Industry News

FinCEN Publishes Frequently Asked Questions Relating to New Customer Due Diligence Rules

April 27, 2018 | Elizabeth Dalziel

On April 3, 2018, the Financial Crimes Enforcement Network (“FinCEN”) published Frequently Asked Questions (“FAQs”) to help “covered financial institutions,” including broker-dealers and dually registered SEC investment advisers, better understand its new Customer Due Diligence Requirements (“CDD Rule”), which will become effective on May 11, 2018. Other “covered financial institutions” include insured banks, commercial banks, federally insured credit unions, savings associations, trust banks or trust companies that are federally registered, and mutual funds.

The CDD Rule will require covered financial institutions to adopt written policies and procedures that are sufficiently tailored to “identify and verify beneficial owners of legal entity customers and to include such procedures in their anti-money laundering compliance program.” A beneficial owner is defined as an individual who directly or indirectly owns 25 percent or more of a legal entity customer’s equity and a person who exercises significant control over a legal entity customer. However, according to the FAQs, should covered financial institutions desire to gather information on individuals owning less than 25 percent of a legal entity customer, they are welcome to do so. The FAQs also provide that covered financial institutions are required to verify beneficial owners’ identities using risk-based procedures that feature the same factors financial institutions are required to use to verify customer identities under the Customer Identification Program rules. Continue reading ›

SEC Weighs in on FINRA’s Proposed Rule Amendments Pertaining to Expungement Procedures

April 24, 2018 | Elizabeth Dalziel

In response to FINRA’s Regulatory Notice 17-42, the Securities and Exchange Commission published a letter detailing its thoughts regarding some rule amendments FINRA proposed relating to its expungement procedures. According to FINRA, “expungement of customer dispute information is an extraordinary measure, but it may be appropriate in certain circumstances.” Nevertheless, critics of expungement have voiced their concern that FINRA’s current procedures for expungement may not be adequate. In response, FINRA proposed the amendments to improve procedures involving expungement requests.

The proposed amendments include changes to FINRA Rule 12805, which outlines the conditions that arbitrators must satisfy prior to granting an expungement request. Rule 12805 does not currently elaborate on how or when expungement relief may be requested during an underlying dispute with a customer. The amendments would require a FINRA associated person who is named as a party in the underlying customer case to seek expungement while the customer case is ongoing. If the associated person files an expungement request, he or she would be obligated to file either a $1,425 filing fee or the applicable filing fee provided in FINRA Rule 12900(a)(1), whichever is greater. Continue reading ›

SEC Retail Strategy Task Force Working to Combat Misconduct Involving Retail Investors

April 19, 2018 | Elizabeth Dalziel

Last year, the Securities and Exchange Commission announced that it was creating a Retail Strategy Task Force as part of the Enforcement Division’s continuing endeavors to shield retail investors. The newly created Task Force has already in 2018 published an Investor Alert relating to Ponzi schemes, as discussed below.

The Enforcement Division has had “a long and successful history of bringing cases involving fraud targeting retail investors.” In recent years, it has seen a substantial number of cases pertaining to fraud that impacted retail investors, such as the sale of structured products that were not suitable to the relevant retail investor and microcap pump-and-dump schemes. The Retail Strategy Task Force will put into practice the education obtained from those cases in order to pinpoint “large-scale misconduct affecting retail investors.” Continue reading ›

SEC Continues to Pursue Municipal Advisor Examinations

April 11, 2018 | Elizabeth Dalziel

Following its publication of a Risk Alert in late 2017 detailing findings from examinations of municipal advisers, the SEC’s Office of Compliance Inspections and Examinations (OCIE) continues to examine municipal advisers in 2018. In 2014, OCIE established the Municipal Advisor Examination Initiative to perform an examination on municipal advisers who recently registered for the first time. OCIE performed over 110 examinations in the course of the Initiative and found that many municipal advisers did not have adequate knowledge of regulatory requirements for municipal advisers. As a result, many municipal advisers were found not to be in adequate compliance with regulatory requirements pertaining to registration, recordkeeping, and supervision. OCIE hoped that in publishing the 2017 Risk Alert, municipal advisers will be compelled to evaluate their policies and procedures to find possible areas for improvement.

Municipal advisers are obligated to register with the SEC pursuant to the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act”). The SEC established its municipal adviser registration rules in September 2013, and the rules became effective in July 2014. The Dodd-Frank Act also established the Municipal Securities Rulemaking Board (“MSRB”), which exercises regulatory authority over municipal advisers. OCIE’s examinations of municipal advisers covered “compliance with regulatory obligations including registration, statutory fiduciary standard of care, fair dealing, recordkeeping, and supervision, among other things.” OCIE discovered that the most common deficiencies among municipal advisers related to registration, books and records, and supervision requirements. Continue reading ›

FINRA Seeks to Streamline and Strengthen Outside Business Activities and Private Securities Transactions Rules

April 2, 2018 | Steve Parker

The Financial Industry Regulatory Authority recently published a Regulatory Notice requesting comment regarding a proposed new rule pertaining to registered persons’ outside business activities. Among other things, the proposed rule would significantly alter a broker-dealer’s obligations with respect to a registered representative’s conduct of investment advisory business through an unaffiliated registered investment adviser.

FINRA decided to propose this new rule after a “retrospective review of FINRA’s rules governing outside business activities and private securities transactions, FINRA Rule 3270 (Outside Business Activities of Registered Persons) and FINRA Rule 3280 (Private Securities Transactions of an Associated Person).” FINRA determined that the rules “could benefit from changes to better align the investor protection goals with the current regulatory landscape and business practices.” As a result, FINRA proposed a new single rule that it claims will make registered persons’ duties in regards to outside business activities clearer and decrease nonessential obligations while enhancing investor protection.

If the proposed rule is adopted, it will replace Rules 3270 and 3280. The comment period ends on April 27, 2018. Continue reading ›

Fifth Circuit Vacates DOL Fiduciary Rule While SEC Pushes Forward with Goal of Fiduciary Duty Reform

March 27, 2018 | Elizabeth Dalziel

On March 15, 2018, the United States Court of Appeals for the Fifth Circuit elected, in a 2-1 decision, to vacate the Department of Labor’s (DOL’s) Fiduciary Rule (Chamber of Commerce of the U.S.A., et al. v. U.S. Dep’t of Labor, et al.). In doing so, the Fifth Circuit overturned the Fiduciary Rule in its entirety, including its new definition of fiduciary advice under the Employee Retirement Income Security Act of 1975 (ERISA) and the Internal Revenue Code (Code), as well as the various new exemptions and revisions to existing exemptions that it features. It is uncertain whether the DOL will request that the Fifth Circuit rehear the case, appeal the case to the United States Supreme Court, or do nothing. The Fifth Circuit’s decision, however, has not deterred the Securities and Exchange Commission (SEC) from continuing to discuss implementing its own fiduciary rule.

According to the Fifth Circuit’s majority opinion, the DOL exceeded its authority in adopting the new fiduciary investment advice definition in the Fiduciary Rule, finding the definition inconsistent with the plain text of ERISA and the Code. The Fifth Circuit also concluded that the DOL acted “arbitrarily and capriciously” in, among other things, requiring people providing services to IRAs to sign a contract under the Best Interest Contract exemption in which they admit that they are fiduciaries and can be sued. Therefore, the Fifth Circuit concluded that “the Rule fails to pass the tests of reasonableness of the [Administrative Procedures Act].” Continue reading ›

SEC to Host National Compliance Outreach Seminar in April

March 15, 2018 | Elizabeth Dalziel

On February 13, 2018, the Securities and Exchange Commission announced that it is accepting registrations for the National Compliance Outreach Seminar (“National Seminar”). The National Seminar, which is part of the SEC’s Compliance Outreach Program, is designed to help educate registered investment advisers’ chief compliance officers (“CCOs”), as well as their senior officers, about “various broad topics applicable to larger investment advisory firms and investment companies.” The National Seminar will take place on April 12, 2018 at the SEC’s headquarters in Washington, D.C., and it will last from 8:30 a.m. to 5:30 p.m. ET. While only 500 participants can attend in person, a live webcast will be provided via www.sec.gov.

This year the National Seminar will include six panel discussions between SEC personnel, CCOs, and various other industry representatives. SEC personnel who participate in the panels typically include officers from the Office of Compliance Inspections and Examinations, the Division of Investment Management, and the Division of Enforcement’s Asset Management Unit, as well as officers from other SEC divisions or offices. CCOs and other senior staff in private advisory firms typically participate in the panels as well. Each of these panels reflects areas of concern which the SEC likely intends to prioritize in 2018. Continue reading ›

Form ADV Amendments Vexing Some Advisers

February 14, 2018 | Steve Parker

The amendments to Form ADV, Part 1 that became effective October 1, 2017 are presenting some registered investment advisers with unforeseen problems as we move into “annual amendment season” in 2018. As we previously highlighted among those changes to Form ADV is the requirement for advisers to disclose estimated percentages of assets held within separately managed accounts in twelve categories of assets.

Advisers with more than $10 billion in regulatory assets under management are required to report the same data as of mid-year and year-end. Smaller firms must report the same data as of year-end only.

This has not proved a simple exercise for some firms. Many have assumed that the custodians of their clients’ assets would readily be able to categorize their clients’ holdings and provide them reports summarizing the data. Continue reading ›

OCIE Publishes its 2018 Examination Priorities

February 12, 2018 | Elizabeth Dalziel

On February 7, 2018, the SEC’s Office of Compliance Inspections and Examinations (“OCIE”) published its Examination Priorities for 2018. The Examination Priorities cover “certain practices, products, and services that OCIE believes may present potentially heightened risk to investors and/or the integrity of the U.S. capital markets.” The five priorities that OCIE specifically listed are (1) issues crucial to retail investors, such as seniors and those saving for retirement, (2) compliance and risks in critical market infrastructure, (3) FINRA and MSRB, (4) cybersecurity, and (5) anti-money laundering programs. This is not an exclusive list, and OCIE invited comments concerning how it can adequately promote compliance.

OCIE intends to continue to make shielding retail investors from fraud a priority. OCIE plans to focus especially on senior investors and those saving for retirement. For example, examiners will pay particular attention to firms’ internal controls that are intended to monitor their representatives, especially in relation to products targeted at senior investors. OCIE will also focus on disclosure of the costs of investing, examination of investment advisers and broker-dealers who primarily offer advice through digital platforms, wrap fee programs, mutual funds and exchange traded funds, municipal advisors and underwriters, and the growth of the cryptocurrency and initial coin offering markets. Continue reading ›

Advertising Remains a Concern to the SEC’s RIA Examination Staff

February 8, 2018 | Elizabeth Dalziel

Whether or not the SEC’s Office of Compliance Inspections and Examinations (“OCIE”) will formally name advertising as among its priorities in 2018, it is clear from its activity and that of the Enforcement Division in 2017 that advertising should remain a concern of every registered investment adviser and chief compliance officer.

In September 2017, OCIE published a Risk Alert identifying the most common compliance issues pertaining to Rule 206(4)-1 of the Investment Advisers Act of 1940, otherwise known as the “Advertising Rule.” An advertisement includes “any notice, circular, letter or other written communication addressed to more than one person, or any notice or other announcement in any publication or by radio or television, which offers” advice regarding securities. The Advertising Rule forbids an investment adviser from “directly or indirectly… publishing, circulating, or distributing any untrue statement of material fact, or that is otherwise false or misleading.” Continue reading ›