Header graphic for print

The BD/IA Regulator

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

FinCEN Proposes Anti-Money Laundering Rules for Registered Advisers

Posted in Anti-Money Laundering

The Department of the Treasury’s Financial Crimes Enforcement Network (FinCEN) on August 25, 2015 proposed rules to require SEC- registered investment advisers to adopt and maintain anti-money laundering (AML) programs and to file suspicious activity reports (SARs). The rules would not apply to state-registered investment advisers.

FinCEN’s rules would define investment advisers as “financial institutions” for purposes of the Bank Secrecy Act (BSA). Thus, investment advisers would face similar requirements as those that apply to banks, broker-dealers and mutual funds. These requirements would include adopting compliance policies, filing Currency Transaction Reports (CTRs) and keeping records relating to transmittal of funds. FinCEN’s proposals would not require advisers to adopt a customer identification (“know your customer” or KYC) program, which FinCEN likely will address in the future. FinCEN would delegate compliance examination responsibility to the SEC.  The deadline for public comments is 60 days after publication in the Federal Register.

To read our client alert, click here.


FINRA Sets Effective Dates for Research Report Conflicts Rules

Posted in Broker-Dealer Regulation, FINRA Enforcement

FINRA rules addressing conflicts of interest relating to the publication of equity research reports become effective on September 25, 2015, or December 24, 2015. Corresponding rules for debt research reports become effective on February 22, 2016.

Rule 2241 is designed to “foster objectivity and transparency” in equity research and provide investors with useful information with which to make investment decisions. The rule broadens the obligations of broker-dealers to identify and manage research-related conflicts of interest, but includes some flexibility in compliance. Among other things, the rule:

  • requires certain analysts to register and pass Series 86 and 87 exams
  • requires broker-dealers to disclose conflicts of interest in research reports and public appearances by research analysts
  • prohibits investment banking personnel from being involved in writing the content of research reports
  • prohibits investment banking personnel from determining how analysts are compensated
  • establishes an information barrier requirement inspired by the Sarbanes-Oxley Act
  • establishes a new standard for personal trading by research analysts

The rule becomes effective on September 25, 2015, or December 24, 2015, depending on the specific provision.

Rule 2242 is FINRA’s counterpart for debt reports. The rule reflects differences in the trading of debt securities, and includes broad exemptions for debt research distributed solely to eligible institutional investors. FINRA Rule 2242 becomes effective on February 22, 2016.

Show Us the Money: FINRA Initiates Sweep Relating to Compensation Practices

Posted in Broker-Dealer Regulation, FINRA Enforcement

FINRA has made no secret of its interest in broker compensation, and the potential conflicts of interest that can be generated by some types of compensation practices.  FINRA discussed these issues in its 2015 annual priorities letter, as well as in its earlier 2013 report on conflicts of interest.  These conflicts are also relevant to FINRA’s ongoing discussions relating to the adoption of a fiduciary-standard for broker-dealers, as well as its recent efforts to adopt rules relating to the disclosure of compensation arrangements relating to registered representatives who transfer customer assets to a new firm.

In August 2015, FINRA sent to a significant number of its members a letter requesting information on their broker compensation practices and supervision.  In the letter, FINRA indicates that its intent is to “continue [its] assessment of the efforts employed by firms to identify, mitigate and manage conflicts of interest, specifically with respect to compensation practices.”

The text of the letter may be found at the following link on the FINRA website: http://www.finra.org/industry/conflicts-interest-review-compensation-and-oversight

The letter requests information as to the one year period commencing in August 2014 and ending July 2015.  The inquiry concerns solely retail accounts, and not institutional sales.

The detailed information sought by FINRA relates to a variety of areas impacting the compensation of registered representatives, including:

  • Who makes compensation decisions, and what departments are involved?
  • How are compensation-related conflicts of interest identified and managed?
  • What surveillance and supervisory tools and processes have been implemented to identify compensation-related conflicts of interest?  How frequently are they implemented?  Did these processes identify compensation-related conflicts of interest, and if so, how many were identified?
  • How is compensation determined for registered representatives, and what features are implemented to reduce any risk to clients’ long-term interests?
  • What types of standard and non-standard compensation arrangements are used to recruit or retain registered representatives?  To what extent is their compensation contingent upon their production from particular product types?  The letter includes a request for specific information as to production thresholds, and production penalties, that can increase or decrease a registered representative’s compensation.

The letter also requests information as to a number of items relating to retail sales process, including how approved products are communicated to registered representatives.  For example, are the products presented by product category, and are they ordered in any particular way?  Are there any methods used that promote specific products or product types?  The presentation may be able to indicate to some extent whether or not certain products are encouraged over others.

The letter requests fairly detailed information about how income is determined for each of several different product types (including no less than eight different types of structured notes), and how that income is shared with the relevant registered representative.  The letter also requests firms to indicate their top 10 proprietary products, and their top 10 independent products, by total revenue.

The letter also takes an interest in situations where third parties could influence a broker’s sales efforts.  For example, firms are asked whether third party product sponsors are permitted to meet with registered representatives, and whether those meetings are “chaperoned” by supervisors or managers.  Are registered representatives permitted to attend off-site sessions sponsored by product sponsors?  All of these situations have the potential to create conflicts of interest.

The responses to the sweep letter will provide FINRA with a considerable amount of information, and an opportunity to assess whether members have listed to, and addressed, FINRA’s concerns.  These responses may also impact any action that FINRA ultimately takes in considering the adoption of a fiduciary standard for broker-dealers.

Investment Adviser Association Fall Compliance Conference – Los Angeles

Posted in Events

Kelley Howes will be a panelist on the Investment Adviser Association Fall Compliance Conference on December 2nd in Los Angeles, California. The workshop will be held at the Westin Bonaventure Hotel, and according to the IAA will provide “an excellent opportunity to gain practical insights on challenging legal and regulatory issues facing SEC-registered investment advisers, and to network with compliance and legal professionals at other IAA member firms.”

To read more information about this event or register, click here.

The National Society of Compliance Professionals – National Conference

Posted in Events

Daniel Nathan will be participating in a panel entitled “Broker-Dealer Compliance and Practical Applications” at the NSCP’s National Conference. The conference will be held at the Gaylord National Harbor Reosrt & Convention Center in National Harbor, MD between November 1st-4th. Among topics the panel will discuss are:

  • Compliance role in the firm: compliance vs. supervision, how not to be a supervisor
  • Documentation – when is it too much?
  • Policies and procedures (maintaining, monitoring, reporting, and recordkeeping)
  • Resources (people, technology, seminars, websites, networking, etc.)
  • Managing regulatory relationships

For more information on this event, click here.

SEC Proposes Rules to Direct Exchanges to Require Compensation Recovery Policies

Posted in SEC Enforcement

Nearly five years after the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Act”) was enacted in July 2010, the SEC approved proposed rules required under Section 954 of the Act. Section 954 of the Act added Section 10D to the Securities Exchange Act of 1934 (the “Exchange Act”), which directs the SEC to adopt rules directing the national securities exchanges and national securities associations to prohibit the listing of any security of an issuer that is not in compliance with Section 10D’s requirements, which require that each issuer develop and implement a policy providing (1) for disclosure of the policy of the issuer on incentive-based compensation that is based on financial information required to be reported under the securities laws; and (2) that, in the event that the issuer is required to prepare an accounting restatement due to the material noncompliance of the issuer with any financial reporting requirement under the securities laws, the issuer will recover from any current or former executive officer of the issuer who received incentive-based compensation (including stock options awarded as compensation) during the 3-year period preceding the date on which the issuer is required to prepare an accounting restatement, based on the erroneous data, in excess of what would have been paid to the executive officer under the accounting restatement.

The deadline for comments on the proposed compensation recovery rules is September 14, 2015.

For a more detailed analysis of the proposed rules, see our recent client alert.