Compliance

FINRA Proposes Rule Designed to Combat Financial Exploitation of Seniors and Other “Specified Adults”

November 23, 2016 | Elizabeth Dalziel

In October 2015, the Financial Services Industry Regulatory Authority, Inc. (“FINRA”) requested comments on a proposal (“Proposal”) to amend its Customer Account Information Rule (“Rule 4512”) and to adopt a new Financial Exploitation of Specified Adults Rule (“Proposed Rule 2165”). Based on a study published in 2011 and a survey published in 2013, FINRA determined that financial exploitation of seniors and other vulnerable adults is a serious and growing problem that must be addressed. As of now, a small number of states have already enacted legislation that is designed to help detect and prevent financial exploitation of seniors. As discussed previously, the North American Securities Administrators Association (“NASAA”) recently adopted a model act that is intended to provide states with guidance for drafting legislation or regulations to protect seniors and other vulnerable adults from financial exploitation.

FINRA, however, believes there needs to be a uniform, national standard regarding a financial institution’s obligations in helping to prevent financial exploitation of seniors and other vulnerable adults. Thus, FINRA first published its Proposal in October 2015 and requested comments on it. After receiving 40 comment letters from both individuals and institutions, FINRA filed the Proposal with the Securities and Exchange Commission in October 2016. The SEC began a comment period on November 7, 2016, and it will end on November 28, 2016.

The proposed amendments to Rule 4512 and Proposed Rule 2165 pertain to the accounts of “Specified Adults.” A “Specified Adult” is defined as “a natural person age 65 or older or a natural person age 18 or older who the member reasonably believes has a mental or physical impairment that renders the individual unable to protect his or her own interests.” Thus, the Proposal applies to accounts held by seniors and other vulnerable adults.

FINRA Publishes Regulatory Notice Clarifying its Capital Acquisition Broker Rules and Sets Effective Date for Implementation

November 11, 2016 | Parker MacIntyre

On October 17, 2016, FINRA published Regulatory Notice 16-37 setting an effective date for implementation of its new Capital Acquisition Broker (“CAB”) rules (“CAB Rules”). The CAB Rules, which codify the creation and regulation of a new FINRA Membership category designed for broker/dealers that restrict their activities to certain designated corporate finance transactions, are discussed in greater detail in a recent Parker MacIntyre blog post (see “SEC Approves FINRA’s Capital Acquisition Broker Rules (“CAB Rules”)”). Continue reading ›

SEC Approves FINRA’s Capital Acquisition Broker Rules (“CAB Rules”)

November 7, 2016 | Parker MacIntyre

A new limited broker/dealer classification framework at the federal level has been created as the result of a recent SEC Order approving a FINRA rule proposal seeking to address the longstanding industry desire for augmented exemptive relief and/or limited registration classifications for broker/dealers that restrict their activities to certain designated corporate finance transactions. The new federal broker/dealer registration category known as Capital Acquisition Brokers (“CABs”), which some observers have dubbed a “lite” form of broker/dealer registration, is the latest development in this area of securities regulation, and follows a recent string of federal and state no-action letters providing exemptive relief to so-called Mergers and Acquisitions (“M&A”) Brokers. However, enthusiasm for the new CAB Rules should be tempered somewhat in that: (1) the CAB Rules do not provide exemptive relief—i.e., they do not allow firms to avoid registration but instead set up a form of registration that is meant to be somewhat less onerous; (2) CAB registration still requires that CAB firms adhere to many of the same strictures required of full broker/dealers; and (3) opting to be regulated as a CAB may require reassessment as time goes on to the extent that a firm’s business activities change. While formally approved by the SEC, FINRA’s CAB Rules are not as yet effective. FINRA will publish the effective date in an upcoming Regulatory Notice. The full set of CAB Rules approved by the SEC may be found online at http://www.finra.org/sites/default/files/SR-FINRA-2015-054-amendment-2.pdf.

Parker MacIntyre Hosts Seminar to Address Issues Faced by Registered Investment Advisers

October 24, 2016 | Elizabeth Dalziel

On October 18, 2016, Parker MacIntyre hosted a seminar addressing legal issues that registered investment advisers (“RIAs”) often face, including developing cybersecurity guidance and implications of the new Department of Labor Fiduciary Rule. The attendees consisted of sixteen individuals representing thirteen RIAs registered from around the southeast. Both SEC-registered and state-registered RIAs were represented among the attendees.

Parker MacIntyre was pleased to welcome Noula Zaharis, the Director of the Securities and Charities Division of the Secretary of State of Georgia, as a guest speaker. She began the seminar with a presentation on how the Georgia Secretary of State registers and regulates investment advisers and common deficiencies encountered by the Georgia regulators. Highlights from another presentation, entitled “Common Deficiencies, Exam Priorities, and Regulatory Initiatives,” included common deficiencies found in RIA examinations, exam priorities that RIAs should ideally be aware of, and the Secretary of State’s regulatory initiatives. Continue reading ›

Investment Advisers Charged for Failure to Disclose Conflicts of Interest Arising From Receipt of Forgivable Loans

September 27, 2016 | Elizabeth Dalziel

On July 18, 2016, the Securities and Exchange Commission (“SEC”) settled charges against two SEC-registered investment advisers (“investment advisers”). The investment advisers, Advantage Investment Management, LLC (“AIM”) and Washington Wealth Management, LLC (“WWM”) failed to disclose receipt of revenue from third-party broker-dealers in the form of forgivable loans and the consequent conflicts of interest.

Investment advisers are prohibited from engaging in any transaction, practice, or course of business that operates as a fraud upon any client or prospective client under Section 206(2) of the Investment Advisers Act of 1940 (“Advisers Act”). They are also prohibited from making any untrue statement of a material fact or omitting any material fact in any report filed with the SEC under Section 207 of the Advisers Act. Continue reading ›

SEC Charges Private Fund Administrator with Failure to Satisfy Gatekeeper Responsibilities

June 28, 2016 | Patricia Klusmeyer

The Securities Exchange Commission (“SEC”) recently settled charges against a New Jersey private fund administrator, Apex Fund Services (“Apex”), for failing to notice or correct what it contended were clear indications of fraud by two of its clients, ClearPath Wealth Management (“ClearPath”) and EquityStar Capital Management (“EquityStar”). The SEC’s Division of Enforcement noted that Apex failed to “live up to its gatekeeper responsibility” and thereby enabled the fraudulent activities of these two investment advisers.

Apex provided accounting and administrative services to various private funds, including several managed by ClearPath and EquityStar. Its duties as fund administrator included keeping records, preparing financial statements, and preparing investor account statements. The SEC charged both ClearPath and EquityStar with securities fraud in enforcement actions, finding that ClearPath had allegedly misappropriated fund assets and used fund assets for unauthorized investments, and that EquityStar had allegedly made materially false and misleading statements to investors and prospective investors of its funds regarding undisclosed withdrawals of fund assets.

FINRA Suspends and Fines Adviser for Altering CRM Record

June 15, 2016 | Steve Parker

Last month, the Financial Industry Regulatory Authority (“FINRA”) suspended an Ameriprise registered representative for one year and fined him $50,000 for altering a record in the client relationship management (“CRM”) software that the adviser used in his Ameriprise office. This enforcement case points to the dangers for broker-dealer representatives and registered investment adviser representatives alike, in editing or altering records relating to interactions with clients.

SEC Issues Report on Review of Definition of “Accredited Investor”

June 14, 2016 | Patricia Klusmeyer

Pursuant to the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act”), the Securities and Exchange Commission (“SEC”) must review the definition of “accredited investor” every four years to determine whether it needs to be modified or adjusted. The SEC staff recently conducted its first review and issued a Report on the Review of the Definition of “Accredited Investor.”

The report provides an in-depth examination of the history of the “accredited investor” definition and discusses possible alternative approaches. The report also responds to comments on the existing definition received from various financial services industry participants, including the Investor Advisory Committee and the Advisory Committee on Small and Emerging Companies. Lastly, the report provides recommendations for potential updates and/or modifications to the existing definition.

Investment Adviser Accused of Raising Operating Capital From Clients by False and Misleading Statements

May 26, 2016 | Steve Parker

Earlier this month, the Securities and Exchange Commission (“SEC”) instituted an administrative proceeding against Blue Ocean Portfolios, LLC (“Blue Ocean”), an SEC-registered investment advisor with approximately $106 million in regulatory assets under management, and its Principal, CEO and Chief Compliance Officer, James A. Winkelmann, Sr. According to the allegations, Blue Ocean and Winkelmann began raising capital from clients of Blue Ocean in order to generate business proceeds for Blue Ocean in April, 2011. The adviser raised the funds by issuing a number of what it called “Royalty Units,” which were in fact interests that paid a minimum return to the investors with the prospect of a higher return if Blue Ocean’s advertising investment yielded successful new customers with annually recurring revenue.

SEC Issues Investor Bulletin on Performance Claims in Advertising

May 24, 2016 | Patricia Klusmeyer

The Securities Exchange Commission (“SEC”) Office of Investor Education and Advocacy recently released an investor bulletin educating investors on investment performance claims in investment adviser advertising and pointing out specific things they should consider prior to investing. This bulletin and newsletter highlight the increasing emphasis regulators have been placing on performance claims in recent years.

Performance advertising is regulated under the Investment Advisers Act of 1940 (“Advisers Act”) and Rule 206(4)-1. Pursuant to Section 206 of the Advisers Act and Rule 206(4)-1, it is considered fraudulent for a registered investment adviser to publish, circulate, or distribute any advertisement which contains any untrue statement of material fact or which is false or misleading. The SEC has issued specific guidance regarding performance claims in advertising that all investment adviser firms must follow in order for their performance advertising to be considered non-fraudulent.