Header graphic for print

The BD/IA Regulator

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

FINRA Proposes Rules to Protect Seniors from Financial Exploitation

Posted in Broker-Dealer Regulation, FINRA Enforcement

In October 2016, FINRA filed with the SEC proposed rules designed to help brokers protect seniors and other vulnerable adults from financial exploitation. The proposal would amend existing customer account information rules to require brokers to attempt to obtain the name and contact information for a “trusted contact person” upon opening an account. Brokers would have the benefit of a “safe harbor” enabling them to place a temporary hold on a disbursement of funds or securities, and to notify a customer’s trusted contact, if they have a reasonable belief that financial exploitation is occurring.

The proposal follows FINRA’s September 2015 Notice to Members 15-37 (“NTM 15-37”) (see our related blog post). The proposed rules revise the prior proposal set forth in NTM 15-37 in some respects, based on feedback from public comments.

Under the proposed rules, a broker-dealer could rely on the safe harbor when the firm has a reasonable belief that financial exploitation is occurring in accounts owned by investors aged 65 or older, or by investors 18 and older with mental or physical impairments that render them unable to protect their own interests.

Scope of the Proposal

Under the proposal, a hold may be placed on suspicious “disbursements,” but not on “transactions.” For example, a customer order to sell a security would not be subject to a temporary hold. However, a disbursement of the proceeds from that sale to another person could be the subject of a temporary hold.

Importantly, the new rules would not create a “duty” to place temporary holds on any disbursements. Instead, they would protect firms that comply with the requirements of the safe harbor when they exercise discretion in placing such a hold.

The proposed rules address a narrow set of circumstances involving senior investors (and others) where there is a reasonable belief that financial exploitation is taking place. 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.

Obtaining Trusted Contact Person Information

FINRA stated that it believes 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 proposed rule change’s requirements.” A broker would not be required to attempt to obtain the name of or contact information for a trusted contact person for accounts in existence prior to the effective date of the proposed rule change until the time that it updates the information for the account either in the course of its normal business, or until it is otherwise required to do so under applicable laws or rules.

Revisions Compared to NTM 15-37

FINRA revised the proposed rules based upon comments received. In particular:

  • Who Can Be a Trusted Contact Person: Unlike NTM 15-37, the proposal permits a person who is authorized to transact business on an account, such as a spouse or a trustee, to serve as a customer’s trusted contact person.
  • Whom a Broker Must Contact: In order to help address privacy concerns, the new proposal remove NTM 15-37’s proposed requirement that the broker contact an immediate family member of the relevant adult, if that person is not a designated trusted contact person.
  • Shortening of Follow-Up Temporary Hold Periods: The proposed rules shorten the permitted hold periods after an initial 15-business-day period from 15 additional business days to 10 additional business days.
  • Relevant Governmental Agencies: The new proposal expands the list of entities that may terminate or extend a temporary hold period to state regulators and state agencies.
  • Written Supervisory Procedures (“WSPs”): Under the new proposal, a broker’s WSPs must identify the title of each person authorized to place, terminate or extend a temporary hold on behalf of the broker.

Potential Effective Date

The proposed rules must be approved by the SEC before they can be implemented. Although the proposed rules would therefore not be effective until at least Q3 2017, brokers should begin to consider which of their policies and procedures, including account-opening forms and WSPs, will need to be updated to appropriately comply with the new rules.

Morrison & Foerster Sponsorship: Structured Products Washington Conference 2016

Posted in Broker-Dealer Regulation, Enforcement, Events

Wednesday, November 9, 2016
9:30 a.m. – 3:40 p.m.

The Washington Court Hotel
525 New Jersey Avenue NW
Washington, DC 20001

The 4th annual Structured Products Washington D.C. conference will be on November 9th.

Speakers will address:

  • The Department of Labor’s Fiduciary Duty Rule and structured products;
  • Disclosure practices, new product approval, post-sale review, conflicts of interest and other emerging issues;
  • Tax developments, including 871(m); and
  • Enforcement issues relating to structured products.

There will be no press or reporting at this year’s conference.

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


Canadian Derivatives and Financial Services Regulatory Developments

Posted in Events, Fund Regulation

Thursday, November 10, 2016
8:30 a.m. – 10:00 a.m.

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

Join a panel of experts from Stikeman Elliott LLP for a presentation and an engaged discussion of Canadian regulatory and legal developments affecting trading in derivatives with financial institutions, public mutual funds and other Canadian counterparties, including:

  • Current issues in derivatives trade reporting;
  • Margin requirements for non-centrally cleared derivatives–an overview of OSFI E-22 and CSA Consultation Paper 95-401;
  • Future use of the ISDA Regulatory Margin Self-Disclosure Letter and the ISDA Variation Margin Protocol by market participants in Canada;
  • Recent amendments to legislation affecting netting and collateral enforcement involving federal deposit taking institutions;
  • Domestic recognized clearing agency recovery plans;
  • Anticipated derivatives dealer/large derivatives participant registration regime;
  • Considerations involving transactions with public mutual funds;
  • The proposed alternative investment fund regime; and
  • Implications of changes to personal property security laws affecting cash collateral.

The session will be hosted at the offices of Morrison & Foerster LLP and moderated by Morrison & Foerster lawyers.

For more information, or to register, simply email tstarer@mofo.com.

Alphabet Soup?

Posted in Broker-Dealer Regulation, Fund Regulation, Investment Adviser Regulation

Several years have now passed since the financial crisis and the onslaught of regulations intended to prevent a future crisis. Regulatory reform has assuredly resulted in significant changes to our financial services sector. Regulatory reform also brought with it an alphabet soup of acronyms and terms with which we all have had to become familiar.

We recently published the newest edition of our Financial Services Glossary, which is intended to serve as a helpful reference source that identifies and explains frequently used terms and acronyms.

Read our Financial Services Glossary.

To request copies for you and your colleagues, please e-mail tstarer@mofo.com.

FINRA Rule 2210 – Communications with the Public

Posted in Events, FINRA Enforcement

Thursday, October 20, 2016
12:00 p.m. – 1:00 p.m. EDT

The FINRA communications rule governs all aspects of communications by member firms. FINRA is in the process of amending Rule 2210. In this teleconference, we will discuss:

  • Upcoming amendments to Rule 2210;
  • The scope of Rule 2210;
  • FINRA enforcement actions relating to communications; and
  • Social media use by broker-dealers and their associated persons.


  • Bradley Berman
    Of Counsel, Morrison & Foerster LLP

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

CLE credit is pending for California and New York.

SEC Approves New Liquidity Risk Management Rules; Swing Pricing Rules

Posted in Fund Regulation

The SEC today unanimously approved “transformational” new rules requiring liquidity risk management programs.

The SEC also approved a swing pricing rule by a vote of 2-1, with Commissioner Piwowar voting against it.

The SEC made several significant changes to the proposal rules to address concerns that the rules would improperly hamstring funds in meeting their objectives.

Here are the highlights:

  • Liquidity risk management programs
    • New rule 22e-4 will require all mutual funds (other than money market funds and ETFs that qualify as “in-kind ETFs”) to establish liquidity risk management programs.  The programs must address:
      • Assessment, management and periodic review of a fund’s liquidity risk
      • Classification of the liquidity of fund portfolio investments
      • Determination of highly liquid investment minimum
      • Limitation on illiquid investments
      • Board oversight
    • Assessment, management and periodic review of a fund’s liquidity risk
      • Liquidity risk is defined as the risk that a fund could not meet requests to redeem shares issued by the fund without significant dilution of remaining investors’ interests in the fund
      • Classification of liquidity
        • Funds must classify each of the investments in its portfolio based upon the number of days in which the fund reasonably expects the investment would be convertible to cash in current market conditions without significantly changing the market value of the investment
        • The determination would take into account the market depth of the investment
        • The SEC voted to create four categories, as compared to six categories, as originally proposed: highly liquid, moderately liquid, less liquid and illiquid
        • Funds may classify investment by asset class, unless market-, trading- or investment-specific considerations with respect to a particular investment are expected to significantly affect the liquidity characteristics of that investment as compared to the fund’s other portfolio holdings within that asset class
      • Determination of a highly liquid investment minimum
        • Funds must determine a minimum percent of net assets that it must invest in highly liquid investments
          • Highly liquid investments mean cash or investments that are reasonably expected to be converted to cash within three days without significantly changing the market value of the investment (the three-day liquidity rule)
          • Funds must adopt policies and procedures for responding to a highly liquid investment minimum shortfall, which must include board reporting in the event of a shortfall
        • Funds may not buy additional illiquid investments if more than 15 percent of its net assets are illiquid
        • An illiquid investment means an investment that the fund reasonably expects cannot be sold in current market conditions in seven days without significantly changing the market value of the investment
        • Funds must review illiquid investments at least monthly
        • If a fund breaches the 15 percent limit, it must report the occurrence to the board and explain how the fund plans to bring illiquid investments back within the limit within a reasonable period of time
          • If not resolved within 30 days, the board must assess whether the plan presented is in the best interests of the fund and its shareholders
        • Board oversight
          • A fund’s board, including a majority of the independent directors, must approve the fund’s liquidity risk management program and the designation of the fund’s adviser or officer to administer the program
          • The board must review, at least annually, a written report on the adequacy and effectiveness of the program
        • Form N-LIQUID
          • This form will require a fund to confidentially notify the SEC when the fund’s level of illiquid assets exceeds 15 percent of its net assets or when its highly liquid investments fall below its minimum for more than a brief period of time
        • Other Forms
          • Form N-1A – require reporting on redemption procedures
          • Form N-PORT – require funds to report aggregated percentage of portfolio representing each of the four classification categories, and position-level liquidity classification, and information regarding highly liquid investment minimums (on a confidential basis)
          • Form N-CEN – require funds to disclose information regarding the use of lines of credit and inter-fund borrowing and lending, and require each ETF to report if it is an in-kind ETF under the rule
  • Swing pricing
    • The SEC approved the option to use swing pricing
    • The purpose is to allow funds to adjust their net asset value to per share to pass on to purchasing or redeeming shareholders certain costs associated with trading activity
    • Open-end funds (other than money market funds or ETFs) can use swing pricing
    • Funds that use swing pricing must adjust the NAV by a specified amount – the swing factor – once the level of net purchases into or net redemptions from the fund has exceeded a specified percentage of the fund’s assets (the “swing threshold”)
      • Must disclose the upper limit on the swing factor used, which may not exceed two percent of NAV (a change from the proposal)
    • Fund boards must approve the swing pricing policies and procedures and periodically review a written report addressing the adequacy and effectiveness of the program
      • Boards must also approve the swing factor upper swing pricing threshold and any changes
    • Implementation
      • Most funds must comply with the liquidity risk management program requirements on December 1, 2018
      • Fund complexes with less than $1 billion in net assets would be required to comply by June 1, 2018

SEC Adopts New Reporting Rules for Mutual Funds

Posted in Fund Regulation

A split SEC today approved new rules addressing mutual fund disclosures and liquidity.  Chair White and Commissioner Stein voted yes; Commissioner Piwowar voted no.

Here are the highlights of the new reporting modernization rules:

  • A new monthly portfolio form, Form N-PORT, will require registered funds other than money market funds to provide portfolio-wide and position-level holdings data monthly.  Data include:
    – Data related to pricing of portfolio securities
    – Information regarding repurchase agreements, securities lending activities and counterparty exposures
    – Terms of derivatives contracts
    – Discrete portfolio-level and position-level risk measures to better understand fund exposure to changes in market conditions
  • The SEC will make this information available to the public after 60 days
  • Form N-Q is rescinded
  • Census reporting
    – New Form N-CEN replaces Form N-SAR
    – New form streamlines and updates information reported to SEC.
    – Must be filed within 75 days of the end of the fiscal year, rather than semi-annually currently required
  • Structured data format
    – Funds would report portfolio and census information in a structured data format, which would improve the SEC’s ability to aggregate and analyze information across all funds and link reported information with information from other sources
  • Increased disclosure concerning securities lending activities
    – Fund registration statements must disclose income and fees from securities lending and the fees paid to securities lending agents
  • Implementation
    – Most funds would be required to begin filing reports on Forms N-PORT and N-CEN after June 1, 2018
    – Fund complexes with less than $1 billion in net assets would be required to begin filing reports on Form N-PORT after June 1, 2018