Compliance

New OCIE Risk Alert Urges Advisers to Review Their Data Security Procedures

May 31, 2019 | Parker MacIntyre

In its latest Risk Alert, the SEC’s Office of Compliance Inspections and Examinations (“OCIE”) heeds advisers and broker/dealers to take a fresh look at their policies and procedures in the area of electronic customer record storage in light of shortcomings discovered by OCIE’s staff as part of recently-conducted regular examinations. These shortcomings include weak or misconfigured security settings on a network storage device that, in the worst-case event, could result in unauthorized access to customer information.

OCIE Risk Alerts are highly useful resources for compliance professionals to consider as these published notices serve as a window into not only the recent experiences of OCIE staffers out in the field, but also the thinking of OCIE management as to where it will be directing its staff to focus on in future examinations. In other words, if the management of OCIE warrants it important enough to publish a Risk Alert on an particular topic, registrants can be assured that future exams will likely focus on deficiencies in that area.

This most recent Risk Alert zeros-in on deficiencies uncovered by examiners with respect to how advisers and brokers are protecting their customers’ electronic records—specifically, records kept in the “cloud” or on other types of networked storage solutions. OCIE defines cloud storage as the “electronic storage of information on infrastructure owned and operated by a hosting company or service provider.” Obviously, such storage systems may be especially vulnerable to hacking or other nefarious activities, and as such, warrant robust protections. Continue reading ›

Parker MacIntyre Co-Sponsors Financial Education and Empowerment Workshop for Women

April 17, 2019 | Parker MacIntyre

Parker MacIntyre is proud to announce that it is a co-sponsor of She Leads, an upcoming financial education and empowerment workshop specifically geared to the unique needs of women in the workforce seeking to secure, protect, and grow their wealth. She Leads is a free event produced and organized by the Office of Georgia Secretary of State Brad Raffensperger in partnership with Investor Protection Trust (IPT), Investor Protection Institute (IPI) and the Association for Financial Counseling & Planning Education® (AFCPE®). The workshop will be held on Friday, May 3, 2019 in Atlanta.

In announcing the firm’s co-sponsorship of She Leads, Steve Parker, Managing Principal at Parker MacIntyre, has stated that “we at Parker MacIntyre are thrilled to be a part of this effort to enhance financial and investment awareness in Georgia, and wholly support Secretary Raffensperger’s initiatives on this front.” Secretary Raffensperger has announced a financial literacy platform, including a series of events aimed at educating Georgians on the importance of investing and money management. She Leads is the second event hosted by the Secretary since taking office in January 2019. As described in the event’s agenda, the goal of She Leads is “to empower women with an increased knowledge about money, their personal relationship with money, and financial issues and strategies that are available to increase and leverage wealth.” Continue reading ›

Firm’s Failure to Act on Numerous Compliance “Red Flags” Results in $250,000 Penalty and Censure by SEC

April 4, 2019 | Parker MacIntyre

A recent settled SEC Order with Wedbush Securities, Inc., a dually-registered investment adviser and broker-dealer, has resulted in a censure and $250,000 fine against that firm. The genesis of this rather harsh result is what the SEC alleges to be the firm’s lack of an ability to follow-up on obvious compliance “red flags” that, in this case, pointed to an extensive and long-running “pump and dump” scheme involving one of the firm’s registered representatives. Indeed, as noted by Marc P. Berger, Director of the SEC’s New York Regional Office, “Wedbush abandoned important responsibilities to its customers by looking the other way in the face of mounting evidence of manipulative conduct.”

The SEC’s regulatory requirements compel broker-dealers to adopt policies and procedures that are sufficiently tailored to determine whether their associated persons are violating the securities laws and to prevent them from violating the securities laws. Broker-dealers are also compelled to ensure that these policies and procedures are sufficiently implemented to discover and prevent securities law violations. Continue reading ›

SEC Solicits “Dialogue” with Public on Custody Rule Implications Raised by Crypto-Assets

March 28, 2019 | Parker MacIntyre

Recognizing the “swiftly developing” digital asset marketplace—a loosely defined sector encompassing cryptocurrencies, virtual coins or tokens (including Initial Coin Offerings or “ICOs”), and other blockchain-related financial assets—the SEC’s Division of Investment Management (the “Division”) has commenced an open-ended request for public comment on how such crypto-assets impact its decades-old Advisers Act Custody Rule (Advisers Act Rule 206(4)-2). The Division’s request for comment comes in the form of a March 12, 2019 letter to the Investment Adviser Association (“IAA”), a lobbying/trade group representing the investment advisory industry.

By way of background, the Custody Rule sets up a number of requirements for SEC-registered investment advisers that have “custody” of a client’s funds or securities. Custody is defined as “holding, directly or indirectly, client funds or securities, or having any authority to obtain possession of them.” Notably, custody includes, among other things, any arrangement under which the adviser is authorized to withdraw client funds or securities, as well as acting as general partner, or in a comparable control position, for an investment fund. The four primary obligations of an adviser having custody are that the adviser must: (i) maintain those funds or securities with a “qualified custodian;” (ii) notify the client in writing of the qualified custodian’s name, address, and the manner in which the funds or securities are maintained; (iii) have a “reasonable basis” for believing that the qualified custodian sends an account statement, at least quarterly, to each client, identifying the amount of funds/securities and setting forth all transactions in the account; and (iv) arrange for an independent public accountant to conduct an annual surprise examination in order to verify the safekeeping of the client’s funds and/or securities. The Custody Rule provides a number of exemptions to some of the above requirements; most notably, one that allows investment fund advisers to avoid the surprise exam requirement so long as audited financial statements are distributed within 120 days of the end of the fund’s fiscal year.

In an effort to “further inform our consideration of how characteristics of digital assets impact the application of the Custody Rule,” the Division’s request for comment seeks public comment on a wide array of trenchant queries, including the following:

Advisers Encouraged to Assess Use of New Electronic Messaging Technologies as part of Annual Compliance Review Process

March 13, 2019 | Parker MacIntyre

With annual compliance reviews in full swing this time of year, we write today to remind advisory firms to be sure to assess the sufficiency of their policies and procedures in the ever-developing area of electronic messaging. Our note comes on the heels of a recent Risk Alert on this topic issued by the SEC’s Office of Compliance Inspections and Examinations or “OCIE,” which exhorts advisory firms to take a fresh look at their current compliance policies in light of the particular risks of non-compliance posed by the firm’s usage of electronic messaging.

“Electronic messaging,” as discussed in OCIE’s Risk Alert, refers to such mediums as text/SMS messaging, instant messaging, personal email, and personal or private messaging, but specifically excludes firm-wide email. Notably, OCIE’s exclusion of firm email from analysis in the Risk Alert should not be read as diminishing an adviser’s compliance obligations to capture, store, and periodically review firm email communications. Rather, as OCIE explains, “firms have had decades of experience complying with regulatory requirements with respect to firm email” and it is not as problematic from a compliance standpoint as compared to some of the newer technologies that run on third-party applications or platforms. Continue reading ›

Georgia Commissioner of Securities Proposes Amendments to Broker-Dealer and Investment Adviser Examination Requirements to Incorporate FINRA SIE Exam

March 1, 2019 | Elizabeth Dalziel

On February 4, 2019, the Commissioner of Securities of the State of Georgia and the Office of the Secretary of State announced its intent to amend the rules governing examination requirements for registered representatives of a broker-dealer and investment adviser representatives. According to the Commissioner, the primary purposes of these amendments are to harmonize Georgia’s rules with the Financial Industry Regulatory Authority’s new rules implementing the Securities Industry Essentials (“SIE”) Exam and to update the requirements regarding examinations to applicants. The SIE Exam, which tests a FINRA registration applicant’s knowledge of securities-related topics, was launched to simplify FINRA’s qualification examination program after the program’s efforts to address new securities products and services resulted in FINRA offering multiple exams with immense content overlap. FINRA also launched the SIE Exam in order to provide greater consistency and uniformity to the securities industry application process.

The State of Georgia requires applicants for registration as a registered representative of a broker-dealer and/or an investment adviser representative to take certain prerequisite examinations. Georgia Rule 590-4-5-.02 details the examination requirements for registered representatives, while Georgia Rule 590-4-4.09 details the examination requirements for investment adviser representatives.

The proposed amendments to Rule 590-4-5-.02, detailing registered representative examinations, would require an applicant applying for registration as a broker-dealer to present proof to the Commissioner that its personnel have passed at least one of a list of specified examinations within a two-year period preceding the date of the application. The amendments also eliminate the Series 87 Research Principal Examination as a potential examination that could be passed. The amendments also would provide that an applicant who is applying to be a registered representative would need to present the Commissioner with proof that he or she has passed the required examinations within either a two-year period immediately preceding the application date or a four-year period in the case of an applicant who has taken the SIE Exam. The amendments also provide that the Commissioner “may reserve the right to find the applicant qualified by other examinations or significant and comprehensive experience in the securities business.”

FINRA Issues Warning of Phishing Scheme Targeting Compliance Personnel

February 26, 2019 | Parker MacIntyre

FINRA has alerted its Member Firms to be on the watch for a fraudulent phishing email scheme targeted at compliance personnel. A phishing scheme typically uses email or some other type of electronic message to trick the recipient into clicking a malicious link or infected file attachment by mimicking a message from a trustworthy party. This particular scheme employs an email purportedly originating from an Anti-Money Laundering compliance officer at an otherwise apparently legitimate Indiana-based credit union. The email—which was received recently by a number of FINRA Member Firms—specifically targets compliance personnel by appearing to be a communication regarding an attempted transfer of money by a client of the recipient’s firm to the credit union which has been placed on hold due to concerns about potential money laundering. The scam is designed to get the recipient to open an attachment, which, according to FINRA “likely contains a malicious virus or malware designed to obtain unauthorized access to the recipient’s computer network.”

FINRA noted the following additional aspects of the fraudulent email that recipients should be alert for:

An otherwise legitimate reference to a provision of the USA Patriot Act allowing financial institutions to share information with each other.
An actual email address that appears to be from Europe, rather than the U.S.-based credit union.
Numerous instances of poor grammar and sentence structure.

FINRA Invites Member Firms to Self-Report Potential Share Class Selection Violations

February 15, 2019 | Parker MacIntyre

FINRA has announced a new self-reporting initiative covering potential violations by its Member Firms of various rules governing share class recommendations relating to 529 Plans. See FINRA Regulatory Notice 19-04 (Jan. 28, 2019). Similar to the SEC’s recent self-reporting initiative regarding mutual fund share class selection in connection with 12b-1 marketing fees (which we have blogged about last month and in May of 2018), this new FINRA initiative (the “Initiative”) offers potential leniency in return for Member Firms coming forward to self-report likely violations pursuant to the terms of the Initiative.

529 Plans are tax-advantaged municipal securities that are structured to facilitate saving for the future educational needs of a designated beneficiary. While the sale of 529 Plans is governed by the rules of the Municipal Securities Rulemaking Board (“MSRB”), FINRA is responsible for enforcing the MSRB’s rules. These rules, in turn, require that recommendations of 529 Plans be suitable in light of the customer’s investment profile, and that Member Firms selling 529 Plans have a supervisory system in place to achieve compliance with the MSRB’s rules.

First Quarter Brings Code of Ethics Reporting Into Focus

February 12, 2019 | Parker MacIntyre

At this time of year, it is important for registered investment advisers to assure that they are in compliance with federal and/or state rules requiring them to monitor their supervised persons’ security holdings and transactions for compliance with the firm’s code of ethics. Even seasoned compliance professionals will encounter questions regarding application of the rule from time to time. While this article is no substitute for a detailed analysis of the rule and its application to a specific firm and its supervised persons, an overview of the rule may be helpful.

As background, all SEC-registered investment advisers are required to adopt a Code of Ethics, which must describe the standards of conduct expected for representatives of the firm and address conflicts that arise from personal trading by advisory personnel. This federal requirement, which governs SEC-registered advisers only, derives from SEC Rule 204A-1, which took effect in 2005. Since then, many state securities administrators have adopted identical or similar requirements, either by adopting SEC Rule 204A-1 “by reference”—i.e., verbatim—into state law, or by crafting similar “me too” provisions. Accordingly, if your firm is SEC-registered, it will be bound by Rule 204A-1; but, if your firm is currently a state-registered adviser, it may be bound by the same or similar requirements. Continue reading ›

What Firms Can Expect Now That the SEC is Back at Work

January 31, 2019 | Elizabeth Dalziel

On December 20, 2018, two days before the recent partial federal government shutdown began, the Securities and Exchange Commission’s Office of Compliance Inspections and Examinations announced its 2019 Examination Priorities. As discussed previously, the shutdown resulted in the SEC operating at a quite minimal level. Now that the shutdown is over, registered investment advisers and broker-dealers can likely expect OCIE to fully implement the following examination priorities.

OCIE listed six examination priorities for 2019: (1) matters of importance to retail investors, especially seniors and investors saving for retirement; (2) compliance and risk in registrants who are tasked with overseeing critical market infrastructure; (3) focus on FINRA and MSRB; (4) digital assets; (5) cybersecurity; and (6) anti-money laundering. According to OCIE, this is not an exhaustive list, and one can expect OCIE to cover other issues in its examinations. However, OCIE has concluded that these issues “present potentially heightened risk to investors or the integrity of U.S. capital markets.” Continue reading ›