartisan Budget Act of 2015, two popular Social Security claiming strategies have been affected. Going forward “file and suspend” will be severely limited and “restricted application” will be phased out.

If you have clients that are nearing retirement, now is a great opportunity to reach out to those individuals and schedule some time to discuss their options. For 180 days following the date the bill was enacted, up until April 30, 2016, you can still implement restricted application and file and suspend strategies under current rules. After that date you will need to revisit your strategies for developing retirement income for your clients.

For more information click here.

SEC Commission Looking at Robo Advisers and New Regulations

Robo advisors have taken off from zero to 60 in no time at all and the SEC is trying to figure out how they should regulate them. A recent study estimated that by 2020 there will over $2 trillion dollars being managed by robo advisors. Not sure what a robo adviser is, well robo advisers allow you to use your smart phone to access automated investment advice and some even allow you to open an account through their proprietary mobile apps. Service offerings range from portfolio management to asset allocation and financial planning. There is little if any human interaction but the fees and minimum investment amounts tend to be lower than traditional brick and mortar financial advisors. You carry your financial adviser in your pocket and he/she goes everywhere with you.

As technology continues to explode, the Commission is now challenged to think through what it means to regulate a robo advisor. The laws as they exist today never contemplated a world with robo advisers in it. So they question appears to be, can robo advisers fit within the existing rules or do laws need to be created or tweaked to address the new realities. If history is any indicator, the SEC will be creating new rules to address robo advisers and how they provide investment advice. Click here to read the full content of the recent speech given by Commissioner Kara M. Stein. Need help to start a robo adviser, let Red Oak Compliance Solutions guide you through the process.

SEC will Vote on Final Rules for Title III Crowdfunding on Friday

Just in time for Halloween, will it be a trick or a treat? It’s been over three years in the making but finally on Friday The Securities and Exchange Commission (“SEC”) will vote on the Final Rules for Title III of the JOBS Act. The proposed rules have been viewed as problematic by many in the crowdfunding industry, so it will be interesting to see if the SEC has addressed their most pressing concerns. So trick or treat, you decide. Either way, the wait will be over and the industry can press forward to bring Title III to fruition.

The meeting is being held at the SEC and is open to the public. It will also be streamed live the SEC web site. Once the rulings are published in the federal register, they should go live 60 days after the vote. Click here for more information.

Have questions about crowdfunding, let Red Oak help you navigate the rules and regulations and keep you compliant.

The Digital Age - Cyber Security

Fourteen years ago, when thousands of financial and client records were destroyed in the 9/11 attacks on The World Trade Center, the big worry for the financial services industry was how to safely maintain and back up all of the paper copies of their books and records required to be maintained by the rules and regulations under which they operate. In 2015 maintaining required books and records and backups in hard copy format is becoming almost unheard of.

One would think that the digital age would make record keeping easier, cheaper, efficient and safer to maintain all of the records required to be maintained by the Securities and Exchange Commission (“SEC”), the Financial Industry Regulatory Authority (“FINRA”) and all of the state regulatory bodies’ rules and regulations. Typically this is the case. However, one big issues most small investment advisers fail to take into consideration is the safekeeping of all of the electronic records, both those maintained locally and backed up offsite; records that contain confidential, non-public information regarding their clients and the Adviser itself. Theft of these records could cause financial ruin for both the Adviser and its clients.

In a recent blog post we discussed an SEC action against a registered investment adviser for failing to have reasonable policies and procedures in place to protect sensitive client information. Due to the lack of procedures there was an intrusion into the adviser’s network, which left all of its clients’ personal, non-public information vulnerable to theft. Over the past few years these types of intrusions have become quite prevalent. So much so that President Obama has designated October as National Cyber Security Awareness Month. You can find out more about National Cyber Security Month on the U.S. Department of Homeland Security’s website.

One final note; having a cybersecurity policy is only a good start to protecting your and your clients’ personal and confidential information. Designing a cybersecurity policy that provides safeguards that your adviser or broker-dealer will realistically be able to implement AND enforce is the only way to truly keep your electronic data safe.

If you have any questions or need help with your cybersecurity policy, please contact us. Red Oak stands ready to help you.

SEC Releases Private Funds Statistics Report

On October 16, 2015, the SEC staff published its first Private Funds Statistics Report, reflecting anonymized and aggregated data reported on Form PF. It covers the data collected from the first calendar quarter of 2013 through the fourth calendar quarter of 2014. The report includes statistics about the distribution of borrowings, an analysis of hedge fund gross notional exposure to net asset value, and a comparison of average hedge fund investor and hedge fund portfolio liquidity.

This report provides an interesting look into the private fund industry, which before Form PF was largely the subject of guesswork and conjecture. Click here to read this report.

Need help with your Form PF, let Red Oak help you through this labor intensive process.

Do You Have the Proper Disclosures in your Documents?

Full transparency of fees and potential conflicts of interest are critical in the private equity industry. The Securities and Exchange Commission (“SEC”) recently announced that as a result of their investigation of three private equity fund advisers with The Blackstone Group, they found that the advisors failed to adequately disclose the acceleration of monitoring fees paid by fund-owned portfolio companies prior to the companies’ sale or initial public offering. The SEC investigation also found that fund investors were not informed about a separate fee arrangement that provided Blackstone with a much greater discount on services by an outside law firm than the discount that the law firm provided to the funds.

The Blackstone Group agreed to pay nearly $39 million to settle charges that it breached its fiduciary duty to the funds, failed to properly disclose information to the funds’ investors, and failed to adopt and implement reasonably designed policies and procedures. Nearly $29 million of the settlement will be distributed to affected fund investors.

Andrew J. Ceresney, Director of the SEC’s Division of Enforcement, has maintained, “We will continue taking action against advisers that do not adequately disclose their fees and expenses, as Blackstone did here.”

“As the beneficiary of the accelerated monitoring fees, Blackstone violated its fiduciary duty by failing to properly disclose the fees,” said Julie M. Riewe, Co-Chief of the SEC Enforcement Division’s Asset Management Unit. “Blackstone further breached its fiduciary duty by choosing to negotiate a legal fee arrangement with greater benefits for itself than the funds it advised, without properly disclosing the arrangement.”

The Division of Enforcement’s Asset Management Unit is continuing its review of private equity fee and expense issues and encourages private equity fund advisers that have identified such issues to self-report them to the staff. Self-reporting is a very important factor that the Commission considers when evaluating cooperation and determining whether and to what extent to extend credit in settlements.

Have questions about what should be disclosed, let Red Oak help you navigate the murky waters.

What Does the SEC think the CCO Job Requirements Should Be?

One of the questions we are asked frequently is “Who can be our CCO?” So often, with so many people wearing so many hats, the desire to hand the compliance duties off to someone who is not very seasoned is very high.

So let’s look at what the SEC has said publically to answer this question. At a recent industry conference, the SEC Chief of Staff Andrew Donohue said that if he were a Chief Compliance Officer, he would look at his role in terms of the following nine categories:

1. The CCO must have "first-hand knowledge" of the applicable laws and regulations including relevant exemptive orders and how these apply to the firm;
2. The CCO must have a "deep understanding" of the firm and its operations and structure and how all the areas relate to each other;
3. The CCO must identify conflicts of interest and how they are reported and resolved and who performs the various functions that are involved;
4. The CCO must understand the firm's clients, products and services including their profitability;
5. The CCO must understand the firm’s compliance and technology platforms;
6. The CCO must have a "detailed knowledge" of the firm's policies and procedures, how they are applied and monitored and what goal they are trying to achieve;
7. The CCO must gain an understanding of the markets in which the firm operates and their business practices;
8. The CCO must create an environment that puts the customer's interest ahead of the firm's interest such that the firm does what it should, not what it can, and senior management must give the CCO the power to do this;
9. Finally, CCOs have to understand what they do not know and how to fill those subject matter expert and competency gaps.

Please click here for the full article.

This message clearly indicates that the SEC expects the CCO to be qualified to perform the duties of the position, just like the rules require. This means there is a real risk to the firm in using someone who is inexperienced to be the CCO. Does your CCO need some additional training or support? Do you feel the need to explore what you don’t know yet? Let Red Oak help you fulfill this regulatory responsibility and provide seasoned and experienced compliance professionals to augment your compliance program.

Top State Investment Adviser Exam Deficiencies

Every two years state securities examiners provide sample data from their investment adviser examinations to NASAA. Using that data NASAA recently released a report on common Investment Adviser (“IA”) deficiencies.

The data shows a 30% decrease in deficiencies from the 2013 report but the following are still the top 5 common areas of deficiency:

• Top books and records deficiencies: not maintaining client suitability documentation and order memorandum.
• Top contracts deficiencies: fees not explained and not having all contracts in writing.
• Top registration deficiencies: Form ADV inconsistencies between Part 1 and Part 2 and the timely filing of amendments.
• Top fee deficiencies: fee charged does not match contract or ADV and unreasonable or excessive charges.
• Top custody deficiencies: improper client invoice for direct fee deduction and dual invoicing of client and custodian for direct fee deduction.

Some additional areas with deficiency were advertising, privacy, fees, and compliance/supervision. The following is a list of “best practices” recommended by NASAA:

• Prepare and maintain all required records, including financial records. Back-up electronic data and protect records.
• Prepare and maintain client profiles or other client suitability info.
• Review and update all contracts. Make sure all fees are clearly noted and adequately explained in the contract.
• Review and revise Form ADV and disclosure brochure annually to reflect current and accurate information. File amendments in a timely manner.
• Prepare and distribute a privacy policy initially and annually.
• Calculate and document fees correctly in accordance with contracts and ADV.
• Keep accurate financials. File timely with the jurisdiction. Maintain surety bond if required.
• Implement appropriate custody safeguards, paying attention to direct fee deduction if applicable.
• Review all advertisements, including website and performance advertising, for accuracy.
• Provide disclosure brochure to clients initially, then provide updates and offers to deliver afterwards as required.
• Prepare a written compliance and supervisory procedures manual relevant to the type of business to include a business continuity plan.
• Keep accurate financials. File timely with the jurisdiction. Maintain surety bond if required.
• Review solicitor agreements, disclosures, and delivery procedures.

To see the full report click here.

If you find yourself overwhelmed or out of time give us a call. We are here to help keep you compliant while allowing you to focus on growing your business.

Red Oak Compliance Solutions Exhibiting at FINRA Advertising Regulation Conference

Red Oak Compliance Solutions, a full-service compliance consulting firm helping broker-dealers, registered investment advisers, banks, insurance companies, investment companies and hedge funds, will be an exhibitor at the annual FINRA Advertising Regulation conference. The conference will be held in Washington, DC on October 8 - 9, 2015 at the Renaissance Washington, DC Downtown Hotel. The conference provides a forum to hear practical changes and new developments involving communications rules and the opportunity to gain guidance on the advertising standards from industry and FINRA experts.

As exhibitors, we will be available to demo and discuss AdMaster Compliance ™, our easy-to-use, 17(a)-4 compliant and highly configurable advertising review system, which can help your company increase efficiency, reduce costs and minimize risk. In a few short years, AdMaster has taken off with a client base which now serves over $1 Trillion in AUM with global public companies and small advisors alike. The high rate of growth of our client base, breadth of the financial services markets we serve, and the accolades we have received from our clients gives us confidence that AdMaster is, beyond a doubt, the predominant advertising solution in the industry. By listening and responding to clients, emphasizing continued development based on our customers’ needs, and having an unrelenting commitment to superb customer service, we plan to continue our quest to be clear the solution of choice in this industry.

In addition, Red Oak’s team of compliance consulting experts can help fulfill your regulatory requirements by reviewing your advertising, performing audits as well as providing other compliance and supervisory services to help handle your ever-increasing compliance obligations. With our advertising and marketing review consulting service, we partner with you and your team to ensure all advertising and marketing for your company is being reviewed effectively, efficiently and most important, compliantly.

We invite all those attending the FINRA Conference to visit our exhibit and let us show you why we can say with confidence, AdMaster is The Best Advertising Review Solution in the World.

Proactive Cyber-Security Risk Management

A recent comment by the Co-Chief of the SEC Enforcement Division’s Asset Management Unit, Marshall Sprung, should provide a better sense of the urgency and seriousness towards their ongoing push to improve cyber-security within our industry. He said in reference to recent sanctions taken against an RIA that suffered a security breach at a third party-hosted web server where client information was obtained, “As we see an increasing barrage of cyber-attacks on financial firms, it is important to enforce the Safeguards Rule even in cases like this when there is no apparent financial harm to the clients.”

What makes his statement stand out is that in the above case, confidential information was obtained by foreign hackers, but no apparent financial harm was done to any of the clients and sanctions against the RIA were still imposed. Not waiting for damages, the SEC is taking action when firms violate the Safeguards Rule [Rule 30(a) of Regulation S-P] by failing to conduct risk assessments, encrypting data, establishing firewalls and establishing procedures for responding to cyber-security breaches.

Specifically, the SEC stated that R.T. Jones Capital Equities Management, Inc.’s, “failure to adopt written policies and procedures reasonably designed to protect customer records and information in violation of Rule 30(a) of Regulation S-P (17 C.F.R sect. 248.30(a) (the “Safeguards Rule”). From at least September 2009 through July 2013, R.T. Jones stored sensitive personally identifiable information (“PII”) of clients and other persons on its third party-hosted web server without adopting written policies and procedures regarding the security and confidentiality of that information and the protection of that information form anticipated threat or unauthorized access. In July 2013, the firm’s web server was attacked by an unauthorized unknown intruder, who gained access rights and copy rights to the data on the server. As a result of the attack, the PII of more than 100,000 individuals, including thousands of R.T. Jones’s clients, was rendered vulnerable to theft.”

As a result, R.T. Jones has appointed an information security manager to oversee data security and protection of PII, and adopted a written information security policy. The firm also installed a new firewall and logging system to prevent and detect malicious incursions, and no longer stores PII on its webserver and any PII stored on its internal network is now encrypted and they retained a cyber-security firm to provide ongoing reports and advice on the firm’s information technology security.

Even with these steps taken, the SEC issued R.T. Jones a cease and desist from committing or causing any violations and any future violations of Rule 30(a) of Regulation S-P and a civil money penalty of $75,000.

The bottom line is don’t wait until damages are done. The risks are there now and your liability can be managed if you start before you have a problem.

Not sure how to protect your firm and clients from cyber-security risk, let Red Oak Compliance Solutions help you mitigate your risks.

Contract Sales People and Supervision

In the business world it is common practice for companies to hire 1099 contract labor instead of hiring employees of the company. In most cases employers hire 1099 contract labor individuals since they are considered to be self-employed and not “employees” of the company, and this allows the company to fill key positions without being subject to added benefit costs.

In the financial services industry 1099 contract labor is also quite common, most notably to fill the sales representative position. It allows the firm to employ sales representatives without having to pay for office space, benefits, or other costs that come with hiring traditional “employees”.

It is true that 1099 individuals are considered contract labor and not employees of the employer and the labor laws concerning the two differ. However, the biggest difference between the financial services industry and the rest of corporate America is the fact that the financial services industry does not have the ability to maintain an arm’s length separation between itself and 1099 individuals like other employers.

For example, say an individual owns a transportation company, and that person contracts with an independent truck owner as a 1099 contract labor driver to pick up and deliver a load of computer parts. While transporting the computer parts the truck overturns and shuts the freeway down and causes damage or harm to another individuals and their property. That truck will, in most cases, be branded with the driver’s company name, not the company for whom it is carrying the load, and have its own insurance policies, and therefore, that truck driver, not the company that contracted with him or her to haul the computer parts, will be responsible for the incident.

With the financial services industry this is not true. As an example in this case, say ABC Securities (“Firm”) hires John Smith to sell products offered through the Firm. The Firm is going to bring John on as a 1099 contract labor sales person. John operates under the doing business name of John Smith Advisers (“JSA”). In order to sell the products offered through the Firm, John is going to have to register with the appropriate jurisdictions as a representative of the Firm. John’s registration is approved and he has an office in a separate city and state from that of the Firm. His office window reads John Smith Advisers. However, the sign on John’s office window also states securities are offered through the Firm. John comes across a product being offered by a group of individuals which pays a nice commission. He decides to participate in the selling of the offering. Sometime later the Firm comes to visit John’s office and sees that he is selling this product. Nothing is said because the product is being sold through JSA and not the Firm. Sometime after that it is found that the product that John has been selling was fraudulent and all of his investors have been harmed. In this case both John and the Firm are going to be the subject of an investigation by one or more regulatory bodies, which will in most cases result in administrative actions and civil suits being filed against both the Firm and John.

Many readers may be questioning the facts outlined in this blog posting. Please click here to read all the details relating to these facts.

In addition, readers should refer to the United States Department of Labor’s factors in determining what actually constitutes contract labor. Please click here to read a more about Independent Contractors. Red Oak is here to help you with all your questions regarding supervision and your compliance responsibilities.

The Texas Department of Insurance has Reduced the Insurance CE Requirements

The Texas Department of Insurance has been busy making insurance agents lives a little easier. Effective 9-1-15, the CE hours for insurance licenses have been reduced to 24 hours per license period (down from 30 hours). In addition, effective January 1, 2016, the expiration date for all individually held insurance licenses will be changed so that they occur on the license holder’s birthday. Additional information regarding this change, the new requirements, and your responsibilities as a license holder can be found on the TDI website. Please click here to be taken directly to the TDI website which has more complete information.

Need help with your insurance appointments. Red Oak is here to help you navigate the state filing requirements.

SEC Testimonials

We have received numerous questions recently regarding the SEC’s guidance on testimonials. Everyone wants to know how to take advantage of the ability to publish comments about themselves and their firm that are available on independent third-party sites.

SEC Rule 206(4)-1(a)(1) prohibits Registered Investment Advisers and Investment Adviser Representatives (“IAR”) from using client endorsements in their advertising. However, the SEC’s guidance has laid out how for advisors to share, on their own social media and websites, public comments about their services that are posted on independent websites (such as Yelp, Angie’s List, etc.).

The following is an overview of the rules to follow in order to post third party content:

• All Content. The advisor must publish all reviews, both positive and negative; The adviser cannot edit or highlight anything; The adviser cannot suppress any or all of the publication, or to organize or prioritize the order in which the commentary is presented.
• Independence. The independent social media site must provide content that is independent of the investment adviser or IAR; There can be no material connection between the independent social media site and the investment adviser or IAR that would call into question the independence of the independent social media site or commentary; The adviser may not make a subjective analysis of the testimonial that was published on the third-party site.
• Mathematical Averages. Investment advisers or IARs may publish testimonials from an independent social media site that include a mathematical average of the commentary provided that commenters themselves rate the investment advisers or IARs based on a ratings system that is not designed to elicit any pre-determined results that could benefit any investment adviser or IAR.
• Advertising on Third Party Site. Investment advisers may advertise on the social media site displaying the testimonial as long as it would be readily apparent to a reader that the investment adviser or IAR’s advertisement is separate from the public commentary featured on the independent social media site and the receipt or non-receipt of advertising revenue did not in any way influence which public commentary is included or excluded from the independent social media site
• Print Advertising. An IAR could state in a newspaper ad “see us on [independent social media site],”; An investment adviser or IAR may not publish the actual testimonials from the independent social media site on the newspaper ad.
• Linking. Advisers may post the logo and a link to the page where the third-party reviews live; Adviser should monitor these sites to make sure they remain comfortable linking to these commentaries.

Remember advisers cannot do anything that looks like they are encouraging positive comments, so advisers must refrain from posting “Thank you” on third party sites. Thank you’ s should be done privately. In addition advisers may see negative comments on third party sites and should avoid reacting defensively. Advisers should do nothing more than post a comment to ask the individual to give them a call to discuss. Social media sites are very public forums and require the utmost discretion.

If advisers of IARs have any questions about how to use third party posts and not violate the testimonial rules, please give us a call. Red Oak is here to help.

New Owners are Liable for Misconduct Prior to Acquisition

I have seen this happen several times now so it is definitely worth discussing. MacKensen & Company, Inc, a registered investment adviser, and the former owner of the firm, Warren MacKensen, were both fined and censured for the conduct of Warren MacKensen relating to misleading advertising. From 2010-2012, Warren MacKensen used hypothetical back-tested performance to claim that the firm's investment models would have outperformed. He never disclosed that the models did not exist during the time periods displayed or include any of the required disclosures when illustrating back-tested performance. The firm was fined $100,000 and required to send the enforcement order to its clients, even though this violation occurred prior to their acquisition of the firm in 2012. It should be noted however, that Warren MacKensen continued to the firm’s Chief Compliance Officer until July 2014 and continued to be an employee until 2015.

It is interesting to note that no violations were mentioned except for those that occurred from 2010-2012, so it appears the new owners cleaned up the issues after they took over. It would be interesting to see the purchase contract to see if only the firm’s assets were purchased or if it was a full transfer and assets and liabilities. The moral of the story is, spend the time to look at more than the AUM when you acquire a firm.

To read the complete order, please click here.

SEC Charges Former Investment Banker with J.P. Morgan with Insider Trading

The Securities and Exchange Commission announced this week that they have charged a former investment bank analyst with J.P. Morgan, with illegally tipping his close friend with confidential information about clients involved in impending mergers and acquisitions of technology companies. The SEC also charged his friend and another individual with trading on the inside information.

The SEC alleges that on two separate occasions, one in 2012 and another in 2013, the former investment bank analyst, Ashish Aggarwal, became aware of sensitive, nonpublic information about two acquisition deals from colleagues who were working on them. Aggarwal then tipped his friend and colleague, Shahriyar Bolandian, who traded on the basis of the illegal tips in his own accounts as well as accounts belonging to his father and sister. Bolandian also tipped his friend Kevan Sadigh. Bolandian worked at Sadigh’s e-commerce company, and together they made more than $672,000 in combined profits from the insider trading. The SEC Enforcement Division’s Market Abuse Unit detected the insider trading through trading data analysis tools in its Analysis and Detection Center. Aggarwal had repeatedly communicated with Bolandian, in the days and weeks leading up to public announcements concerning the mergers and acquisitions of the technology companies. Bolandian and Sadigh then purchased the same series of call options in the companies, their trades often executed within hours or even minutes of each other, and typically were 100 percent of the daily trading volume of those option series.

Robert A. Cohen, Acting Co-Chief of the SEC Enforcement Division’s Market Abuse Unit, commented, “We will continue to proactively identify and combat serial insider trading schemes, particularly when it involves industry professionals.” In a parallel action, the U.S. Department of Justice also announced criminal charges against Aggarwal, Bolandian and Sadigh, on August 25, 2015.

Click here for the complete story.

Recent SEC Activities

Are you aware of the recent SEC activity relating to investment advisers? The Securities and Exchange Commission (“SEC”) is now looking into advisory firms’ liquidity risk management in current exams. In addition, the SEC’s Chicago regional office has sent out a sweep aimed at gathering data to determine how advisers are handling liquidity risk and the Boston office recently sent out a sweep to dig into firms’ whistleblower policies.

Knowing what is going on in the SEC exam program nationwide can help firms to be better prepared when their turn comes for an exam. If you have not had an exam recently, it’s a good idea to do a gap analysis or mock audit to make sure you are ready, from that first phone call throughout the entire audit process.

If you need any assistance in preparing for an audit, give us a call. Red Oak is ready and able to help you evaluate your current compliance program.

What to do Before the SEC Comes

The Securities and Exchange Commission (“SEC”) is continuing to focus on their exam initiative. They are working to complete more exams than ever before, especially for those firms that have not been audited before. One best practice that everyone should implement is to create an introductory presentation for the SEC Examiners.

An introductory presentation is your chance to tell the examiners all about your firm, your business model and your compliance program. This can help the examiners understand how your firm operates and focuses them on the key areas to review for your type of firm.

Remember this is not a sales pitch. You are not trying to sell the examiners on becoming clients, you are trying to help them understand there is no fraud or deception at your firm. A PowerPoint is a very effective format for this presentation and your Chief Compliance Officer needs to be present during the meeting. If your chief Compliance Officer is comfortable presenting, let him/her lead this initial meeting.

So put together a PowerPoint now so you are not caught by surprise and under the gun to produce dozens of documents and try to create a compelling presentation. The presentation should include your organizational structure, firm history, all conflicts of interest, your compliance culture, mission statement, client base, services provided, your marketing strategy and risks.

Also remember this presentation is a living document so you need to update it at least semi-annually so that it remains relevant.

Brokers Go Rogue and Sell Unauthorized Private Placements for 14 Years

The Securities and Exchange Commission (“SEC”) has fined and censured a broker-dealer/registered investment adviser $450,000, fined and suspended a supervisor for twelve months for failing to stop two rogue brokers from selling an unauthorized private placement for which they received commissions and barred permanently and fined the two rogue brokers.

According to the SEC, the brokers sold the fund to over 125 clients in a 14-year period using the firm's offices and sent the clients statements from the firm's client reporting system. The SEC faults the firm for failing to adopt reasonable policies and procedures governing the use of its client reporting system and the supervisor for allowing the brokers to select which files to be reviewed every year rather than taking a random sample.

To read the complete Administrative Proceedings Document, please click here.

The regulators are looking at consolidated statements since they are so easy to fabricate. Firms should never allow manual changes to be made to client reporting documents. There should also be base reporting templates that are made available after they have been reviewed by compliance for representatives to use with clients. There are specific disclosures that need to be included on these statements.

Firms also must ensure that supervisors stay in line with the compliance program and follow the firm’s policies and procedures, including those involving selling away. If you have any questions about how your reporting system works or could be improved, please give us a call to discuss.

Rep Barred for Churning

The Financial Industry Regulatory Authority (FINRA) announced today that it has permanently barred Richard Adams, a former registered representative of Caldwell International Securities Corp., from the securities industry for churning customers’ accounts and other securities rule violations. Adams also failed to report a dozen unsatisfied judgments and liens on his U4 Registration Form as required by FINRA rules.

FINRA found that from July 2013 to June 2014, Adams excessively traded and churned the accounts of two customers generating more than $57,000 in commissions. At the same time, the excessive trading activity in these accounts resulted in over $37,000 in customer losses.

Brad Bennett, FINRA’s Executive Vice President and Chief of Enforcement, said, “A key element of retail investor protection is the aggressive pursuit of brokers who churn and excessively trade customer accounts. FINRA has no tolerance for brokers who place commissions ahead of what is suitable and appropriate for their customers.”

In settling this matter, Adams neither admitted nor denied the charges, but consented to the entry of FINRA’s findings.

Investors can obtain more information about, and the disciplinary record of, any FINRA-registered broker or brokerage firm by using FINRA’s BrokerCheck. FINRA makes BrokerCheck available at no charge. In 2014, members of the public used this service to conduct 18.9 million reviews of broker or firm records. Investors can access BrokerCheck at www.finra.org/brokercheck or by calling (800) 289-9999. Investors may find copies of this disciplinary action as well as other disciplinary documents in FINRA’s Disciplinary Actions Online database. Click here to read the full press release.

While this may be an extreme example it still illustrates why it is prudent to document transactions in client accounts, whether it be through notes from client meetings, calls, or simply showing how a trade is suitable for their current situation.

Additionally, it is extremely important to stay on top of your U4 information. There is a 30 day window to update your U4 for any reportable event. Not sure if something needs to be reported? Let us know, we are here to help.

Social Media and Testimonials

With advances in technology providing access to more information and opinion than ever before, investment advisers (IA) and investment advisory representatives (IAR) must be vigilant in how they use Social Media in their advertising and marketing. Social Media is often used to build relationships and more than ever to let people express their views and opinions. IA’s and IAR’s can easily run afoul of the Security and Exchange Commission’ (SEC) Testimonial Rule 206(4)-1(a)(1). Fortunately, the SEC’s Department of Investment Management issued guidance last year to help us better understand appropriate and inappropriate uses of Social Media.

Rule 206(4)-1(a)(1) states, “[i]t shall constitute a fraudulent, deceptive, or manipulative act, practice, or course of business . . . for any investment adviser registered or required to be registered under [the Advisers Act], directly or indirectly, to publish, circulate, or distribute any advertisement which refers, directly or indirectly, to any testimonial of any kind concerning the investment adviser or concerning any advice, analysis, report or other service rendered by such investment adviser.”

And while “testimonial” is not defined in the Rule, the SEC staff has consistently interpreted that term to include a “statement of a client’s experience with, or endorsement of, an investment adviser.” Between the Rule itself and the staffs’ interpretation of what a testimonial is, there has been limited ability to include comments by clients about their experience with an IA or IAR in advertising. Recent guidance does indicate that as long as certain conditions are met it may be possible.

Notable changes in the SEC’s position include:

• The publication of an article by an unbiased third party regarding the adviser’s investment performance unless that article includes a statement of a client’s experience with or endorsement of the adviser.
• An advertisement that contains non-investment related commentary regarding an IAR, such as regarding an IAR’s religious affiliation or community service.

When using third party commentary it is important to understand that it must be unbiased and independent of the IA or IAR. As long as the IA or IAR has no ability to affect the commentary or how the public commentary is presented on an independent social media site the testimonial prohibition may not be implicated. It is essential that ALL (unedited) public commentary is made available and updating of new commentary is on a real-time basis. If the IA or IAR drafts or submits commentary or if the IA or IAR has the ability to suppress some or all of a commentary, the testimonial rule would be implicated. Also prohibited would be an IA or IAR compensating a social media user for authoring the commentary.

When referencing commentary on independent Social Media sites in advertising, IA’s and IAR’s can direct the public by stating, “see us on [independent social media site]” to let clients/prospective clients know that they can research public commentary about the IA or IAR but they could not publish any testimonials from the independent Social Media site in their own advertising without implicating the testimonial rule.

For more information (including the use of client lists/photos and fan or community webpages) please see the SEC’s IM Guidance Update #2014-04: GUIDANCE ON THE TESTIMONIAL RULE AND SOCIAL MEDIA

Red Oak stands ready to assist IAs and IARs with all their social media questions.

End of Year Reminder

It may only be the beginning of August, but it’s time to start focusing on the end of year routine all registered investment advisers must endure in order to remain in compliance with the Rules and Regulation under which they operate. The time period of October 1 through December 31 is a busy time for all of us. But that is especially true for the small investment adviser trying to service its clients and keep up with the ever mounting compliance requirements that the regulatory world keeps throwing at them.

In the midst of end of quarter billings, winding up the year-end financials, preparing for the impending tax season, scheduling year end portfolio reviews with clients, watching the markets while also attending a myriad of Halloween parties, working on travel arrangements for the holidays with the significant other, Christmas shopping and attending a host of holiday parties and school holiday events, it is important to remember the small things that are also important to be done. These things include funding your renewal account with FINRA, reviewing your Form ADV Parts 1 and 2 to ensure they are up to date and reviewing the Form U4 to make sure it is up to date.

So make sure you set time aside to go over the ADV’s, review your contracts, take a look at the Form U4 and most importantly, make sure you fund your renewal account with FINRA.

Riding the Robo-Advisor Wave

In an age of Instagram, Instacart, and instant gratification in general, a more tech-savvy generation is looking to a streamlined way to save and invest their money. This is evidenced by the growing number of robo-advisors entering the automated investment management arena as well as the growing AUM managed by these advisors. Earlier this week, InvestmentNews published a story announcing that LPL Financial was throwing its hat into the ring. Other independent broker dealers including Cambridge Investment Research Inc. and Commonwealth Financial Network announced their intentions to have robo-adviser offerings earlier this year. They will be entering a part of the market dominated by relative industry newbies Betterment and Wealthfront and industry mainstays Charles Schwab & Co. and Vanguard with AUM totals of $2.52 million, $2.56 million, $3 billion, and $21 billion, respectively.

While these names and figures may seem intimidating to companies trying to enter this space, fear not. Financial technology, or FinTech, is ever evolving in ways to give the consumers what they want: transparency and ease of investing. This coupled with a change in factors driving the brand loyalty of Millennials leaves the robo-advising world open for everyone with the willingness to take the risk and lead market innovation.

So what should new companies entering the robo-adviser world think about from a compliance standpoint? Having a service that is completely automated and only provided via a website and/or phone application requires that you have sound cybersecurity and privacy policies in place to detect and prevent hacking and identify theft as well has having a customized Terms of Use for advisory clients to acknowledge in order to set the expectation of how your site will work. Your automated program must also take into account how you will verify client identities and check client names against terrorist watch lists in a way that is both affective and is seamlessly integrated into your code. While Red Oak will not create the code for you, we can get your company registered and assist you with the workflow of your software in order to successfully integrate the necessary regulatory requirements. For more information, please contact us at 888.302.4594 or at sales@redoakcompliance.com.

SEC Proposes Amendments to Form ADV and Books and Records Rule

Certain Investment Advisers need to get ready for another round of changes. On June 12, 2015, the U.S. Securities and Exchange Commission (“SEC”) published a proposed rule recommending amendments to the Form ADV, the Books and Records Rule, Rule 204-2 and several other technical amendments. The proposed amendments to the Form ADV would require investment advisers to provide additional information that will help the SEC and investors to better understand the risk profile of the individual investment advisers and the industry in general. The proposed amendments to Rule 204-2 would expand the records investment advisers are required to maintain related to performance calculations communications. The following are some of the highlights of some of the proposed changes:

PROPOSED FORM ADV AMENDMENTS

Separately Managed Accounts

Several of the proposed Form ADV amendments would require investment advisers to provide more detailed information concerning separately managed accounts. The proposal states, “For purposes of reporting on Form ADV, we consider advisory accounts other than those that are pooled investment vehicles…to be separately managed accounts.” Under the proposed rule, investment advisers would be required to provide information about the types of assets held and, for certain investment advisers, the use of derivatives and borrowings in the account. Additionally, in certain circumstances, the proposed rule would require investment advisers to identify any custodians where separately managed account assets are held.

Additional Information about Investment Adviser

Under the proposal, additional questions would be added to the Form ADV. Some examples of the additional information that would be included in this area would be:

• expanded branch office information;
• information regarding the use of websites for social media platforms;
• information regarding whether the investment adviser’s chief compliance officer is compensated or employed by anyone other than the investment adviser;
• more specific information related to client types and regulatory assets under management attributable to client types;
• information regarding the number of clients that the investment adviser provided investment advisory services to but does not have regulatory assets under management for; and
• information regarding the amount of regulatory assets under management that is attributable to non-U.S. clients.

Umbrella Registration

Some investment advisers to private funds may be organized as a group of related investment advisers that are separate legal entities operating as, and appearing to investors and regulators to be, a single advisory business. Because of the way the Form ADV is currently organized, private fund advisers organized as a group of related investment advisers could have to file multiple investment adviser registration forms for the same advisory business. The SEC has proposed amendments to the Form ADV Part 1A that would simplify the process of registration for these investment advisers while providing additional and more consistent data about private fund advisers that operate in this manner.

PROPOSED RECORD KEEPING REQUIREMENTS AMENDMENTS

One of the proposed revisions to Rule 204-2 would require investment advisers to maintain performance calculations and communications that the investment adviser circulates or distributes to “any person” instead of “ten or more persons” as currently stated in Rule 204-2. Additionally, the SEC is proposing an amendment to require investment advisers to maintain originals of all written communications received and copies of written communications sent by an investment adviser relating to the performance or rate of return of any or all managed accounts or securities recommendations.

The SEC has opened a 60 day response period for investment advisers to provide feedback regarding the proposed amendments. Comments will be accepted until August 11, 2015. To read the full please, please click here.

Investment advisers should continue to monitor developments regarding the proposed changes. Red Oak Compliance Solutions can help you with any questions and provide assistance with getting your documents in order.

RIA Firms: Are You Properly Registered in the States You Have Clients?

We regularly encounter this question when working with investment advisors interested in establishing their own new RIA firms, or existing firms going through the renewal process at the end of the year. It is critical to be properly registered in the states you have clients in since you cannot charge advisory fees if you are not.

Because most states follow the same general rules pertaining to the “de minimis exemption,” RIA firms must register or notice file under the following circumstances:

• The RIA firm has a physical office location in the state
• The RIA firm has more than 5 clients residing in the state
• The RIA firm is actively soliciting in the state

It is also important to understand how the regulators define “clients”. When counting clients in a state, remember that members of the same household count as a single client. So, if you are managing assets for a married couple, residing in a state, that household counts as a single client.

At present, there are only two states that require an RIA Firm to notice file or register before taking on a single client. Those states are Texas and Louisiana. This is important to take into consideration if you are considering growing your business by expanding into other states or if one of your clients moves to a new state.

As always, because states often make regulation changes, it is a good idea to check with either your state regulator or RIA compliance consultants to confirm the latest RIA registration and notice filing requirements.

Everyone at Red Oak Compliance Solutions stands ready to assist you with any questions regarding this or any other compliance matters.

Red Flags for Senior Investors

Older Americans have often been and continue to be the targets of various fraud including investment fraud. The SEC issued an Investor Alert for seniors in June of this year to help investors become more familiar with common “red flags.” The following are among the more prevalent practices to be aware of.

Promises of High Returns with Little or No Risk. Always high on the list, promises of high returns with little or no risk should cause concern. The SEC cautions that all investments carry some level of risk and that the potential for greater returns generally comes with greater risk. Seniors should avoid “can’t miss” or “guaranteed return” investment offers. The old adage “buyer beware” still offers sound advice.

Unregistered Persons. In an age where technology makes verifying the qualifications of investment professionals so easy, it is difficult to understand how often unregistered and unqualified fraudsters can find people ready to invest with them. Technology is not always easily adopted by some older Americans so it is important to have multiple options for individuals to find answers. Regulators have provided a number of ways to research the background of individuals and firms including registration/license status and disciplinary history:

• Search Security and Exchange Commission (SEC)’s Investment Adviser Public Disclosure (IAPD) online database.
• Search Financial Industry Regulatory Authority (FINRA)’s BrokerCheck online database.
• Contact State securities regulator.
• Contact SEC’s Office of Investor Education and Advocacy: (822) 732-0330

Red Flags in the Financial Professional’s Background. The records of SEC, FINRA and State securities regulators can be used to identify potential problems of a financial professional including a) employment at firms that have been expelled from the securities industry, b) personal bankruptcy, c) termination, d) being subject to internal review by an employer, e) a high number of customer complaints, f) failed industry qualification examinations, g) federal tax liens and h) repeatedly moving firms among others.

Pressure to Buy Quickly. High pressure sales tactics in any industry should be considered a red flag but when used by investment professionals the best advice is to walk away. Avoid “act now” offers and requests to make immediate decisions without allowing time for you to research the professional or the product/service being offered.

Free Meals. Be aware that “free lunch” seminars are often used to attract new clients and to sell investment products not to educate the public. The SEC recommends that if you plan to attend one, you should not commit to purchasing anything or opening an account while at the seminar. They say that even if the free meal does not come with a high-pressure sales pitch, you should expect the “hard sell” in subsequent contacts from the person selling the investment.

Additional Resources

• A Guide For Seniors: Protecting Yourself Against Investment Fraud
• Social Media and Investing: Tips for Seniors
• “Free Lunch” Investment Seminars: Avoiding the Heartburn of a Hard Sell: A FINRA Investor Alert about “free lunch” investment seminars.

Red Oak Compliance Solutions is here to help if you have any questions.

SEC Charges Investment Adviser for Inflating Hedge Fund Prices

The Securities and Exchange Commission (“SEC”) recently charged a Greenwich, Conn.-based investment advisory firm and its two owners with fraudulently inflating the prices of securities in the hedge fund portfolios they managed.

The SEC investigation found that AlphaBridge Capital Management told investors and its auditors that it obtained independent price quotes from broker-dealers for certain unlisted, thinly-traded residential mortgage-backed securities. Instead, AlphaBridge gave internally-derived valuations to broker-dealer representatives to pass off as their own. The inflated valuation of these assets caused the funds to pay higher management and performance fees to AlphaBridge. AlphaBridge and its owners Thomas T. Kutzen and Michael J. Carino agreed to pay $5 million to settle the charges.

“The integrity of the portfolio valuation process is critical to fund investors, especially when it involves illiquid securities,” said Julie M. Riewe, Co-Chief of the SEC Enforcement Division’s Asset Management Unit. “AlphaBridge claimed to use market-grounded price quotes from brokers when in fact it relied on its own rosy view of market conditions to price its portfolio.” To read the full press release click here.

This is a good reminder that advisors should document sources when showing performance, whether it be readily available data regarding market indexes, listed securities or more illiquid offerings. For advisors creating their own portfolios and valuations this illustrates the importance of utilizing data from resources that have a reputation of being reliable and remaining fair and balanced in portfolio valuation. Red Oak Compliance Solutions is here to help you through the process.

SEC Charges Investment Adviser with Cherry-Picking

The Securities and Exchange Commission (“SEC”) recently issued fraud charges against an investment adviser and the adviser’s owner for improper trade allocation. The charges stemmed from the adviser’s alleged allocating of options trades that appreciated in value during market hours to his personal and business accounts while allocating options that declined in value to the client accounts.

It appears that for some time the SEC’s enforcement division has been monitoring for improper trade allocation, referred to as “cherry picking”, by analyzing large volumes of trade allocation data from registered investment advisers in order to identify instances of cherry picking. According to Julie M. Riewe, Co-Chief of the SEC Enforcement Division’s Asset Management Unit, without a client bringing these types of issues to the attention of the SEC, fraudulent trade allocations are typically difficult to detect. Therefore, they devised the monitoring program to identify specific custodians providing institutional services to investment advisers and their clients in order to allow them to more efficiently monitor trade allocations.

The SEC’s Asset Management Unit and regional offices in Boston and Los Angeles have led this data monitoring program to help in the detection and prevention of cherry picking. The process combines monitoring of the advisers trades allocations and statistical analysis to determine the likelihood of profitable trades allocated to non-client accounts. Please click here to read the full story.

It is critical that advisers have a robust surveillance and monitoring system to detect trade allocation issues. If you are unsure how your trade allocations are being monitored or would like a review of your current system, let Red Oak Compliance Solutions assist you.

Cybersecurity Assessment Tool

The Federal Financial Institutions Examinations Council is providing a Cybersecurity Assessment Tool that institutions can use to help identify risks and evaluate their policy. While this tool was not designed for broker-dealers and investment advisers, it may be useful to help with their cybersecurity compliance efforts.

Click here to view the tool.

Culture of Compliance: Do You Put Your Money Where Your Mouth Is?

You will often hear regulators and compliance professionals speak about the need for investment advisers and broker dealers to establish a culture of compliance within their firms. Instituting this type of atmosphere requires more than simply creating a compliance manual and code of ethics. Establishing a culture of compliance also means dedicating knowledgeable staff and sufficient resources to insure that your firm properly implements your compliance program. Last August, we sited a survey by Cipperman Compliance Services which indicated that the compliance function in the surveyed firms was underfunded and understaffed.

The survey’s finding came to fruition for one firm on June 23, 2015, when the Securities and Exchange Commission (SEC) settled an administrative proceeding against an investment adviser for, among other things, failure to complete their annual compliance review and failure to implement and enforce provisions of its policies and procedures and code of ethics. The SEC indicated that these failures were caused substantially because the adviser’s President “dedicated insufficient resources to compliance, which contributed substantially” to the failures of their compliance program. Not only did senior management of the adviser hire a Chief Compliance Officer with limited experience, they failed to provide the CCO with adequate guidance regarding his duties and required him to have various additional job functions ranging from research analyst to CFO. The CCO realized that he needed help to fulfill his compliance responsibilities and made multiple requests for help to senior management. In response, they expressed that their primary concern was serving their clients and did not provide the CCO with any additional resources. Ultimately, an SEC exam found that the advisory firm failed to complete its annual compliance review for two consecutive years and had multiple code of ethics violations related to its trading program. The SEC’s sanctions included monetary fines totaling $285,000 and the suspension of its President from acting in a supervisory role for a twelve month period.

While serving your clients may be your primary concern, serving a suspension because you failed to provide resources to your compliance program could hinder your ability to do so. It is also completely unnecessary. As noted by the SEC, one of the remedial acts undertaken by the adviser was eventually retaining a compliance consultant to help monitor their compliance program reviews and act as a compliance resource to the firm’s employees. Should you find that your CCO is stretched thin or fear that your compliance program is threatening to jeopardize your business, Red Oak is here to help you enhance your program and aid in its implementation.

Please click here to read the full SEC order.

Title IV of the JOBS Act of 2012

As of June 19, 2015 it will become much easier for small business startups to raise capital, as Title IV of the Jumpstart Our Business Startups Act of 2012 (“Act”) goes into effect. The new Act revises some of the regulation that, combined with limitations on availability to capital, has made it difficult, costly and time consuming for startups to get off the ground. The Act accomplishes this with the removal of the accredited investor requirement, an individual with a net worth of $1M or more or $200,000 in annual income, for small startups wishing to raise large sums of money, as well as eliminates the wait to be approved by state regulatory bodies and the requirement to issue quarterly reports and list their shares on an exchange. Additionally there is a “test the water” provision which allows startups to run their ideas by the media and investors before they are required to spend the money on a formal proposal to be reviewed by the Securities and Exchange Commission.

On June 19 small startups will be able to raise money, values of $20M to $50M, through crowdfunding programs. This means that any individual of adult age residing in the United States will be able to take part in small offerings.

FINRA Kicks off Proposed BrokerCheck Rule revisions with National Ad Campaign

On May 27, FINRA filed a rule change with the SEC proposing an amendment to rule 2210 to require each FINRA member’s website to include a “readily apparent reference” and hyperlink to BrokerCheck.

The reference and hyperlink would only need to be included on the firm’s initial webpage and any other webpage that includes a professional profile of one or more registered persons who conduct business with retail investors. This requirement will not apply to directory pages limited to registered persons’ names and contact information.

This rule’s requirements will only apply to broker-dealers that provide products or services to retail investors. FINRA believes this requirement aligns with its goal of increasing retail investor awareness and usage of BrokerCheck.

On June 1, FINRA also launched a national ad campaign promoting BrokerCheck. The ads caution investors to check the backgrounds of individuals they are thinking of engaging before they make their final decision. FINRA showcases the need for checking BrokerCheck in 15-second cable television spots containing humorous examples of people taking action without conducting any background research. A print ad also ran in the Wall Street Journal on June 2.

“People immediately go online to check out a new restaurant where they might spend $25 for a meal, but don’t think to use BrokerCheck when they’re handing over $2,500—or $25,000 of their life’s savings or even more—to an investment professional to invest,” said FINRA chairman/CEO Richard Ketchum. To help investors make informed choices about brokers and firms “that has to change, and we hope this campaign will help,” he added.

We think the next step may be a “Yelp” for financial professionals. Can’t help but wonder how to monitor such sites for potential customer complaints. It will be interesting to watch as it evolves.

Compliance Officer Receives Whistleblower Award in excess of $1 Million

The Securities and Exchange Commission announced an award of more than a million dollars to a compliance professional who provided information that assisted the SEC in an enforcement action against the whistleblower’s company. By law, the SEC cannot disclose information that might directly or indirectly reveal the identities of whistleblowers so the complete information regarding this action is not available.

Andrew Ceresney, the Director of the SEC’s Division of Enforcement stated “This compliance officer reported misconduct after responsible management at the entity became aware of potentially impending harm to investors and failed to take steps to prevent it.”

According to the SEC, this is the second award to an internal audit or compliance professional. These verdicts may change how upper management views compliance officers, more as adversaries rather than risk management partners. Compliance officers should consider having an outside and independent firm audit the firm's regulatory compliance to help alleviate this situation.

Please click here to read the release.

Inadequate Written Supervisory Procedures Results in SEC Settlement

On March 4, 2015 the Securities and Exchange Commission (SEC) brought charges to Irving, Texas based Broker Dealer, H.D. Vest Investment Securities (the Firm). The SEC alleged that the Firm failed to supervise two registered representatives, who misappropriated customer funds.

The theft occurred because the Firm lacked sufficient written supervisory procedures regarding registered representatives’ outside business activities. Because of these lack of controls, the two representatives were able to defraud these customer, in one case, by transferring or depositing customer brokerage funds into their outside business accounts.

The Firm, without admitting or denying wrongdoing settled with the SEC. They settled the charges with the SEC by paying a $225,000 fine and engaging the services of an outside compliance consultant. Click here to read the full SEC release.

FINRA Issues Exam Priorities Letter

FINRA has released its 10th Annual Regulatory and Examinations Priorities Letter, highlighting its 2015 regulatory focus. FINRA announced they will highly scrutinize certain product offerings including interest rate sensitive fixed income securities (long duration bonds, MBS, interest-only bond funds), variable annuities, liquid alts, and non-traded REITS. The FINRA examiners will focus on the implementation of the revised supervision rules including reviews of branch offices and OSJs and compliance testing. FINRA will analyze IRA rollovers, sales of private placements suitability, failure to offer required fund breakpoint discounts, and anti-money laundering procedures. Firms should also review their valuation procedures to ensure adequate net capital, their cybersecurity programs, and their order routing and best execution practices. Please click here to read the full release.

FINRA Amends and SEC adopts FINRA Rule 3110(e) Requiring Background Checks Starting in July

FINRA's rule requiring member firms to conduct a public records search to verify the accuracy and completeness of information on a Rep's Form U4 has been approved and goes into effect in July. The amended rule requires a public records search to be completed no later than 30 calendar days after the U4 is filed." The public records search must verify the name and address; search criminal, bankruptcy, and litigation records; investigate liens; and review business records. The rule only requires "a national search of reasonably available records." In addition, the rule requires a review of the individual’s U-5 if they have been registered previously. Please click here to read the full SEC release.