Massachusetts' RIAs Must Obtain Bond

The Massachusetts Securities Division (“MSD”) issued a statement to remind Massachusetts registered advisers who are located in the state and have investment discretion that they must obtain a bond of at least $10,000 from a Massachusetts bonding company.  The MSD defines "investment discretion" as the "authority to execute buy or sell transactions." The MSD will be reviewing the bonding requirements during their routine exams.

To read the entire statement, please click here

New direction for SEC Enforcement?

News agencies are reporting that Robert Khuzami, the Director of the SEC Division of Enforcement, is leaving the SEC. According to the reports, this has not been confirmed by Mr. Khuzami but it could happen as soon as next month. Does this mean the SEC will be looking for an even tougher Director of Enforcement? Click here for one article discussing his alleged departure.

Social Media Policies for Investment Advisers

Blogs, Twitter, Facebook, LinkedIn, Google+, internet forums are all social media tools widely utilized in today’s technology age and a prevalent, almost expected, part of doing business and maintaining personal social connections. Businesses provide information about their company and services and clients and prospective clients have typically adapted to many forms of electronic media, and frequently use technology to research companies or individuals. Social media has become an integral part of modern society and a critical component of Investment Adviser compliance programs.

Social media content may be considered advertising or client correspondence, may inadvertently contain testimonials, investment advice, and may violate anti-fraud provisions or privacy regulations.

The SEC issued a National Examination Risk Alert, dated January 4, 2012, addressing the use of social media by Investment Advisers. While the SEC does not have specific regulation regarding the use of social media, Rules 206(4)-7 (Compliance Program), 206(4)-1 (Advertising), and 204-2 (Books and Records) are applicable.

Considerations: Investment Advisers need to be aware of their web presence, as well as the activities of their associated personnel, and incorporate social media into their policies and procedures. Although not an all-inclusive list, Investment Advisers should consider the following when evaluating its current social media usage and policies:

Advertising, Anti-Fraud Provisions, Testimonials, and Record Retention:

• Websites, blogs, social media profiles, and status updates could be considered advertising and should be in compliance with advertising rules.
• Comments responding to blog posts or status updates may be considered advertising or correspondence.
• LinkedIn recommendations, Facebook “likes”, Twitter “Favorites”, Google+ “likes”, dependent on content, may be considered testimonials.
• Record keeping obligations apply to any advertising and correspondence. Information available electronically must meet books and records retention rules.
• What information is available about the Adviser, and associated persons, through non-related or third party sites?

Recommendations: Investment Advisers should review their current practices, written compliance policies and procedures, and evaluate whether they, or their personnel, utilize social media.

Written compliance policies and procedures should contain a precise and reasonably designed policy regarding social media use by the firm and associated personnel as well as methods for detecting and addressing violations. The policy may include a listing of authorized social media platforms and guidelines for the monitoring of information, updates, retention, and content. Advisers should address personal use of social media by employees including what information is authorized for use in personal profiles and guidelines or restrictions on content relating to the Adviser.

General best practices include:

• Business Use: business email addresses, company information, social media profiles, etc. should be limited to business communications and reviewed as part of the compliance program.
• Personal Use: prohibitions or limitations on the use of company email address, website address, and any marketing materials on personal profiles or blogs.
• Restrictions or prohibitions on participation in business related internet chat rooms or forums.
• Disclosure of social media use, training for personnel, and periodic acknowledgement or certification of the firm’s policies and procedures.

Additionally, it is recommended that Advisers review and monitor information available electronically via third parties and utilized by Solicitors. Information disseminated by third parties or solicitors may also be considered advertising or testimonials and need to be considered when creating and monitoring social media policies.

Click here for the full National Examination Risk Alert

Time for Annual Renewals – Important Dates and Deadlines

As the holiday season approaches, so does the deadline for annual renewals. Annual Renewals are due December 13, 2012. To ensure that your renewal process is completed in timely and accurate matter, we recommend that you review current registrations for both your firm and registered persons of your firm to determine that they are up to date and accurate so that your fees are properly assessed by the regulators on your Preliminary Renewal Statement. Important deadlines are as follows:

• NOVEMBER 12, 2012: Preliminary Renewal Statements are available via IARD/WebCRD; we recommend you review your statement for accuracy.
• DECEMBER 10, 2012: Renewal payments submitted electronically should be made to ensure that payment is posted by the December 13th payment deadline.
• DECEMBER 13, 2012: The total amount due on your firm’s Preliminary Renewal Statement should be paid and received by IARD/WebCRD.
• DECEMBER 21, 2012: Year-end form filings through IARD/WebCRD must be submitted by 6pm eastern time.
• JANUARY 2, 2013: Final Renewal Statements are available via IARD/WebCRD; we recommend that you retain this statement for your records and review registration statuses for your firm, branches and registered persons to ensure all registrations are accurate.
• FEBRUARY 1, 2013: Any amount due according to your Final Renewal Statement should be paid and received by IARD/WebCRD.

FINRA provides a handy 2013 IARD Renewal Program Checklist. For a copy, click here.

For the complete 2013 Renewal Program Calendar provided by FINRA, click here.

If you have any questions or would like Red Oak to assist you in completing your annual renewal, we are here to help. We can provide guidance on all of your compliance needs. Please contact us for further information.

A New Chapter for the SEC Fort Worth Office

In the aftermath of Allen Stanford’s $7 billion Ponzi scheme and blistering congressional and SEC reviews, the Fort Worth office is under new management and rebuilding its reputation into one of legal and regulatory advocacy for the SEC rather than the informal character of years past.

With such a transformation, the office is seeing increased morale, greater enforcement and increasing specialty in review of bribery cases and oil and gas investments. The office is now seen as a more formidable enforcement entity where careers can be made and high profile cases are under investigation. At present, the office is conducting probes into Chesapeake Energy and Wal-Mart and has hired a geophysicist to assist in the examination of natural gas claims in related securities offerings.

High profile, complex investigations are currently ongoing alleging inappropriate financial perks for Chesapeake Energy’s CEO and another separate investigation alleging a cover-up of widespread bribery involving Wal-Mart’s operations in Mexico. Further, defense attorneys have also shared opinions that the office is less accommodative and less flexible than in previous times.

The SEC Forth Worth Office includes Arkansas, Texas, Kansas and Oklahoma as part of its jurisdiction as well as oversight of prominent public companies such as AT&T, Dell and Exxon-Mobile. With the office now towing the line of Washington’s “cop-on-the-beat” attitude, industry participants in the region should be well prepared when working together with the SEC Fort Worth Office.

Source

Conflicts of Interest and Risk Governance

At the recent National Society of Compliance Professionals conference October 22, 2012, Carlo di Florio, the SEC's Director of the Office of Compliance Inspections (“OCIE”) and Examinations, instructed broker-dealers and advisers to increase their efforts to prevent conflicts of interest. The National Exam Program (“NEP”) has adopted a risk-based strategy to determine who to examine and they have identified conflicts of interest as a key area for their risk analysis.

Mr. di Florio defined a conflict of interest to include favoring the firm over a client, one client over another client, or employees over their firm. He also stressed the importance of practices that "may be technically within the letter of the law, but are not in keeping with the spirit of the law." Mr. di Florio discussed the high-priority conflicts that the OCIE will scrutinize: sales practices, outside business activities, mutual fund wrap programs, side-by-side portfolio management, affiliations between advisers and broker-dealers, and valuation practices.

Mr. di Florio stated that firms should create a "cross-functional leadership team to identify and understand all conflicts within their business model." In addition, firms should create and implement specific conflicts of interest policies and procedures which include prohibited practices, training, monitoring, and discipline. Finally, Mr. di Florio assigned responsibility to the firm's business line as "the first line of defense" with additional monitoring and testing responsibilities designated to compliance and internal audit.

Firms need to take this seriously and create and implement a specific conflicts of interest policy and procedure to include the elements outlined by Mr. di Florio in his speech. Click here to download the full speech.

Red Oak Compliance Solutions is able to help you design and implement a robust conflicts of interest policy.

Coordinated Examinations Identify Top Broker-Dealer Compliance Violations

Based upon coordinated examinations of broker-dealers throughout the United States, the North American Securities Administrators Association (NASAA) has identified the top compliance violations and offered a series of recommended best practices for broker-dealers to consider in improving their compliance practices and procedures.

The examination results were released at NASAA’s annual conference which was held in San Diego along with best practices to help firms manage their compliance functions efficiently.

These best practices were developed after a series of examinations of broker-dealers, conducted by state securities examiners, revealed a significant number of problem areas. The 2012 examinations were conducted under the guidance of NASAA’s Broker-Dealer Operations Project Group.

A total of 236 examinations conducted between January 1 and June 30, 2012, found 453 types of violations in five compliance areas. The highest percentage of violations were in the books and records area with supervision, sales practices, registration & licensing, and operations rounding out the list.

The top five types of violations found involved: failure to follow written supervisory policies and procedures, suitability, correspondence/e-mail, maintenance of customer account information, and internal audits.

Best Practices
Based upon the examination results, NASAA recommended 10 best practices to help broker-dealers develop compliance practices and procedures in the following areas:

• Suitability. Broker-Dealers must develop effective standards and criteria for determining suitability. State regulations and FINRA Rules 2090 and 2111 require registered persons to “know your customer” and receive training sufficient to demonstrate knowledge of the products before a sale occurs.
• Develop, Update, and Enforce Written Supervisory Procedures. BDs also should ensure that staffing and expertise are commensurate with the size of the BD, type(s) of businesses engaged in by the firm, and the individual responsible for specific procedures.
• Exception Reports. Introducing dealers should obtain the necessary exception reports from the clearing dealer to ensure proper compliance. Upon the generation of exception reports, all BDs must document and resolve “red flags” in a timely manner. BDs that rely solely upon conversations with salespersons to address exception reports without contacting investors may subject themselves and supervisory staff to regulatory and/or legal action.
• Branch Office Audits. Develop a branch audit program that includes a meaningful audit document/plan, unannounced visits, a means to convey audit results, and a follow-up plan requiring that the branch take corrective action.
• Selling Away. BDs must ensure that adequate procedures are in place to address private securities transactions (selling away). If this activity is permitted, the firm’s written supervisory procedures should be adequate to monitor this activity on an ongoing basis. The BD’s procedures must have a mechanism to conduct a meaningful review of the request and in the instance where the request is denied, a process to determine the salesperson is/has not engaged in the activity./li>
• Outside Business Activity. Written outside business activity requests from salespersons must be received, reviewed and approved by the firm prior to the activity. The BD and salesperson are required to report the outside business activity on the salesperson’s Form U4. The firm should have a supervisory procedure in place to address its approval/denial process and a requirement that the salesperson promptly report any changes to the approved outside activity.
• Advertisements. Advertisements and sales literature MUST be fair and balanced and must be reviewed and approved by the BD and/or FINRA. Seminar notices/advertisements, programs, seminar materials utilized, and guest speakers must be approved by the BD. In instances where the salespersons routinely conduct seminars, a supervisory representative of the firm should randomly attend the seminar for compliance purposes.
• Correspondence. Correspondence, both electronic and hard copy, must be effectively monitored by the BD. This includes a system of capturing and maintaining electronic, business-related correspondence sent by salespersons from websites and social network service providers outside the firm. For additional guidance, refer to FINRA NTM 11-39.
• Customer Complaints. Upon receipt of a complaint, firms must acknowledge the receipt, conduct and document a thorough review of the customer’s allegations, and, if necessary, update the salesperson’s Form U4. In situations where the firm discovers wrongdoing, the firm should remediate customer harm. Timely reporting and remediating customer harm are some of the factors under NASAA guidelines to determine if the firm is entitled to credit for cooperation.
• Working with Seniors. Baby Boomers are moving into retirement, and as individuals age, cognitive abilities begin to diminish. BDs and financial professionals should develop procedures/best practices for handling accounts of “senior” investors. A number of recommendations relating to these best practices are contained in joint reports issued in 2008 and 2010 by NASAA, SEC, and FINRA.

For a copy of the complete NAASA report please click here.