More On Legal & Compliancefrom The Advisor's Professional Library
- Where Are We Headed? The ultimate compliance goal is to help ensure that everyone associated with an advisory firm acts ethically at all times. Advisors and RIAs should do the right thing, even when regulators are not looking over their shoulders.
- Do’s and Don’ts of Advisory Contracts In preparation for a compliance exam, securities regulators typically will ask to see copies of an RIAs advisory agreements. An RIA must be able to produce requested contracts and the contracts must comply with applicable SEC or state rules.
Top exam personnel at three main regulators for advisors and broker-dealers—the Securities and Exchange Commission, Financial Industry Regulatory Authority and the states—laid out their exam priorities Monday, which included conflicts of interest, email retention, cybersecurity and a few specific products they’re zeroing in on.
Speaking during a panel discussion at the Insured Retirement Institute’s legal and regulatory conference in Washington—which was moderated by Brian Rubin, a partner at Sutherland, Asbill and Brennan—Dan Sibears, executive vice president of Member Regulation at FINRA, said that identifying conflicts of interest is a “No. 1 priority” for FINRA. One of the “key issues,” Sibears said, is conflicts between a firm or its salespeople and their customers.
Noting FINRA CEO Richard Ketchum’s remarks last year that firms should conduct “a top-to-bottom” review of their conflict policies, Sibears said that after Ketchum’s speech last year, FINRA launched a “national initiative” to collective information about firms’ conflicts and identified 12 firms. “We’ve picked up a lot of information” on firms’ conflicts, he said, adding that FINRA is drafting a best practices guide for firms in this area.
Willie Davis, examination manager at the SEC’s Chicago regional office, added that for the commission, conflicts of interest are considered a “perennial risk” that will always “be a focus of our examinations.”
Bruce Ramge, director of the Nebraska Department of Insurance, noted his belief that cybersecurity is the “No. 1 risk management issue now.” He said the issue must be on every firm’s radar as “costs associated with a breach are tremendous.”
Sibears noted that FINRA has seen “a proliferation of complaints in the cybersecurity space,” which involves customer information being compromised, particularly in the area of online accounts.
Susan Shroeder, FINRA’s deputy in charge of its New York operations, noted at FINRA’s annual conference in late May that its enforcement division is handling more than 100 wire-hacker cases. In some of these cases, “a customer’s email gets hacked and then the hacker reaches out to the customer’s broker and asks for a wire transfer to be sent” to a bank account, she said.
While all three panelists noted the importance of email retention policies, they zeroed in on the products that will face heightened scrutiny.
The SEC’s Davis noted that “product risk plays a key role” in how the commission decides which firms to examine. He noted the “retailization of complex products to the public, and more firms using alternative strategies in annuities and mutual funds” as areas of particular concern to the agency. The use of “alternative and hedge fund strategies in the variable space” are a concern for the agency, he said.
Ramge noted that a National Association of Insurance Commissioners working group is currently reviewing how regulators should regulate contingent-deferred annuities. “We still haven’t developed the regulatory structure for that product,” he said.
Abkemeier said there was a big push to get more contingent deferred annuities, which must be sold by a registered rep, into the market and that the products were gaining "greater receptivity" in tax-qualified plans. However, he said, "sales have not gained traction among financial advisors."
Abkemeier added that there is "light at the end of the tunnel" for contingent-deferred annuities, as an NAIC work group has proposed "a path to a clean approval and regulatory process."
Sibears of FINRA said that the self-regulator will be looking at the suitability of the sale of life insurance products to fund long-term care costs, an issue that was highlighted in a Monday Wall Street Journal article.
Commonly referred to as life settlements, the article explains that the practice allows policyholders to sell their policies at a discount in the secondary market and then the buyer takes over premiums and consequently collects the death benefit.
The Journal article goes on to state that Gov. Rick Perry of Texas signed a law Friday that gives state Medicaid officials the authority to tell people “they can sell long-held life insurance policies to a third party to pay for custodial health care of their choice. Those who do so would remain eligible for Medicaid when those funds run out.”
Similar bills are pending in at least seven other states: New York—where lawmakers introduced legislation last week—California, Florida, Kentucky, Louisiana, Maine and New Jersey, the Journal article says.
---Check out In Medicaid Planning, Don’t Surrender Life Insurance—Trade It for LTC Instead on AdvisorOne.