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.
- Conducting Due Diligence of Sub-Advisors and Third-Party Advisors Engaging in due-diligence of sub-advisors isnt just a recommended best practice it is part of the fiduciary obligation to a client. An RIA should be extremely reluctant to enter a relationship with a sub-advisor who claims the firms strategy is proprietary.
The Financial Industry Regulatory Authority warned broker-dealers Thursday to prepare for heightened scrutiny this year in a host of areas, namely of their recommendations on IRA rollovers, private placements and complex products like nontraded REITs.
FINRA highlights in its exam priorities letter that it will also create this year a dedicated enforcement team under its High Risk Broker initiative to prosecute brokers who have a pattern of sales practice abuses. FINRA barred 16 such brokers in 2013.
Susan Axelrod, FINRA’s executive vice president of regulatory operations, encouraged firms to use the guidance “along with their own analysis” to enhance their compliance programs as FINRA “will be examining for strong controls and robust compliance efforts in these areas.”
Richard Ketchum, FINRA’s chairman and CEO, said in the same statement that by providing “detailed guidance to firms, we hope to not only support firms’ compliance efforts but also to alert firms to the issues we have identified as the most salient risks to investors and the integrity of our markets.”
FINRA notes that its areas of concern include conflicts of interest, fraud, how firms handle liquidity risk, and high-frequency and algorithmic trading, and that the self-regulator “will update its view on risks throughout the year.”
Cipperman Compliance Services notes that while FINRA’s exam priorities letter helps firms by highlighting FINRA’s new focus areas (interest-rate sensitive securities, recidivist brokers), “every year the list just gets longer because FINRA never really drops any of the old topics off the list (for example, anti-money laundering, customer data protection, conflicts of interest).”
Products to Watch
FINRA says that it will examine the suitability of recommendations to retail investors for complex products, which include structured products, like leveraged exchange-traded funds; interest-rate sensitive investments, like long-duration bond funds and muni securities; nontraded real estate investment trusts; frontier emerging-market funds; and mortgage-backed securities.
Qualified Plan Rollovers
FINRA also says that in 2014, reviewing firms’ qualified plan rollover practices will be an examination priority, and that staff will examine firms’ marketing materials and supervision in this area. FINRA will also evaluate securities recommendations made in rollover scenarios to determine whether they comply with suitability standards in FINRA Rule 2111.
In its just released Regulatory Notice 13-45, FINRA reminds firms of their responsibilities concerning IRA rollovers. FINRA said that it issued the December notice to remind firms of their responsibilities when recommending a rollover or transfer of assets in an employer-sponsored retirement plan to an IRA or marketing IRAs and associated services.
FINRA says that it shares the Government Accountability Office’s concerns that investors may be misled about the benefits of rolling over assets from a 401(k) plan to an IRA. In Regulatory Notice 13-23, FINRA warned against making claims of “free IRAs” or “no-fee IRAs” where investors do pay costs associated with these accounts.
FINRA says that it will not only be monitoring general solicitation and advertising of private placements under the recently adopted amendments to Rule 506 of Regulation D, but it will also assess the due diligence suitability of private placements. The self-regulator will also focus on offerings of securities through private placements.
As part of the JOBS Act, which became law in 2012, retail investors will be allow to purchase unregistered securities offered through crowdfunding websites. However, to maintain investor protections, the Act limits the amount they can invest in a year based on their income and net worth. The SEC and FINRA proposed rules on Oct. 23, and comments are due by Feb. 3.
FINRA notes that the objective of its proposed rules is to ensure that the capital-raising objectives of the JOBS Act are advanced in a manner consistent with investor protection.
Until adoption of the SEC’s proposed rules, no JOBS Act crowdfunding is lawful.
FINRA notes that as its rules become effective, and funding portals become FINRA members, the self-regulator will implement a regulatory program designed to protect investors while recognizing the distinctions between funding portals and broker-dealers.
Check out these related stories on ThinkAdvisor:
- SEC Notes Progress, Room for Improvement at Credit Rating Agencies
- FINRA Floats System to Automatically Flag Problems With Broker Sales Practices