FINRA Exam Priorities

It’s that time of year again and FINRA has published its Exam Priorities Letter which highlights areas of significant focus in their audit program. These priorities represent FINRA’s assessment of the key issues they will focus on in 2013. The areas highlighted in their letter include:

Under Business Conduct and Sales Practices

• Suitability and Complex Products (FINRA Rule 2111)
• Business Development Companies (BDCs)
• Leveraged Loan Products
• Commercial Mortgage Backed Securities (MBS)
• High-Yield Debt Instruments
• Structured Products
• Exchange Traded Funds and Notes (ETFs and ETNs – particularly those using leverage)
• Non-Traded REITs
• Closed-End Funds
• Municipal Securities
• Variable Annuities
• Cyber-Security and Data Integrity
• Microcap Fraud
• Private Placement Securities
• Anti-Money Laundering
• Automated Investment Advice
• Branch Office Supervision

Insider Trading

Firms must be vigilant in safeguarding material, non-public information, and should periodically assess information barriers and risk controls to ensure they are adequate. FINRA provides some examples of risk controls that firms should assess to make sure their insider trading controls are adequate.

Financial and Operational Priorities

• Guarantees and Contingencies
• Margin Lending Practices
• Leverage and Liquidity

Market Regulation Priorities

• Algorithmic trading
• High Frequency Trading Abuses
• Alternative Trading Systems (ATS)
• Options Origin Codes
• Large Options Position Reporting (LOPR)
• Fixed-income (including best execution)

For more complete information on the key issues outlined above, please read the entire letter by clicking here.

As always, if you need any help with your compliance program or have any questions, please contact us. Our team at Red Oak is always here to help guide you through the regulatory quagmire.

Social Media Risk - Negative Posts

Social Media, like many things in the financial services industry has a lot of risks that need to be handled appropriately. FINRA and the SEC have issued rules and guidance to help Advisers regulate this regulatory maze but they fail to give specific instructions. Instead they leave it up to the Adviser's Compliance Officer to create reasonable policies to monitor social media use.

There are a few risk areas we feel compelled to discuss here so that Advisers have a little better idea of how to handle certain circumstances.

One such circumstance is what an Adviser should do if someone adds a negative comment to their social media site. Human nature’s first instinct is to delete it. However, this is a very bad idea. You need to report anything that would be considered a complaint to your Compliance Officer. If you are unsure whether it rises to the level of a complaint, you should consult your Compliance Officer. You should never respond to anything that is a complaint and if it is not a complaint, remember anything you put on your site is visible to everyone. Translated that means be careful that you are projecting the image you want for yourself and your firm and never put anything negative in writing on your social media site.

This is your site and you are responsible for everything on it. So use your Compliance Officer for guidance, always follow the regulations and never forget this is a public forum, visible to just about everyone. If someone posts something that is inappropriate, remove it immediately and let your Compliance Officer know what happened. You should also let the individual know that this is unacceptable and provide guidance on what can and cannot be posted. Remember, your image and brand are at stake, so view all comments through that lens.

Mistakes do happen so if something is posted in error, either remove it or correct and repost it.

Advisers also need to carefully monitor their Privacy settings to make certain their content is only visible to those they want it to be visible to. Since social media sites make numerous updates to how their application works, Advisers need to monitor the social media vendors for updates that may require them to update their privacy and account settings.

Social media is evolving at an unbelievable rate, Advisers need to be ready to ride the wave and information is the key to controlling the ride.

Private Placements of Securities Effective Date

On December 3, 2012 the SEC Approved New FINRA Rule 5123 Regarding Private Placements. FINRA Rule 5123 requires each FINRA member that sells an issuer’s securities in a private placement, subject to certain exemptions, to file with FINRA a copy of any private placement memorandum, term sheet or other offering document the firm used, within 15 calendar days of the date of the sale, or indicate that it did not use any such offering documents.

Firms must file the required offering documents electronically through FINRA’s new private offering filing system through the FINRA Firm Gateway.

In addition, firms must submit filings regarding member firm private offerings (MPOs), as required by FINRA Rule 5122 (Private Placements of Securities Issued By Members), through the same FINRA Gateway system.

Click here for the full regulatory notice 12-40.

SEC Applying Current Rules to Past Deeds

The SEC recently showed that it can and will impose the expanded rules provided by the Dodd-Frank Act to actions that occurred before the statute became effective. The case in question involves a hedge fund manager alleged to have engaged in various fraudulent activities. The SEC imposed a permanent bar against the advisor prohibiting him from associating with a broker-dealer, municipal securities dealer, NSRSO, etc. even though the law prior to Dodd-Frank only permitted a ban from associating with an investment adviser. The SEC stated this action was necessary to protect the public from future harm.

Since the SEC has no issue applying current rules to past deeds, we must all be aware and determine how this view might affect our firms.

To read the full enforcement action, please click here

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