SEC Issues MiFID II No-Action Relief and Allays Various Cross-Border Concerns

The SEC recently issued three no-action letters designed to provide market participants with greater certainty regarding their U.S. regulated activities as they engage in efforts to comply with the EU’s Markets in Financial Instruments Directive (MiFID II).

In a recent client alert, I provided a summary of all three no-action letters and explain that as a result of these no-action letters, existing soft-dollar and commission-sharing arrangements may continue, subject to certain new restrictions. Click here to read the client alert.

As background, MiFID II will require, for impacted EU parties, that research be priced separately from execution, starting on January 3, 2018. This represents a significant change from the current practice, whereby research is generally supplied as part of a bundle of services, with no explicit charge.

Absent new U.S. regulations or other relief, this change had the potential to cause a significant number of problems for U.S. advisers, funds and clients dealing with EU parties.

WSP’s Under the DOL Fiduciary Rule

Broker-dealers have written supervisory policies (WSPs) that cover almost all aspects of their business.  But more WSPs may be needed to address the DOL fiduciary rule.

While it may seem that no such requirement exists, the Department of Labor (DOL) has turned this around … if the firm intends to rely on the Best Interest Contract Exemption (BICE).

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The SEC’s Back In the Fiduciary Regulation “Game”

The SEC announced its plans to move “from the sideline” on fiduciary regulations on June 1, 2017.  That day, SEC Chairman Jay Clayton issued a statement referencing U.S. Department of Labor Secretary Alexander Acosta’s call for SEC participation and stated that he “look[ed] forward to robust, substantive input that will advance and inform the SEC’s assessment of possible future actions.” This represented the SEC’s first serious foray back into this area since a rule finalized in April 2005 entitled “Certain Broker-Dealers Deemed Not To Be Investment Advisers” that added Rule 202(a)(11)-1 to the Investment Advisers Act of 1940.  That rule was short-lived and was vacated by the U.S. Court of Appeals for the D.C. Circuit in 2007.
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Required Disclosures After the DOL Fiduciary Rule

You may have already missed a required deadline for disclosure to your retirement plan clients … or not.  In this post, we explore the requirement to update retirement plan disclosures to reflect changes in the information that was initially provided, including a change in fiduciary status under the new rules.
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Political Contribution Limitations Now Also Mandatory for Broker-Dealers

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.

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