The SEC’s Rule 206(4)-5 under the Investment Advisers Act of 1940 (Advisers Act), aka the Pay-to-Play Rule, was partially delayed until recently, when FINRA adopted a complementary Rule. Broker-dealers that engage in distribution or solicitation activities with a government entity on behalf of any investment adviser need to pay close attention to the rule changes. I have outlined the rules, penalties and new FINRA rule below.
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The SEC’s 2017 Cybersecurity Alert and New Cyber Unit
In August 2017, the SEC’s Office of Compliance Inspection and Examinations (OCIE) issued a Risk Alert outlining observations from its “Cybersecurity 2 Initiative,” which was built upon its 2014 “Cybersecurity 1 Initiative.” Notably, this alert offered a rare industry compliment, describing “an overall improvement” in cybersecurity practices and processes since the Cybersecurity 1 Initiative. Below we summarize the OCIE staff’s observations, certain criticisms and their descriptions of robust policies, procedures and practices.
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The DOL’s Best Interest Contract Requirement: Effect on Litigation Against Broker-Dealers
The playing field for the financial services industry in general, and broker-dealers and brokers in particular, has changed during this past year. On June 9, 2017, the Department of Labor (“DOL”) fiduciary advice standard, which is applied to all financial professionals advising retirement (plan and IRA) accounts, became applicable. As a result, the standard of care required of broker-dealers providing advice to IRA investors has changed, at least in many cases. This Article describes the effect on litigation against broker-dealers providing advice to IRA investors that would result if firms are required to enter into “Best Interest Contracts” with IRA investors, as the DOL’s Best Interest Contract Exemption currently requires.
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Fiduciary Rules for the Transfer of IRAs
When a financial advisor moves from one broker-dealer to another, both the firm and the advisor want his or her clients to come along. When those clients have IRAs, any recommendations to the IRA investors are now subject to greater scrutiny. This is because, under the DOL’s new fiduciary advice rule, a recommendation to move an IRA from another firm is a fiduciary recommendation. And while this would ordinarily be a prohibited transaction under the Internal Revenue Code – because the broker-dealer and advisor will make money if the account is transferred but won’t if it isn’t – there is an exemption that permits the recommendation and any resulting compensation, if a number of conditions are satisfied.