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.