Regulator Mind Reading

Being a CCO is a very demanding job. CCOs have to balance being the bad guy with remaining open so that people feel comfortable interacting with them. They have to keep the lines of communication open while maintaining control. It’s like a high wire act at the circus, one misstep and you better have a safety net. And with the Dodd-Frank Act and the ever changing regulatory environment, the CCOs balancing act is even more precarious.

Being able to read a regulators mind would be a very useful ability for a Chief Compliance Officer to possess. But absent that ability, reviewing the cases brought by regulators against firms can give you a pretty good idea of what’s on their mind. When I look at the cases brought by the SEC in May, I wonder if Chief Compliance Officers realize they are in the regulators crosshairs. CCOs may be the police for the industry but the regulators are internal affairs.

SEC Alleges Former Employee of Investment Adviser Aided and Abetted the Violation of SEC Rule 204-2 (Books & Records Requirements)

On June 6, 2011, the U.S. Securities and Exchange Commission ("SEC") charged a long time employee at Bernard L. Madoff Investment Securities LLC ("BMIS") with "aiding and abetting violations of Section 204 and Rule 204-2 of the Investment Advisers Act of 1940 (the Adviser Books and Records Violations)."

The SEC alleges that BMIS, "failed to make, maintain on its premises, or keep accurate, certain books and records required by law." The SEC noted several examples where the firm failed to maintain accurate cash receipts, disbursement records, accurate ledgers, and failed to keep true and accurate bank statements, cancelled checks and cash reconciliations. This is a violation of the Books and Records requirements. The SEC alleges that as an employee in investment advisory operations, the BMIS employee assisted in falsifying documents, making repeated material misrepresentations, and generated fictitious account statements; thus, violating the Investment Advisers Act of 1940, Rule 204-2 and perpetuating the firm's violations. One has to wonder how many more BMIS employees have yet to be charged?

Insider Trading

Hedge fund founder Raj Rajaratnam was found guilty on five counts of conspiracy and nine counts of securities fraud involving insider trading. This is a big victory for the government and a vindication of their aggressive use of phone taps to fight Wall Street crimes.

SEC Publishes Notice Regarding Inflation Indexing of Performance Fee Rule

The Securities and Exchange Commission today provided public notice of its intention to raise certain dollar thresholds that would need to be met before investment advisers can charge their clients performance fees. This would satisfy Section 418 of the Dodd-Frank Act which requires the SEC to issue an order to adjust these dollar thresholds for inflation by July 21, 2011 and every five years thereafter.

Social Media Hot Topics

There have been a lot of discussions lately regarding the regulatory landscape in the financial services sector. I know everyone has Dodd-Frank on the mind these days; however another significant hot topic is Social Media. It is a topic of discussion at every conference I have attended this year.

Over the last couple of months the IIROC (Investment Industry Regulatory Organization of Canada) has issued their guidance on social media, FINRA announced their examination priorities for 2011 and the SEC sent our sweep letters regarding the use of social media. It’s clear with all the attention social networking has generated that it is not a fad that’s going away and the regulators are serious about making sure it’s done in a compliant manner.

So what does it mean when I say “in a compliant manner”? Well first and foremost it means that you have policies and procedures that are reasonably designed to supervise and train your representatives and staff about how to use or not use social media sites. One thing that has been made perfectly clear is that a policy that says you do not allow social networking and attestations from your representatives stating they do not use social media is not considered sufficient by the regulators.

2011 BD and RIA Renewal Process

The 2011 Renewal Program begins on November 15, 2010 when FINRA releases the Preliminary Renewal Statements on Web CRD/IARD.

Firms should note the following key dates for the renewal process:

October 25, 2010 - Firms may begin submitting post-dated Form U5 and BR Closing/Withdrawal filings

November 1, 2010 - Firms may begin submitting post-dated BDW and ADV-W filings

November 15, 2010 - Preliminary renewal statements available

December 13. 2010 - Full payment of renewal statements due

January 3,2011 - Final Renewal statements available

February 4, 2011 - Full Payment of final renewal statement due

For the full FINRA NTM, click here: BD and IA Renewals

Proposed DOL regs expose more advisors to fiduciary liability

The Department of Labor is working to reduce the fees and costs in 401(k) plans and make these fees totally transparent. The DOL has broadened the definition of fiduciary, which means that more people who are advising retirement plans, including IRAs, will be held liable as fiduciaries.  This new definition includes advisors who are giving advice to a plan on a one-time basis and advisors whose advice does not necessarily serve as a primary basis for plan investment decisions. While I think this will cause the more irresponsible advisors think twice about selling a 401(k) plan, the vast majority will welcome this new definition. They have argued fr years that they do feel they have a fiduciary responsibility to these clients. What will be interesting to see is how this will affect registered reps who are not investment advisors and have sold plans for years.

For more information, click here: Proposed DOL Regs on Fiduciary Responsibility