Broker-Dealer Law Blog

View the full bio for Broker-Dealer Law Blog at the Faegre Drinker website.

Articles by Broker-Dealer Law Blog:


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.

Continue reading “Updated State Fiduciary and Best Interest Developments Chart”

The First SEC Share Class Selection Disclosure Settlements: What We Learned & What’s Next?

Jim Lundy and Ben McCulloch authored an article entitled “The First SEC Share Class Selection Disclosure Settlements: What We Learned & What’s Next?” for the Investment Adviser Association’s IAA Newsletter Compliance Corner. In the article, Jim and Ben discuss the first wave of settlements under the SEC’s SCSD Initiative as well as lessons learned. They also explore the agency’s ongoing efforts regarding the remaining participants, consequences for firms who opted not to self-report, and the Division of Enforcement’s continued scrutiny of revenue sharing arrangements, disclosures, and conflicts.

Read the full article.

*Originally published in the IAA Newsletter, April 2019

SEC Releases SCSD Self-Reporting Initiative Settlements

The SEC recently announced its first round of settlements with registered investment advisors (RIAs) who had self-reported pursuant to the agency’s Share Class Selection Disclosure Initiative (SCSD Initiative). Additional RIA settlements pursuant to the SCSD Initiative are expected, and RIAs who did not self-report face additional scrutiny from the Division of Enforcement. Industry reaction has involved frustration, but the SEC’s focus on RIA conflicts of interest, disclosures, and more recently revenue sharing is increasing.

Continue reading “SEC Releases SCSD Self-Reporting Initiative Settlements”

State Fiduciary and Best Interest Developments

A number of states are seeking to impose fiduciary or best interest requirements on broker-dealers, investment advisers, financial planners and/or insurance brokers and producers in their dealings with customers. While the rules vary from state to state, they are in addition to – and sometimes inconsistent with – federal requirements being considered by the SEC or by the Department of Labor for retirement investment advice. We have prepared a chart summarizing the activities in each state along with proposals of the National Association of Insurance Commissioners (NAIC), which we update periodically as needed. You may access the chart here.

Drinker Biddle Launches Best Interest Compliance Team

As discussed regularly on this blog, the financial industry has seen a stream of rules and regulations in recent years that relate to the standard of care and management of conflicts for broker-dealers, investment advisers, insurance agents and companies.

The need for experienced counsel to help navigate the evolving and overlapping federal and state “best interest” obligations has increased. It’s the reason we’re excited to announce the launch of our Best Interest Compliance Team.

This interdisciplinary group of more than 20 lawyers consists of attorneys with experience across Investment Management, ERISA, SEC & Regulatory Enforcement Defense, Litigation/FINRA Arbitration, and Insurance Regulatory and Transactional practice areas.

The Best Interest Compliance Team will help clients make decisions about questions such as:

  • What does the SEC’s proposed Regulation Best Interest mean?
  • How does the SEC’s RIA interpretive guidance impact the standards currently applied to RIAs?
  • What is the effect of the court order vacating the DOL’s Fiduciary Rule and what already-implemented changes will continue under the SEC proposals for RIAs and broker-dealers?
  • How should written supervisory procedures be revised in light of these changes and proposals?
  • What measures should be taken to show good-faith compliance with the DOL’s non-enforcement policy?
  • Where should broker-dealers/RIAs/insurance companies go from here?
  • How should insurance agents deal with conflicting state regulatory schemes?

To learn more about the new Best Interest Compliance Team, read our press release or visit our team page on the Drinker Biddle website.

SEC Proposes Regulations to Reform Retail Investment Standards

The SEC has issued proposed rules seeking to clarify how investment professionals advise retail investors. The three-part proposal includes a requirement that brokers act in a customer’s best interest; interpretive guidance on the fiduciary duty applicable to investment advisers; and Form CRS, which mandates certain disclosures by broker-dealers and investment advisers to their clients. The SEC’s release of these proposed rules and guidance is only the beginning of what will likely be an active 90-day comment period. As the SEC Commissioners did repeatedly, we encourage interested parties to participate in the SEC’s comment letter process.

An alert that I co-authored analyzes significant parts of the proposal and offers thoughts on what to look out for as the SEC continues to address these issues.

Click here to read the alert

For additional information and discussion on these SEC proposals, below is a link to Drinker Biddle’s Inside the Beltway from the day after the SEC’s open meeting in which partners Fred Reish, Brad Campbell and I discuss the SEC’s proposals and their anticipated impacts.

Inside the Beltway Recording

 

SEC Open Meeting on Broker-Dealer and Investment Adviser Standards

On April 12, 2018, the Securities and Exchange Commission (SEC) announced an open meeting scheduled for April 18, 2018 at 3:30 p.m. (ET) to discuss standards applicable to broker-dealers and investment advisers in their dealings with retail investors. The subject matters scheduled to be covered are threefold:

Continue reading “SEC Open Meeting on Broker-Dealer and Investment Adviser Standards”

FINRA Seeks Comments on Proposed New Rule to Govern Outside Business Activities and Private Securities Activities of FINRA Member Associated Persons

If adopted, proposed new FINRA Rule 3290 will be significant for broker-dealers who allow their associated persons to engage in outside business activities (in particular in securities related fields – such as serving with/as a third-party investment adviser) and broker-dealer staff who engage in such activities.  In general, the changes may make the lives of both such groups a bit easier.

FINRA Rule 3290 would be a replacement for both current FINRA Rule 3270 (Outside Business Activities (OBA) of Registered Persons) and current FINRA Rule 3280 (Private Securities Transactions of an Associated Person) for its member broker-dealers.  As explained in Regulatory Notice 18-08, compliance with proposed FINRA Rule 3290 would involve only modest and mostly clarifying changes for most traditional “3270” activities.  The impact on what are now “3280” activities could be more pronounced.

Probably of the greatest interest for many broker-dealers: proposed Rule 3290 would ease current requirements with respect to the investment advisory activities of their registered persons.  Under Rule 3280, FINRA members must supervise and record on the members’ books and records the transactions resulting from a variety of outside “IA” activities of their associated persons. Under proposed Rule 3290, any IA activity conducted on behalf of a dually registered “BD/IA” or for an IA affiliate of a member would be excluded from the rule.  Any IA activity conducted for a third-party, non-affiliated IA would constitute an “investment-related” activity under the rule – as a result, it would require that the registered person provide prior written notice of such activity, and the FINRA member would then be required to conduct a risk assessment and based on its assessment, to: (a) approve the registered person’s participation, (b) approve it subject to conditions or limitations, or (c) disapprove it. However, the proposed rule would not impose a general supervisory obligation over the IA activities and would not require the FINRA member to record on its books and records transactions resulting from such IA activities.

Under the proposed rule, if an activity is not “investment related,” the broker-dealer would effectively have no material obligations (other than receiving notice of the activities and recording the activity on the associated person’s Form U-4).  If the activity is “investment-related,” then the broker-dealer would be required to perform a risk assessment.  The proposed rule defines “investment-related” as “pertaining to securities, commodities, banking, insurance, or real estate (including, but not limited to, acting as or being associated with a broker-dealer, issuer, investment company, investment adviser, futures sponsor, bank, or savings association).”

The proposed rule would impose a supervisory obligation in two key situations:

-First, if a broker-dealer decides to impose its own conditions or limitations on a registered person’s participation in an investment-related activity, the broker-dealer would then be required to “reasonably” supervise the registered person’s compliance with those specific conditions or limitations.  Actual supervision of the underlying activities would not be required.

-Second, to the extent that a broker-dealer approves a registered person’s participation in a proposed investment-related activity and such activity would require, “if not for the person’s association with a member, registration as a broker or dealer under the Exchange Act and the person is not so registered,” the activity would be deemed to be part of the broker-dealer’s own business.  So, if an associated person could only legally engage in an “OBA” because the individual is associated with a FINRA member, the FINRA member approving that activity must treat the activity as its own in all respects.  Accordingly, all applicable securities laws and regulations and FINRA rules, including supervision and recordkeeping, would apply to the FINRA member with respect to the approved activity.

Under this second situation, if the registered person is associated with more than one FINRA member, the individual FINRA members would be permitted to develop a formal allocation arrangement whereby at least one member agrees in writing with specificity to comply with all applicable securities laws and regulations and FINRA rules (including supervision and recordkeeping obligations) regarding the proposed activity.

As provided in summary as part of Regulatory Notice 18-08:

Selling Private Placements Away from Member Subject to the proposed rule, potentially to the fullest extent – prior notice by the registered person and risk assessment by the member. If the member disapproves the activity, it has no further obligation. If the member approves the activity, the activity becomes part of the member’s business and must be supervised and recorded as such.
Activities at Third-Party IA Subject to the proposed rule, but in an intermediate manner – prior notice by the registered person and risk assessment by the member because it is investment related and not excluded from the proposed rule, but the member is not required to supervise or keep records of the IA activities.
Non-Investment Related Work (e.g., car service, seasonal retail) Subject to the proposed rule, but in a limited manner – a registered person must provide prior notice to the member, but the member is not required to perform a risk assessment of or supervise the activity.
Activities at Affiliates (e.g., IA, Insurance and Banking Affiliates) Generally excluded from the proposed rule – the proposed rule excludes activities at affiliates, whether or not investment related, unless those activities would require registration as a broker or dealer if not for the person’s association with a member.
Personal Investments (e.g., Buying Away) Excluded from the proposed rule, but potentially subject to other rules (e.g., FINRA Rule 3210) or firm-imposed notice requirements.

 

Guidance to Prevent Non-Line Supervisory Liability

In light of the supervisory standards applicable to compliance officers and in-house attorneys with broker-dealer and investment management firms, these individuals and firms need to appreciate and manage the risks of supervisory liability being applied to them due to the violative conduct of business personnel.  In an article titled “Compliance and Legal Officer Guidelines To Prevent Non-Line Supervisory Liability” my colleague Carrie DeLange and I analyzed the “Gutfreund Standard” and the SEC’s more recent guidance from a Division of Trading and Markets “FAQ,” and other statutes and rules, and provide guidance for compliance officers and in-house attorneys with broker-dealer and investment management firms to best manage these situations. Continue reading “Guidance to Prevent Non-Line Supervisory Liability”