Policies and Procedures

SEC Approves FINRA Self-Trading Rule

May 28, 2014 | Steve Parker

Earlier this month, the Securities and Exchange Commission (SEC) approved a change to Financial Industry Regulatory Authority (FINRA) Rule 5210. The rule now requires member broker-dealers to implement and enforce policies and procedures “reasonably designed” to monitor and prevent “self-trading” activity. See SEC Release No. 34-72067.

The rule, in its amended form, is designed to provide FINRA with increased ability to monitor and limit the “unintentional” interaction of orders that come from the same firm. This issue is distinct from any self-trading that are the products of fraudulent or manipulative design. Rather, FINRA’s rule will attempt to limit the misleading impact that this unintentional self-trading has on marketplace data and trade volume of a security.

The rule change will place new restrictions on self-trading activity that occurs as a result from one or related algorithms or that originate in one or related trading desks. Self-trading, as used by FINRA, does not result in a change in beneficial ownership and may or may not be a bona fide trade. The agency believes that self-trading, even conducted without fraudulent or manipulative intent, may be disruptive to the marketplace and distort information on a given security. The agency points to data it has collected that show self-trading of this kind may account for five percent or more of a security’s daily trading volume.
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FINRA Wants Heightened Supervision of Complex Products

February 8, 2012 | Steve Parker

In a move that signals the need for heightened due diligence and supervision among financial advisory firms, the Financial Industry Regulatory Authority (FINRA) released Regulatory Notice 12-03 in relation to complex products last month. It is intended to guide firms to increase their supervision of activity involving complex products such as structured notes, reverse convertibles, inverse or leveraged exchange traded funds, hedge funds and securitized products. FINRA has already brought a number of enforcement actions against firms relating to complex products, charging inadequate supervision, unsuitable recommendations and misleading price sales.

Among the problems noted by FINRA is the uncertainty of how these products will behave in the market, as opposed to theoretical projections. The notice states, “Regulators have expressed concern about complex products because the intricacy of these products can impair the ability of registered representatives or their customers to understand how the product will perform in a variety of time periods and market environments, and can lead to inappropriate recommendations and sales.”

FINRA chose not to define a complex product in the notice due to the ever changing innovation in the marketplace; however, the notice states that “any product with multiple features that affect its investment returns differently under various scenarios is potentially complex.” The notice goes on to give a non-exhaustive list of examples of complex products. FINRA advises firms that are unsure whether a product is complex to err on the side of applying their procedures for enhanced oversight to the product.
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SEC Hits Mid-Sized RIA’s for Compliance Violations, Signaling Continued Interest

December 6, 2011 | Steve Parker

The Securities and Exchange Commission Enforcement Division last week settled enforcement actions against three mid-sized registered investment advisors for failing to establish, maintain and follow written compliance procedures. Two of the firms had assets under management less than the new $100 million cutoff for federal registration, and the other firm’s assets were just over that amount.

OMNI Investment Advisors, Inc., was a two-advisor firm with 190 accounts and $65 million under management. The SEC found that it had no compliance program in place for over two years, during which time the owner and CCO was out of the country and not actively engaged in the firm’s business. When the SEC announced an examination of the firm in late 2010, the firm apparently purchased an “off-the-shelf” compliance manual designed for both broker-dealers and investment advisors, but did not customize it for its own advisory business. No annual compliance reviews were conducted, and the firm’s advisors were apparently not supervised. The firm’s owner was also found to have backdated and failed to review a number of documents containing his signature, including client advisory agreements. As a sanction, the SEC barred the firm’s owner from the securities industry and fined him $50,000, in addition to censuring the firm.
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Social Media and the Investment Adviser

June 7, 2011 | Steve Parker

More and more brokers and investment advisers are becoming familiar with the applicable social media regulations, including those described in FINRA Regulatory Notice 10-06, to put into place procedures that permit the wide use of social media for marketing purposes. These social media sites are proving an invaluable way to create and build client relationships, referral networks and other marketing opportunities. While this guidance was welcomed by firms, much of FINRA’s guidance is proving incomplete, as broker-dealers struggle to find ways, for example, to implement procedures to comply with FINRA’s record-keeping and other requirements.

Subject firms wishing to employ greater social media need to make sure that they follow FINRA’s requirements and those of the Exchange Act, the Investment Adviser’s Act and applicable state law. The most important factor is, of course, full, accurate, fair, complete and honest disclosures particularly on those pages that are permanent as opposed to transient messages. As FINRA made clear, all social media records, even Tweets and Facebook wall postings, must be maintained by the firm as part of their supervision. Additionally, a firm needs to set a written social media policy and follow the policy thoroughly.

From a compliance standpoint, for entities subject to FINRA rules, it is important to realize that blog posts, websites, banner ads, bulletin boards and static content on social media sites are considered advertisements under Rule 2210 and thus subject to the detailed requirements of that rule, including principal review or approval prior to posting for publication. This includes profile, background and wall information.
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