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Waive or Pay: FINRA Reaches Final Settlements in Its Mutual Fund Waiver Initiative

Justice Brandeis once famously said that sunlight is the best disinfectant. Perhaps, but in FINRA’s purview, settlements might be better. Along these lines, FINRA recently announced that it has reached final settlements in its nearly four-year initiative to obtain restitution from member firms that allegedly failed to waive mutual fund sales charges. These firms also allegedly failed to properly supervise the sale of mutual funds that offer sales charge waivers. The settlements were substantial: 56 member firms agreed to pay $89 million in restitution for 110,000 charitable and retirement accounts.

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An Imperfect Storm(s): FINRA Bars Compliance Personnel for Falsifying Branch Audit Data

It often is said that “it’s not the crime, but the cover-up” that is the most damaging to someone alleged to have committed misconduct. In a recent FINRA enforcement action, however, the cover-up was the crime. On July 3, 2019, FINRA barred Vincent J. Storms, a now-former Raymond James & Associates (RJA) compliance associate, for particularly egregious falsifications of RJA’s branch audit data that violated FINRA Rules 2010 and 4511.

At RJA, Mr. Storms was responsible for auditing branch offices and performing follow-up work resulting from the audits. As part of the audits, RJA sent an email to each registered representative requesting that they complete a questionnaire that gathered information such as whether the representative had any undisclosed outside business activities or undisclosed securities accounts at other broker-dealers, and whether the branch used third-party vendors to store data.

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Recent State Fiduciary Duty Developments: Updates from Massachusetts, New Jersey, Illinois and the CFP Board

The issue of “best interest” continues to be a hot topic in the states and trade groups, though one state has fallen out of the running…at least for now.

The State of Massachusetts has two pending initiatives. The first is a regulation proposed by the state Securities Division requiring investment advisers to create a table of fees for their services. The comment period on the proposal ended in May, and we await further action. In a more recent development, the Division is considering a regulation that would apply a fiduciary standard on broker-dealers, investment advisers and their representatives. The proposal was released in mid-June, and the comment period ends on July 26. Under the proposal, enforcement would be vested in the Securities Division, and it would not create a private right of action.

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House Looks to Put the Brakes on Reg BI

On the heels of the SEC’s recent approval of the “Reg BI Package,” on June 26, 2019 the U.S. House of Representatives passed a bill that would prevent enforcement of Reg BI.  Specifically, Rep. Maxine Waters included a last minute amendment to an appropriations bill that would prevent any funds from being used to “implement, administer [or] enforce” Reg BI.

While the bill was comfortably passed in the House, its prospects to pass in the Senate seem unlikely.  Senators will have the opportunity to introduce their own version, which will then need to be reconciled with the House’s.  As always, we will continue to closely monitor any developments concerning Reg BI, and will publish any updates.

The Final Reg BI Package: What to Know and What’s Next

To nobody’s great surprise, on June 5, the SEC approved the “Reg BI Package,” which includes a series of new standards governing the fiduciary responsibilities of broker-dealers and investment advisers. The approved items consisted of the Regulation Best Interest – Standard of Conduct for Broker-Dealers; Form CRS Relationship Summary; Standard of Conduct for Investment Advisers; and Interpretation of “Solely Incidental,” all of which seem likely to have considerable impact on the industry going forward.

Drinker Biddle’s Best Interest Compliance Team issued an alert summarizing the June 5th meeting, certain statements made by the commissioners, and examining the potential effects of the new standards.

Read the full client alert.

Recent State Fiduciary Duty Developments

We have updated our State Fiduciary and Best Interest Developments chart to reflect regulatory changes in New Jersey. The New Jersey Bureau of Securities has proposed a rule that will establish a fiduciary standard for broker-dealers and clarify the standard applicable to investment advisors. The comment period on the proposal ends on June 14; we anticipate that the regulation will become effective later in 2019. (Details of the proposal may be found in the chart.) The proposal is part of New Jersey governor Murphy’s aim to provide strong consumer protections. That objective also led Gov. Murphy in the last few days to veto legislation that would have eliminated a fiduciary standard for insurance producers.

We are also delighted to announce the expansion of the Drinker Biddle Best Interest Compliance Team by the addition of a team of attorneys with experience in litigation involving retirement and health benefits, especially in defending class action lawsuits. The new members of the Team are: Kimberly A. Jones, James F. Jorden, Glenn Merten, Gregory Ossi, Waldemar J. Pflepsen, Jr. and Michael A. Valerio.

Please contact us if you have questions about state developments or other issues that affect your business.

The Robare Ruling Regarding “May” Disclosures and “Willfulness”

The SEC continues to intensify its focus on investment advisers’ disclosures on Form ADV, including issues such as revenue sharing arrangements. A recent D.C. Court of Appeals decision finding that the use of the word “may” in such a disclosure violated the Investment Advisers Act of 1940 could have significant ramifications for investment advisers and the SEC’s Division of Enforcement going forward.

Read the full blog post.

SEC Issues Risk Alert Regarding Reg S-P, Privacy, Safeguarding, and Registrant Compliance

The SEC’s OCIE recently issued a Risk Alert focusing on compliance issues related to Regulation S-P, the primary SEC rule governing compliance practices for privacy notices and safeguard policies for investment advisers and broker-dealers. The Risk Alert summarizes the OCIE’s findings from two-year’s worth of issues identified in deficiency letters to assist investment advisers and broker-dealers in adopting and implementing effective policies and procedures for safeguarding customer records and information pursuant to Regulation S-P.

In this alert, partner Jim Lundy outlines the Regulation S-P requirements, the OCIE’s Regulation S-P findings and key takeaways for SEC registrants.

Updated State Fiduciary and Best Interest Developments Chart

We have updated our state fiduciary/best interest developments chart. We are still waiting for finalization of the Nevada rules on the fiduciary duty for broker-dealers and investment advisors and the effective date of the New York rules on the sale of annuities and life insurance. In the meantime, though, Maryland and Massachusetts have stepped in with new developments.

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