More On Legal & Compliancefrom The Advisor's Professional Library
- Risk-Based Oversight of Investment Advisors Even if the SEC had a larger budget and more resources, it is doubtful that the Commission would have the resources to regularly examine all RIAs. Therefore, the SEC is likely to continue relying on risk-based oversight to fulfill its mission of protecting investors.
- Preventing and Dealing with Client Complaints Although the SEC has not provided specific guidance on how client complaints should be handled, a firms policies and procedures should provide clear direction how to do so, as neglecting complaints can exacerbate a bad situation.
The Financial Industry Regulatory Authority plans to consider at its Dec. 6 Board meeting several rule proposals and amendments, chief among them a proposal that would require broker-dealers to disclose to customers brokers’ compensation packages.
Securities lawyer Patrick Burns spoke out publicly in an October interview with AdvisorOne saying that he wants to change the status quo in broker compensation. “Our clients who are investment advisors would like to see the playing field leveled in terms of disclosures,” Burns told AdvisorOne at the time.
Burns, based in Beverly Hills, Calif., told AdvisorOne in that interview that unlike brokers, his RIA clients must disclose all forms of direct and indirect compensation and conflicts of interest, including soft dollars and any additional benefits that an advisor gets for using a certain custodial platform.
"I think this proposal has some legs," Burns (right) told AdvisorOne in a separate interview on Thursday. "There has been a lot of talk about FINRA harmonizing BD and RIA regulations, moving to a common fiduciary standard for RRs and IARs, etc." The timing of the rule proposal, he added, is "very interesting."
The rule FINRA will consider in December would require "disclosure to transferring customers of recruitment compensation packages offered to induce registered representatives to move from one firm to another.”
Burns said a lot of his comments from the October AdvisorOne article on Broker Bonuses "ring true" for this current FINRA proposal. "Clients should receive full and fair disclosure about all direct and indirect costs of doing business with a brokerage firm, as well as conflicts (incentives to hit production targets, sell proprietary products, etc. needed to have their bonuses forgiven)."
Jonathan Henschen, president of Henschen & Associates, a broker-dealer recruiting firm, told AdvisorOne on Thursday that while the FINRA proposed rule would be a "non-event" for the independent broker-dealer channel "wirehouses will be affected in a big way with reps concerned that disclosure to clients about their large bonus to move, make them look as if they are moving for their own interests rather than the clients." Added Henschen: "When you consider the minute differences that exist between the wirehouses, it’s hard to argue with client’s potential conclusion."
Other items on FINRA's list includes a proposal to seek “essential information” from crowdfunding portals that want to apply for membership with FINRA under the Jumpstart Our Business Startups (JOBS) Act. FINRA notes that prospective funding portals would file their information with FINRA “voluntarily” until the SEC and FINRA put in place rules governing funding portals, which will likely come next year.
The North American Securities Administrators Association listed crowdfunding as one of its top 10 investor threats in August. Matt Kitzi, Missouri Securities Commissioner and chairman of NASAA’s Enforcement Section, said at the time that “the number of entities pitching themselves as crowdfunding vehicles online has risen dramatically–from a couple hundred to about 1,700.” However, he notes, “none of the domain name holders can do anything until rules are written” regarding crowdfunding. That’s what the Securities and Exchange Commission is grappling with now.
FINRA said it will also consider in December amendments to its own proposal to permit persons who are the "subject of" allegations of sales practice violations made in customer-initiated arbitration claims, but who are not named as parties to the arbitration, to seek expungement relief by several means.
The revised proposal incorporates changes suggested in comments to Regulatory Notice 12-18 as well as views of a FINRA committee.
In addition, FINRA’s Board will consider proposed amendments to FINRA Rule 5210 (Publication of Transactions and Quotations) to address a firm's obligation to have policies and procedures in place that are reasonably designed to review the firm's trading activity for, and prevent, certain wash sale transactions (i.e., transactions in a security that involve no change in the beneficial ownership of the security).