2013 Annual Compliance
Meeting & AML Training
2013 Annual Compliance Meeting
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USA Patriot Act & AML Policy
Communications with the Public
Investment Advisory Business
Suitability Determination & Document Completion
Dealing with clients who may have diminished mental
capacity or elder abuse
Social Media
Compliance Reminders
2
USA PATRIOT Act
and
Anti-Money Laundering
3
Definition of Money Laundering
• Money Laundering is the process of concealing the existence, illegal
source, or application of income derived from criminal activity, and the
subsequent disguising of the source of that income to make it appear
legitimate.
• Three Stages:
– Placement – Introducing money into the financial system
– Layering – Conversion of funds into another form
– Integration – Placing funds back into the economy as clean dollars
4
Increased AML Issues
• Questions:
– Is AML still an issue?
• Yes!
– Are you seeing any new trends?
• Penny stocks, insider trading, identity theft
– Why do we still have to take AML Training?
• Regulatory and firm requirement to receive AML
training at least annually.
5
Vital to our AML program: KYC & CIP
• Know Your Customer (KYC)
– As Representatives meet with customers they are required to
know the customers financial and suitability needs as well as
where the assets come from to fund an account.
• Customer Identification Program (CIP)
– Obtain customer identifying information PRIOR to opening an
account, verify this information, then document the
information.
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Customer Identification Program (CIP)
• How well do you know your clients?
• Do you compare the data provided on the
NAF?
• Do you physically view the ID?
7
Verification of Identity
- Identity must be verified on all NEW customers
– What constitutes a NEW customer?
• Customer does not have an “existing” account with ProEquities
• Even if you have personally known this person for several years, if
there is no existing ProEquities account then they are NEW to
ProEquities
• Even if customer was with you at a previous firm, they are NEW to
ProEquities and require ID verification
– Identity must be obtained and verified prior to the
opening of the account
– Record information on the New Account Form
8
Verification of Identity – Identification
Concerns
• Customer Refuses to Provide Identification Documents or
Documents Look Unusual
• Customer Exhibits an Unusually or Excessively Nervous
Demeanor
• Customer Expresses Concern or Unusual Questions About
Compliance Procedures with Government Reporting or
AML Policies
• Customer’s Address is Outside Your Normal Geographic
Area of Coverage
• Waterfront / Border States
Call Your OSJ or AML Compliance Officer Immediately If You Become
Suspicious of a Prospective Customer!
9
Suspicious Activities & Red Flags
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•
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YOU are responsible for detecting and reporting suspicious activities and red
flags.
KYC very crucial!
– To detect suspicion you must know your customer, their needs and what
are normal transactions for them.
– If activities fall outside of the normal transaction type this is a red flag.
Examples:
– Refusal to provide an acceptable ID
– Frequent trading in penny stocks
– Withdrawing deposited funds as soon as they are deposited
– Funds in/out of the account do not match the stated income levels for
the client
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Penny Stock Transactions
• Increased AML Issues:
– Shares deposited or ACAT received
– Sell shares in large blocks or limit shares traded daily
– Client is often an insider for the stock
• What are our risks?
– Insider Trading, Theft, Market Manipulation
11
Penny Stock Red Flags
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Client deposits large volumes of penny stocks via stock certificates
Client provides a legal opinion to remove restrictive legends.
Client has received shares from consulting work performed.
There is no verifiable or legitimate physical place of business.
There are multiple press releases on the company in one day.
There is a history of company name changes, symbol changes, or reverse splits.
The company’s employees are immediately dumping the stock received via a
compensation program.
Company changes their business’ products entirely.
There are NO recent Edgar filings with the SEC.
The stock has more than 4 characters in the ticker symbol. If the 5th letter is an
“E”, it is not registered with the SEC and if it is a “Q”, the company is in bankruptcy.
12
New AML Trends Observed
• Identity Theft and Phishing Emails
– ProEquities has had an influx of fraudulent emails
sent from a client’s email address to the registered
rep.
– The emails request account information, balances,
and subsequently request that securities be
liquidated and wired to a 3rd party or foreign bank
account.
13
Identity Theft (Continued)
• Tips
– Be wary of emails requesting account balance, wire
instructions, or account information.
– Be cautious about an email from a client that would not
normally contact you via email.
– Be on alert if you receive an email requesting this type of
information when the client is elderly or retirement age.
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Identity Theft (Continued)
• If you receive this type of email:
– DO NOT provide account information
– DO NOT provide account balances.
– Respond requesting that he or she contact you directly to
conduct the transaction
– CONTACT the client to verify accuracy and/or instruct the
client to change their email passwords immediately.
– Contact the AML Compliance Officer or a member of
Compliance immediately!!!
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Other Helpful Tips
• Always know the purpose of third party checks and third party
wires.
• Pay careful attention to any clients referred to you by clients.
Develop an understanding of the referred client’s relationship
with the existing client, especially if the existing client is
relatively new.
• Be wary of a client telling you at account opening or soon
after account opening that they want to “dump” or “liquidate”
stock and close the account.
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Clients Circumvent Reps
• Increase of Clients avoiding the Rep
– Customer Service and Trading has received an increase in
calls from clients wanting to reopen closed accounts
and/or deposit stock and liquidate
• How do we prevent this?
– When closing an account request a ‘BLOCK’ on the account
so it may not be reopened.
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Accepting Customer Funds
• Cashiering responsibilities play a vital part in the deterrence
of money laundering. When accepting funds from
customers ensure you follow the firm’s policies.
– Checks must be made payable to ProEquities or Pershing. You may not
accept checks made payable to you or your DBA/company name
– Do not accept cash, money orders, or travelers checks
– Do not accept third party checks (double endorsements)
– Do not accept bank starter checks or counter checks
– Do not accept cashier or official checks for any amount less than $10,000 in
non-qualified accounts
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Willful Blindness
• We all have a responsibility for recognizing and reporting
suspicious activities.
• Failure to report a red flag can be viewed as “willful
blindness”.
• Willful blindness subjects the firm and YOU to significant civil
liability and possible criminal penalties.
• Willful blindness is one of the most significant aspects of AML
laws.
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Type of Suspicious Activities
source: FinCEN Suspicious Activity Report Form
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What should you do?
• Suspicious activities should be directed to Compliance
immediately.
• If you have notified Compliance of suspicious activities you
should NOT inform the OSJ, Representative, or Client.
• Let Compliance handle it!
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Civil and Criminal Penalties
• USA Patriot Act
– Fines up to $500,000 or twice the value of the property
involved and 20 years in prison
• Money Laundering Abatement Act
– Fines up to $1,000,000 or twice the value of the
property involved
• Bank Secrecy Act
– Fines up to $500,000 and/or 10 years in prison
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Training and Audits
• All Registered Reps, Investment Advisor Reps, OSJ’s, and
Home Office Employees Must Receive Training on the Act
• ProEquities Will Be Audited For Compliance With the Act
• ALERT - Some Insurance Companies Have Started Requiring
that Agents/Reps, Licensed with Them, Complete Their
Company Specific Training
– Insurance Company(s) AML Training Does not Provide
Exemption from ProEquities Required Training
– ProEquities Required AML Training May not Provide
Exemption from Insurance Companies Requirement
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Communications With
The Public
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Communications With The Public
FINRA Regulatory Notice 12-29
• Communication categories have been reduced
from six to three.
-The new categories are:
1. Institutional Communications
2. Retail Communications
3. Correspondence
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Communications With The Public
• Institutional communication includes any written communications that are
distributed or made available only to institutional investors
• Retail communications include any written communication that is
distributed or made available to more than 25 retail investors within any
30 calendar-day period. “Retail Investor” includes any person other than
an institutional investor, regardless of whether the person has an account
with the firm. Retail communications must be PRE-APPROVED by
compliance prior to being sent.
• Correspondence includes any written communication that is distributed or
made available to 25 or fewer retail investors within any 30 calendar day
period.
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Communications With The Public
Content Standards under NASD rule 2210 have not been affected by this new rule. NASD
rule 2210 states communications must:
– Not be misleading or untrue
– Not lack material facts
– Not contain exaggerated, unwarranted, or unfounded information
– Not contain predictions or promises
– Take into consideration the audience it is directed toward
– Be balanced – showing risk as well as reward
– Must be approved by principal and Home Office
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Retail Communications
• All retail communications must obtain PRIOR approval from
Compliance
– Submit all retail communications via AdTrax
– FINRA review does not equal Pre-Approval by Compliance
– Emerald and Forefield materials are not Pre-Approved
• Appropriate disclosures are required
• Retail Communications may include:
– Newspaper/Magazine ads
– Billboards
– TV/Radio commercials/interviews
– Websites
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Investment Advisory
Business
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Third Party Money Managers
• Suitability of selected portfolio – initially and
ongoing
• Appropriateness of IAR fees
• Required paperwork
• New Account Form (non-brokerage) fully completed
• Investment Advisory Agreement
• All paperwork from the third party manager or required
to open the TPAM account
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Wrap Fee Accounts
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Wrap Fee Accounts are:
– Targeted to a more affluent investor
– Charge monthly fees vs. “per investment” commissions
– Provides a variety of services including:
• Investment advice;
• Investment research; and
• Brokerage services
Advisors must:
– Provide continuous, hands-on management
– Be acutely aware of clients’ assets, trading habits and any other financial
services to be provided
– Advisory business is NOT like traditional commission/brokerage business
– Advisory business is NOT merely an alternate means of compensation
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Wrap Fee Account Suitability
• You must have a reasonable basis to believe the
recommendation of a wrap fee account is appropriate based
on these and other factors:
– Financial status;
– Investment objectives;
– Trading history;
– Size of portfolio;
– Nature of securities held
– Account Diversification
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Wrap Fee Account Suitability
• Once the client’s investment profile is established, you must
determine:
– The projected cost to the customer;
– Alternative fee structures; and
– The client’s fee structure preferences
• You must disclose all material components of the program
including the fee structure, services provided, and that the
program may cost more than purchasing the investments
separately or through a traditional brokerage/commission
arrangement
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Wrap Fee Accounts
• When “not” to use:
– Client wants to “buy and hold” investments
– Client does not understand the fee structure
– No intent to provide continual service
• No servicing, no advisory services provided
– Low assets and no anticipation to add further assets for
management
– Transfer assets, liquidate, then invest in commissioned
products (VA’s, REITs, etc.)
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Wrap Fee Accounts
• Meet with the client at least annually to review
investments, performance, investment goals, time
horizon, and fees
– Best Practice: Quarterly reviews/contacts, with one of
those in person
– Document calls and/or meetings with clients
– Document account reviews (statement, performance reports,
etc.)
» CRM systems with auto date/time stamp
» Makes notes of the advice given during discussions,
including specific “no change” advice
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Wrap Fee Accounts
• Best practices (continued)
• Documentation
– Make notes of other services provided such as
mortgage review, cash flow analysis, budget
preparation, estate planning, etc. that are part of the
overall advisory services provided and which are
covered by the wrap fee
– Follow-up letter or email to client regarding items
covered in review/meeting
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Wrap Fee Accounts
• Sample follow-up letter/email
Dear John,
It was a pleasure meeting with you and Susan yesterday. I hope little
Johnny does well in lacrosse this season.
As we discussed in our meeting, your portfolio seems to be on target;
therefore I do not recommend making changes at this time. In addition to
reviewing your securities accounts, we also looked at your estate plan. I
will review this and call you in the next two weeks to discuss or schedule
an appointment.
As always, I appreciate the trust you have placed in <DBA Investments>.
Please do not hesitate to contact me or my staff if we can assist you in any
way.
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Wrap Fee Accounts
• Examples of “best practice” documentation
– Detailed notes regarding calls, meetings, etc. with
the client
• Especially those calls/discussions of other financial
matters where the IAR was not specifically
compensated for the services, but are covered under
the wrap fee
» Discussions regarding power bills, mortgage, estate
planning, private business, etc.
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Wrap Fee Accounts
• Documentation not adequate
– Meeting held in 2008, but no further meetings,
calls, etc. noted in file, even if they occurred
– No documentation in file
– Computer/CRM system not backed up, therefore
data lost
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Frequently Noted Exceptions
• Frequently-noted exceptions in advisory
paperwork
– New account form incomplete
– Fee schedule not complete
– Client and/or IAR did not sign agreement
– Lack of NAF or IA agreement
– Arbitration agreement or other terms altered in
NAF/IA agreement
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Rep-Managed Wrap Accounts
• CAM/ProTrade accounts
– State licensing requirements
• You are executing transactions, which requires the
appropriate state securities licensing
– For incoming transfers - what holdings are being
transferred in?
– What are the plans for mutual fund holdings?
– Did the rep sell/earn a commission on those
funds?
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Allowable Assets CAM/ProTrade
• Policy regarding share classes
– No-load and load waived mutual funds
– A shares
• Allowed to be transferred in where not sold by the rep
within previous 2 years or where sold at NAV
• Allowed to be purchased in wrap fee accounts at load
waived/NAV at any time
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Allowable Assets (continued)
• Policies…
– B shares
• Allowed to be transferred in where not sold by the rep
within previous 2 years (whether at ProEquities or prior
broker/dealer)
• Allowed as concession to customer to avoid “forced”
surrender charge or taxable event
• Where liquidated (not in-family exchange), subsequent
purchase must be made in no-load fund, load-waived A
share or other non-commissionable product
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Allowable Assets – (Continued)
• Policies…
– C shares
• Allowed to be transferred in as concession to customer to
avoid “forced” taxable event to customer
• Once liquidated, MUST purchase no-load or load-waived A
share, or other non-commissionable product
• Only allowed to be transferred in where not sold by rep in
previous 2 years, whether at ProEquities or prior
broker/dealer
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Allowable Assets – (Continued)
• Money market funds
– Accounts invested mostly or solely in money
market only for an extended period of time
• Potentially brings into question active management
• No penny stocks
– Firm policy requires that penny stocks be
conducted on unsolicited basis only
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Allowable Assets CAM/ProTrade
• Variable annuities
– Only those intended for advisory arrangements,
i.e., no load or low load
– Must be processed through Pershing “Subscribe”
system to be included on CAM/ProTrade
statement
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Allowable Assets CAM/ProTrade
• Options
– Must meet suitability requirements established by
ProEquities and be approved for options trading
by Home Office Registered Options Principal
• Strategies must be suitable for the client
• Client must have the capability to understand the
strategy, on at least a basic level
47
Financial Planning/Advice
• Agreements
– Financial Planning Agreement
– Financial Advice Agreement
• IAR and/or customer revisions to agreement language
not acceptable, unless specifically approved in advance
by RIA and/or BD CCO
• Allowable fees
– If over $5,000, requires IA compliance preapproval
48
Disclosure Brochures
• Deliver to all new advisory clients
– Wrap Fee Program Brochures for Private Access, Defined
Solutions, or CAM/ProTrade/5PR accounts
– Part 2A (TPAM accounts, Financial Planning or Financial
Advice agreements
– Ensure that the required brochure is being provided to
ALL NEW advisory clients
– ProEquities will provide the annual update or material
event update to all advisory clients
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Form ADV Part 2B
• Required effective 7/31/2011 for all IARs who are providing
investment advice to clients
– Personal brochure regarding the IAR
– Provide to all new clients
• Update as needed and send to clients
– Disclosures (complaints, financial, etc.)
– Outside business activities
– IAR is responsible for mailing to customers for updates.
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Personal Trading
• New IARs
– Must provide statements or a manually prepared “initial holdings
report”
• Required under Section 204 of Advisers Act
• Ongoing monitoring
– Representatives Must notify ProEquities of all ProEquities and/or
outside brokerage accounts
– Violation of Code of Ethics for maintenance of account without notice
and duplicate records to ProEquities
• Violations of the Code of Ethics will be included in annual report to
management
• Subject to disciplinary action, including letter of caution/warning,
fine, etc.
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Other RIA/Compliance Issues
• Advertising
– Testimonials prohibited
• SEC rules not ProEquities
– Use of partial client list allowed in limited circumstances,
as long as certain criteria are met
» No cherry picking
» Clients to whom the list is provided
» Partial client list and selection method pre-approved
by ProEquities
– As with any other advertising materials, all IA-related
advertising must be pre-approved
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Other RIA/Compliance Issues
• Political Contributions
– Investment Advisors Act Rule 206 (4)-5
– “Pay to Play Rule”
– Applies to IARs only
– ProEquities Policy issued March, 2011
• Pre-approval required for all contributions over $100 per
individual contribution to any candidate for public office or
political party or multiple contributions to the same candidate or
party, which together exceed $150
• Any candidate or political party – not limited to state/local office
or those for whom the IAR is entitled to vote – includes all federal
offices
• Submit the “Political Contribution Request Form” available on
Advisor Portal
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Other RIA/Compliance Issues
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Customer complaints
– As with all other complaints, must be promptly reported to ProEquities
• Complaint defined as “any written grievance”
– Client is unhappy and they put their unhappiness in writing
– Regardless of product type, must be reported to ProEquities
• Reporting Requirements
– Statistical reporting
– Form U-4/Form U-5, where applicable
– IAR’s Part 2B, if reportable on Form U-4
– Late filing penalties (up to $1500) and possible disciplinary action
to ProEquities for routine late filings
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Suitability
Determination &
Document Completion
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Suitability Determination
 KYC – Obtain information to know the client
 Suitability rule 2111
 Recommendations:
1. Must be suitable to the client’s investment
objectives, risk tolerance, time horizon and overall
financial need.
2. Must be documented whether the client makes the
purchase or not.
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Variable Annuity Recommendations
• FINRA Rule 2330 requires
– The customer to be informed of material features of
the proposed VA such as:
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Potential surrender period
Potential surrender charges
Tax penalties (if redeemed/sold prior to 59 1/2)
M&E charges
Charges for riders and enhancements
Insurance and investment components
Market risk
– The Rep to ensure the customer would benefit from
the features of the proposed VA such as:
• Tax-deferred growth (if not purchased in a qualified account)
• Annuitization
• Death or living benefit
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Variable Product Compliance Guidelines
• Surrender charge on old contract greater than 5% of
contract value, or $2000
• Replacement products held less than 5 years and originally
sold by the same rep
• Replacements with decreased living or death benefits
• Transfers where penalty free withdrawal is taken and
invested in another contract
• Transactions for customers under age 50 and over the age
of 65
• Transactions exceeding $250,000
• Transactions which exceed 40% of client’s net worth
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Required ASF for 1035
Exchanges
• ALL fields MUST be completed on the Annuity Switch
Form (ASF)
– Blank boxes, “N/A” and “Per Prospectus” will be
rejected
• Use the Morningstar Annuity Intelligence tool
located on Advisor Portal OR Contact carriers to
ensure surrender charges, death benefits, riders, etc.
are accurately stated on the ASF.
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VA Transaction Requirements
• Submit ALL Variable Annuity transactions to your
OSJ for REVIEW and PRE-APPROVAL PRIOR to
submitting to the product sponsor, including:
– New money purchases
– Additions to existing policies
– 1035 exchanges
**All transactions require pre-approval by your OSJ
***Group Variable Annuities must be processed through ProEquities.
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VA Training
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ProEquities requires annual training on
Variable Annuities in compliance with
the training requirements of Rule 2330
–
All reps who sell Variable Annuities
MUST complete the training
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EIA - Outside Business Activity
• Disclose EIA sales activities on Outside Business Activity
Form
– Separate from Insurance activities
– Detail under “Other Outside Business Activity”
– Disclose companies you sell EIA’s with, number of hours
per month you spend working on EIA business, and total
compensation for previous year
• Trade Blotter Requirements
– Maintain EIA Trade Blotter for all transactions
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EIA Guidelines & Parameters
• Allowable EIA Activities:
– Sales commission 10% or less
– Surrender period 10 years or less
– Unregistered EIA’s may not be marketed primarily as
investments
– Ensure customer is fully informed
• Product Features
• Suitability
• Expenses and Costs
• Annuity Switch Form(ASF) requirement
– If securities sold to purchase EIA or other insurance product
or EIA sold to purchase a security, then an ASF is required
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Failure to Follow EIA Procedures
 First Instance: Written notice of violation
 Second Instance: Letter of Caution & $250 fine
 Third Instance: Letter of Warning & $500 fine
 Fourth Instance: Ask for resignation
64
Mutual Fund Suitability & Breakpoints
• Suitability
– Share Class – front end load, back end load, ongoing
load
– Time horizon and Age
• Breakpoints
– Household accounts to obtain total holdings for
breakpoint
– Understand breakpoint availability per prospectus
– Letter of Intent/Rights of Accumulation
– 90 Day Reinstatement
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Mutual Fund Documents
• MFIAF (Mutual Fund Investor Acknowledgement Form)
– “Per Prospectus” not acceptable. Complete ALL blanks.
• USL (Universal Switch Letter)
– Required for all switches
– Document fees, charges, etc.
• Other Required Documents
– MF Analyzer, Letter of Intent, B Share Worksheet
Failure to submit required paperwork may
result in a commission hold
66
Mutual Fund B Share Policy
• B Share Mutual Fund Policy
– New Purchase Documents (excluding systematics)
• B Share Worksheet
• Mutual Fund Investor Acknowledgement Form
• Mutual Fund Analyzer comparing share classes (recommended)
• Large B Share Purchases
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–
–
–
$100,000+ must receive pre-approval from Compliance
Mutual Fund Analyzer required – OSJ & Compliance must approve
Letter of Consent with client signature
Failure to obtain pre-approval, trade will be cancelled and corrected to A
Shares at the expense of the Representative
• Pershing or Fund Direct - Same Policy Applies for both
67
Mutual Fund C Share Issues
• Large C share purchases where the client may have received a
breakpoint in A shares.
• C share purchases for clients who have a long time horizon
where it may be more cost effective to place the client in A
shares over the long term due to lower internal fees and
expenses on the A share vs. the C share. The FINRA mutual
fund analyzer is a great free tool that can be utilized to show
clients the effects that different share class loads and their
corresponding internal expenses may have on their
investments over the life of the investment.
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Unit Investment Trusts (UIT)
• What is a UIT?
1. Investment Company Securities issued in
units
2. Sponsor assembles a portfolio, deposits
securities in a trust, and sell the units in a
public offering
3. Securities are redeemable and issued for a
specific term or series.
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Unit Investment Trust
•
•
•
•
NASD NTM 04-26
Breakpoints-UIT breakpoints generally function as a sliding reduction in the
sales charge percentage available for purchases beginning at specified dollar
amounts, such as $25,000 or $50,000 (or the corresponding number of units).
Generally, investors may aggregate same-day purchases from a sponsor in their
own and related accounts to reach a breakpoint.
Rollovers-After an investor redeems trust units through a sale or mandatory
redemption, UIT sponsors will allow him or her to reinvest the proceeds into
another UIT(s) usually within 30 days, at a reduced sales charge. Please see the
trust’s prospectus for specific policies.
Exchange discounts: Certain UIT sponsors permit exchange discounts for
purchases made with the proceeds from a UIT holding of another sponsor
70
Leverage and Inverse ETFs
• FINRA Regulatory Notice 09-31
• Leverage ETFs seek to deliver multiples of the
performance of the index or benchmark they
track.
• Inverse ETFs, also called “short” funds seek to
deliver the opposite of the performance of the
index or benchmark they track.
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Leveraged and Inverse ETFs
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•
•
•
Most leveraged and inverse ETFs “reset” daily, meaning that they are designed
to achieve their stated objectives on a daily basis. Their performance over
longer periods of time can differ significantly from the performance of their
underlying index.
Due to this daily “reset” a leverage or inverse ETFs performance can quickly
diverge from the underlying index or benchmark which could lead to
significant losses even if the long term performance of the index showed a
gain.
Leveraged and Inverse ETFs may be more costly than traditional ETFs and you
should use the FINRA Fund Analyzer to estimate the impact of fees and
expenses on the investment.
Leverage and Inverse ETFs may be less tax efficient than traditional ETFs, in
part because daily resets can cause the ETF to realize significant short-term
capital gains that may not be offset by a loss.
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Direct Investments Products (DI)
There are many types of Direct Investment Products available
through ProEquities: (i.e.)
• Real Estate Investment Trusts (REITs)
• Business Development Companies (BDCs)
• Limited Partnership / LLC programs (LPs/LLCs)
• Private Real Estate Programs
• Private Oil & Gas /Royalty Interest Programs
• 1031 / 1033 exchange programs (1031s)
• Private Land Development and Equity Programs
• Equipment Leasing (usually publicly registered/non-traded)
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Direct Investments- Compliance
Perspectives
• ProEquities Home Office Compliance wants to help you and
your Representatives.
• We are all in this together!
• Regulations continue to increase for Alternatives.
• Striving to keep you and your Representatives compliant
without reinventing the wheel.
• Many firms are being fined for not following their current
procedures and for not adhering to prospectus rules
regarding a specific state.
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DI Product Industry Regs.
• Representatives selling Direct Investments (DI) must be
appropriately registered to be able to solicit DI products.
• If a Rep does not have a Series 7, 22 or 62 license, he/she
cannot be the rep of record for a client or solicit DI
products until properly licensed. The representative must
contact the Licensing Department to submit a request to
become Series 7, 22 or 62 licensed. Also, if a
representative is not registered in the client’s state of
residence, the rep must add this State to his Registrations
prior to soliciting to a client. All new documentation must
be provided to client for completion after the effective
date of this registration.
.
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DI Guidelines
•
•
•
Limitations/Guidelines:
For REITs, LPs, LLCs or Private RE Offerings:
No more than 10% of the client’s investable assets may be in any one
program****
• For BDCs: These offerings require an investor to have a investable net worth of
$350,000 or more, regardless of income. For clients with a net worth of
$350,000 to $499,000 – no more than 5% should be invested into any one
BDC, 10% overall; for clients with a net worth of $500,000 or more – no more
than 10% should be invested into any one BDC, 20% overall.
• The total DI Investments should not exceed 30% of the client’s overall
investable assets
• Requests for an exception to these guidelines should be sent in writing to the
DI Compliance Principal prior to presenting to a client, and must have written
approval prior to submitting to OSJ.
• If using Joint Net Worth to meet product suitability, you should use Joint Net
Worth for overall concentration of DI Investments.
****Certain states have implemented more restrictive guidelines and you should
consult the prospectus for the product in order to determine client suitability.
These state guidelines supersede ProEquities guidelines.
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DI – Regulatory Requests
• FINRA Arbitrations are now asking for more information
not just from representatives but also from the
supervisor/principal approving the transactions.
• FINRA also requests that we furnish not only the firm’s due
diligence file, but the representative’s due diligence file on
the product. This file should be kept in a product file not a
client file or with current offered prospectus information
and can be electronic records.
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DI Product Training
•
•
•
Representatives who obtain their licenses and registrations in order to sell DI
products must also take the DI Product training provided by the ProEquities Due
Diligence Department. This will classify the representative as a “DI Advisor” and
place his or her name in the roster for any upcoming meetings, calls or
conferences concerning DI products.
This training program is called “DI Certify” and the link to begin this training can be
found on Advisor Portal, Sales Support and Marketing/Due Diligence Product
Services and click on “DI Certify”. Once under this tab a representative should see
“Product Training” and should take each product type tests. Once complete,
he/she should click on the name of product to be sold to certify the specific
product they wish to sell.
It is also recommended that the representative contact the sponsor to obtain a
sales kit and check on attending a Rep focus meeting.
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DI Product Training Continued
• ProEquities Due Diligence Department performs an extensive review of
the sponsor and each of their products; however, while ProEquities may
have approved this product to be sold on our platform, it would have been
approved for “some investors” and may or may not be suitable for your
specific client. This can only be determined by you as the representative
and the client as each situation and client is different. Please ensure that
you are doing your own research and not just depending on ProEquities
due diligence alone. Regulations require representatives to explain how a
representative determined the suitability of client’s transaction.
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Key Items on DI Transactions to Maintain
• Documentation of client meetings, times, phone
calls;
• A product file with information such as brochures,
prospectus, continued quarterly reports and
ProEquities initial product report that would support
you performed your own due diligence and did not
rely on just the wholesaler information.
• Your rationale in detail about the suitability of the
transaction.
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Client Suitability Continued
Points to consider:
- Age of client, physical and mental health
- Long Term effects on the Heirs
- Client’s required time horizon and current tax bracket
- Income and Net Worth Qualification by Product – (Particularly
whether or not this investment will meet the client’s State of
Residence requirement as stated in prospectus.
- Are the Risk Tolerance and Investment Objectives of Client in line with
Product being offered?
- Illiquidity of Product offered and client’s overall % of illiquid
investments. (i.e., if client owns 50% private Real Estate and they are buying
REITs then you need to take that into account.
- Does client’s income appear to be sufficient prior to this investment?
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Client Suitability Continued
• Income potential needs of client – Not all DI products generate
income for investors nor can they guarantee total return of
principal. Have you explained these risks to the client?
• Does the client thoroughly understand the product being offered
and how the product is structured
• Does the client understand how the investment can be affected in a
downturn of the economy. Do clients understand the product
income can be suspended and the value of asset can go up or down
in certain situations.
• Risk factors and fees associated with product should be reviewed
with client upfront prior to sale.
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Client Suitability Continued
• Review the transaction as if you have to go on the
defensive the next day;
• Always keep notes on the transaction.
• When making suitability determinations for DI
products, if you have any questions on suitability or
need assistance, please contact your OSJ/DP or the
DI Compliance Principal or Due Diligence
Department at ProEquities.
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DI Advertising
•
DI Advertising submitted should follow FINRA guidelines for Advertising at all times. Product
disclosures could be required in addition to standard representative disclosures and some
could require FINRA review.
•
NASD Rule 2210(c)(2) requires a firm to file advertisements and sales literature concerning
public direct participation programs within 10 business days of first use or publication
Pieces submitted for review should include any FINRA reviewed letters from sponsor if
applicable. If a slide presentation is submitted, it should have a separate introductory slide
that should have Representative name and appropriate rep disclosure and product disclosure
to be viewed at beginning of program or as a handout as clients enter a meeting.
•
•
Products that fall under Regulation D requiring Accredited Investors cannot be sold by means
of a general solicitation. Discussions of these products can only take place with clients with
whom the representative has a pre-existing relationship PRIOR to the offering of this product
on ProEquities platform. Any discussion of these products will require PES Home Office
Compliance approval prior to the invitation being sent.
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DI Workflow
• DI paperwork can be submitted electronically through either
STP or Onboard for OSJ/DP approval. Once approved the
originals can be forwarded to the Sponsor or Custodian by the
representative.
• The originals generally do not go to ProEquities Home Office
unless a check needs to be attached to subscription document
prior to sending to sponsor if non-qualified or if purchasing
within a Pershing IRA brokerage account purchase although
not required. No DI purchases are allowed within fee-based
IRA’s, 403-b accounts or brokerage accounts where Pershing is
not the custodian such as cash accounts.
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DI Workflow Continued
• If Pershing is the custodian, there is a Transmittal Sheet that
can be attached to the Pershing IRA original subscription
document and Private Investment Form that enables the rep
to overnight to Pershing directly as long as the client’s account
is funded and the funds are clear of any 4-day check hold. This
form can be found on Advisor Portal under “T” for transmittal
sheet. Just remember that Pershing has a 48-72 hour
turnaround. The Private Investment Form must be attached
and completed, including full name of investment description.
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DI Workflow Notes
Things to remember:
• REITs generally do not require a “wet” principal signature on the subscription
documents.
• LPs/LLCs, some BDCs and Private DI programs usually require a physical “wet”
signature of the principal approval. Most will accept a fax copy of the OSJ/principal
signature, but representative should contact sponsor to be sure.
• Most sponsors do not accept third party checks endorsed by a client payable to
sponsor. In any review of a transaction the OSJ/DP should also review client’s
check for client name or authority to sign the check provided. Counter checks
should not be used.
• Generally, most sponsors require original subscription documents be provided to
process the transaction. Representatives need to make sure once OSJ/DP has
approved they are then allowed to send out the original.
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DI Product Tips
•
•
•
Volume Discounts are available for some DI products – (This is usually for the REITs and
can be found in the Plan of Distribution section of the prospectus). Some sponsors will
automatically apply once received but representatives should examine this section of
prospectus and be familiar with the levels provided.
IRA accounts are subject to Unrelated Business Taxable Income (UBTI or UBIT) tax from
some alternative products, usually from an LP or leasing program. IRA’s are not exempt
and a client can be charged interest owed and be subject to a significant tax preparation
fee from the custodian.
Representatives must always present clients with a Prospectus, either physically or
electronically if available for review prior to submitting any paperwork for processing.
Most sponsors give instructions in the kit that a client must have at least five (5) days
prior to purchase. If a representative is providing a prospectus to a client it is always a
solicited trade, unless that client brings in the prospectus to that rep. In that situation,
unless the rep’s broker dealer has a selling agreement with that product, the rep cannot
assist client.
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DI and Due Diligence Product Hubs
• Access to Due Diligence Department Reports*
*These reports are for Broker/Dealer Use Only.
• DI Alerts and News on Products, Paperwork, Closings, etc., will
generally be sent out as a blast email but could also be placed
on Advisor Portal Alerts or News.
• Sponsor Name, Telephone Number
• DI Department and DD Department contacts
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Dealing with clients who
may have diminished
mental capacity or
elder abuse
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Diminished Capacity
Diminished Capacity may sometimes be difficult to identify.
Common Signs of Diminished Capacity are listed below.
• Memory Loss-is the client repeating him/herself
• Disorientation- Is the client confused over time, place or simple concepts
• Changes in personality
• Poor Judgment
• Difficulty conveying simple instructions
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Diminished Capacity
If your client is showing signs of diminished capacity you should
• Check to see if a trading authorization/POA is on file. If so
contact them.
• Suggest that the client bring a close family member or friend
to your next meeting
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Elder Abuse
Financial Elder Abuse occurs when someone exploits or
influences an elderly person to gain access to that person’s
assets.
• Misusing or stealing an elders money or possessions
• Coercing or deceiving an elder into signing documents such as
POAs or wills
• Elder abuse could be conducted by a relative, caretaker, friend
or stranger who gains the elderly persons trust or who uses
scare tactics to unduly influence the elderly person.
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Elder Abuse
Elder Abuse Red Flags
• Atypical or unexplained withdrawals
• Abrupt changes in wills, trusts, or POAs
• Changes in beneficiaries on insurance policies,
qualified accounts, or TODs
• Fear of eviction or nursing home placement if
money is not provided
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Elder Abuse
If elder abuse is suspected please notify the
compliance department. Some States require
elder abuse to be reported to the appropriate
state agency(s).
For additional info please review FINRA
Regulatory Notice 07-43
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Social Media
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Social Media
– Allowable forms of social media include:
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Approval & Review Process
• OSJ Approval to Begin
• Complete Brainshark training prior to being approved for
social media
• Sign agreement acknowledging that they understand and will
adhere to the ProEquities policies while utilizing social media
to conduct securities business
• Email address registered with FMG and Smarsh
• Pre-approval of personalized landing page and other material
used
• Feed from sites to Smarsh which requires OSJ to review and
monitor
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Compliance
Reminders
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Handling of Customer Funds
• ProEquities operates pursuant to the (k)(2)(ii) exemptive provision
and must transmit customer funds AND securities by noon of the
next business day following receipt.
• There are NO exceptions to this provision. It also applies to the
home office. Therefore you may not hold any checks or securities
past noon of the next business day following receipt.
• It is imperative that you log all checks and securities that you
receive on the respective blotter and send them on to either the
home office or product sponsor no later than noon the following
business day
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Variable Annuity Policy Delivery
• Be sure to maintain evidence that the policy
was delivered to the client
• Some companies no longer send delivery
receipts such as JNL in which case you will
need to use the ProEquities delivery receipt
which can be accessed on advisor portal under
the forms section of the ops and compliance
tab.
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Outside Business Activities
• FINRA Rule 3270 – Outside Business Activities of Registered
Persons
– Outside Business Activities (OBA) form must completed and
approved by Compliance PRIOR to engaging in the activity
• Spouse activities must be disclosed as well
– Fully complete the OBA Questionnaire and make any changes as
needed
– Annual attestation required for each OBA
– Potential conflict of interest
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Customer Correspondence
• Letterhead with proper disclosures
• Includes all outgoing and incoming securities-related
correspondence
• E-mail is considered written correspondence
– Reminder that text messages and instant messages are prohibited under
ProEquities’ policies as these constitute written correspondence but cannot be
captured and maintained as required.
• Do not use securities letterhead for personal or non-client purposes
• All correspondence is required to be reviewed by your OSJ
• Correspondence can be submitted via AdTrax
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Outside Brokerage Accounts
• NYSE Rule 407/NASD Rule 3040
• Prior notification to ProEquities of any securities account held
outside of the firm.
• Firm opening the account should require written authorization from
ProEquities before opening the account.
• ProEquities must receive duplicate statements and confirmations.
• Includes personal accounts of Registered person and immediate
family.
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Customer Complaints
•
ALL complaints (including insurance and other non securities complaints), oral and written,
must be sent to your OSJ and the Compliance Department immediately upon receiving
–
Complaint simply defined is a client’s putting their unhappiness or dissatisfaction in writing!
•
If you are unsure a complaint is received contact the Compliance Department
•
Clients may contact ProEquities directly for any matter including filing a complaint
•
Representatives may NOT settle directly with a customer under any circumstances
•
Settlement agreements are required in most cases
•
Copies of complaints and all supporting documents should be maintained in the Complaint File
indefinitely
•
Compliance notifies E&O carrier of all claims in order to preserve the notice provision of the
E&O policy
•
Contact Michelle Smith in Compliance with any complaint questions
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Regulatory Issues
• Notify your OSJ and Compliance if:
 You have a regulatory issue (arbitration, lawsuits,
arrests, indictments, etc., whether securities related or
fixed, non-security product related)
 You are being audited by a regulatory agency or have
received an inquiry from a regulatory agency
• Provide Compliance with copy of regulatory agency audit
reports and correspondence
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Form U-4 Reporting
•
Securities Regulators, both federal and state, require that you and ProEquities
maintain an accurate and complete Form U-4 at all times. You are required to
notify ProEquities immediately of any of the following items:
 Address Change (home or business)
 Customer Complaints – whether securities or insurance related
 Civil Judgment – report to ProEquities at both issuance of judgment and final
judgment if appealed.
 Compromise with a creditor
 Liens
 Bankruptcy – report to ProEquities at the filing and discharge
 Arrest
 Litigation
 Regulatory Action (including state insurance regulators)
•
•
Failure to maintain an accurate and complete Form U-4 is a violation of
securities regulations and is a slam-dunk finding for an examiner and potential
penalty to you and ProEquities!
If you are not certain if an item is reportable on Form U-4, call Compliance
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Form U-4 Reporting
Requirements
•
Where these events are reportable on the representative's U-4, the U-4 is required
to be filed (i.e., drafted, signed by the representative and filed by ProEquities) within
30 calendar days from the event date.
•
Each event is assessed a $110 disclosure review fee by FINRA
•
Late filing penalties - currently assessed at $100 for the first day and $25 for each
additional day up to a maximum of 60 days. This increases the maximum amount of
the late disclosure fee from $300 to $1,575. Please see FINRA regulatory notice 1232 for additional info.
•
The filing fees and late filing penalties will be charged to the representative.
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Non-Cash Comp Reimbursement
• Request approval PRIOR to engaging in activity
1. Invitation to attend a product sponsor’s training event.
2. Receiving reimbursement from a product sponsor for an
event YOU hold.
- Ensure activity meets the policy standards
- Maintain all appropriate receipts, invoices, etc.
- Sponsor reimbursement must be in check made
payable to ProEquities, Inc. from the sponsor’s
checking account
*No personal checks from wholesalers or other product sponsor employees
will be accepted.
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Private Securities Transactions (PST)
•
Private securities transactions must be requested in writing from the
representative and approved by Compliance in writing PRIOR to any such
investment.
•
Examples:
– Selling securities to public investors on behalf of another party without
the participation of the employing firm
– Purchasing securities for your own account away from the firm
– Referring an individual to a company who eventually purchases an
interest in the company directly from the company
•
Concerns and Conflicts:
– Potential for “selling away”
– Confusion to investors
– Legal and regulatory exposure for the firm
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Books and Records
• Maintain 6 years
– Client account must be kept 6 years after account
closed
• Maintain 3 years
– Correspondence, Advertising, Checks and Securities
Blotters, Trade Blotters, Statements, Audits
• Maintain Permanently
– Rep contracts and files, Complaints, Log of closed client
accounts
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Questions?
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