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The BD/IA Regulator

Providing securities regulatory, enforcement and litigation trends for broker-dealers, investment advisers and investment funds

FINRA Observes Second Anniversary of Its Senior Helpline

Posted in FINRA Enforcement

On April 21, 2017, FINRA issued a press release marking the second anniversary of its Securities Helpline for Seniors.  The press release may be found here.

As most of our readers know, the Helpline provides a toll-free number that senior individuals and their caretakers can call to voice concerns about the handling of their brokerage and investment accounts.  The Helpline has not only been a useful resource for these individuals, but it has also helped FINRA understand the types of issues that these investors face.

The release notes a number of interesting statistics relating to the use of the Helpline in its two-year history:

Total calls to the Helpline: 9,200
Number of states from which calls were placed: 50
Average age of callers: 70
Number of matters referred to federal, state and
non-U.S. regulators:
Referrals to adult protective services: 130
Voluntary reimbursements to callers generated through the Helpline: $4.3 million

FINRA notes that the calls raised concerns about, among other issues, potential unsuitable recommendations, account churning, fraud and illegal activity involving brokerage accounts and investments.

FINRA also notes, approvingly, that many FINRA member firms have established designated points of contact to work with Helpline staff to streamline the resolution of investor issues.

FINRA Revises Its Sanction Guidelines

Posted in FINRA Enforcement

In April 2017, FINRA announced that it had revised its sanction guidelines for violations of its rules. The new revisions, among other things:

  • contain a new factor requiring that the exercise of undue influence over a customer, such as an elderly investor, be considered when adjudicating violations;
  • introduce three new sanction guidelines: “Systemic Supervisory Failures,” “Short Interest Reporting,” and “Borrowing From or Lending to Customers”;
  • create a new factor related to the mitigating effect of regulator or firm-imposed sanctions and corrective actions that have been taken; and
  • amend a number of sections of the sanction guidelines to revise sanctions for more serious FINRA rule

The revised sanction guidelines became effective immediately, and may be found on FINRA’s website at the following link: finra.org/Industry/Enforcement/SanctionGuidelines.

By way of explanation, the sanction guidelines do not stipulate fixed punishments or penalties for violations of the FINRA rules. Instead, the premise of the sanction guidelines is that FINRA adjudicators have a range of potential sanctions for a particular violation, and they may consider aggravating and mitigating factors in order to arrive at an appropriate sanction for the relevant violation.

The new revisions are the result of FINRA’s most recent review of the sanction guidelines. FINRA has indicated that additional review is currently in process as to potential additional changes.

Our Take and a Few Additional Points

The new guidelines address a number of issues that have recently been of significant interest to U.S. regulators. For example, consistent with recent regulatory attention, FINRA has introduced a new principal consideration that examines whether a broker-dealer’s employee has exercised undue influence over a customer. This new consideration reaffirms the notion that financial exploitation of senior and other vulnerable customers should result in more severe sanctions. This focus on vulnerable investors is consistent with the concerns behind FINRA’s recent rule changes relating to senior investors, which we discussed at: http://www.bdiaregulator.com/2017/04/sec-approves-finras-rules-to-protect-seniors-from-financial-exploitation/.

As to short interest reporting, under the prior guidelines, violations involving short interest reporting would have been determined under the guideline related to short sale However, FINRA believed that this method of review did not account for the different factors typically presented by short interest reporting violations. Accordingly, the introduction of the guideline for short interest reporting sets forth considerations that relate specifically to these cases.

FINRA also implemented changes relating to rule violations that involve churning or unauthorized transactions. The low end of the suspension range for an individual respondent who engages in churning or unauthorized transactions increased from 10 business days to one month. The high end of the suspension range for churning and unauthorized transactions for an individual respondent has increased from one year to two years; in addition, the revised guidelines for churning or unauthorized transactions recommend that FINRA adjudicators strongly consider imposing a bar from the industry on an individual respondent when the respondent acted recklessly or intentionally. This change reflects FINRA’s 2017 exam priorities letter and its emphasis on excessive trading.

Unit Investment Trusts and Structured UITs – May 4

Posted in Events, Unit Investment Trusts

Thursday, May 4, 2017
8:30 a.m. – 9:30 a.m.

Morrison & Foerster LLP
250 West 55th Street
New York, NY 10019

Alaia Capital & Morrison & Foerster Seminar

A unit investment trust, or UIT, is a type of registered investment company under the Investment Company Act of 1940, in which a portfolio of stocks, bonds or other securities are professionally selected and deposited into the trust. The portfolio is fixed and unmanaged. A UIT can offer investors diversification, liquidity and access to specific investment strategies. A UIT also may offer investors access to more structured returns that, in certain respects, may resemble the returns often associated with market-linked or structured products. During the session, the speakers will discuss:

  • Basic organizational structure and participants;
  • Regulation of UITs;
  • Filing and other requirements applicable to UITs;
  • Structured UITs;
  • Benefits associated with Structured UITs;
  • UITs and the DOL’s fiduciary duty rule; and
  • Fiduciary and advisory issues generally.

CLE credit is pending for California and New York.

For more information, or to register, please click here.

SEC Approves FINRA’s Rules to Protect Seniors from Financial Exploitation

Posted in Broker-Dealer Regulation, FINRA Enforcement

On March 30, 2017, the SEC approved the adoption of new FINRA Rule 2165 (Financial Exploitation of Specified Adults) (see our related blog post about the proposal).  Among other things, Rule 2165 permits brokers to place holds on disbursements of funds or securities from the accounts of “specified adult” customers.  Specified adults include those 65 and older or those 18 and older who the broker “reasonably believes has a mental or physical impairment that renders that individual unable to protect his or her own interests.”

Rule 2165 provides brokers with a safe harbor from FINRA Rules 2010 (Standards of Commercial Honor and Principles of Trade), 2150 (Improper Use of Customers’ Securities or Funds; Prohibition Against Guarantees and Sharing in Accounts) and 11870 (Customer Account Transfer Contracts).  Rule 2165 also amends FINRA Rule 4512 (Customer Account Information) to require that brokers make reasonable efforts to obtain the name of and contact information for a trusted contact person for a customer’s account.

Rule 2165 and amended Rule 4512 become effective on February 5, 2018.

Scope of the Amendments and New Rule

Among other things, amended Rule 4512 requires brokers to make reasonable efforts to obtain the name of, and contact information for, a trusted contact person upon the opening of a non-institutional customer’s account or when updating account information for a non-institutional account in existence prior to February 5, 2018.  The amendments do not prohibit brokers from opening and maintaining an account if a customer fails to identify a trusted contact person as long as the broker makes reasonable efforts to obtain the information.  FINRA notes that asking a customer to provide the name and contact information for a trusted contact person ordinarily would constitute reasonable efforts to obtain the information and would satisfy the Rule’s requirements.

According to FINRA, the trusted contact person is intended to be a resource for the broker in administering the customer’s account, protecting assets and responding to possible financial exploitation.

Temporary Hold on Disbursement of Funds or Securities

Among other things, Rule 2165 permits (but does not require) a broker to place a temporary hold on a disbursement of funds or securities from the account of a specified adult if

  • the broker reasonably believes that financial exploitation of the specified adult has occurred, is occurring, has been attempted or will be attempted;
  • the broker, not later than two business days after the date that the broker first placed the temporary hold on the disbursement of funds or securities, provides notification orally or in writing (which may be electronic) of the temporary hold and the reason for the temporary hold to certain enumerated persons; and
  • the broker immediately initiates an internal review of the facts and circumstances that caused the broker to reasonably believe that the financial exploitation of the specified adult has occurred, is occurring, has been attempted, or will be attempted.

Rule 2165 broadly defines “financial exploitation” to include

  • the wrongful or unauthorized taking, withholding, appropriation or use of a specified adult’s funds or securities; or
  • any act or omission taken by a person, including through the use of a a power of attorney, guardianship or any other authority, regarding a specified adult, to
  • obtain control, through deception, intimidation or undue influence, over the specified adult’s money, assets or property; or
  • convert the specified adult’s money assets or property.

As we previously noted, however, FINRA’s guidance to brokers in handling the accounts of elderly investors, including as to issues such as suitability of investments, is significantly broader.

Rule 2165 also prescribes certain supervision and record retention requirements, and brokers relying on it must develop and document training policies and procedures reasonably designed to ensure that associated persons comply with its requirements.

FINRA’s NAC Revises Sanction Guidelines

On April 10, 2017, FINRA announced that the National Adjudicatory Council (“NAC”) revised the Sanction Guidelines to include coverage for financial exploitation of vulnerable individuals or individuals with diminished capacity.  The Sanction Guidelines also include three new guidelines relating to systemic supervisory failures, borrowing and lending arrangements, and short interest reporting.

The revised Sanction Guidelines are available here, and are effective immediately.

Our Take

According to FINRA, approximately 10,000 Americans will turn 65 every day over the next decade, and their collective investments account for more than 75 percent of all financial assets in this country.  As we have previously discussed, the SEC and FINRA identified protecting senior financial investors as examination priorities.  While Rule 2165 and the accompanying amendments to Rule 4512 take the apparent position that financial professionals are an initial line of defense against exploitation, brokers could face challenges in implementing the changes, including with the decision-making discretion afforded to them with respect to the “reasonable belief” elements of the rules.

DOL Fiduciary Rule Delayed by 60 Days

Posted in Broker-Dealer Regulation, Investment Adviser Regulation

Late in the day on April 4, 2017, the Department of Labor (“DOL”) made publicly available its final rule, extending by 60 days the implementation of its fiduciary rule adopted in April 2016 (the “Fiduciary Rule”).  The final rule is expected to be published in the Federal Register on April 7, 2017, and will become effective immediately upon publication, one business day before the Fiduciary Rule was scheduled to become applicable.

Read our client alert.

FINRA’s Engagement Initiative

Posted in FINRA Enforcement

In our capacity as advisers to financial institutions, we carefully monitor FINRA’s rulemaking and enforcement activities with a view to thinking about how these affect market participants and their activities.  FINRA’s March 2017 announcement of its engagement initiative provides an opportunity for the industry to consider FINRA’s activities on a much broader level.

FINRA’s special notice reflects its previously announced plans to examine its rules and procedures based on its interaction with the industry.  For example, in his cover letter to FINRA’s 2017 examination priorities letter, Robert Cook, FINRA’s President and CEO, discussed his “never ending” listening tour of the industry.

The special notice describes in detail the (many!) current forums, such as advisory and other committees, in which FINRA interacts with industry participants and other interested persons in order to monitor industry developments and help inform its rulemaking and other activities.  Among other things, FINRA requests comments on whether these mechanisms are effective and appropriate.

The notice discusses FINRA’s rulemaking process, including the means by which FINRA obtains the public’s views regarding its proposals through, for example, its comment process.  The notice seeks comments as to how, for example, the comment process can be made more useful and more inclusive.

As to examination and enforcement activities, the notice describes the means by which FINRA communicates its planned activities, such as its annual priorities letter, as well as the means by which FINRA disseminates information about its completed activities, such as its disciplinary database and its posting of decisions.  Many market participants use this information as a tool to guide their ongoing compliance priorities.  FINRA’s request for comment includes questions, for example, as whether its current communications provide sufficient transparency and useful guidance to the market.

FINRA has requested comments on the initiative, and the comment period will end on May 5, 2017.

Our Take. As a self-regulatory organization, FINRA is uniquely positioned to interact with the financial services industry, as well as investors, to help ensure that it is properly fulfilling its role.  FINRA’s engagement initiative provides an important means by which the industry and the public can help inform FINRA as to the extent to which it is performing its duties effectively.

SEC Adopts T+2 Settlement Cycle for Securities Transactions

Posted in Broker-Dealer Regulation

On March 22, 2017, as previously anticipated by the market, the SEC adopted an amendment to Rule 15c6-1 under the Securities Exchange Act of 1934 to shorten the standard settlement cycle for most broker-dealer transactions from three business days after the trade date (T+3) to two business days (T+2).  The SEC proposed the amendment on September 28, 2016, in connection with a variety of related changes to the SEC’s rules and the rules of self-regulatory organizations such as FINRA to facilitate the U.S.’s move to a T+2 settlement cycle.

According to the SEC, Rule 15c6-1, as amended, is designed to enhance efficiency, reduce risk, and ensure a coordinated and expeditious transition by market participants to the shortened standard settlement cycle.

Broker-dealers will be required to comply with the rule beginning on September 5, 2017, and to assist them (and other securities professionals and the investing public) in their preparation for the implementation, the SEC has established an e-mail address (T2settlement@sec.gov) for the submission of inquiries to the SEC staff.

For additional discussions of the proposed T+2 changes, see our previous articles here (FINRA), here (NSCC and NYSE), here (SEC Rule 15c6-1(a)), and here (Structured Notes).