Articles Posted in Industry News

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The Financial Industry Regulatory Authority recently published a Regulatory Notice requesting comment regarding a proposed new rule pertaining to registered persons’ outside business activities.  Among other things, the proposed rule would significantly alter a broker-dealer’s obligations with respect to a registered representative’s conduct of investment advisory business through an unaffiliated registered investment adviser.

FINRA decided to propose this new rule after a “retrospective review of FINRA’s rules governing outside business activities and private securities transactions, FINRA Rule 3270 (Outside Business Activities of Registered Persons) and FINRA Rule 3280 (Private Securities Transactions of an Associated Person).”  FINRA determined that the rules “could benefit from changes to better align the investor protection goals with the current regulatory landscape and business practices.”  As a result, FINRA proposed a new single rule that it claims will make registered persons’ duties in regards to outside business activities clearer and decrease nonessential obligations while enhancing investor protection.

If the proposed rule is adopted, it will replace Rules 3270 and 3280.  The comment period ends on April 27, 2018. Continue reading ›

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On March 15, 2018, the United States Court of Appeals for the Fifth Circuit elected, in a 2-1 decision, to vacate the Department of Labor’s (DOL’s) Fiduciary Rule (Chamber of Commerce of the U.S.A., et al. v. U.S. Dep’t of Labor, et al.).  In doing so, the Fifth Circuit overturned the Fiduciary Rule in its entirety, including its new definition of fiduciary advice under the Employee Retirement Income Security Act of 1975 (ERISA) and the Internal Revenue Code (Code), as well as the various new exemptions and revisions to existing exemptions that it features.  It is uncertain whether the DOL will request that the Fifth Circuit rehear the case, appeal the case to the United States Supreme Court, or do nothing.  The Fifth Circuit’s decision, however, has not deterred the Securities and Exchange Commission (SEC) from continuing to discuss implementing its own fiduciary rule.

According to the Fifth Circuit’s majority opinion, the DOL exceeded its authority in adopting the new fiduciary investment advice definition in the Fiduciary Rule, finding the definition inconsistent with the plain text of ERISA and the Code. The Fifth Circuit also concluded that the DOL acted “arbitrarily and capriciously” in, among other things, requiring people providing services to IRAs to sign a contract under the Best Interest Contract exemption in which they admit that they are fiduciaries and can be sued. Therefore, the Fifth Circuit concluded that “the Rule fails to pass the tests of reasonableness of the [Administrative Procedures Act].” Continue reading ›

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On February 13, 2018, the Securities and Exchange Commission announced that it is accepting registrations for the National Compliance Outreach Seminar (“National Seminar”).  The National Seminar, which is part of the SEC’s Compliance Outreach Program, is designed to help educate registered investment advisers’ chief compliance officers (“CCOs”), as well as their senior officers, about “various broad topics applicable to larger investment advisory firms and investment companies.”  The National Seminar will take place on April 12, 2018 at the SEC’s headquarters in Washington, D.C., and it will last from 8:30 a.m. to 5:30 p.m. ET.  While only 500 participants can attend in person, a live webcast will be provided via www.sec.gov.

This year the National Seminar will include six panel discussions between SEC personnel, CCOs, and various other industry representatives.  SEC personnel who participate in the panels typically include officers from the Office of Compliance Inspections and Examinations, the Division of Investment Management, and the Division of Enforcement’s Asset Management Unit, as well as officers from other SEC divisions or offices.  CCOs and other senior staff in private advisory firms typically participate in the panels as well.  Each of these panels reflects areas of concern which the SEC likely intends to prioritize in 2018. Continue reading ›

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The amendments to Form ADV, Part 1 that became effective October 1, 2017 are presenting some registered investment advisers with unforeseen problems as we move into “annual amendment season” in 2018.  As we previously highlighted among those changes to Form ADV is the requirement for advisers to disclose estimated percentages of assets held within separately managed accounts in twelve categories of assets.

Advisers with more than $10 billion in regulatory assets under management are required to report the same data as of mid-year and year-end.  Smaller firms must report the same data as of year-end only.

This has not proved a simple exercise for some firms.  Many have assumed that the custodians of their clients’ assets would readily be able to categorize their clients’ holdings and provide them reports summarizing the data.  Continue reading ›

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On February 7, 2018, the SEC’s Office of Compliance Inspections and Examinations (“OCIE”) published its Examination Priorities for 2018.  The Examination Priorities cover “certain practices, products, and services that OCIE believes may present potentially heightened risk to investors and/or the integrity of the U.S. capital markets.”  The five priorities that OCIE specifically listed are (1) issues crucial to retail investors, such as seniors and those saving for retirement, (2) compliance and risks in critical market infrastructure, (3) FINRA and MSRB, (4) cybersecurity, and (5) anti-money laundering programs.  This is not an exclusive list, and OCIE invited comments concerning how it can adequately promote compliance.

OCIE intends to continue to make shielding retail investors from fraud a priority.  OCIE plans to focus especially on senior investors and those saving for retirement.  For example, examiners will pay particular attention to firms’ internal controls that are intended to monitor their representatives, especially in relation to products targeted at senior investors.  OCIE will also focus on disclosure of the costs of investing, examination of investment advisers and broker-dealers who primarily offer advice through digital platforms, wrap fee programs, mutual funds and exchange traded funds, municipal advisors and underwriters, and the growth of the cryptocurrency and initial coin offering markets. Continue reading ›

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Whether or not the SEC’s Office of Compliance Inspections and Examinations (“OCIE”) will formally name advertising as among its priorities in 2018, it is clear from its activity and that of the Enforcement Division in 2017 that advertising should remain a concern of every registered investment adviser and chief compliance officer.

In September 2017, OCIE published a Risk Alert identifying the most common compliance issues pertaining to Rule 206(4)-1 of the Investment Advisers Act of 1940, otherwise known as the “Advertising Rule.”  An advertisement includes “any notice, circular, letter or other written communication addressed to more than one person, or any notice or other announcement in any publication or by radio or television, which offers” advice regarding securities.  The Advertising Rule forbids an investment adviser from “directly or indirectly… publishing, circulating, or distributing any untrue statement of material fact, or that is otherwise false or misleading.” Continue reading ›

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On November 22, 2017, the Securities and Exchange Commission issued an Order Making Findings and Imposing Remedial Sanctions and Cease and Desist Order against an investment adviser, Gray Financial Group, Inc., its founder, Laurence O. Gray, and its co-CEO, Robert C. Hubbard, IV.  The SEC alleged that Gray Financial, Gray, and Hubbard “offered and sold investments in a Gray Financial proprietary fund of funds… to four Georgia public pension clients, despite the fact that they knew, were reckless in not knowing, or should have known that these investments did not comply with the restrictions on alternative investments imposed by Georgia law.”  This case brings attention to an investment adviser’s obligation to “know its clients,” including the obligation to be familiar with laws and contractual provisions that place limitations on the types and amounts of investments in which certain clients, such as pension plans, can invest.

The Public Retirement Systems Investment Authority Law (“the Act”), codified as O.C.G.A. §§ 47-20-80 through 47-20-87, allows certain large retirement systems to invest in alternative investments, such as venture capital funds and merchant banking funds, subject to certain restrictions.  For example, the Act provides that such investments cannot in the aggregate exceed five percent of the retirement system’s assets at any time.  The Act also provides that before a large retirement system can invest in an alternative investment, the alternative investment needs to have had or concurrently have four or more other investors not affiliated with the investment’s issuer. Continue reading ›

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On January 8, 2018, FINRA published its 2018 Annual Regulatory and Examination Priorities Letter.  As we noted in our last blog post, FINRA announced in December 2017 that it would continue to make enforcement a priority in the coming year.  This Letter can be useful in helping firms ensure compliance since it outlines regulatory issues that FINRA plans to prioritize in the coming year.

According to the Letter, fraud is perpetually a significant issue for FINRA.  This past year, FINRA made numerous referrals to the Securities and Exchange Commission “for potential insider trading and other fraudulent activities involving individuals outside FINRA’s jurisdiction.”  One area of fraud that FINRA intends to place particular focus on is microcap fraud schemes, especially schemes targeting senior investors.  FINRA advises member firms that they should pay attention to their brokers’ activities involving microcap stocks, especially when the brokers show a newfound interest in purchasing microcap stocks for their accounts or for customers’ accounts. Continue reading ›

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Susan A. Schroeder, the Executive Vice President and Head of Enforcement at the Financial Industry Regulatory Authority, recently discussed FINRA’s Enforcement Department’s day-to-day activities and goals at an event sponsored by the Securities Industry and Financial Markets Association (“SIFMA”).  Schroeder discussed FINRA’s efforts to combine two enforcement groups into one unit, as well as FINRA’s intention to continue to devote its time to “vigorous enforcement” despite calls for less regulation in Washington.

In early 2017, FINRA began what Schroeder described as “a comprehensive self-evaluation and organizational improvement initiative called FINRA360.”  Before FINRA360, FINRA employed two separate enforcement teams.  One was tasked with administering disciplinary events pertaining to trading-based matters discovered by FINRA’s Market Regulation oversight division.  The other was tasked with administering disciplinary events brought forward by FINRA’s other regulatory oversight divisions, such as Member Regulation and Corporate Financing.  FINRA concluded through FINRA360 that combining these two enforcement groups into one unit could bring about “more efficiency and greater effectiveness through better communication.” Continue reading ›

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On November 15, 2017, Stephanie Avakian and Steven Peikin, the Co-Directors of the Securities and Exchange Commission’s Division of Enforcement, published the Division’s Annual Report for fiscal year 2017.  Avakian and Peikin emphasized the Division’s commitment to enforcing the federal securities laws in order to “combat wrongdoing, compensate harmed investors, and maintain confidence in the integrity and fairness of our markets.”  They also emphasized their goals of shielding investors, discouraging misconduct, and reprimanding and penalizing those who violate the federal securities laws.  To accomplish these goals, five core principles, according to Avakian and Peikin, will serve as the Division’s road map.

First, the Division will focus primarily on retail investors, who Avakian and Peikin believe are not only the most common market participants, but also are the most susceptible and least equipped to handle financial loss.  The Division plans to keep confronting violations of the securities laws that can have a strong impact on retail investors, such as accounting fraud, sales of unsuitable products, Ponzi schemes, and pump and dump schemes.  The Division has also established a Retail Strategy Task Force to formulate competent methods of confronting securities law violations that affect retail investors.  The Retail Strategy Task Force will work with the SEC’s examination staff and the Office of Investor Education and Advocacy to pinpoint risk areas common to retail investors. Continue reading ›

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