The SEC FINRA Monitor

Study: Recent Disciplinary Actions Against Chief Compliance Officers

2011-10-07T14:09:00.000-07:00

Study reminds CCOs they risk permanently tattooing their reputations for violations........

A study recently released by the law firm Sutherland Asbill & Brennan, covering the period November 2010 through June 2011, found the SEC and FINRA bringing disciplinary actions against Chief Compliance Officers for conduct ranging from failure to supervise registered representatives to failure to supervise anti-money-laundering. See more....

http://www.sutherland.com/files/Publication/62408b34-1db6-40b1-a1f8-8bd5fc7e998e/Presentation/PublicationAttachment/61491b0d-d831-4c08-85b8-8c5b19050356/TheGirlwiththeSEC-FINRATattoo.pdf

FINRA Orders Raymond James to Pay $1.69 Million for Charging Unfair Commissions

2011-09-30T11:45:00.000-07:00

Yet another example of "Fair Prices and Commissions Rule" violation......

FINRA has now ordered Raymond James & Associates, Inc. and Raymond James Financial Services, Inc. to pay restitution of $1.69 million to more than 15,500 investors who were charged unfair and unreasonable commissions on securities transactions. FINRA also fined the two entities $225,000 and $200,000, respectively, and is requiring the each firm to calculate and repay additional overcharges from Nov. 1, 2010, through the date that they each revised their schedule.

FINRA charged that from Jan. 1, 2006 to Oct. 31, 2010, the two companies used automated commission schedules for equity transactions that charged more than15,500 customers nearly $1.69 million in excessive commissions on over 27,000 transactions involving, in most instances, low-priced securities. FINRA found that the firms' supervisory systems were inadequate because the firms established inflated schedules and rates without proper consideration of the factors necessary to determine the fairness of the commissions, including the type of security and the size of the transaction. See more.....

http://www.finra.org/Newsroom/NewsReleases/2011/P124536

FINRA WEBINAR TO EXAMINE ENFORCEMENT TRENDS

2011-09-26T09:52:00.000-07:00

FINRA will host a live one-hour webinar on October 12, 2011(1:30 PM (EST)/ 10:30 AM (PT) examining recent enforcement actions against broker-dealers and registered representatives. The program will provide an overview of new developments and trends. In addition, panelists will discuss improving broker-dealer compliance programs by applying lessons learned from enforcement actions. See more....
http://www.finra.org/Industry/Education/OnlineLearning/Webinars/P124216?utm_source=onsite&utm_medium=button&utm_campaign=enforcement_case_trends

NASAA Will Continue IARD System Fee Waiver

2011-09-19T08:35:00.000-07:00

The North American Securities Administrators Association (NASAA) recently announced that it will waive the initial set-up and annual system fees paid by investment adviser firms (IAs) and investment representatives (IARs) to maintain the Investment Adviser Registration Depository (IARD) system. Noting that state securities regulators were sensitive to the cost of compliance borne by investment advisers, many of which operate small businesses in local communities, Jack Herstein, NASAA President and Assistant Director of the Nebraska Department of Banking & Finance Bureau of Securities stated that "any cost savings that can be achieved without weakening investor protection will benefit both investors and small businesses in a struggling economy." See more.....

http://www.nasaa.org//NASAA_Newsroom/Current_NASAA_Headlines/14937.cfm

Will FINRA Become the New Regulator for Investment Advisers?

2011-09-14T10:28:00.000-07:00

Yesterday, in front of the House Financial Services Capital Markets SubCommittee, Richard Ketchum, CEO of the Financial Industry Regulatory Authority (FINRA) testified that FINRA is prepared to assume the regulation of investment advisers. Ketchum noted that while the SEC oversees more than 11,000 investment advisers, but in 2010 conducted only 1,083 exams of those firms due to lack of resources. Noting two studies related to the regulation of broker-dealers and investment advisers that were completed by the SEC in January, Ketchum stated, "the average registered adviser could expect to be examined less than once every 11 years." This means that "[w]hile the SEC examines only about 9 percent of investment advisers each year, 55 percent of broker-dealers are examined each year by the SEC and FINRA," he said.

The SEC's study on investment adviser exams concluded that, going forward, the Commission would not have sufficient capacity to conduct effective registered investment advisers examinations with adequate frequency. Further, the study found that enhanced examination responsibilities given the SEC under Dodd-Frank meant that an increase in agency examination staff "is unlikely to keep pace with the growth of registered investment advisers."

Making the argument that if FINRA were to become the SRO for investment advisers, Ketchum pledged that FINRA would establish a separate entity with separate board and committee governance to oversee any adviser work, and would plan to hire additional staff with expertise and leadership in the adviser area. He argued that FINRA possessed the experience operating a nationwide program for examinations and had the ability to leverage existing technology and staff resources to support a similar program for investment advisers. See more......

http://www.finra.org/Newsroom/Speeches/Ketchum/P124416

FINRA Regulatory Notice 11-39: Social Media Websites and Use of Personal Devices for Business Communications

2011-08-26T08:54:00.000-07:00

Following its January 2010, Regulatory Notice 10-06, providing guidance on communications with the public through social media sites, FINRA has issued Regulatory Notice 11-39 providing further clarification about application of FINRA rules to new technologies. The notice addressed a number of topics, including recordkeeping, supervision, third-party posts, third-party links and websites, and associated persons accessing social media sites from personal devices.

Recordkeeping
FINRA reminds members that their obligations to keep records of communications made through social media depend on whether the content of the communication constitutes a business communication. The SEC has stated that the content of an electronic communication determines whether it must be preserved.

Supervision

As part of its responsibility under NASD Rule 3010, a firm's registered principal must, prior to use, review any social media site that an associated person intends to use for a business purpose.   FINRA has noted that a registered principal must review an associated person's proposed social media site in the form in which it will be “launched.”  Under NASD Rule 2210, unscripted participation in an interactive electronic forum comes within the definition of “public appearance.”

To monitor these fora, FINRA recommends that firms adopt risk-based supervisory procedures utilizing post-use review, including sampling and lexicon-based search methodologies, of unscripted participation in an interactive electronic forum.   FINRA requires that any procedure that a firm adopts be reasonably designed to ensure that interactive electronic communications do not violate FINRA or SEC rules. static posting is deemed an “advertisement” under NASD Rule 2210 and therefore requires a registered principal to approve the posting prior to use.

Links to Third-Party Sites
FINRA warns members that a firm may not establish a link to any third-party site that it knows or has reason to know contains false or misleading content.  FINRA concludes that a firm could be deemed to have become "entangled" with a third-party site if, for example, it participates in development of the content on the third-party site.

Data Feeds
The notice also addresses FINRA's requirement that firms adopt procedures to manage data feeds into their own websites. FINRA is requiring that firms regularly review data feeds for red flags that indicate that the data may not be accurate, and take immediate steps to correct any inaccurate data.

Finally, in a "Q&A format, the notice provides additional guidance regarding, recordkeeping, supervision, third-party posts, third-party links and websites, and associated persons accessing social media sites from personal devices. See more....

http://www.finra.org/Industry/Regulation/Notices/2011/P124186

ENHANCING CCO EFFECTIVENESS: SEVEN THINGS CCOs SHOULD REMEMBER

2011-08-25T10:02:00.000-07:00

As we mentioned in our July 25, 2011 post, prior to delving into the actual work, skills and knowledge required of a Chief Compliance Officers to an investment adviser, the very first step a CCO should take is to make sure she understands the framework and principles that guide the work they do. Not surprisingly, given the demands of their position, even experienced CCOs ignore or forget some of these clearly written admonitions about the CCO function that routinely appear in canned written compliance policies and procedures that they pass out to registered adviser personnel. As a reminder, periodically, we’ll post rules CCOs should never forget. We follow now with a third rule.

Rule Number Three: Communicate your role to your Boss(es)

To avoid the appearance that you are doing more than administering the compliance program, take the time to carefully define, in writing, your job responsibilities and take steps to ensure that person(s) who supervise you know them and understand the roles and limitations of the job. Then, periodically, take the time to remind them again and again. Were I to give a quiz to all of the managers who supervise CCOs, asking about the CCO role and what a CCO does, I venture, most of them (who have not served in that capacity or have no prior legal or compliance background) would, unfortunately, fail. Even more unfortunate, is that they and other employees believe that you are somehow, by definition, responsible for the day-to-day oversight of others. When you’re perceived as the person responsible for “signing-off” on the actions of others, you open yourself up for assuming supervisory responsibility, and thus liability, for those employees.

The New Whistleblower Protection Rule

2011-08-16T07:16:00.000-07:00

The SEC's new whistleblower program officially became effective on August 12, and the SEC has launched a new webpage for people to report a violation of the federal securities laws and apply for a financial award.

Following enactment of Section 922 of the Dodd-Frank Wall Street Reform and Consumer Protection Act, the Office of the Whistleblower was established by the SEC to administer its whistleblower program. The SEC has appointed Sean McKessy as its head. Under the program, the SEC may provide monetary awards to eligible individuals who come forward with high-quality original information that leads to an SEC enforcement action in which over $1,000,000 in sanctions is ordered. The webpage notes that the range for awards is between 10% and 30% of the money collected. See More....
http://www.sec.gov/news/press/2011/2011-167.htm

Former Major League Player and Others Charged with Insider Trading

2011-08-04T12:49:00.000-07:00

The SEC has charged former professional baseball player Doug DeCinces and three others with insider trading ahead of a company buyout. DeCinces, a third baseman, played for fifteen seasons (1973 - 1987) in the major leagues for three different teams, including nine years with the Orioles and six years with the California Angels. The SEC charged that DeCinces and his associates made more than $1.7 million in illegal profits when Abbott Park, Ill.-based Abbott Laboratories Inc. announced its plan to purchase Advanced Medical Optics Inc. through a tender offer.

DeCinces agreed to pay $2.5 million to settle the SEC’s charges, and the three others also agreed to settlements.

The SEC's complaint alleges that DeCinces received confidential information about the acquisition from a source at Santa Ana, Calif.-based Advanced Medical Optics. He then began purchasing shares of Advanced Medical Optics in several brokerage accounts, buying more throughout the course of the impending transaction as he received updated information from his source. During the period, DeCinces also illegally tipped three associates who traded on the confidential information – physical therapist Joseph J. Donohue, real estate lawyer Fred Scott Jackson, and businessman Roger A. Wittenbach. See more....

http://www.sec.gov/litigation/litreleases/2011/lr22062.htm

Husband of Former Playboy CEO Charged with Insider Trading

2011-08-03T10:34:00.000-07:00

The SEC's Chicago Office has filed a civil injunctive action in the U.S. District Court in Chicago against William A. Marovitz, the husband of former Playboy CEO Christie Hefner, charging him with illegal insider trading in Playboy stock in advance of public news announcements. See more....

http://www.sec.gov/litigation/litreleases/2011/lr22059.htm

SEC Report on Examination of Certain Structured Securities Products Sold to Investors

2011-07-28T20:28:00.000-07:00

The Securities and Exchange Commission staff has issued a report summarizing the results of a sweep examination of the retail structured securities products business of 11 broker-dealers, covering a cross-section of the industry. The report identifies common weaknesses seen in sales of structured securities products and describes measures by broker-dealers to better protect retail investors from fraud and abusive sales practices.
The report can be viewed at http://www.sec.gov/news/studies/2011/ssp-study.pdf

ENHANCING CCO EFFECTIVENESS: SEVEN THINGS CCOs SHOULD REMEMBER

2011-07-25T12:49:00.000-07:00

Prior to delving into the actual work, skills and knowledge required of a Chief Compliance Officers to an investment adviser, the very first step a CCO should take is to make sure she understands the framework and principles that guide the kind of work CCOs perform. Not surprisingly, given the demands of their position, even experienced CCOs ignore or forget some of these clearly written admonitions about the CCO functions, even though they routinely show up in canned written compliance policies and procedures that are passed out to adviser personnel.

As a reminder, periodically, we’ll post rules CCOs should never forget even as they comply with all the other rules that apply to investment advisers. We start with the first two below:

Rule Number One: Your Job is to “Administer” the Compliance Program: The CCO’s job function as mandated by Rule 206(4)-7 (the “rule”) is limited to“administering” the investment adviser’s compliance policies and procedures. While the rule contains no explicit definition for what the term administering means, the rule makes one thing clear, it is the adviser who is legally required to “adopt and implement written policies and procedures reasonably designed to prevent violation” of the Investment Advisers Act of 1940. What this means is that you are not the guarantor that your adviser will not experience a compliance failure. Nor is it necessarily true, from a supervisory perspective, that you are responsible for the compliance failures of others in the firm. To the contrary, the failure of a compliance program to find and remedy compliance problems can just as easily be viewed as evidence that the adviser’s compliance program, including its policies and procedures, are not effective.

This doesn’t mean that compliance personnel of an adviser can’t be sanctioned for not properly supervising employees. Of course, they can be and are sanctioned. However, the fact that you are a CCO does not, in and of itself, give you supervisory responsibility over your adviser’s personnel. In short, if you’re not supervising other advisory personnel, and you limit supervisory responsibility to persons who are part of the compliance staff, the Adopting Release to the rule makes clear that you aren’t necessarily liable for the supervisory lapses of your adviser. This leads to our second rule.

Rule Number Two: Consider avoiding taking on roles that give the appearance that you supervise personnel outside of administering the compliance function: Such advice may be particularly hard to follow with smaller advisers or in other instances where the adviser’s overall management structure is fairly narrow (e.g. the president and CCO are one and the same). However, for most others, taking on management responsibilities outside the compliance program can be a recipe for trouble. One such problem is that it places you in a supervisory role, when the very title of chief compliance officer does not carry with it supervisory responsibility. The SEC made this clear when it adopted the rule. In short, if you do supervise others outside the compliance staff, remember using, among other rules and Investment Advisers Act §203(f), the SEC has brought cases showing you can be sanctioned for not properly supervising investment adviser representatives and others.

FINRA's New Q&A Guidance on Reporting Customer Complaint Information

2011-07-19T10:28:00.000-07:00

Under FINRA Rule 4530 that became effective on July 1, 2011 governing reporting requirements for customer complaints, FINRA issued Regulatory Notice 11-10 reminding member firms of the requirement that they electronically report specified events and quarterly customer complaint information.

Member firm are also required to file with FINRA copies of certain criminal actions, civil complaints and arbitration claims. The Notice also provided guidance on automated reporting under the new rule. To assist member firms with implementation, in new Notice 11-32, FINRA has provided questions and answers regarding the application of the new rule. FINRA has said it will use the information for regulatory purposes to identify and initiate investigations of member firms, offices and associated persons that it believes might pose a risk. View Notice.

Effective July 21, 2011, Advisers to Hedge Funds and Private Equity Funds Face Registration

2011-07-19T09:27:00.000-07:00

Under Title IV of the Dodd-Frank Wall Street Reform and Consumer Protection Act, effective July 21, 2011, changes to the registration and reporting and recordkeeping requirements of the Investment Advisers Act of 1940 require advisers to private funds (hedge funds and private equity funds) to register with the SEC. In the past, many of these advisers relied on the so-called “private adviser” exemption to avoid registration. Under Section 403 of the Dodd-Frank Act, now some of these same advisers that exclusively advise venture capital funds and private fund advisers with less than $150 million in assets under management in the United States, face narrower exemptions for adviser registration. However, foreign private advisers and advisers to licensed small business investment companies are exempted.

Under the Dodd-Frank Act, the SEC will also have the authority to collect data from investment advisers about their private funds for the purposes of the assessment of systemic risk by the Financial Stability Oversight Council. Finally, the Dodd-Frank Act modifies the allocation of regulatory responsibility for mid-sized advisers between state regulators and the SEC. here.

Dodd-Frank: More New Rules for Investment Advisers and Hedge Funds

2011-06-27T09:00:00.000-07:00

The Securities and Exchange Commission now has new rules implementing core provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act regarding investment advisers, including those that advise hedge funds.

The Securities and Exchange Commission has adopted rules that now require advisers to hedge funds and other private funds to register with the SEC, establish new exemptions from SEC registration and reporting requirements for certain advisers, and reallocate regulatory responsibility for advisers between the SEC and states.

http://www.sec.gov/news/press/2011/2011-133.htm

Insider trading by accountants, attorneys and other professionals

2010-11-30T13:41:00.000-08:00

Why do people, who should presumably know better than most i.e. accountants and attorneys, continue to engage in insider trading by misappropriating material non-public information from the companies they serve? In doing so, either through ignorance or pure greed (or both) they end up leaving a "paper trail" long enough for the SEC to follow right to their door and the doors of their family members and friends.

The SEC's most recent case against a former Deloitte partner continues a long line of such cases.

http://www.sec.gov/litigation/litreleases/2010/lr21758.htm