News & Events – Compliance and Regulatory Alerts

In a recent Bates Group article covering FINRA’s 2018 Annual Conference, we reported that Michael Solomon, FINRA’s Senior Regional Director, warned of specific exam deficiencies that may trigger compliance scrutiny. In particular, he urged firms to protect investors against representatives attempting to “gam[e] the system” by trading Short Term Unit Investment Trusts (“UITs”). FINRA has put teeth into that warning by bringing enforcement actions against firms in connection with their representatives’ “offending” UIT client sales activity.

The SEC has highlighted frequent “best execution” deficiencies found in some recent examinations of investment advisers. As described in a new Office of Compliance Inspections and Examinations (“OCIE”) Risk Alert, investment advisers have a fiduciary obligation to seek “best execution” of client transactions. 

Despite some last minute pushback, the Financial Crimes Enforcment Network’s (FinCEN) long-anticipated Customer Due Diligence Requirements for Financial Institutions (CDD Rule) became fully effective on May 11th. The CDD Rule, which was proposed initially in August 2014, amends Bank Secrecy Act regulations to clarify and strengthen customer due diligence obligations for financial institutions. FINRA stated that the purpose behind the CDD Rule is “to improve financial transparency and prevent criminals and terrorists from misusing companies to disguise their illicit activities and launder their ill-gotten gains.”

Following the recent federal court decision to vacate the fiduciary duty rule, the Department of Labor released a Field Assistance Bulletin setting forth a temporary enforcement policy applicable to investment advice fiduciaries. The new policy is intended to address uncertainty about fiduciary obligations formerly required by the DOL rule, or under the Best Interest Contract Exemption, the Principal Transactions Exemption and certain amended prohibited transaction exemptions (collectively PTEs).

The SEC Division of Enforcement issued guidance in the form of Frequently Asked Questions (FAQs) on its Share Class Selection Disclosure Initiative (SCDI). The FAQs, released May 1st, provide detailed answers on questions raised by the initiative, including adviser eligibility and the distribution of funds to clients. Bates Group has been monitoring and reporting on SCDI developments and has closely reviewed this new guidance.

The SEC Division of Enforcement announced a "Share Class Selection Disclosure Initiative" intended to protect and reimburse investors from an adviser’s conflict of interest. The new initiative offers an incentive to advisers and related individuals and entities to review and potentially self-report conflicts of interest, as they relate to the adviser’s collection of 12b-1 fees, as well as its disclosure of such fees, that are in violation of fiduciary duties imposed under the Investment Advisers Act. The deadline to conduct this analysis, address these issues, and self-report is Tuesday, June 12th – only seven weeks away.

At an open meeting, the Securities Exchange Commission voted 4-1 to propose a set of rulemakings and interpretations designed to establish clear relationship standards between broker dealers and investment advisers and their retail clients. The SEC prescription comes on the heels of the 5th Circuit Court of Appeals decision to vacate the Labor Department’s stricter “fiduciary duty rule” promulgated under the Obama administration.

Comments must be submitted by April 27, 2018 on a FINRA proposal to consolidate rules on outside business activities of registered persons (Rules 3270 & 3280). The proposal contains a number of amendments intended “to reduce unnecessary burdens while strengthening investor protections.”

The SEC Division of Enforcement announced a "Share Class Select Disclosure Initiative" intended to protect and reimburse investors from an adviser’s conflict of interest. The new initiative offers an incentive to advisers and related individuals and entities to review and potentially self-report conflicts of interest, as they relate to the adviser’s collection of 12b-1 fees, as well as its disclosure of such fees, that are in violation of fiduciary duties imposed under the Investment Advisers Act. If the adviser self-reports the conflict and returns the money to investors, the Division of Enforcement will recommend that the Commission accept favorable settlement terms and not impose civil penalties that would otherwise have been imposed. Investment advisers that do not self-report and reimburse may face stronger sanctions. Bates Group recommends that advisers review their share class selection policies and procedures and disclosure practices. Follow the link for a more detailed review of the issues at stake and how Bates Group can help.

The SEC has announced their examination priorities for 2018.

FINRA has announced their regulatory and examination priorities letter for 2018.

FINRA Issued Regulatory Notice 17-40 on November 21, 2017 to provide guidance to firms regarding Anti-Money Laundering program requirements under FINRA Rule 3310, following the adoption of FinCEN's Final Rule to Enhance Customer Due Diligence (CDD) Requirements for Financial Institutions.

Covered financial institutions must assess and enhance their AML programs to be in compliance with the specific requirements of the new Rule by May 11, 2018. Is your firm ready?

Bates AML/BSA Consulting and Testifying Expert Susan Berger provides some background and details about the two new requirements which must be satisfied by the May 11 deadline.

In two notices issued last week, the Financial Industry Regulatory Authority addressed a few longstanding issues. First, FINRA proposed expanding the legal options available to investors when filing a claim against an inactive firm or associated person. Second, FINRA requested comments on allowing compensated non-attorney representatives to continue to represent customers in disputes between investors and broker-dealers. Comments on both are due December 18, 2017. In addition, FINRA Executive Vice President of Regulatory Operations Susan Axelrod (at left) offers insight on how FINRA is identifying high risk brokers.

On August 28, 2017, the Office of Management and Budget approved the Department of Labor’s (DOL) 18-month Fiduciary Duty Rule (Rule) delay request, extending the Transition Period and applicability of certain requirements and exemptions of the Rule until July 1, 2019.