ARM
2014 Annual Educational
Conference
NASAA Regulator Panel
Amelia Island, Florida
March 4, 2014
Panelists & Moderator
Pam Epting – Florida
Andrea Seidt - Ohio
Melanie Lubin - Maryland
Moderator: Janet L. Edwards
UPDATE ON STATE RULES &
LEGISLATION
Update on State Legislation
Florida –
3 bills currently filed impacting the securities industry:
(1) proposal to authorize Intrastate Crowdfunding;
(2) proposal to prohibit employers from obtaining user id and passwords for
employee’s social media accounts;
(3) proposal to prohibit employers from conducting credit checks on employees or
potential employees; an amendment has been incorporated to exclude the securities
industry
Louisiana –
Proposing legislation to require an examination or certification for an RA affiliated with a
federal adviser in order to qualify to do business in Louisiana. There is currently an
exam/cert. requirement for an RA affiliated with a state registered IA, but not an SEC IA.
Nevada –
2014 off year for legislature; however made revision to make it a dishonest practice to use
a certification or professional designation that is non-existent.
Update on State Legislation
Ohio –
Considering legislative changes as a result of the
enactment of Dodd-Frank and JOBS Acts.
Utah –
Considering an exemption for Merger & Acquisition
dealers; may be handled by rule but will await
outcome of federal legislation. Will follow the
standards set forth in recent SEC no-action letter.
Update on State Rules
Florida –
During 2014 will be proposing rules regarding the following:
(1) updates to incorporations by reference;
(2) updates to IA rules to include issues relating to
custody and supervision;
(3) deletion of obsolete rules;
(4) overhaul of rules to make more user friendly.
Nevada –
Currently updating regulations and considering adoption of the
following:
(1) NASAA Unethical Business Practices of Investment
Advisers, Investment Adviser Representatives and
Federal Covered Advisers; and
(2) NASAA Custody Requirements for Investment Advisers
Update on State Rules
Washington –
Have proposed amendments to investment adviser regulations
that provide for two limited exemptions from IA registration:
(1) certain venture capital fund managers, and
(2) certain 3(c) (7) fund managers.
Texas –
In 2014, Texas adopted a notice filing requirement for advisers
to private funds and made corresponding changes to the rule
exempting advisers to institutional investors from registration.
Maryland –
Updating IA rules to modify:
(1) Brochure Rule
(2) Performance-Based Compensation Provisions
(3) Custody Requirements
Other Guidance or Significant
Regulatory Changes
Florida –
Have implemented a 5 year cycle examination program for state registered IA
firms
New York –
May improve timeliness of BD agent registration in NY by timely submitting
FP; per NY law the prints must "clear" prior to a decision being made.
Ohio –
Recommend (1) resolution of old disclosure items prior to submitting an
application, and (2) submission of a timely response to requests for disclosure
details.
Tennessee –
Will implement a field examination program to review the sales practices of
branches of broker-dealer firms beginning in late April 2014.
STATE ENFORCEMENT
TRENDS
Actions on License, Industry
Participants
• 3564 licenses withdrawn due to state action (27% increase
from 2011 reporting period)
• 736 licenses revoked, suspended, or conditioned
• Industry Participant Breakdown:
– 414 actions against Broker‐Dealer Firms & Agents
• 225 actions against BD Firms, 189 against Agents
– 338 actions against Investment Adviser Firms & Reps.
• 181 actions against IA Firms, 158 against IARs
– 46 actions against Insurance Firm or Agent
ENFORCEMENT CONCERNS
•
•
•
•
•
•
•
REG D- 506 PRIVATE PLACEMENTS
‘JOBS’ ACT ISSUES/CROWDFUNDING
REG A+
SUITABILITY
NON-EXCHANGE TRADED REITS
ILLIQUID SECURITIES
PONZI/PYRAMID/BIZ OP
HOT TOPICS AND BEST PRACTICES
FOR BROKER DEALERS
1) Suitability
Broker Dealers (“BDs”) must develop effective standards and criteria for
determining suitability. State regulations and FINRA Rules 2090 and 2111
require registered persons to “know your customer” and receive training
sufficient to demonstrate knowledge of products prior to sale.
2) Develop, Update, and Enforce Written Supervisory Procedures
BDs should also ensure that staffing and expertise are commensurate with
the size of the BD, type(s) of business engaged in by the firm, and the
individual responsible for specific procedures. With recent announcements
of BD staff reductions, state securities regulators have become concerned
that proper internal controls and the ability to respond to customer service
and regulatory inquiries are maintained.
12
HOT TOPICS AND BEST PRACTICES (cont.)
3)
Exception Reports
Introducing dealers should obtain the necessary exception reports from
the clearing dealer to ensure proper compliance. Upon the generation of
exception reports, all BDs must document and resolve “red flags” in a
timely manner. BDs that rely solely upon conversations with salespersons
to address exception reports without contacting investors may subject
themselves and supervisory staff to regulatory and/or legal action.
4)
Branch Office Audits
Develop a branch audit program which includes a meaningful audit
document/plan, unannounced visits, a means to convey audit results, and
a follow-up plan requiring that the branch take corrective action.
13
HOT TOPICS AND BEST PRACTICES (cont.)
5) Selling Away
BDs must ensure that adequate procedures are in place to address private securities
transactions (selling away). If this activity is permitted, the firm’s written supervisory
procedures should be adequate to monitor this activity on an ongoing basis. The BD’s
procedures must have a mechanism to conduct a meaningful review of the request and
in the instance where the request is denied, a process to determine the salesperson
is/has not engaged in the activity. Additional violations which may be charged in
selling away cases include, but are not limited to, fraud, sale of unregistered securities,
and supervision.
6) Outside Business Activity
Written outside business activity requests from salespersons must be received,
reviewed and approved by the firm prior to the activity. The BD and salesperson are
obligated to report the outside business activity on the salesperson’s Form U-4. The
firm should have a supervisory procedure in place to address its approval/denial
process and a requirement that should the approved outside activity change the
salesperson is required to promptly report the changes to the firm.
14
North American Securities Administrators Association | www.nasaa.org
HOT TOPICS AND BEST PRACTICES (cont.)
7)
Advertisements
Advertisements and sales literature MUST be fair and balance and MUST be
approved by the BD and/or FINRA. Seminar notices/advertisements, programs,
seminar materials utilized, and guest speakers must be approved by the BD. In
instances where the salespersons routinely conduct seminars, a supervisory
representative of the firm should randomly attend the seminar for compliance
purposes. Remember, your advertisements are published into the public domain
and regulators, the public, and your competitors are watching.
8)
Correspondence
Correspondence, both electronic and hard copy, must be effectively monitored by
the BD. This includes a system of capturing and maintaining electronic businessrelated correspondence sent by salespersons from websites and social network
service providers outside the firm. For additional guidance, refer to FINRA Notice
11-39.
15
North American Securities Administrators Association | www.nasaa.org
HOT TOPICS AND BEST PRACTICES (cont.)
9) Customer Complaints
Upon receipt of a complaint, firms must acknowledge receipt, conduct and
document a thorough review of the customer’s allegations, and, if necessary, update
the salesperson’s Form U-4. In situations where the firm discovers wrongdoing, the
firm should redress customer harm. Timely reporting and remediating customer
harm are some of the factors under NASAA guidelines to determine if the firm is
entitled to credit for cooperation.
10) Dealing with Senior Citizens
Baby Boomers are now moving into retirement. As we age into our “golden years”
our cognitive abilities begin to wane. BDs and, for that matter, financial professionals
should develop procedures/best practices for handling accounts of “senior”
investors. A number of the recommendations relating to these best practices are
contained in joint reports issued in 2008 and 2010 by NASAA, SEC, and FINRA found
below.
16
North American Securities Administrators Association | www.nasaa.org
STATE EXPUNGEMENT
PROCESS AND TRENDS
NASAA Expungement Review
Process
• Expungement requests are communicated from
FINRA to NASAA Steering Committee as part of Rule
2080 waiver process
• Steering facilitates state review of requests, including
weekly calls with state expungement points of contacts
• States report whether they are or are not opposed to
expungement and whether they are or are not likely to
intervene in the litigation
• Not uncommon for states to request additional
information where expungement recommendation is
scant on details
Combined Rule 2080 Waiver
Requests & Litigation
19
Rule 2080 Waiver Requests
20
Rule 2080-Related Litigation
(No Prior Waiver Request)
21
Expungements: Looking
Ahead
• States will continue to request
additional information when reviewing
2080 waiver requests, if additional
information is warranted.
• States likely to take additional action if
there’s an issue with a particular
waiver request.
• States will continue to be involved
with litigations, e.g., Lickiss, John Doe
• Ongoing dialogue with FINRA and
FINRA Dispute Resolution.
22
ARM 2014
ANNUAL EDUCATIONAL CONFERENCE
NASAA Regulator Panel
Amelia Island, Florida
March 4, 2014