More On Legal & Compliancefrom The Advisor's Professional Library
- Whistleblowers A whistleblower is any individual providing the SEC with original information related to a possible violation of federal securities law. The Dodd-Frank Act established a whistleblower program that enables the SEC to reward individuals who voluntarily provide such information.
- RIAs and Customer Identification Just as RIAs owe a duty to diligently protect their clients privacy and guard against theft, firms also play a vital role in customer identification. Although RIAs are not subject to an anti-money laundering rule, securities regulators expect advisors to address these issues in their policies and procedures.
The Financial Industry Regulatory Authority is warning broker-dealers to ensure that their supervisory procedures regarding use of certifications and designations in advising senior investors are in order, as protecting vulnerable customers, including senior investors, continues to be a high regulatory priority for FINRA.
FINRA issued in November a Notice to Members that urged BDs to implement, as appropriate, the practices outlined in the Notice to strengthen their own supervisory procedures.
FINRA points to Regulatory Notice 07-43, which requires firms, at a minimum, to have supervisory procedures in place reasonably designed to prevent their registered persons from using a senior designation in a manner that is unethical or misleading. “Firms that allow the use of any title or designation that conveys an expertise in senior investments or retirement planning where such expertise does not exist may violate FINRA Rule 2010, NASD Rule 2210, NYSE Rule 472, and possibly the anti-fraud provisions of the federal securities laws and FINRA rules,” the Notice warns.
NASD Rule 2210 and NYSE 472 prohibit firms and registered persons from making false, exaggerated, unwarranted or misleading statements or claims in communications with the public, the Notice states. This prohibition includes referencing nonexistent or self-conferred degrees or designations or referencing legitimate degrees or designations in a misleading manner. Firms, the Notice warns, must “therefore must have adequate supervisory procedures in place to ensure that their registered persons do not violate this requirement.”
As with all supervisory procedures, these procedures should be written, clearly communicated to employees, effectively enforced, and they should cover how approved designations may be used, the Notice states. In addition, FINRA reminds firms that all advertisements and sales literature as defined in NASD Rule 2210(a), including communications that include the use of these designations, must be approved prior to use and in writing by a registered principal pursuant to NASD Rule 2210(b)(1).
To better understand the use and oversight of senior designations, in January 2011, FINRA surveyed retail broker-dealer firms that varied in terms of size, location, product mix and business model.
One hundred fifty-seven firms provided responses to the survey, which focused on the prevalence of senior designation usage, the extent to which particular senior designations were used or prohibited and the supervisory systems in place regarding senior designations.
FINRA said that the survey responses pointed to “widespread use of senior designations in the broker-dealer community.” Specifically, 68% of firms that completed the survey indicated that they allow the use of senior designations by registered persons. Of the firms that permit the use of senior designations: 89% currently have registered persons who use senior designations; and 11% do not have any registered persons using senior designations at this time.
Survey respondents that allow registered persons to use senior designations were asked whether they prohibit the use of any particular designations. While 73% of the responding firms reported that they prohibit the use of particular senior designations, 27% said that they do not have any such prohibitions, the survey found.
Of the firms that prohibit the use of particular designations, some banned the use of only one or two designations while other firms were much more restrictive—i.e., allowing the use of only a small number of designations.