RIA Compliance Blog

DOL Issues Additional Guidance as Enforcement Date of Fiduciary Rule Approaches

January 26, 2017 | Patricia Klusmeyer

The Department of Labor (DOL) recently issued two new sets of FAQ guidance regarding the revised definition of fiduciary investment advice under the Employee Retirement Income Security Act of 1974 (ERISA) and the Internal Revenue Code of 1986 (Code), as well as the new prohibited transaction exemptions (PTEs). The first set of guidance is directed to retirement investors, not advisers, and answers basic questions investors may have regarding the new rule and how it will work. The second set of guidance is aimed at financial service providers and focuses mainly on the revised definition of fiduciary investment advice and the situations in which fiduciary duties will or will not attach under the new rule.

While the first set of FAQ guidance is not necessarily aimed at financial service providers, it did provide a few useful insights that I will briefly discuss here. The DOL stated that the new rule does not require advisers to indiscriminately move clients from commission-based accounts to fee-based accounts, and instead requires advisers to act in the client’s best interest when deciding what type of account to recommend. Regarding the best interest requirement, the DOL clarified that providing investment advice in a client’s best interest does not mean that advisers have a duty to find the best possible investment product for clients out of all the investments available in the marketplace. Continue reading ›

SEC Office of Compliance Inspections and Examinations Publishes its 2017 Examination Priorities

January 19, 2017 | Elizabeth Dalziel

On January 12, 2017, the Office of Compliance Inspections and Examinations (“OCIE”) of the Securities and Exchange Commission (“SEC”) published its examination priorities for 2017. OCIE selects its priorities based on practices and products that it believes to constitute significant risks to investors and the investment markets. It also receives insight from a variety of sources, such as staff from the SEC’s regional offices and other regulators. The priorities for 2017 are primarily based around protection of retail investors, protection of elderly and retiring investors, and addressing market-wide risks like cybersecurity and anti-money laundering.

The first priority that OCIE plans to emphasize is the protection of retail investors. Over the years, new technology has provided investors with new, innovative ways to invest their finances. As a result, the SEC and other regulators must regulate new potential risks that are bound to occur. To address the possible challenges that retail investors face, OCIE plans to implement a number of examination initiatives. For example, it plans to evaluate registered investment advisers and broker-dealers who provide electronic investment advice, such as “robo-advisers.” It also intends to pay particular attention to wrap fee programs and exchange-traded funds (“ETFs”), as well as enlarge its Never-Before-Examined Adviser Initiative program. Finally, OCIE intends to address the challenges related to investment advisers who operate on a multi-branch business model Continue reading ›

SEC Sanctions Investment Adviser for Breaking Promises to Correct Deficiencies

January 17, 2017 | Steve Parker

Most deficiencies identified in the course of investment adviser examinations can be remedied by the adviser simply taking corrective measures. This can be true even with regard to deficiencies that are somewhat serious violations, but only if corrective action is taken and sustained.

In 2016, the Securities and Exchange Commission (“SEC”) starkly demonstrated the importance of following through with promises advisers make to the SEC Examinations Staff. Because they did not make promised corrections, Moloney Securities Co., Inc. and Joseph R. Medley, Jr. were forced to consent to the entry of an Order Instituting Proceedings that required them, among other things, to pay civil penalties and to hire an independent compliance consultant to monitor and report certain aspects of the firm’s compliance program. Continue reading ›

FINRA Releases Annual Regulatory and Examination Priorities Letter, Part I

January 12, 2017 | Elizabeth Dalziel

On January 4, 2017, the Financial Industry Regulatory Authority (“FINRA”) published its Annual Regulatory and Examination Priorities Letter (“Priorities Letter”). The Priorities Letter notifies firms about issues that FINRA intends to examine in 2017. It is also intended to let firms know which of these issues are relevant to their businesses so that the firms can improve their compliance with FINRA rules and their risk management programs.

According to the Priorities Letter, FINRA draws its examination priorities from both observations made in the course of regulation and suggestions from a variety of outside sources. Evidence has shown that many FINRA-registered firms have found past Priorities Letters helpful in making sure their business is in compliance with FINRA rules. Finally, FINRA assures readers of the Priorities Letter that in formulating an examination, FINRA looks to factors such a firm’s “business model, size and complexity of operations, and the nature and extent of a firm’s activities against the priorities outlined in this letter.”

FINRA intends to prioritize the following issues in 2017. Continue reading ›

Asset Management Company and its Owner Charged With Fraud

December 22, 2016 | Elizabeth Dalziel

On December 1, 2016, the Securities and Exchange Commission (“SEC”) announced that it had filed a complaint for injunctive and other relief in the United States District Court for the Southern District of Florida against Onix Capital LLC (“Onix Capital”), an asset management company, and its owner, a Chilean national by the name of Alberto Chang-Rajii (“Chang”). The complaint alleges that Onix Capital and Chang “violated the federal securities laws by fraudulently raising approximately $7.4 million from investors based on material misrepresentations regarding the investments offered, the use of the funds raised, and the background and financial success of Chang himself.”

Onix Capital was not an SEC-registered adviser, nor was Chang registered as an investment adviser or broker-dealer. However, the SEC alleged that Onix Capital and Chang violated the Investment Advisers Act of 1940 (“Advisers Act”). Specifically, the SEC alleged that Chang, “for compensation, engaged in the business of advising… investors… as to the value of securities or as to the advisability of investing in, purchasing, or selling securities,” and therefore met the definition of an “investment adviser” subject to the anti-fraud provisions of the Advisers Act. Continue reading ›

FINRA Implements New Rule Requiring “Educational Communication”

December 7, 2016 | Elizabeth Dalziel

On March 23, 2016, the Securities and Exchange Commission (“SEC”) approved the adoption of FINRA Rule 2273, a rule first proposed by the Financial Industry Regulatory Authority (“FINRA”) on December 16, 2015. Rule 2273 provides that member firms who hire or associate with a registered representative must provide an “educational communication” to the representative’s former and current customers. The education communication is designed to provide customers with guidance regarding their decision whether to remain customers of that representative. Rule 2273 went into effect on November 11, 2016.

FINRA’s stated purpose for proposing Rule 2273 was to provide “customers with a more complete picture of the potential implications of a decision to transfer assets.” The belief was that otherwise, customers would simply rely on their “experience and confidence” with the representative. FINRA found that such experiences alone do not always guarantee that staying with the representative will be in the customers’ best interests. Thus, FINRA proposed the educational communication, which contains a number of questions that FINRA believes customers should ask themselves before deciding to remain with the representative. Continue reading ›

Wells Fargo Seeks to Compel Arbitration to Prevent Fake Account Lawsuits

December 6, 2016 | Elizabeth Dalziel

On November 23, 2016, Wells Fargo successfully defended a class action lawsuit relating to the recent fake account scandal, Mitchell v. Wells Fargo Bank NA. This class action lawsuit, filed by three Wells Fargo customers in the United States District Court for the District of Utah, called for at least $5 million in damages, as well as potential punitive damages, stemming from the bank’s opening of at least 2 million accounts that its customers did not authorize. However, Wells Fargo succeeded in having the case referred to arbitration, citing clauses in its account agreements compelling arbitration in the event of a dispute, as well as a September 2015 case from the United States District Court for the Northern District of California that also involved Wells Fargo’s alleged opening of unauthorized accounts. Continue reading ›

FINRA Charges Oppenheimer & Co. for Multiple Compliance Failures

December 2, 2016 | Elizabeth Dalziel

On November 17, 2016, the Financial Industry Regulatory Authority, Inc. (“FINRA”) issued a Letter of Acceptance, Waiver and Consent (“AWC”), in which Oppenheimer & Co., Inc. (“Oppenheimer”) agreed to settle numerous charges. Pursuant to the AWC, Oppenheimer will be fined $1.575 million. It will also be required to make remediation payments of $703,122 to seven arbitration claimants and $1,142,619 to customers who qualified for but did not receive applicable sales charge waivers pertaining to mutual funds.

Many of the violations related to FINRA Rule 4530. Rule 4530(f) requires FINRA members promptly to provide FINRA with copies of certain civil complaints and arbitration claims. Rule 4530(b) provides that if a FINRA member realizes that it or an associated person has violated any securities or investment-related laws that have widespread or potential widespread impact to the firm, the member must notify FINRA. The notification should take place within either 30 calendar days after the determination is made or 30 calendar days after it reasonably should have been made.

According to FINRA’s findings, Oppenheimer failed to file in excess of 350 of these required filings. Moreover, FINRA found that when Oppenheimer did make the required filings, the disclosures were, on average, more than four years late.

SEC Adopts Final Rules Amending Intrastate and Small Offering Exemptions

November 30, 2016 | Steve Parker

On October 26, 2016, the SEC adopted final rules in a year-long administrative rulemaking proceeding seeking to modernize the decades-old federal securities registration exemptions applicable to intrastate (i.e., within the borders of one state) offerings and certain small ($1-5 million) offerings. The SEC’s adopting order in this proceeding both amends the current intrastate offering “safe harbor” found at Rule 147 under the Securities Act of 1933 (“1933 Act”) and creates a new free-standing intrastate exemption designated Rule 147A. The newly-released order also impacts small exempt offerings by increasing the offering limit for capital raises conducted pursuant to Rule 504 under Reg D of the 1933 Act to $5 million from $1 million. Finally, the order repeals the sparsely-utilized Reg D Rule 505.

The primary impetus for this rulemaking and its oft-stated goal of “modernizing” the SEC’s regulatory regime regarding intrastate offerings clearly has been the spread of intrastate crowdfunding exemptions recently adopted pursuant to state “blue sky” securities laws. Notably, 42 states have currently enacted, or are in some stage of enacting, an intrastate crowdfunding exemption—the vast majority of these relying upon 1933 Act section 3(a)(11) (the statutory provision for which Rule 147 acts as a safe harbor). Intrastate crowdfunding, however, despite its quick proliferation over the last four years, has not been immune to controversy. Perhaps the biggest issue has been how to properly fit 21^st century securities offerings based on internet communications and marketing/sales platforms onto a securities exemption crafted in 1933.

Section 3(a)(11) provides an exemption from federal registration for “[a]ny security which is part of an issue offered and sold only to persons resident within a single State or Territory, where the issuer of such security is a person resident and doing business within, or, if a corporation, incorporated by and doing business within, such State or Territory.” Accordingly, it has been the SEC’s contention that any kind of general advertising or solicitation must be conducted in a manner consistent with the requirement that offers made in reliance on Section 3(a)(11) and Rule 147 be made only to persons resident within the state or territory of which the issuer is a resident. In a published 2014 pronouncement, the SEC has stated that while use of the internet would not be incompatible with a claim of exemption under Rule 147, crowdfunding portals would need to implement adequate measures so that offers of securities are made only to persons resident in the relevant state or territory.

Federal Court Denies Motion to Block DOL Fiduciary Rule

November 28, 2016 | Patricia Klusmeyer

The U.S. Circuit Court of Appeals for the District of Columbia recently denied a motion brought by the National Association for Fixed Annuities (NAFA) to enjoin the implementation of the new Department of Labor (DOL) fiduciary rule. This is the first court decision on a legal challenge to the rule. There are currently several other lawsuits against the DOL seeking to overrule the new DOL fiduciary rule that await decision.

NAFA is an insurance trade association that represents insurance companies, independent marketing organizations, and individual insurance agents. NAFA has been very vocal in its opposition to the new DOL fiduciary rule, stating that the new rule will have “catastrophic consequences for the fixed indexed annuities industry” and that meeting the April 2017 deadline is “almost an impossibility for the industry.” Along with other opponents to the rule, NAFA believes the rule will lead to higher compliance costs and will greatly increase litigation risk.