On September 27, 2022, the SEC announced that it had sanctioned 15 Broker-Dealers and one affiliated RIA for widespread recordkeeping violations of Section 17(a)(1) of the Exchange Act and Rule 17a-4(b)(4) thereunder resulting from the firms’ failure to maintain and preserve electronic communications. The SEC uncovered the misconduct after commencing a September 2021 sweep – a risk-based initiative to investigate the use of off-channel and unpreserved communications at broker-dealers. These firms agreed to the facts set forth in the SEC’s Order Imposing Remedial Sanctions and a Cease-and-Desist and agreed to pay total penalties of $1.1 BILLION and to implement improvements to their compliance policies and procedures.
The SEC Press Release advised that:
“Finance, ultimately, depends on trust. By failing to honor their recordkeeping and books-and-records obligations, the market participants we have charged today have failed to maintain that trust.”… As technology changes, it’s even more important that registrants appropriately conduct their communications about business matters within only official channels, and they must maintain and preserve those communications.”
Continue reading “16 “At One Blow” – The SEC Sanctions for Recordkeeping Failures”
We have made it a point previously in this blog to track developments of the SEC’s Regulation Best Interest (Reg BI), even speculating more aggressive enforcement actions could be coming due to certain Reg BI deficiency letters sent to firms late last year. Since Reg BI went into effect in June 2020, however, many have waited with bated breath to see what enforcement of the regulation would look like in practice. While the SEC has pursued some cases regarding firms missing deadlines and omitting certain information in disclosure documents, it had taken no further action until June. On June 15, 2022 the SEC finally took its first substantive Reg BI action by filing a civil regulatory complaint in the U.S. District Court for the Central District of California against Western International Securities, Inc. and five of its brokers for allegedly selling a risky debt security, known as corporate L Bonds, to its retail customers. The Complaint invokes Section 15l-1(a) of the Securities and Exchange Act of 1934 — Regulation Best Interest — and seeks to enjoin the Defendants from the acts, practices and courses of business described in the Complaint.
Continue reading “And Now for the SEC’s First Substantive Reg BI Action”
A common phrase to abide by in the New Year is “out with the old, in with the new.” FINRA’s 2022 Report on its Examination and Risk Monitoring Program (the “Report”), however, contains a combination of old and new priorities. We previously previewed the Report.
Old priorities, once again included, are: Anti-Money Laundering, Reg BI and Form CRS, and cybersecurity.
New risk areas include: firm short positions and fails-to-receive in municipal securities; trusted contact persons; funding portals and crowdfunding offerings, disclosure of routing information; and portfolio margin and intraday trading.
Continue reading “Exam Time: FINRA Releases its 2022 Report on its Examination and Risk Monitoring Program”
Pennsylvania has adopted legislation implementing the model regulation concerning suitability in annuity transactions adopted by the National Association of Insurance Commissioners (NAIC). This brings to 19 the total number of states adopting the NAIC suitability model. Nevada may be the next state to watch. Nevada’s Securities Administrator has indicated that she is resuming work on the state’s fiduciary rule for investment advisers and broker-dealers and expects to release the rule by November. Stay tuned.
Continue reading “Recent State Fiduciary and Best Interest Developments: Pennsylvania’s New Law; Nevada May be Next”
SEC Chair Gary Gensler has not publicly stated much regarding Reg BI since Spring of this year. Generally, though, the messaging from SEC leadership regarding the Division of Examinations and the Division of Enforcement continues to be aggressive. In the retail investor area, for example, in late August Chair Gensler appointed Barbara Roper, the Director of Investor Protection for the Consumer Federation of America, as a Senior Advisor to the Chair. Turning back to Reg BI specifically, what we continue to hear out of the SEC is that Chair Gensler’s regime is going to play the Reg BI “hand that it has been dealt” aggressively.
On November 4, 2021, SEC Commissioner and former Acting Chair Allison Herren Lee gave a speech at ACLI’s CLE 2021 Conference on Life Insurance Products entitled “A Call to Action: Recommendations for Complying with Reg BI.” Commissioner Herren Lee covered several Reg BI topics, including what constitutes a recommendation and mitigation. Regarding recommendations, she noted that the Commission’s supplemental materials accompanying Reg BI speak of a “call to action” that may be viewed as influencing an investor to invest in or trade a particular security being enough to constitute a recommendation. On this topic, she emphasized the importance of the account opening process. Commissioner Herren Lee also addressed mitigation, in particular to manage the risk of an associated person putting their interests ahead of their customers, perhaps due to limitations in the firm’s products menu.
Continue reading “Reg BI: What’s Going On and What May Happen Next?”
Investigating financial service providers to 401(k), 403(b) and other retirement plans for compliance with ERISA remains an area of focus for the U.S. Department of Labor (DOL) Employee Benefits Security Administration.
Join members of Faegre Drinker’s ERISA financial services team on April 27 from noon to 1:00 p.m. CT, as we explore what registered investment advisers can expect if they are selected for an investigation and best practices for getting through an investigation and negotiating a favorable resolution as quickly and painlessly as possible. While the focus will be on RIAs, this session should be informative for broker-dealers and dual registrants as well.
Continue reading “Upcoming Webinar | DOL Investigations of Registered Investment Advisers Under ERISA – What Should You Know? What Can You Do?”
As the countdown to the June 30, 2020, date for compliance with Reg BI inches forward, FINRA and the SEC are providing a potpourri of support and information to help firms ensure compliance.
FINRA EFFORTS: FINRA’s northeast regional director announced in late October that FINRA will perform “preparedness reviews” of broker-dealers to determine firms’ readiness to comply with Reg BI. At its November Senior Investor Conference, FINRA President and CEO Robert Cook confirmed FINRA’s intention to perform these “stress tests.” . FINRA has emphasized that its intent is not to be punitive and fine firms for compliance violations. Rather, FINRA insists its primary goal is to assist firms in successfully implementing the nearly 1,000 pages of Reg BI’s regulations.
Continue reading “Reg BI Information Overload: The Countdown to June 2020 Continues with Planned Reg BI Stress Tests, Checklists and FAQS Courtesy of FINRA and the SEC”
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.
Continue reading “An Imperfect Storm(s): FINRA Bars Compliance Personnel for Falsifying Branch Audit Data”
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.