More On Legal & Compliancefrom The Advisor's Professional Library
- Trading Practices and Errors When SEC-registered investment advisors conduct annual audits of firm policies and procedures, they should pay close attention to trading practices. Though usually not required to, state-registered advisors should look at their trading practices and revise policies that do not fully protect clients.
- Dealings With Qualified Clients and Accredited Investors Depending upon an RIAs business model and investment strategies, it may be important to identify “qualified clients” and “accredited investors.” The Dodd-Frank Act authorized the SEC to change which clients are defined by those terms.
The new head of the Securities and Exchange Commission’s national broker-dealer exam program said Monday that two big areas of focus for the SEC are variable annuities and firms’ supervisory policies.
Variable annuities “are a big focus” for the SEC, said Julius Leiman-Carbia, associate director and head of the National Broker-Dealer Examination program in the SEC’s Office of Compliance Inspections and Examinations (OCIE), with 12% of SEC exams focusing on VAs. Leiman-Carbia, who was appointed to his position in April, oversees approximately 300 lawyers, accountants and examiners responsible for the inspections of U.S.-based broker-dealers.
Suitability is another big issue, Leiman-Carbia said, “not only with products but with practices and procedures.” This highlights a bigger issue, he said, “which is one of supervision.” While it’s “sometimes hard” for firms to supervise all of their representatives in various locations, “supervision is extremely important—to know what is going on at the regional and community level.”
Leiman-Carbia noted that OCIE’s “more robust” exam program—which focuses on risk assessment—has included more collaboration among the regional and national offices. The regional offices “know the players and the profile of firms,” he said, “so we need to identify the risks that come out of the regions and assess how [those risks] will have a national impact.”
Both Leiman-Carbia and Mike Rufino, chief operating officer, member regulation sales practice at the Financial Industry Regulatory Authority (FINRA), participated in a panel discussion at the Insured Retirement Institute’s (IRI) regulatory affairs conference in Washington on Monday.
Rufino said that among the examination program changes that FINRA has made over the last year includes an office of risk, verification of firm assets, and more branch office exams. FINRA, he said, will perform more than 800 branch office exams in 2011 because that’s where any broker “wrongdoing” is most likely to occur.
Rufino also noted three areas of concern for FINRA: the retailization of structured products; products with principal protection; and broker-dealers’ outside business activities.
The proliferation of structured products that have been designed for more sophisticated high-net-worth folks are making their way to “mainstream America,” Rufino said, has gotten the attention of “regulators and Congress.”
As for products that tout principal protection, Rufino says FINRA is asking, “What is protected? How much is protected—10%, 20%?” And, he said, FINRA wants to know if brokers are explaining the “risks that go along with these products.”
Brokers’ outside business activity is also a “big focus” for FINRA, Rufino said. FINRA needs to know what a broker-dealer is doing outside of their main business because “we still have a responsibility to supervise that” activity.