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.

SEC Speaks Out About Using the Word "May" in Disclosures

The SEC has once again brought action against a firm for failure to properly disclose existing conflicts of interest. According to the SEC’s Order, the firm entered into an ‘undisclosed’ arrangement with an unaffiliated broker-dealer to provide trade execution for the adviser’s clients at a commission rate of $0.01 per share. However, under their existing arrangement, the broker-dealer charged the adviser’s clients between $0.04 and $0.06 per share, and then paid the amount exceeding $0.01 per share commission to the adviser’s affiliated broker-dealer as a “referral fee.” In that way, the affiliated broker-dealer and the adviser were actually paid between $0.03 and $0.05 per share on the adviser’s client.

The adviser’s ADV Part 2A disclosed that its affiliated broker-dealer “may” receive referral fees when obviously it was receiving them. All advisers should review their disclosures on at least an annual basis to make sure they accurately reflect what is occurring as opposed to what might occur in the future.

Please click here to read the full Order.

SEC Administrative Hearings Gain More Bite

Traditionally, the Securities and Exchange Commission (“SEC”) has only been able to impose penalties on regulated entities and individuals through the administrative process. Since passage of the Dodd-Frank Wall Street Reform and Consumer Protection Act, the SEC is now able to apply civil penalties against any person or company. This change has created some increased efficiencies as well as potential problems.

Prior to Section 929P of Dodd-Frank, the best alternative to an administrative hearing for non-regulated entities was for the SEC to file a lawsuit in Federal Court. Defendants often consider the administrative option to be quicker and less costly. But the advantages of the administrative option for the SEC appear to be even greater and include: limited discovery, no right to a jury trial, and inherently biased administrative law judge, and a biased appeal to the SEC Commissioners. This last point brings up an obvious ethical problem.

The administrative judges are appointed by the SEC and any appeal of the judges’ decision is appealed to the SEC Commissioners. Since it takes a vote of the SEC Commissioners to proceed with an enforcement action, those Commissioners are hearing the appeal of the case they authorized to proceed in the first place. The judges are not held to any code of conduct or code of ethics.

Since the passage of Dodd-Frank, the SEC has not lost a single administrative process case. They have a 100% success rate. However, their record was only about 60% successful when they filed lawsuits in Federal Court.

The SEC has been open with its intention to try more cases in its administrative process and defendants who had hoped to fight the SEC’s allegation in Federal Court may find that they are instead sent to an administrative process without many of the tools they had hoped to use such as the right to a jury, expansive discovery, dispositive motions, evidentiary challenges, or even time to prepare for trial.

One good option to help prevent an administrative process is to better understand your business and how to avoid actions that can introduce you to the process. A solid Compliance program that helps define your potential risks and implements processes to mitigate your risk exposure is essential. Please click here to read the complete story.

If you would prefer to focus your attention on your clients and the day-to-day operation of your firm, Red Oak Compliance Solutions is here to help with any or all of your compliance requirements.