10-13-20

Important Takeaways from SIFMA-Bates Virtual Branch Office Compliance Visits Webinar

Important Takeaways from SIFMA-Bates Virtual Branch Office Compliance Visits Webinar

On Monday, October 5, 2020, nearly 700 Compliance, Supervision, Risk, Legal and Regulatory experts and professionals tuned in to a panel discussion covering virtual branch office inspections and the challenges facing regulators and industry supervision and compliance teams. The webinar, jointly organized by Bates Compliance and SIFMA, reviewed the current requirements and status of branch office inspections, recent regulatory relief, and compliance expectations for on-site inspection requirements going forward. The featured speakers included:

  • Jennifer Stout – CEO, Bates Group (opening remarks)
  • Jill Ehret - Director, Bates Compliance - Bates Group
  • Lou Moschetta - Senior Vice President and Deputy Director of Compliance, Wells Fargo Advisors
  • Joseph Neary - Chief Risk Officer, Cetera Financial Group
  • John O’Neill - Executive Vice President and Chief Compliance Officer, LPL Financial
  • Joseph J. Sheirer - Vice President, Member Supervision Examination Program, FINRA
  • Paul M. Tyrrell - Partner, Sidley Austin (moderator)
  • Kevin Zambrowicz - Managing Director and Associate General Counsel, SIFMA

Here are some of the highlights.

Branch Office Inspections

Led by Sidley Austin partner Paul Tyrrell, the panelists discussed the dramatically altered environment since on-site compliance and regulatory inspections ceased in March 2020 due to the pandemic. Bates Compliance’s Jill Ehret described the significant impact on firm compliance based on differences in firm size, the number of home offices, the sufficiency of technology, and the necessity of new practices and protocols to mitigate risk. SIFMA’s Kevin Zambrowicz mentioned that most branch offices are closed or are providing very limited or no onsite client services, and that so far firms are taking a conservative approach to reopening. He said that many firms are doing what they can to do inspections remotely—for most firms, “the policy…is that corporate travel is restricted,”—and are relying on technology instead of an  on-site examination component. Wells Fargo’s Lou Moschetta expects no on-site inspections for an extended period—“possibly 2nd quarter next year.”

The panelists generally agreed that the FINRA relief that extended the 2020 exam cycle through Q1 2021 was necessary, but that the extension is not long enough to complete the 2020 cycle. Zambrowicz expressed concern about the ripple effects of such a time frame for the 2021 inspection cycle, anticipating going in the direction of extended relief and remote inspections for both 2020 and 2021. Cetera Financial Group’s Joseph Neary stated that the current 2020 and 2021 deadlines are “unrealistic.” LPL Financial’s John O’Neill said that his firm has thousands of locations; as a result, they are “focusing on how to triage which branches we can get to by March 2021,” and are employing risk-based approaches to prioritize offices within a three-year cycle.

Reopening (Hypothetically Speaking)

Zambrowicz discussed efforts to address the “practicalities” of a return to onsite inspections amid re-openings, describing such a process as “exceedingly complicated.” He explained a firm’s duty to have a supervisory system in place, but noted the logistics involved for a firm staffer to visit a location in this environment, including state- and even county-level travel restrictions and the testing and quarantining around even a single visit. He stated that, without even “considering the health concerns of the examiner,” the logistics of the process were “not feasible.” He advocated for the use of remote supervision using existing technology, an approach which has already been embraced by certain regulators who have recognized the need and capability to go remote.

Moschetta furthered the point, saying that a big management concern is the volume of advisers operating from remote locations. “How many will continue to work from home? Could be thousands… No answer to that yet.”

FINRA’s Joseph Sheirer highlighted the temporary relief provided to firms from having to register locations as non-branch offices, saying, “we’ve given a pass on registering these locations, recognizing the challenges of on-site inspections.” He stated that FINRA is facing the same challenges as the industry and that unless there was a customer harm, or a threat to market integrity, the inspections that have been conducted have been all remote: “We are as virtual as you can get.” He noted that  includes remote examinations, branch office visits and enforcement programs, and said that, to date, even “on-the-record” testimony has been handled remotely.

Learning How to Adapt

Bates Compliance’s Ehret described how firms are adapting to current conditions. She said that although the focus has been on the rules and the inspections, “we should be thinking more about the review element,” which does not need to be on site. The more off-site preparation completed during the review phase, the less burden there is on the on-site element. Ehret said that firms are also thinking about other practical changes to (i) address travel limitations, including, for example, using supervisors who are closest in proximity to do onsite reviews, (ii) strengthen pre-visit questionnaires, and (iii) conduct virtual interviews.

FINRA’s Sheirer highlighted the value of recent regulatory notices on remote supervision. The guidance emphasized using a risk-based approach and sharing industry best practices. He agreed that firms should consider and document changes to protocols and practices, including using new communications platforms and enhancements to virtual monitoring and supervision.

Zambrowicz said there were numerous examples of different regulators (e.g., CFTC, NFA) allowing virtual solutions to satisfy on-site requirements. Moderator Tyrrell added that recent interpretive guidance from the NFA represents an “important marker” to that end. Sheirer cautioned that while FINRA is considering making certain relief permanent, “there are still things that benefit from an on-site,” such as the ability to see space sharing that may present conflicts of interest, outside business activities, body language, and the like. Like Ehret, he focused on solutions that could enable off-site inspections, such as enhanced email review and monitoring.

Issues Pre-COVID (and Beyond)

Cetera’s Neary also emphasized pre-exam work, noting how his firm upped its requirements on electronic record keeping, email review, and centralized trading. LPL Financial’s O’Neill pointed out that the results of virtual reviews have been relatively “consistent” with pre-COVID reviews. O’Neill noted “an uptick of email use, which is good for our email review system,” .. O’Neill reiterated that “we’re not necessarily seeing a drop-off in quality or anything… So, we’re trying to look at our program and say, ‘how we can make some of this permanent?’”

Similarly, Moschetta said his firm was seeing the same sort of findings in substance and volume as those found in pre-pandemic on-site review. He said that existing and new technology processes and enhancements generally discover items such as outside business activities, private securities transactions and unreported complaints. Further, he said, the new efforts are helping their partners cope in the field know what to expect and to deliver.

Ehret noted some additional benefits. She said new technology is enabling “look backs, specialized reviews for outside business activities, identification of red flags on social media, and more documentation on office activities that are now subject to additional firm reporting.”

All Roads Lead to Virtual Supervision and Inspections

SIFMA’s Zambrowicz stated the consensus position that the evolution of technology is mitigating the need “to actually be there” and that firms should use the lessons from the current environment to recognize “the opportunities.” He said that “it is a logical next step to go virtual and that the pandemic brought to a head the natural and technological evolution of virtual supervision and inspections.”

Bates Compliance’s Ehret reiterated that most of the work required for an inspection is done prior to an on-site inspection: “The heavy lifting has already been done in review.” The way clients are currently working with their advisers is the way of the future.

SIFMA has made this program available on demand.

For more information or further questions about this program or Bates Compliance's services, please contact David Birnbaum, Managing Director, at dbirnbaum@batesgroup.com or call 917-273-2682.


About Bates Compliance:

Jill Ehret is a Bates Compliance Director based in St. Louis, MO. Ms. Ehret is a seasoned securities industry professional with over 19 years of experience bringing practical, application-based insight and approaches to broker-dealer and registered investment advisor compliance departments and issues.

Bates Compliance’s consulting practice delivers guidance and tailored compliance solutions to our broker-dealer, investment adviser and hybrid firm clients on an as-needed or ongoing basis. Our team—made up of experienced senior compliance, legal and former regulatory professionals—drafts and tests policies, procedures, and supervisory and compliance processes, recommending and implementing changes based on leading practices to enhance compliance and supervisory systems and to remediate regulatory, litigation and internal audit findings. With nearly four decades of working with leading law firms, financial services companies and regulatory bodies, Bates provides support every step of the way.

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09-24-20

Announcing Our Newest Experts

Bates Group is proud to welcome our newest experts and consultants: 

Gary Ferrari

AML, Financial Crimes, Global Compliance Risk Management

Gary Ferrari is a compliance risk management leader in global financial institutions and consulting firms. He has served in senior-level leadership positions and governance roles integral for building, executing, and remediating regulatory and financial crime/AML compliance programs throughout the U.S. and the world. Mr. Ferrari’s focus has been on the Pillars of Compliance, designing the framework, standards, and methodology for building and resourcing compliance programs, and overseeing core compliance functionality.

Full Bio

Barbara A. Halper, JD, MBA

BD-IA Compliance, Seniors and Vulnerable Investors, Compliance Testimony

Barbara Halper, Esq. is a Bates consultant and expert specializing in proactive risk assessment, training, testing, and management services that support businesses in meeting compliance-related needs with a focus on proactive services in meeting Best Interests regulatory requirements. She also provides strategic litigation and arbitration support from the sale of alternative investments. Ms. Halper’s consultation and services are designed to provide Bates’ clients with proactive measures for supervising the sale of securitized products by employees (or contractors and their employees) who may be subject to issues related to their advancing age or infirmity.

Full Bio

Timothy McClendon, CIC, CWCA

Insurance, Workers’ Compensation, Risk Management

Tim McClendon serves as an expert witness in insurance-related litigation and has over 40 years’ experience as a Certified insurance Counselor (CIC). Mr. McClendon also holds a Certified Workers Compensation Advisor (CWCA) designation and is a licensed risk manager. As a member of the Society of Certified Insurance Counselors national faculty, Tim teaches insurance courses throughout Texas and around the country including Certified Insurance Service Representatives, Certified Insurance Counselors and Ruble Seminars. He is a former “Teacher of the Year” for Professional Insurance Agents of Texas and has been a member of the adjunct faculty teaching insurance and risk management courses for the M. J. Neeley School of Business at Texas Christian University.

Full Bio

Edward Truax

Insurance and Annuities, 401K/Pension/Retirement, Elder Issues

Ed Truax is a Bates affiliate with more than 30 years of experience as a financial advisor and consultant. His focus was, and remains, the intergenerational transfer of family-owned and closely held business interests. Mr. Truax brings a wealth of experience with the suitability and sales practices of life insurance, annuity products, qualified and non-qualified retirement plans, in both individual and corporate settings. He has offered expert testimony in life insurance-related civil litigation and served as Chairman of an arbitration panel deciding matters related to insurance agency dissolution. He is experienced as a keynote speaker, sales concept trainer, and provider of continuing education.

Full Bio


Our nation-wide roster of over 165 quantitative and substantive consultants and experts span 250 unique areas of expertise. We invite you to explore our expert offerings by visiting the Bates Group’s Expert Search page.
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09-11-20

CEO Message: 9/11 National Day of Remembrance

CEO Message: 9/11 National Day of Remembrance

Dear colleagues and friends,

Today marks 19 years since the tragic and devastating events of 9/11.  In remembrance of the many lives lost, the families and friends of the victims, the heroes and brave volunteers, and our colleagues and friends who were impacted, I am pausing for a moment of reflection in their honor.  I hope you will join me and help ensure they are never forgotten.

 “If we learn nothing else from this tragedy, we learn that life is short and there is no time for hate.”

- Sandy Dahl, wife of Flight 93 pilot Jason Dahl, in Shanksville, Pennsylvania, in 2002

 

Respectfully,

Jennifer Stout, CEO

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09-03-20

Bates Group Summer Roundup – Catch Up on What You’ve Missed and What’s Coming Up This Fall

Bates Group Summer Roundup – Catch Up on What You’ve Missed and What’s Coming Up This Fall
Labor Day is almost here, which means those lazy, remote days of summer are coming to a close. What did you miss when you powered down this summer? 
 
We have a roundup of all the important Bates news, events and alerts from July and August as well as a sneak peek of the next few months to help you head into Fall fully prepared. 
 

NEWS

New FinCen Guidance on the CDD Rule, Cyber Fraud and Virtual Currency Scams Exploiting Twitter - 8/20/20

FINRA Roundup: Guidance on Private Placements, Digital Assets, Virtual Hearings, and Proposals - 8/6/20

Bates Group, Complidata Bring Expertise and A.I. Technology Together to Optimize AML and Compliance - 8/5/20

DOL Proposes New Class Exemption for Investment Advisers - 7/30/20

Welcome to Our New Bates Experts - 7/24/20

Bates Practice Leadership Insights: Julie Johnstone on the Changing Litigation Landscape - 7/22/20

New OCIE, FinCEN Alerts Emphasize Vigilance Against Ransomware, Imposter Scams, Money Mule Schemes - 7/16/20

 

COMPLIANCE AND REGULATORY ALERTS

SEC Issues COVID-19 Compliance Observations and Recommendations for BDs and IAs - 8/17/20

SEC Issues “Private Funds Adviser” Compliance Risk Alert - 7/2/20

 

WEBINARS AND CLE

Webinar: Covid-19 Leads to Novel Compliance Concerns - 8/20/20

CLE Webinar: Capital Market Uncertainty in the Time of COVID-19 and Potential Legal & Regulatory Impact - 8/13/20

CLE Webinar: Anti-Money Laundering and Fraud Risks In the Age of COVID-19 - 7/30/20

Bates Compliance Roundtable: Assessing, Fine-Tuning and Improving Your Business Continuity Plan - 7/15/20

CLE Webinar: Regulatory Exams and Investigations in the Age of COVID-19 - 7/9/20

View all of our On-Demand webinars and CLEs on our Recorded Programs page.

 

COMING UP

September 21-22 - Join Christine Davis, Bates Managing Director of Forensic Accounting and PLI program co-chair, and Edward Longridge, Managing Director of Bates AML & Financial Crimes, at the  PLI Pocket MBA 2020: Finance for Lawyers and Other Professionals CLE Webinar.

September 23-24 - Visit Bates Group's Interactive Virtual Booth at the SIFMA C&L Virtual Forum. Bates is a proud Silver sponsor of this online event. (And yes, we’ll be giving away wine and goodies!)

October 5 - Join SIFMA and Bates Group for our “Virtual Branch Office Compliance Visits" CLE Webinar. (Registration coming soon!)

October 8 - Join us at the annual FSDA Industry Outreach Program. Bates is a proud Platinum sponsor of this online event.

October 13-15 - Join us at the IBDC-RIAC Annual Risk Management Conference. Bates is proud to sponsor and speak at this online event.

October 19-21 - Register now for the 2020 NSCP National ConferenceBates Compliance Manging Director and NSCP Board member Linda Shirkey will be speaking on Day 1 of the conference (Session 3b. IA/PF – Understanding the SEC’s Proposed Advertising Rules). Bates is a proud Gold sponsor of this online event.

 

NEED ASSISTANCE?

For additional information and practice support, please Contact Us today, and follow the links below to Bates Group’s Practice Area pages:
 

Consulting and Expert Testimony

Retail Litigation and Consulting

Institutional and Complex Litigation

Bates Compliance

Regulatory and Internal Investigations

Bates AML and Financial Crimes

Forensic Accounting and Economic Damages

Insurance and Actuarial Services

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Bates Group is with you every step of the way. Contact us today for more information on how our End-to-End Solutions can help your firm.

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08-20-20

Webinar Today, August 20, 2020: Covid-19 Leads to Novel Compliance Concerns

Webinar Today, August 20, 2020: Covid-19 Leads to Novel Compliance Concerns

Topic - Covid-19 Leads to Novel Compliance Concerns: Branch Audits, Selling Away and Much More

Date/Time - Aug 20, 2020, 2:00 p.m. Eastern / 11:00 a.m. Pacific

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(L-R) Lilian Morvay, Jill Ehret, Paul Horn

 

Lilian Morvay, Bates Group Expert and Founder/CEO of the Independent Broker Dealer Consortium (IBDC) will be presenting a complimentary webinar titled "Novel Coronavirus Leads to Novel Compliance Concerns: Branch Audits and Selling Away" Thursday, August 20, 2020 at 2 p.m. Eastern.

She will be joined on the panel by Bates Compliance Director Jill Ehret, Bates Cybersecurity Expert Paul Horn (Founder/CEO, H2Cyber), moderator Dan Newman, Esq. (Partner, Nelson Mullins), Scott Sherman, Esq. (Partner, Nelson Mullins), and Melissa Tarentino (Vice President of Legal Affairs, Ladenburg Thalmann Financial Services).

Our panel of experts will explore:

  • Performing FINRA Mandated Branch Supervision and Audit Responsibilities in a Virtual World;
  • Tips & Best Practices for Reviewing OBAs and Identifying Potential Selling Away Issues in the Midst of a Pandemic;
  • Legal: Recent Actions Involving Branch Audits, Supervision and Selling Away;
  • Incorporating Virtual Supervision Into Your Newly Established Reg BI Procedures;
  • Maintaining Cyber Vigilance in the World of Virtual Supervision and Audits.

Presented by IBDC

REGISTER HERE

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08-05-20

8/13 CLE: Capital Market Uncertainty in the Time of COVID-19 and Potential Legal & Regulatory Impact

8/13 CLE: Capital Market Uncertainty in the Time of COVID-19 and Potential Legal & Regulatory Impact

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The first half of 2020 has been a very challenging time for the capital markets. With a global pandemic arising – the likes of which have not been seen in more than 100 years – U.S. economic activity has largely collapsed, and unemployment has risen to levels not seen since the Great Depression. Join Bates Group’s next CLE Webinar on Thursday, August 13th as we look at 2020 in the context of past bear markets, whether a comparison to the 1918 influenza pandemic is relevant to today, and which sectors and industries have been hardest hit by the economic disruption. The webinar will also explore the impact of COVID-19 on potential capital market-related litigation and regulatory and enforcement areas to keep an eye on. Featuring (L-R above)  co-moderators Jack McGuire of Oppenheimer & Co. and Esther Cho of Keesal, Young & Logan, along with Greg Kyle, Bates Group Director and Expert.

Registration is required to attend this Zoom webinar.

CLE credit approved in MO and CA, giving reciprocity credit to NJ and FL. NY accreditation is available through the approved jurisdiction rule. 

Date: Thursday, July 30, 2020

Time: 12:30 p.m. Eastern / 9:30 a.m. Pacific

Program Length: 1 hour

Register Here


Program Speakers:

Jack McGuire, Managing Director/Deputy General Counsel, Director Of Litigation, Oppenheimer & Co (Co-moderator)

Esther Cho, Shareholder and Chair of Executive Committee, Keesal, Young & Logan (Co-moderator)

Greg Kyle, Director and Expert, Bates Group

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08-05-20

Bates Group, Complidata Bring Expertise and A.I. Technology Together to Optimize AML and Compliance

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Bates Group and Complidata today announced a partnership to combine leading financial crime industry expertise and Artificial Intelligence (A.I.) technology together in a joint approach to assist financial institutions with tuning and optimizing their anti-money laundering operations and compliance.

Bates Group offers services including AML and financial crimes, compliance, regulatory investigations, and advisory services. Based in Belgium, Complidata is a leader in the use of A.I. to drive automation and optimization for improved regulatory compliance. The partnership will assist financial institutions with the tuning and optimization of their transaction monitoring and sanctions and name screening systems — significantly increasing efficiencies and effectiveness in their processes and procedures while reducing the percentages of false-positive alerts.

“There is significant pressure at the Board level of financial institutions to maximize the efficiencies of the organization while addressing anti-money laundering process and procedures. Exacerbating the challenge is the need to meet increasing compliance requirements by regulatory agencies with corporate headcount reductions. We’re leveraging the in-depth experience of Bates Group’s experts and with Complidata’s state-of-the-art technology to assist organizations in achieving this goal,” said Edward Longridge, Managing Director, Bates AML and Financial Crimes.

Under the partnership, Bates will provide subject matter expertise with regards to AML, financial crimes, and sanctions; provide services in design, configuration, testing, and tuning and optimization of AML, financial crime, and sanctions systems; perform AML and sanctions system reviews and model validations; develop governance and oversight processes, including policies and procedures; conduct AML and sanctions risk assessments; AML and sanctions gap assessments and audits; regulatory response support; and staffing support for AML backlogs and lookbacks.

“Bates Group has worked, for the past four decades, with hundreds of financial institutions, regulators, and other stakeholders. As a result, we have amassed a deep knowledge of the current trends and future direction of the financial services business and regulatory landscape,” said Longridge. “Our experts work with firms to prepare and assist in the implementation, review, and enhancement of compliance, risk, and supervisory programs — including testing to support firms undergoing internal and regulatory investigations, remediation and implementation, and preparation through mock exams.”

Complidata will provide A.I.-based solutions for the automation and optimization of AML/KYC processes; machine learning solutions for alert triage optimization; supervised and unsupervised learning solutions for anomaly detection, customer segmentation; network analytics for entity resolution; A.I.-based solutions for the digitization of paper trails as in Trade Finance and Corporate KYC; and intelligent OSINT retrieval.

“We are a leading provider of A.I. driven solutions to optimize and automate AML, KYC, and Sanctions programs. Complidata has introduced explainable A.I. and remain on the cutting-edge of industry advancements, including the incorporation of White-box testing. We are aligned with the latest recommendations of regulators across the globe regarding intelligibility, robustness, and stability. Our team members have been involved in more than 100 financial crime projects in Europe and around the world in finance, banking, and related industries,” said Matthias Verbeke, CEO, Complidata.

“Together, Bates Group and Complidata are well-positioned at the crossroads between technology and advisory to establish, improve, support, and manage the anti-money laundering and financial crimes best practices of financial institutions in the U.S. and across Europe and Asia,” Verbeke added.

For more information on this and other services in the U.S., visit Bates AML and Financial Crimes.

In Europe, visit https://www.complidata.io/.


About Bates Group

Bates Group (www.batesgroup.com) has been a trusted partner to our financial services clients and their counsel for over 30 years, delivering superior quality and results on a cost-effective basis. With a roster of nearly 200 financial industry and regulatory compliance experts, Bates provides solutions throughout the lifecycle of legal, regulatory, and compliance matters, offering services in AML and financial crimes, regulatory enforcement and internal investigations, compliance, risk management, litigation consultation and testimony, forensic accounting, and damages consulting.

 
About Complidata

Complidata (www.complidata.io) provides A.I.-driven Process Automation Solutions to streamline and optimize compliance processes and underlying operations across several vertical domains for FSIs. Complidata deploys these solutions as managed services, to help clients define, implement and manage the controls and achieve regulatory compliance. Complidata helps its clients to make their compliance operations more effective and efficient.

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07-24-20

Welcome to Our New Bates Experts

Bates Group is proud to welcome our newest experts and consultants: 

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Amy Bard, Esq.

Sales Practice Litigation, Compliance, Senior Investors

Amy Bard is a Bates affiliate expert with 37 years of litigation experience. After starting her career at a major Wall Street firm, she served as an Assistant District Attorney at the Manhattan District Attorney’s office, where she prosecuted major narcotic traffickers resulting from investigations by the Drug Enforcement Agency. Ms. Bard has devoted the last 20 years of her legal career to litigation in the securities and financial services arenas. As in-house counsel to UBS Financial Services, and later principal at Bressler, Amery & Ross (a national firm representing major broker-dealers and Investment advisors), she gained extensive experience arbitrating before FINRA and other regulatory tribunals.

Full Bio

 

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Paula Barnes

Retail Industry Expert, Retail Contracts, Regulatory and Compliance investigations

Bates affiliate expert Paula L. Barnes is currently Senior Counsel for Macy’s, Inc., and serves as a marketing law and retail regulatory law generalist strategically advising Macy’s, Bloomingdale’s, and Bluemercury clients on a variety of matters. Her practice areas at Macy’s include reviewing, drafting, and negotiating vendor contracts, designer collaboration and other apparel distribution/co-branding agreements, sponsorship, data analytics, technology platform agreements, and talent releases. Ms. Barnes also advises on advertising, social media, and digital marketing; corporate social responsibility strategy, including corporate diversity and inclusion efforts and multi-cultural community engagement, cause marketing, and corporate giving objectives, sustainability initiatives and green marketing and other brand protection matters. She is a member of the Macy’s Diversity and Inclusion Business Council and a 2019 participant in the company’s Strategic Leaders Institute. 

Full Bio

 

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Linda Houston

Wealth Management, Branch Management, Hiring and Recruiting, Retail Securities Litigation and Arbitration

Linda Houston is a Bates affiliate expert with nearly 20 years of leadership experience at Merrill Lynch (1999-2017) with various roles including extensive recruiting of Financial Advisors. She has hired under the known Broker Protocol agreements and was instrumental in training Market Executives nationwide on recruiting practices. Ms. Houston made over 100 recruit hires in her tenure as a Market/Managing Director, and her involvement included initial recruit discussions, proper transitions under broker protocol, financial transition packages, deferred compensation, and incentive compensation. Her in depth and personal knowledge of recruiting practices across the industry makes her a valuable resource to firms.

Full Bio

 

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Donald Mattersdorff, CFA

Investment Advisory, Risk Management, Securities Analysis (Equity and Fixed Income)

Donald Mattersdorff is a Bates affiliate expert who has over 30 years of experience as a portfolio manager and an investment advisor for families, trusts, mutual funds, and institutional clients. He is highly experienced in the construction of investment portfolios of stocks and bonds for private clients, as well as portfolio management for pension funds. He is also knowledgeable in equity and fixed income analysis, as well as economic analysis currency risk management and mean-variance portfolio optimization. Mr. Mattersdorff has additional experience in portfolio performance reporting, including portfolio performance attribution analysis.

Full Bio

 
Need a Consulting or Testifying Expert? Please visit our Expert Search to view our online roster of Bates experts and consultants or call us at 503-670-7772.
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07-22-20

Bates Practice Leadership Insights: Julie Johnstone on the Changing Litigation Landscape

As Managing Director for Bates Group's Retail Litigation practice, Julie Johnstone manages and oversees financial litigation and arbitration matters. Her team assists broker-dealer and investment advisers, banks and insurance companies, as well as State and Federal Regulators, throughout the life cycle of their retail litigation matters, from early case assessments, profit and loss reports, damage analyses, and “what if” scenarios, to expert consultation and testimony at hearing, as well as mediation and settlement support. We asked Julie to consider the state of retail litigation in light of the pandemic and to anticipate some of the long-term implications on case management and dispute resolution going forward. Here is a recap of our conversation.

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Question: The pandemic has had a significant disruptive effect on retail investors and the financial markets. Do you expect to see a surge of litigation as a consequence?

Given that the recent market decline was one of the steepest and fastest in history, we are expecting an increase in litigation, especially where investors have incurred realized losses. However, the extent of litigation could be dependent on the shape of the market recovery, and, given that the market has recovered fairly quickly, we would possibly expect to see fewer claims filed involving paper or unrealized losses. Our past experience with market volatility, as well as recent news and our discussions with clients, support this expectation.

When do you anticipate an uptick in litigation activity?

There is always a lag after a market decline before claims are filed, and services are requested at many points throughout the lifecycle of a case—that is, from pre-litigation to resolution. Our clients tell us that their pre-litigation teams are busy. We are also currently working our way through pre-pandemic claims involving strategies to enhance yield, private placements, allocation drift, alternative investments, and others.

What types of retail investor claims do you expect to be filed as result of the pandemic? 

We monitor economic trends, market events in sectors (such as oil and gas) and liquidity issues, generally. These are the kinds of indicators that provide insight for our clients and help us better understand the emerging landscape. Right now, we expect future claims related to margin and securities lending accounts, energy- and airline-related investments, and other sectors impacted by various stay-at-home orders and business closures. In addition, we expect to see claims filed with respect to volatility-linked investments, order execution, vulnerable investor issues, business interruption, employment, general suitability, and allocation issues relating to the overall market decline and volatility, just to name a few.

How will litigation practice change as a result of the pandemic?

Time will tell, but many practice details will be altered. For example, expect greater use of video conferencing in conjunction with the traditional in-person arbitrations. Our experiences under current, temporary conditions, such as managing through the delays and postponements of hearings, may offer some indications about future changes. Permanent norms have not yet been established, but in-person FINRA hearings are still being postponed through September. Where both parties agree, counsel will need to navigate whether to move forward with video hearings or continue to postpone.

Further, we’ve noticed that some of our clients are expecting that claimants might be more motivated to settle the cases that were originally scheduled for hearing during the 2020 summer, rather than having to wait for the matter to be heard at a future date. So, the new environment not only impacts procedures, but it also may have tactical and even strategic consequences as well.

In the Retail Litigation practice at Bates, we have been adapting during this period as we support our clients toward a new normal. For example, our team of experts and case managers is training to effectively use various video conferencing platforms; we have been communicating more with our clients to better understand their needs as they consider pandemic-related challenges and an increasing number of claims; and, as mentioned, we have been proactively exploring issues that are likely to result in litigation our clients will face.

Tell us more about how you are working with clients to prepare for potential litigation.

One way we are helping our clients prepare for the potential increase in litigation is through various CLE webinars, a number of which have been completed, and others which are in development. We are also publishing relevant alerts and communications. These communication efforts concern the latest thinking around financial market issues like the trading of complex products. Recent program headlines include: “Senior and Vulnerable Investor Protection;" "Potential Litigation Claims in the COVID-19 World;” “Regulatory and Litigation Issues in a Post COVID-19 World;” “Introduction to Arbitrator Evaluator & ABCs of Financial Schedules;” “Reg BI for Litigators;" and "Best Practices in Defending Margin-Related Cases." Upcoming webinars and recorded programs are listed online. 

The pandemic has increased uncertainty and some stress, but it has also accelerated change throughout the financial sector. What are the positive consequences coming out of this?

Yes, it has. This has been a very challenging time for many businesses and individuals, and Bates is no exception. As our clients have had to do, we have adapted, and I would say we have done so successfully. Bates shifted to a 100% remote workforce mid-March without missing a single client deliverable. Through the transition, and over the last few months, Bates staff have engaged technology to develop new norms for staying connected and managing work effectively.

What will you be grateful for when this pandemic is over?

The pandemic has offered a time to reflect both professionally and personally. I have reflected on the many things to be grateful for over the last few months. I am grateful to the first responders, for the ability to continue working while so many have lost their jobs, and for the ability to spend quality time with my immediate family. I look forward to seeing my friends and clients in person and to visiting my favorite establishments as they reopen. And, I am hopeful for an economic recovery that allows us all to thrive.

The current crisis presents many challenges. Bates practice leaders, consultants, and experts can help. Please contact:

Julie Johnstone, Managing Director, Retail Securities Litigation

Alex Russell, Managing Director, White Collar, Regulatory and Internal Investigations

A. Christine Davis, Managing Director, Forensic Accounting and Financial Crimes

Greg Faucher, Managing Consultant, Insurance and Actuarial Services

Robert Lavigne, Managing Director, Bates Compliance

Edward Longridge, Managing Director, Bates AML and Financial Crimes

 

You may also be interested in:

Bates Practice Leadership Insights: What Compliance Officers are Thinking About Now

Bates Practice Leadership Insights: What AML Officers are Thinking About Now

Bates Practice Leadership Insights: Regulatory Investigations Now and on the Horizon

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06-26-20

Bates Practice Leadership Insights: Regulatory Investigations Now and on the Horizon

Bates continues our practice leadership conversations this week with Alex Russell, Managing Director of Bates’ White Collar, Regulatory and Internal Investigations Practice. Alex’s team supports corporations, financial services firms, law firms and regulators by bringing technical, big data analytics and managerial expertise to a variety of disputes and investigations. He also co-leads Bates’ big data analytics service and manages matters involving the assessment of economic damages. We asked Alex about regulatory investigations, big data and the issues firms and their legal counsel are currently concerned about. Here is a recap of our conversation.

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Question: How has the pandemic affected your clients right now?

Generally, I would say that firms are under considerable and increasing pressures created by market uncertainty. The added pressures come not only as a direct consequence of market declines and volatility, but also from the way that regulators, customers, employees and even litigants react to it—often exacerbating problems by layering on top their own concerns and urgencies. Add to that the very real challenges of working remotely (including issues as disparate as cybersecurity and childcare), and it is fair to say that our clients are operating in a very difficult environment. The top concern that I hear, from nearly everyone, is that there are just not enough hours in the day to get done what needs to get done.

Let’s talk first about regulatory investigations. Do you expect an uptick in investigative activity as a consequence of this market volatility?

Absolutely. But this should not be a surprise. The regulators have been very vocal, in public and private, that they are minding the store and fulfilling their oversight and investigative responsibilities. And they are intent on proving it. At Bates, we are already seeing an uptick in such regulator activity, but as with prior market dislocations, we should adjust our expectations and prepare for these current regulatory investigative priorities to play out over the next several years.

Can you be more specific? What sort of regulatory enforcement matters, for example, should we expect?

Some are very easy to see coming; anything involving leverage for example, whether in the form of margin, the use of options, or leveraged ETFs / structured products themselves. We’ve had ascending markets for so long that leverage has become a normal part of the market again, and may have even been extended into areas that the regulators will deem inappropriate. Fraud claims will also rise, from penny stock’s touting COVID-19 vaccines, to individuals running Ponzi like schemes that are exposed when new investments dry up. Uncertainty creates an opportunity for many different types of fraudsters to take advantage of that confusion to the detriment of investors. The increased pressure on reps to try and sustain the income level they need will tempt some to bend the rules in ways that are sure to prompt action. It seems unlikely that the regulators will stop pursuing the fee-based actions (12b-1, 529, revenue sharing) that they have been pursuing over the last few years, so I expect those to continue as well. We’ve handled well over 30 of those types of investigations and claims for our clients, and we have not seen any indication of those slowing down at all. The list goes on.

What is the outlook in the white collar space?

Market manipulation schemes, in particular penny stock pump-and-dump schemes will show up quite regularly, and have already started to do so. Similarly, insider trading allegations around the use of material non-public information will be a source of steady activity, in addition to many of the same actions (fraud, for instance) that will also be the target of regulatory scrutiny. We’ve been steadily working on insider trading, and market manipulation matters even more so, pre-COVID-19 and expect to handle quite a few more after this. Interestingly, many of our recent pump-and-dump matters have been in a criminal rather than civil context, I am curious to see if that trend reverses itself or if the pandemic will accelerate the trend of criminal indictments.

How will big data shape this conversation?

The analysis of big data will play a critical role in helping to resolve many of the issues being raised. Since these issues will cut across firms as a whole, the analysis would be infeasible without the use of big data. Many of the regulators are already reporting sharp increases in the alerts being generated by big data analysis for market surveillance. For instance, FINRA noted a 200% increase in alerts around best execution, wash sales, spoofing, and layering. Regulators are using the tools of big data analysis to “spot risk bubbling up,” and those same tools can help firms identify risk internally, conduct their own investigation and analysis, and resolve the underlying issues. Big data will be a critical part of identifying what will show up when Regulators examine firm behavior, and in responding to claims made by the regulators on the basis of big data analysis. Enforcement actions will likely intensify as a result of these developments.

In many cases, we have taken on large-scale investigations by serving as a critical external resource for big data and analytics assignments. This lets our clients’ internal personnel focus their resources on their essential, day-to-day tasks.  Since the onset of COVID-19, we have also been asked to provide insight into peer practices and to collate trend information gathered through interaction with the regulators. This has been positively received by our clients, who feel forearmed with useful information prior to interacting with regulatory staff.  Clients appreciate being able to speak with our staff knowing that they have dealt with the same or similar issues on behalf of other clients, and that we have the technical skills to perform efficient, accurate, and insightful quantitative analysis. That combination of skills and awareness of how the regulators are treating certain issues has allowed us to assist counsel in delivering positive outcomes for their clients.

What final thoughts are you offering to clients at this time?

First, work diligently to maintain your pre-pandemic compliance processes and procedures, and document your efforts. Second, keep up with regulators’ current expectations of firm practices. To the extent possible, talk to peers and counterparts in other firms to find out what they are seeing, what is working and what isn’t. Third, review the available data out there and do what you can to form an accurate picture of how the industry is responding to the challenges this crisis has created. Finally, use all available information to forecast developing trends so you can spot the opportunities and avoid the pitfalls.

 

The current crisis presents many challenges. Bates practice leaders, consultants, and experts can help. Please contact:

Alex Russell, Managing Director, White Collar, Regulatory and Internal Investigations

Edward Longridge, Managing Director, Bates AML and Financial Crimes 

Christine Davis, Managing DirectorForensic Accounting & Economic Damages

Dennis Greenberg, Managing Director, Third Party Risk Management Services

 
You may also be interested in:

Bates Practice Leadership Insights: What Compliance Officers are Thinking About Now

Bates Practice Leadership Insights: What AML Officers are Thinking About Now

 
Don't miss our Webinar July 9, 2020: Regulatory Exams and Investigations in the Age of COVID-19. Presented by Bates Group and Eversheds Sutherland.

Click Here to Register for this Zoom Webinar

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06-15-20

Bates Media Mentions: Bob Lavigne and Hank Sanchez Quoted in Investment News and AdvisorHub articles

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Robert Lavigne, Managing Director and head of Bates Compliance, and Hank Sanchez, Managing Director, Bates Compliance are both quoted in the Investment News cover article “The Sound of Silence,” concerning Reg BI and Form CRS, published on June 1, 2020 (print edition).

Link to Investment News

 

Mr. Lavigne is also quoted in the June 4, 2020 AdvisorHub article "J.P. Morgan Securities Unfurls New Comp Plan on Eve of Reg BI."

Link to AdvisorHub

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06-12-20

Bates Group Response to COVID-19 (Updated)

As the news and impact of COVID-19 continue to evolve, I am reaching out to update you on the steps that Bates Group is taking to promote the health and safety of our employees, consultants, and clients, as well as ensure uninterrupted operations during this crisis.

Bates Lake Oswego Office: The Bates Group Lake Oswego office remains closed and our employees will continue to work remotely. Until further notice, our office will also remain closed to vendors and visitors, unless there is an essential need. When our offices do reopen, Bates employees will have the option to continue to work remotely, and Bates Group will limit the number of employees, ensure social distancing, require personal protective equipment as necessary, and adhere to strict cleaning requirements and gathering restrictions.

Travel Restrictions:  Bates Group continues to suspend business travel until further notice.  Non-essential travel should be limited and consistent with state or local guidelines.

Remote Work / Telework:  Bates continues its flexible work arrangements and employees continue to work remotely. 

Bates Group’s IT Department continues to improve infrastructure and security, and the ability to work and collaborate remotely ensures that Bates is able to deliver high-quality services without interruption. In addition, ongoing remote work and system stress tests continue to validate that our IT infrastructure fully supports our new normal.

Meetings and Events:  Bates will continue to suspend work-related participation in any in-person public events or gatherings.  As with travel restrictions, we will regularly review this restriction and update with any changes.  

Bates Group will continue to monitor developments and adhere to federal, state, and local guidance. 

 

For the latest updates on COVID-19, please review the following:

Please do not hesitate to reach out to me or members of the leadership team with any questions.

Thank you,

Jennifer Stout, CEO
email: jstout@batesgroup.com
main: 503-670-7772

updated: 6/12/2020
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06-09-20

Bates Practice Leadership Insights: What AML Officers are Thinking About Now

Bates continues our practice leadership conversations this week with Edward Longridge, Managing Director of Bates Anti-Money Laundering and Financial Crimes Practice, for his views on the matters most pressing for AML officers right now. Here is a recap of our conversation.

Question: How has the financial anti-money laundering agenda and/or regulatory enforcement framework been affected by the pandemic?  

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Edward Longridge: For AML and fraud departments, two trends have presented themselves since the advent of COVID-19. First, there has been an increase in the number of Coronavirus-related scams, and, in particular, scams targeting the elderly. Fraudsters and money launderers are taking advantage of what they perceive to be opportunities for criminal activity in the current environment. These heightened activities are putting extra pressure on compliance teams to adapt and perform.

Second, the regulators have not taken their foot off the pedal. Expectations, during this time when systems are being stressed, have only increased. While it is true that FinCEN requested financial institutions to contact them if they are having difficulties in the timeliness of Suspicious Activity Report (“SAR”) filings, and though, in certain cases, regulatory exams may be delayed, AML departments must still meet—and indeed exceed—their obligations to fully comply with regulatory rules and expectations. In short, AML and Fraud departments need to be on an increased watch during the pandemic now, and for the foreseeable future.

Question: What should AML officers be focusing on in the next several months? 

There remains uncertainty over how long COVID-19 will last. Even after cities and states reopen, it is anticipated that there will be a large percentage of the population who will opt to work remotely. AML compliance systems will need to adapt to this change as a more permanent reality.

Further, the virus has changed people’s spending habits. This will, no doubt, continue. As a consequence, AML officers should review their transaction monitoring scenarios and rules to tune and adapt them to the changes in transactional behavioral patterns caused by the coronavirus.

Question: Is there a particular area that banks should be paying attention to that may not seem so obvious? 

Yes. Banks should be vigilant over increased fraud attempts and changes in the patterns of their customers’ transaction activity. One area for banks and broker-dealers to pay close attention to is AML volumes. With teams working remotely, firms may find it hard to keep up with the non-stop volume of transaction monitoring alerts which can lead to an increase in backlogs. Banks and broker-dealers should adjust their resources accordingly.

Question: What does post- recovery look like? 

Nobody can realistically foresee all the consequences of what is to follow in the next six months. That said, states will open in phases and will likely take a cautious, staggered approach to avoid a second wave of infections. How successful they will be is unknown.

Financial institutions will need to pay close attention to ensure their offices are compliant with all city, state and federal health guidelines. For example, they may have to reconfigure for social distancing in the office, possibly including redesigned desk space. Firms may also need to rotate their staff between remote and onsite so that not everyone is in the office on the same day. While it is anticipated that regulators will take an understanding approach with financial institutions, AML and financial crimes departments cannot afford to let up.

Question: What type of support are clients looking for now? 

In addition to our ongoing efforts helping clients establish and execute effective AML and financial crimes compliance programs, we are working with a number of parties on third-party risk management. This covers a wide range of topics, including vendor risk management, VPN matters, and cyber security/data security. Several firms have also turned to us recently to help them keep up with their transactional volumes.

Given the prevalence of new scams posed by bad actors, the added stresses placed on compliance programs and systems by remote working arrangements, and the unrelenting demands by regulators to fulfill their anti-money laundering and anti-fraud obligations, firms are under significant pressures. We continue to assist them in these efforts.


The current crisis presents many challenges. Bates practice leaders, consultants, and experts can help. Please contact:

Edward Longridge, Managing Director, Bates AML and Financial Crimes 

Christine Davis, Managing Director, Forensic Accounting & Economic Damages

Dennis Greenberg, Managing Director, Third Party Risk Management Services

 

For further reading, you may also be interested in:

Bates Practice Insights: What Compliance Officers are Thinking About Now

AML Compliance Report: FinCEN Says Hold the Line, FFIEC Updates Exam Manual

White Paper: The Challenges of AML Leadership

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06-05-20

New Capital Market Insights White Paper: Bear Markets, Black Swan Events and Volatility

New Capital Market Insights White Paper: Bear Markets, Black Swan Events and Volatility

The first part of this year has been challenging for the equity markets. With a global pandemic suddenly arising—the likes of which have not been seen in more than 100 years—U.S. economic activity largely halted, and unemployment skyrocketed, reaching in excess of 40 million initial unemployment claims in just 10 weeks. By some estimates, the gig economy, or “1099 workforce,” comprises an additional 20 million people.

Will the economy experience a V-shaped recovery and quickly bounce back or is the recovery likely to be a long, protracted U-shape? That remains a key question. One thing is clear though, life in the time of corona is currently very challenging for people, the economy, and the markets—and much is uncertain.

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The sudden appearance of a severe global pandemic is just the most recent example of a “black swan event” roiling the markets. By definition, black swans are rare and seldom seen, and as such are difficult, if not impossible, to predict. They can be triggered by either unexpected market, economic, or external factors such as geopolitical, war, or terrorist events.

In our new Capital Insights report we examine in detail bear markets, black swan events, and volatility to gain some perspective on how the recent—or current?—bear market compares with historical periods.

Download this white paper

 

Other Bates Research White Papers

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06-04-20

CEO Message: Standing up to Racial Injustice

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To my valued colleagues, clients, and community:

Over the past week I have struggled to find the right words to express my feelings about the events unfolding in our country. I have also debated whether to make a public statement.  However, I think the time has come for me to stand up and speak out from my position as a leader.  I have been horrified by the deaths, incarcerations, and racial inequalities of Black Americans and our country’s inability or unwillingness to make the changes to stop them.  I am deeply saddened by the tragic killing of George Floyd in Minneapolis last week as well as so many other black lives that have been lost over too many years.  While I am dismayed by the violence and destruction that have since followed, I recognize that civil disobedience can be an important catalyst for change.

It is time for us to come together to create change actively and urgently on both systemic and individual levels.  The acts of racism, discrimination and violence must end.  Institutional racism built into our core systems of housing, education, and jobs must be recognized and replaced by opportunities for all.  I am using this forum to state that I stand in solidarity with those fighting to eradicate racial injustice, and I pledge to learn how to be an ally to and actively support the Black community. 

Bates is a firm that has always embraced and thrived on change.  Right now, and into the future we will embrace the call for change among us to support and champion anti-racist values.  Over the coming months Bates will critically re-examine itself and its decisions and look for other ways to promote and uphold our values.  Last year we joined Partners in Diversity, a local non-profit focused on diversity, equity, and inclusion, which gives our team opportunities to participate in workshops and discussions, as well as access to their job board.  We also added a dedicated recruiter to our People and Culture team to help build a quality and diverse pipeline of candidates.

I encourage you to stand with me, and I am seeking to partner with others to open my eyes to even greater possibilities for inclusion and equality.

Finally, I end with this powerful quote from Bryan Stevenson of the Equal Justice Initiative:

“I’m sixty years old and have been practicing law for thirty-five years. I have a lot of honorary degrees and went to Harvard. And I still go places where I am presumed dangerous. I have been told to leave courtrooms because the presumption was that I was the defendant and not the lawyer. I have been pulled out of my car by police who pointed a gun on me. And I can just tell you that, when you have to navigate this presumption of guilt, day in and day out, and when the burden is on you to make the people around you see you as fully human and equal, you get exhausted. You are tired. And I would argue that the black people in the streets are expressing their fatigue, their anger, and their frustration at having to live this menaced life in America.”

I look forward to further dialogue and action. 

– Jennifer   

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06-03-20

Bates Group Partners with Linda Tuck Chapman and Ontala for Third Party Risk Management Services

Bates Group is proud to announce our partnership with Ontala Performance Solutions, led by internationally acclaimed expert Linda Tuck Chapman, to expand Bates’ risk services to include the critical area of third-party risk management.

Linda Tuck Chapman is President of Ontala Performance Solutions Ltd.; creator and Faculty for "Certified Third Party Risk Management Professional" (C3PRMP), delivered in partnership with SIG University; and author of Third Party Risk Management: Driving Enterprise Value.

“Many companies have outstanding outsourcing capabilities but do not have strong third-party continuity, governance, and review plans,” said Benjamin Pappas, Bates Group President. “Third-party issues represent a major risk for companies, their managers, and even their board members who may personally face fines or regulatory action. As a recognized financial services industry expert, Linda, in partnership with Bates, brings deep, actionable insight and exceptional expertise to clients in third-party risk management, governance, and optimization. The partnership is a perfect fit in expanding our risk portfolio and value to financial industry clients.”

Initially, our combined team will offer:
  • Maturity and Effectiveness Assessments for third-party/vendor risk management programs
  • Comprehensive Services for monitoring & controlling third-party “Work-From-Home” risks
  • Third-party Risk Assessments, Controls Evaluations and Contract Reviews to ensure all controls, performance, and compliance requirements protect your organization
  • Proven Training and Education for all stakeholders at all levels, either as classroom and eLearning.

“Our strategic partnership brings a powerful blend of specialized expertise, hands-on experience, and outstanding practitioners to the market,” said Tuck Chapman. "Managing third-party relationships by criticality and risks has never been more important. The global crisis makes us hyper-aware that trustworthy relationships are vital. Implementing an effective third-party risk management program will bring comfort that your decisions are risk-informed and resilient.”

“Despite, and because of, all that we are dealing with in business and the economy today, it has never been more critical for financial services firms to maintain best practices in the areas of anti-money laundering (AML) and financial crimes—across all relationships. Bates and Ontala bring expert recommendations, technical, and consulting services needed to survive and thrive in the financial services industry today,” said Edward Longridge, Managing Director, Bates AML & Financial Crimes.

Visit Bates' Third Party Risk Management Services

 

For more information, please contact: Dennis Greenberg, Managing Director at dgreenberg@batesgroup.com or 914-588-3965

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06-02-20

Introducing Bates Group’s Business Interruption Litigation Support

Introducing Bates Group’s Business Interruption Litigation Support

The COVID-19 pandemic has had a far-reaching impact on businesses across the country and throughout the world, putting strain and pressure on the insurance industry more than ever before.

Bates Group’s industry-leading insurance, forensic accounting and economic damages experts stand ready to assist Insurers and agents in the many challenges they face as result of the pandemic, including pre-litigation claims reviews and multi-faceted support should a matter proceed to litigation. Our insurance litigation team works side-by-side with regional and multinational insurance companies, reinsurance firms, underwriters and their in-house and outside counsel. 

Bates experts and consultants have experience handling claims across the following types of insurance coverage:
  • Commercial Property Business Interruption
  • D & O Liability
  • Property & Casualty
  • Builders Risk
  • Bad Faith
  • Force Majeure
  • Named Peril Coverage
  • All Risk Coverage
  • Employment Practices Liability
  • Excess/Umbrella Liability
  • Eligible Employee 

For more information, please visit our Business Interruption service page or contact:

Andrew Daniel, Director, Securities Litigation Expert and Consultant - adaniel@batesgroup.com

A. Christine Davis, Managing Director, Forensic Accounting and Commercial Damages - cdavis@batesgroup.com

Sheila Murphy, Insurance, Litigation and Regulatory Expert- smurphy@batesgroup.com

Greg Faucher, Managing Consultant, Insurance and Actuarial Practice Leader - gafucher@batesgroup.com

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05-20-20

Bates Practice Leadership Insights: What Compliance Officers are Thinking About Now

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During this transition period between what was and what will be the “new normal,” we thought it timely to provide some current thinking from top Bates’ leaders on clients’ immediate and near-term compliance challenges. While no one knows with certainty what the future holds, these “leadership conversations” are intended to share some insight from experts on the front line. For our first conversation, we caught up with Robert Lavigne, Managing Director and Bates Compliance Practice Leader, and Hank Sanchez Esq., Bates Compliance Managing Director and former SEC and FINRA regulator, to get an understanding of what they are hearing from compliance officers right now, as well as advice for compliance teams in the "new normal." Here is a recap.

Question: What are the top concerns you are hearing right now?

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Bob Lavigne: “Our compliance practice is fielding a large number of implementation questions concerning Regulation Best Interest (Reg BI). We anticipate that most firms are making good-faith efforts to be in compliance by the rule deadline, so we are preparing for—and have been heavily involved in—what we refer to as ‘Day 2’ work. This includes, just to name a few items, tuning product score cards and product rationalizations, supervisory processes, branch office inspections, compliance testing and book and records reviews.”

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Hank Sanchez: “Reg BI remains the top concern. I would only add that we are addressing many questions related to Form CRS (that is, Reg BI Customer Relationship Form disclosures), including process questions concerning how and when to deliver these forms to clients, and ensuring that language in the separate disclosure documents concerning conflicts and fees is clear and adequate.”

Lavigne: “There are of course some firms, usually small- to medium-sized, that have not yet fully prepared for the implementation of the rule. We are currently working with some to help them catch up and be compliant on June 30th.”

Sanchez: “That’s right. Those that are just now trying to catch up can still evidence the necessary ‘reasonable’ attempts to comply, but they will certainly be scrambling to catch up after July. Those firms should understand that the delay may affect their ability to complete the rest of their compliance requirements in the second half of the year.”

Question: How has the Coronavirus affected client efforts to meet the compliance deadline for Reg BI or other compliance goals? 

Lavigne: “Many firms that have diligently prepared policies, procedures and operations to meet Reg BI and Form CRS deadlines are now confronting pandemic-related challenges around training. They are also concerned with their ability to supervise and execute new policies and procedures, in part because more of their employees are working remotely.”

We are also responding to pandemic-related questions on conducting branch inspections, which would typically be done on site.  FINRA requires on-site inspections, but ‘on-site’ is more complicated now. During the pandemic, on-site will likely be remote. Some firms have delayed their branch inspections during the pandemic. Compliance teams have been limited in their ability to review, and will also have to play catch up.” 

Sanchez: “Firms are facing additional technology challenges as a consequence of COVID-19. Some firms did not have the initial ability for compliance staff to access supervision systems immediately when the lockdowns occurred and had to use work-arounds when those problems popped up. Technological issues continue to crop up in many places, including, for example, in trade reporting and surveillance for firms with trade desks.”

Question: What does post-COVID-19 compliance look like?

Lavigne: “As firms make the slow transition out of lockdown mode, they will be forced to address the fact that some ways of doing business simply will not go back to the way they were. From a compliance standpoint, firms must think seriously about the adequacy of their remote working policies and if they are scalable in a new environment.”

Sanchez: “The pandemic is accelerating and intensifying previous trends, but the bottom line is that greater reliance on remote working arrangements can cause serious and even unexpected compliance and supervisory issues, depending on how much business is being done out of someone’s home or other remote location. So, as risk assessments and business continuity plans get updated and firms prepare for contingencies that may keep brokers and advisers out of the office for extended periods of time, firm leadership will have to face the realities of more comprehensive remote compliance. This will cost firms money and maybe require additional staff as well. In the longer term, new roles may need to be defined, new techniques developed, and compliance staff will have to become more proficient in them to fulfill regulatory requirements.”

Lavigne: “I should note that our practice group is also responding to a host of non-Reg BI pandemic-related challenges which we anticipate will last for quite a while. These concerns are quite diverse. We are working on everything from work-life business culture issues to proper use (to ensure forgiveness) and disclosure around PPP loans.”

Question: What are regulators looking for at this time?

Lavigne: “Regulators are looking to see that firms are making a good faith effort at implementing changes right now, as well as looking at how firms are adapting to the changing environment. It is important for firms to make sure that policies and procedures are still being followed and, perhaps as importantly, that compliance efforts are visible throughout the organization. This means reaching out to representatives and branches proactively and in real time.  Being able to evidence your change management and implementation will be key when speaking to a regulator about your Reg BI program.” 

Sanchez: “As a practical matter, if I were a compliance director right now, I’d be most concerned about what didn’t work in the business continuity plan and getting it fixed. Next, I’d be wondering how to do post-mortem testing to ensure things were done properly during the lockdown and to identify what needs to be corrected. For instance, were supervision and surveillance programs up to the task? Did they work? What needs to be corrected? Following that, there should be thorough updates to the firm’s risk assessment (as well as the business continuity plan) to cover any new or foreseeable events—meaning, at a minimum, any shutdown of a home office for any length of time longer than a day or two.”

Lavigne: “Regulators are going to ask you whether the business continuity plan worked or not.  Firms should take the time to review what did and did not work and make sure they address the areas of concern. The answers will matter. Now is the time to address it.

Sanchez: “Beyond these heightened and immediate regulatory concerns, it is abundantly clear that directors must remain on top of firm compliance with respect to anti-money laundering and cyber programs. But it also requires compliance officers to pay attention to those areas where regulators have specifically highlighted their priorities, including continuously addressing privacy-related policies and procedures and ensuring electronic delivery of required forms to customers.”

Question: What is your outlook on the market going forward?

Lavigne: “Keeping up with compliance responsibilities during ‘normal times’ is challenging. These are not normal times. During COVID-19, even the ordinary compliance tasks present unexpected challenges. But COVID-19 also presents an opportunity to take a hard look at the entirety of your compliance and supervisory operations. We suggest that firms take this advantage to reassess old programmatic approaches to compliance and consider supervision and risk mitigation through greater use of data and technology. That may yield cost savings and regulatory benefits long-term.  

Sanchez: “During this time, taking a moment to survey the overall compliance operation would be valuable. Firm leadership should acknowledge what worked well and who made it happen. That they got it right should absolutely be recognized. For those firms that struggled, this is also an important moment. Those firms should engage in an assessment of the role of compliance management within their business. Perhaps, firm leaders may consider providing a compliance greater say when budget conversations turn to systems and staffing upgrades.

Reach out to Robert Lavigne at rlavigne@batesgroup.com and Hank Sanchez at hsanchez@batesgroup.com. For more information, visit Bates Compliance online at www.batescompliance.com.

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05-11-20

Welcome Our New Bates Experts

Bates Group is proud to welcome our newest experts and consultants: 

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Kathy D. Ireland

ERISA, Investment Advisers Act, Codes of Ethics

Kathy D. Ireland is a Bates Group consultant specializing in ERISA and investment adviser issues, including codes of ethics and fiduciary matters. Prior to establishing her own consulting practice, Ms. Ireland served as Counsel for Federal Government Affairs at Ameriprise Financial in Washington, D.C. From 2011 to 2017 she represented SEC-registered investment advisers at the U.S. Department of Labor as well as the SEC as Associate General Counsel of the Investment Adviser Association. Prior to joining the IAA, she was an independent consultant focusing on ERISA and securities issues. Ms. Ireland is an attorney, earning her J.D. from the College of William and Mary and an LL.M. in Labor Law from the George Washington University National Law Center.

Full Bio

 

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Philip Lieberman, CPCO, CLU

Property and Casualty Insurance

Philip Lieberman is a Bates affiliate expert with a broad range of experience in the insurance industry. During his 50-year career, he has served as an expert witness in more than 140 case matters, representing both plaintiffs and defendants. He has also been deposed and cross-examined and has authored reports and served on arbitration panels. Following the sale of his agency to a national bank, Mr. Lieberman taught insurance under the auspices of the American Institute for Property & Liability Underwriters, Inc. and the Independent Agents and Brokers of New Jersey. Mr. Lieberman holds the Chartered Property Casualty Underwriter (CPCU) and Chartered Life Underwriter (CLU) designations.

Full Bio

 

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Jennifer Luce

Accounting, Media, Publishing

Jennifer Luce is a Bates affiliate expert based in New York. She is a CPA with an MBA and has nearly a decade of public accounting and media industry experience. Ms. Luce held various financial and accounting roles at AOL Time Warner, and prior to that worked in public accounting. She has served in financial analyst and managerial positions and is now using her finance and accounting skills to provide forensic accounting and litigation consulting services in disputes involving companies, government entities and law and accounting firms, financial statement analysis, and complex liability and damage analyses. A keen eye for detail, complex analytical proficiency and communication skills are the keys to her success. Ms. Luce graduated from Clarkson University with a BS in accounting. She then attended Boston University and earned her MBA. 

Full Bio

 

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Mike Steinmetz

Cybersecurity

Bates Group expert Mike Steinmetz has more than 40 years of federal, state, and private sector experience. As Rhode Island’s first State Cybersecurity Officer, he delivered the first cyber-risk assessment of state government and authored the state’s first cybersecurity strategy. As Rhode Island’s Homeland Security Advisor, he completed a complex risk analysis of physical, technological, and other risks to the state’s critical infrastructure. Mr. Steinmetz’s private sector work includes positions with Northrop Grumman, where he delivered the company’s first international cyberstrategy initiative. He later transitioned into international energy and power, addressing digital risk and security for National Grid plc, serving concurrently as National Grid’s Global Director, Governance Risk and Compliance, the Global Director for Strategy, Planning and Budget and as the interim Acting U.S. Chief Information Security Officer.

Mr. Steinmetz is an Oxford University Martin School Associate and serves on the Board of Boston College’s Woods College for Advancing Studies, Masters of Cybersecurity Policy and Governance. He is also Senior Advisor to the Cityforum in London, frequently chairing or speaking at its annual Cybersecurity Masterclass. A decorated combat pilot, Mr. Steinmetz is a graduate of the Peabody Institute of the Johns Hopkins University and a distinguished graduate of the National Defense University.

Full Bio

Need an Consulting or Testifying Expert? Please visit our Expert Search to view our online roster of Bates experts and consultants or call us at 503-670-7772.

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05-07-20

Bates Group Welcomes New Managing Director Steven Engel

Bates Group Welcomes New Managing Director Steven Engel

Bates is proud to welcome Steven Engel as a new Managing Director on the Bates Compliance team. Steven brings to Bates a background in Risk and Regulatory Advisory. He was previously with BNY Mellon Corporation where he served as a Senior Principal in the Program Management Office. Prior to BNY Mellon, he was Director of Financial Services Risk and Regulatory Consulting at a Big Four consulting firm, serving institutional and retail clients in a national practice. At Bates, Steven will be working directly with clients to support their risk and compliance activities and solutions.

Full Bio

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03-18-20

What We Have Learned From Previous Market Downturns and Corrections

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Dear Clients and Friends:

Over the course of the last 40 years we’ve seen plenty of ups and downs in the markets. Along the way, Bates Group has helped our clients sort through the complexities and fallout of each financial upheaval—and the inevitable litigation and regulatory investigations that follow—by providing clear and accurate analyses, reporting, and expertise.

This was true from the 1987 stock market crash through the limited partnership litigation in the early 1990s, the bond market crash in 1994, the Asian financial crisis in 1997, the Russian default in 1998, the bursting of the “technology bubble” at the turn of the century, the credit crisis that began in late 2007, and now the markets’ reaction to the COVID-19 pandemic.

Each of these events caused investors to re-evaluate the way in which they think about the markets and investing. During the turmoil that followed, previously existing models and paradigms were challenged, and Bates Group helped to provide insight into these challenges by carefully separating fact from fiction and reducing critical issues to their core, while guiding our clients in support of their regulatory compliance.

We know that the current crisis is a challenging time for you, your families and your businesses. Our practice leaders, consultants and experts are available to answer your questions and be a source of knowledge to in-house and outside counsel, and our clients’ compliance, risk, supervision, audit and business teams to help them through this period. Please do not hesitate to reach out to us for any reason.

If there is one thing we have learned over the course of 40 years as experts and consultants, it is that market corrections happen, and rebounds will eventually follow. While we do not have a crystal ball to tell us when this will occur, based on our experience, we know that market participants will react and we will continue to be there to offer our consultation and industry expertise to help you through it. 

Wishing You All the Best,

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03-17-20

FINRA Postponement of In-Person Arbitration & Mediation Hearings

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FINRA has announced that, in response to the evolving coronavirus disease 2019 (COVID-19), it “has decided to administratively postpone all in-person arbitration and mediation proceedings scheduled through May 1, 2020. “

“If you have an in-person hearing or mediation session that is postponed as a result of this decision, you will be contacted by FINRA staff to reschedule or discuss remote scheduling options,” said the regulator. Importantly, FINRA relayed that the postponement “does not affect other case deadlines. All case deadlines will continue to apply and must be timely met unless the parties jointly agree otherwise.”

Bates stands ready to support clients with their FINRA arbitration matters. If you are a Bates client and your case is postponed, we look forward to being in touch with you to discuss your interim case support needs.

Please also feel free to reach out to our team to discuss any of the following services: 

Litigation Services and Damages Analyses

Search for a Quantitative or Substantive Consultant or Testifying Expert

Request a Consulting or Testifying Expert

Arbitrator Evaluator™ Selection Tool

Managed Document Review Services


Contact:

 

Julie Johnstone - Managing Director - Retail Litigation

jjohnstone@batesgroup.com

 

Andrew Daniel - Director, Expert - Retail Litigation

adaniel@batesgroup.com

 

Peter Klouda - Director, Expert - Retail Litigation

pklouda@batesgroup.com

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03-16-20

UPDATE: NSCP Regulatory Interchange with the SEC, DOL & FINRA: July 24, 2020 in Denver, CO.

UPDATE: NSCP Regulatory Interchange with the SEC, DOL & FINRA: July 24, 2020 in Denver, CO.
Linda Shirkey

UPDATE: The NSCP Regulatory Interchange with the SEC, DOL & FINRA has been moved to July 24, 2020 in Denver, CO. Bates Compliance Managing Director Linda Shirkey will be facilitating a discussion at this half-day conference for Investment Advisors, Private Fund and Broker-Dealer Industry Professionals. 

Details at the NSCP Event Page

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03-09-20

Bates Compliance Practice Leader Robert Lavigne Discusses Reg BI in ThinkAdvisor Article

Bates Compliance Practice Leader Robert Lavigne Discusses Reg BI in ThinkAdvisor Article

Bates Compliance Practice Leader Robert “Bob” Lavigne is quoted in a new article entitled “Reg BI Compliance Race is On,” published by ThinkAdvisor on February 24, 2020. Bob offers insight on the challenges to achieve regulatory compliance with the new SEC rule by the June 30, 2020 deadline.

Read the full article at ThinkAdvisor

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03-05-20

Facing the Coronavirus: Financial Industry Preparations, Reassurances and Contingencies

Facing the Coronavirus: Financial Industry Preparations, Reassurances and Contingencies

If you’ve been in meetings about investor communications, business travel, or other contingency planning over the past few days and weeks, you are not alone. Since the outbreak of the coronavirus (also referred to as COVID-19) and more recently, the precipitous volatility of the financial markets, financial firms have been deluged with questions from just about every stakeholder group about how to respond. Regulators are weighing in as well. Bates looks at some of the efforts to prepare and reassure everyone out there.

The Markets

Despite early attempts by Federal Reserve Board Chair Jerome Powell to reassure investors that the central bank is “closely monitoring developments and their implications for the economic outlook” and that the Board “will use our tools and act as appropriate to support the economy,” the Fed took more definitive action earlier this week by lowering the target range for the federal funds rate by 1/2 percentage point in an attempt to protect the economy from potential disruptions.

Political actors have been vocal about pressuring the Fed to do more. The President reportedly urged the central bank to be more aggressive cutting rates and suggested that Congress cut taxes. As we went to print, Congress, however, appears to be closing in on a bipartisan $8.3 billion appropriation to combat the virus. Presidential candidates, most notably former candidate Senator Warren, are advocating for substantial fiscal stimulus to address the current situation and potential spread. The Senator wrote letters to CEOs of the globally systemic important banks demanding they provide information regarding “how you evaluate the risks to your institution and its customers associated with coronavirus, the extent to which your institution is exposed to those risks and prepared to absorb their impact, and how you are monitoring the developments going forward.”  

Firm Management  

For all market participants, the priority is to make preparations to keep transactions and other financial functions operating. A spokesperson from the NYSE stated they are carefully monitoring the spread of COVID-19, and that the exchange has “robust contingency plans, tested regularly, to enable continuous operation of the NYSE exchanges should any facilities be impacted.”

Many financial firms have restricted business travel in Asia and Italy, required employees in those areas work from home, and placed other restrictions on travel and attending conferences. Some U.S. firms are restricting travel, as well. Reuters quotes financial sources discussing the preparation of back-up facilities, “splitting up critical teams into rotating shifts and physically distancing staff from one another.” Ultimately, the plans ensure that employees know what they need to do to keep the company operating. 

Backing up how prepared market participants are, Kenneth Bentsen Jr., CEO of the Securities Industry and Financial Markets Association (“SIFMA”), in an interview with Reuters relayed that  “most firms have playbooks for handling a range of business disruptions, including pandemics.” He stated that the “industry is reviewing and updating contingency plans in order to minimize any potential disruption to the financial markets that could be caused by personnel being unable to work onsite.” Plans include potentially “moving staff to backup locations away from major cities.” Bentsen conveyed that “our job is to do as much preparedness as we can . . . and to be as resilient as possible. That's been up and running for several weeks now, and we're prepared."

SEC  

On March 4, 2020, the SEC issued an Order that “provides publicly traded companies with an additional 45 days to file certain disclosure reports that would otherwise have been due between March 1 and April 30, 2020.”  In the release accompanying the Order, the SEC makes clear that companies should “continue to evaluate their obligations to make materially accurate and complete disclosures in accordance with the federal securities laws.”

To receive the relief under the newly issued Order, companies must submit a summary report explaining “why the relief is needed in their particular circumstances.” The Commission stated that it “may extend the time period for the relief, with any additional conditions it deems appropriate, or provide additional relief as circumstances warrant.” 

The SEC Division of Investment Management also issued a statement saying that it is actively monitoring the current and potential effects of the virus on investment advisers and funds. The staff noted, however, that it “would not recommend enforcement action if fund boards do not adhere to certain in-person voting requirements in the event of unforeseen or emergency circumstances affecting some or all of the directors,” as a result of “the current and potential effects of COVID‑19.” Division staff stated that its no-action position applies to board meetings held between March 4 and June 15, 2020 (with extensions as circumstances warrant.)  

Retail Investors

For retail investors, regulators have been offering up advice when considering investment concerns. On February 28, 2020, FINRA issued “Investor Tips for Turbulent Markets,” a 5-step primer for when “the stock market gets rocky” to “elevate your financial security.” While not explicitly referencing the advent of the health crisis, the primer contains key steps to “‘steady your pulse during market downturns.”  These key points include (i) revisiting financial goals to guide a sound investment approach; (ii) diversify across, and within, the major asset classes relative to your overall portfolio; (iii) automating payments to strengthen financial security; (iv) understanding the impact of changing interest rates; and (v) protecting against fraud by working with registered representatives and using FINRA’s BrokerCheck.

Conclusion

The global nature of the coronavirus challenges the broader economy in ways that are as yet unknown. Messages of preparations, reassurance, and contingency plans by market leaders are helpful to “steady the pulse” as stakeholders move forward. Bates will continue to monitor developments.

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01-28-20

Bates Group Welcomes New Managing Director Jennifer L. Cunningham

Bates Group Welcomes New Managing Director Jennifer L. Cunningham

Bates Group is proud to welcome new Managing Director Jennifer L. Cunningham. She is an accomplished and seasoned financial services industry professional, with over 20 years of experience working with financial advisors and customers in branch office management. Her areas of expertise include risk and supervision, customer complaints, FINRA arbitration and mediation matters, suitability, operations, sales support, Human Resources, customer communications and relations, project management and FINRA new member applications.

Ms. Cunningham has held various broker-dealer management positions during her career. At UBS Financial Services, Inc. (UBS), headquartered in Weehawken, New Jersey, she was a Director, Senior Client Communications Manager, where she worked in the Marketing office, drafting and executing UBS’s customer communications. Ms. Cunningham was a Director, Complex Administrative Manager for UBS’s Park Avenue branch office in New York City, where she supervised branch office sales support personnel along with the operations and compliance teams.

Before joining UBS in 2013, Ms. Cunningham was a Vice President, Administrative Manager at the Merrill Lynch Fifth Avenue flagship office in New York City, where her responsibilities included various compliance supervisory reviews and approvals, customer complaints, heightened supervision, liaising with in-house and outside counsel on customer litigation, as well as serving as Merrill’s corporate representative for those matters.

Prior to joining Bates, Ms. Cunningham served as a Managing Director at another consulting firm, where she provided expertise in support of broker-dealer litigation and customer complaint matters, prepared FINRA broker-dealer New Member Applications, and served as lead project manager for specialized regulatory and compliance consulting retentions. Ms. Cunningham began her financial services career in the early 1990’s in Wilmington, Delaware. She became a FINRA licensed Sales Assistant in 1997 and has held FINRA Series 7, 9, 10, 31, 63 and Series 65 licenses.

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01-15-20

Bates Expert William Jannace Quoted in Investment News Article

Bates Expert William Jannace Quoted in Investment News Article

Bates Group Expert and Consultant William Jannace is quoted in a new article from Investment News. The article discusses FINRA's interest in brokerage bank sweep accounts at a time of low commissions for brokers.

Read the full article at Investment News.
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01-06-20

Bates Group Expands Regulatory Compliance Services with Acquisition of The Advisor’s Resource, Inc.

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(L - Linda Shirkey, R - Shelley Dragon)
 

Bates Group is pleased to announce the acquisition of The Advisor's Resource, Inc. (TARI), a leading compliance consulting firm based in Texas. The acquisition further expands Bates Group’s compliance division, Bates Compliance, with greater access and resources to service Registered Investment Advisers (RIAs), as well as private equity and hedge fund firms across the United States.

Veteran compliance leader and TARI Founder & President Linda Shirkey will join Bates Group, along with Shelley Dragon, TARI’s director of client service. They will continue to serve TARI’s account base as well as other Bates clients across the United States as members of the Bates Compliance team. Shirkey and Dragon are both based in Houston, TX.

“We welcome Linda, Shelley, and the TARI clients to Bates,” said Benjamin Pappas, Bates Group President. “TARI is nationally recognized for its deep regulatory compliance expertise. With the addition of TARI, we are immediately expanding our expertise and ability to provide industry-leading regulatory compliance services in Texas, throughout the South, and nationwide.”

Ms. Shirkey noted that the acquisition of TARI by Bates Group benefits TARI clients because of the “direct match in ethics, values, and strong client focus” between Bates and TARI. “I am very excited about the deep and expanded capabilities that Bates Compliance brings to our clients,” she said.

The Bates Compliance team of senior compliance staff and former regulators bring tailored regulatory compliance services, guidance, and expertise to financial services clients on an as-needed or ongoing basis to meet the evolving requirements and practices of today’s global financial services industry. Bates Compliance provides a wide range of support to financial institutions of all sizes, structures, and business models, and works with its clients to review, test, and bolster their compliance programs.  Bates Compliance provides and implements solutions based on regulatory requirements and industry-accepted best practices designed to supplement and enhance compliance and supervisory systems, and remediate the results of regulatory and internal audit findings.


About Bates:

Bates Group (www.batesgroup.com) has been a trusted partner to our financial services clients and their counsel for over 30 years, delivering superior quality and results on a cost-effective basis. Voted a Best Securities Litigation Consulting Firm by readers of the New York Law Journal and an NYLJ Hall of Fame service provider, Bates Group provides solutions throughout the lifecycle of legal, regulatory, and compliance matters. With a roster of over 200 financial industry and regulatory compliance experts, Bates offers services in litigation consultation and testimony, regulatory enforcement and internal investigations, compliance solutions, AML and financial crimes, forensic accounting, damages, and big data consulting. 

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12-19-19

Reg BI Countdown – Is Your Firm Ready?

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Last month, we reported on FINRA's announcement that they will be conducting SEC Reg BI readiness assessments to better understand companies' Reg BI implementation preparations. In particular, regulators want to know if: 1) Your firm needs Reg BI guidance; 2) Whether you’re looking at product offerings, suitability, disclosures and conflicts; 3) How far along your firm is in comparison to peer firms; and 4) Whether you can demonstrate that your company has a thoughtful approach and operational procedures in place.

Bates Compliance helps firms achieve Reg BI readiness. Our Reg BI Team is available to advise, guide and implement a selective or full suite of Reg BI services.

 
Companies have hired us to help them:
  • Create conflicts committees
  • Identify conflicts and control summaries
  • Assess and update WSPs and compliance manuals
  • Draft Form CRS
  • Develop firm-wide employee compliance, management and operations training
  • Create a process for client disclosure documents and recordkeeping
  • Plan ongoing Reg BI consulting support, and more!

Get ahead of the regulators and begin formulating your plan today with Bates Compliance.

 

Give Bates Compliance a call today to learn about how our Compliance Solutions and Reg BI Readiness Workshops can support your firm’s SEC Reg BI Implementation efforts.

 
Contact:

Robert Lavigne, Managing Director - 508.868.6741 or rlavigne@batesgroup.com

David Birnbaum, Managing Director - 917.273.2682 or dbirnbaum@batesgroup.com

Rory O'Connor, Director - 860.671.7270 or roconnor@batesgroup.com

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11-15-19

Reg BI Countdown - FINRA Wants to Know How Your Reg BI Implementation is Coming Along

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During the 2019 SIFMA C&L New York Regional Seminar, FINRA announced that they will be conducting SEC Reg BI readiness assessments to better understand companies' Reg BI implementation preparations.

“Starting this month, “ said Bates Compliance Managing Director Robert Lavigne, “FINRA will be taking steps to check on companies ahead of this rule implementation. Companies should heed their warning and begin working on a plan.”

According to FINRA conference speakers, below is a list of what the regulators are interested in learning when they visit your firm this Q4 and in 2020:

  1. Does your firm need Reg BI guidance?
  2. Are you looking at product offerings, suitability, disclosures and conflicts?
  3. How far along are you in comparison to peer firms?
  4. Can you demonstrate that your company has a thoughtful approach and operational procedures in place?

Ready to get started or not sure where to begin? We're here to help.

Learn How Bates Compliance Can Support Your Reg BI Implementation Efforts

 

Give Bates Compliance a call today to learn about how our Compliance Solutions and Reg BI Readiness Workshops can support your firm’s SEC Reg BI Implementation efforts.

 
Contact:

Robert Lavigne, Managing Director - 508.868.6741 or rlavigne@batesgroup.com

David Birnbaum, Managing Director - 917.273.2682 or dbirnbaum@batesgroup.com

Rory O'Connor, Director - 860.671.7270 or roconnor@batesgroup.com

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11-12-19

Bates Welcomes Our Newest Experts and Consultants

Bates Group is proud to introduce our newest experts and consultants. Follow the links below to view their full bios, or visit our Expert Search to view the entire Bates roster of experts and consultants.

 

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Gontran de Quillacq

Equity Derivatives and Structured Products, Options and Futures, Quantitative Investment Research, Portfolio Management

Gontran de Quillacq is a Bates Group Consultant and Expert in the areas of equity derivatives and structured products, options and futures, equity finance, Delta One, proprietary trading, statistical arbitrage, quantitative investment research, and portfolio management.

Mr. de Quillacq traded derivatives for two decades at top-tier banks of the London Square Mile and Wall Street. As a portfolio manager, he researched and managed investment strategies, delivered both in hedge fund and in structured note formats. He selected portfolio managers and strategies for top hedge funds and asset managers. In 2017, Mr. de Quillacq co-founded a quantitative activity deploying the latest machine learning techniques in global long/short equities. He is a quantitative researcher and portfolio manager for an asset management firm deploying volatility arbitrage strategies and has held FINRA Series 7, 63, and 55 licenses.

Full Bio

 

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Caryn Miller

Compliance, Legal, Retail BD/RIA, Mutual Funds

Caryn Miller is a Bates Compliance consultant based in New York City and Los Angeles. Ms. Miller joined Bates Group after nearly 22 years at Bank of America Merrill Lynch that were divided almost equally between positions in Legal and Compliance. Her previous roles—spanning 20 years—included legal positions with the U.S. Securities and Exchange Commission, Division of Investment Management (New York), another dual registrant broker-dealer/investment adviser, and two major New York law firms. She is an accomplished financial services specialist with extensive experience in the retail broker-dealer/investment advisory and mutual fund fields.

Full Bio

 

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Michael Dorsey

Market Regulation, Asset Management and Corporate Compliance

Mike Dorsey is a Bates Group Consultant and Expert in Market Regulation, Asset Management and Corporate Compliance. Throughout his professional career, Mr. Dorsey has advised executives of broker-dealers and investment advisers on legal and regulatory aspects of their businesses, including fixed-income trading and securities lending, financial and operational matters, and alternative trading systems. For 8 years, he held various positions of increasing responsibility in the Division of Market Regulation at the SEC and has since held a variety of positions in the securities and asset management industries. Mr. Dorsey holds FINRA Series 7 and 24 licenses.

Full Bio

 

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Amy Ott, CPA

Tax Examinations, Tax Litigation Support

Amy Ott is a Bates Group Expert and Certified Public Accountant located in Central Oregon. She has 20 years' experience as an independent Tax Consultant. Her focus has been tax controversy (tax examinations and litigation support) for income tax and property tax at the federal and state levels. Ms. Ott also has extensive experience with Research and Development and Orphan Drug Tax credits, including computations for tax provisions and returns, and audit defense.

Full Bio

 

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Mark Filler, CPA

Tax, Damages, Commercial Disputes, Business Valuation per Divorces and Shareholder Disagreements

Mark Filler is a Bates Group Consultant and Certified Public Accountant. His experience has been entirely with small firms, with a focus on helping small business entrepreneurs solve their tax and business problems. Over the past 25 years, Mr. Filler has focused on providing consulting and expert witness assistance to clients and counsel in commercial disputes, with particular emphasis on business valuations pursuant to divorces and shareholder disagreements. Mr. Filler has been retained by lawyers and claims professionals to calculate damage assessments and business interruption losses, to assist in arson and embezzlement investigations, to provide testimony in accountants’ malpractice lawsuits, and to measure damages for lost profits in personal injury cases as well as wrongful discharge and death cases, among others.  Mr. Filler has worked on over 1,300 cases and has provided testimony over 120 times at depositions and in State and Federal Court.

Full Bio

 

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Tali Taft, CPA, CIA, CFE

Governance, Risk, Internal Audit, Fraud, Compliance

Natalie "Tali" Taft is a Bates Group Consultant and Expert in Governance, Risk, Internal Audit, Fraud, and Compliance with more than 27 years of financial services industry experience. She is an experienced financial services executive leader, a negotiator with federal examiners, and is recognized as an IIA All-Star Conference speaker and keynote speaker and master of ceremonies. The foundation of Ms. Taft’s career was built during her 18 years as an Internal Auditor, and she maintains multiple certifications in her field. Ms. Taft served over 5 years as a Senior VP at Santander Consumer USA, managing the Enterprise Risk Management department. Before joining Santander, she served as the CCO for Think Finance where she oversaw a robust financial services regulatory department. Ms. Taft has also held Internal Audit management positions with GM Financial and Bank One.

Full Bio

 

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Paul Horn, C|CISO, CISSP, CRISC, CISM, GCIH

Cybersecurity

Paul Horn is a Bates Group Consultant and seasoned Cybersecurity Expert with 20 years of experience based in Prosper, Texas.  Mr. Horn previously served as the Chief Information Security Officer for an independent Broker-Dealer with billions of dollars in assets under management and thousands of Advisors spread across the United States.  He has been a part of several FINRA and SEC Cybersecurity sweeps and examinations and maintains a deep understanding of the regulatory requirements associated within financial institutions as well as prioritizing risk remediation activities. Mr. Horn has a Master's of Science in Management with a concentration in Information Systems Security and a Bachelor’s of Science in Business Administration in Information Technology from Colorado Technical University as well as several industry certifications. He also on a variety of Advisory Boards for information security-related topics and shows a deep dedication to the information security community by mentoring other security professionals.

Full Bio

 

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Debra Vaughan

RIA Compliance Supervision, Sales Supervision and Suitability, Branch Management

Debra Vaughan is a Bates Compliance Expert and Consultant based in Florida. She is an accomplished and seasoned professional with proven success in sales support, operations, compliance oversight, trading, risk, and management. Before joining Bates, Ms. Vaughan was an Executive Director for more than a decade with Morgan Stanley Chicago PWM with overall responsibility for all of the Administrative and Risk functions. She was also responsible for ensuring compliance with legal and regulatory requirements within each jurisdiction. Ms. Vaughan began her career with Goldman Sachs in Chicago, and also served as an Investment Associate at Lehman Brothers.

Full Bio

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11-11-19

This Week at Bates

Bates Group Leaders and Experts will be appearing at several industry events around the country this week:

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November 12, 2019 – Meet Bates Group Director and Senior Investor Expert Joseph Thomas at the FINRA 2019 Senior Investor Protection Conference in Washington, D.C.

 

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November 13, 2019 – Bates is a proud Silver sponsor of the Sixth Annual "Keep Moving Forward with Legal Diversity" CLE program, hosted by Wells Fargo Advisors and the Bar Association of Metropolitan St. Louis (BAMSL). CLE and CPE credit available.

 

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November 14, 2019 – Bates Chief Legal & Administrative Officer Tony Ogden will appear on the Cybersecurity panel at Greensfelder's Annual Securities Industry Symposium in St. Louis, offered in conjunction with BAMSL.


Get the latest News, Alerts and Updates from Bates Group. Visit the Bates News page and sign up to receive industry news by practice area, articles and papers from Bates Research, and up-to-date compliance and regulatory alerts, delivered to your inbox!

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11-07-19

Bates Managing Director Hank Sanchez Quoted in The Wall Street Journal

Bates Managing Director Hank Sanchez Quoted in The Wall Street Journal

Bates Managing Director and Expert Consultant Hank Sanchez is quoted in a new article from The Wall Street Journal on how the disparity in federal and state laws governing marijuana has complicated investment policies at U.S. brokerages.

Read the full article at The Wall Street Journal.

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10-18-19

Bates Compliance’s Reg BI Countdown Kick-Off Begins!

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October is here! That means the SEC’s Reg BI implementation deadline is right around the corner. To support your implementation efforts, Bates Compliance is rolling out the Bates Reg BI Countdown with action items to keep your compliance team on track as the June 30, 2020 implementation deadline approaches.

The Bates Compliance consulting team, made up of former CCOs and senior regulators, will be providing you with ongoing insight and deadline reminders as the implementation date approaches. Our goal is to make the implementation process easy for you and to encourage the participation of your entire team.

 

Action Item 1: Take Steps to Review Conflicts

Here are three easy steps to review potential conflicts of interest:

  1. Assemble representatives from various internal groups of your firm
  2. Appoint an individual to be the conflicts coordinator and/or a designated conflicts lead.
  3. Identify and start documenting your firm’s conflicts and mitigation controls.
 

Where can you find conflicts?

According to Bates Compliance Director Jill Ehret, high-level conflicts of interest can include:

  • Compensation payouts
  • Products offered by the firm
  • Outside Business Activities
  • Individual Conflicts
  • Investment Advisory and other financial services affiliations
  • Ownership structure of the firm

Now that you have an initial plan, you can roll up your sleeves and get to work! But just in case you need a little extra support, Bates is here to help. Bates Compliance helps firms with their Reg BI implementation, including further defining conflicts, determining your disclosure approach and mitigating risk to your firm.

Want to learn more? Please call or email Bates Managing Director Bob Lavigne at (508) 868-6741 or rlavigne@batesgroup.com.

Learn More about Reg BI Solutions from Bates Compliance.


Bates Compliance is a proud sponsor of the 2019 NSCP National Conference, October 21-23 at the Hilton Baltimore (Booth #33). Managing Director Hank Sanchez to appear on panel 10A, Wednesday, October 23rd.

Hank will also be discussing Reg BI and other "Hot Topics in Compliance" at the SIFMA C&L New York Regional Seminar on October 22nd.

Bates Compliance Director JIll Ehret and CEO Jennifer Stout will be speaking on Reg BI Developments at the IBDC 2019 Annual Conference, October 28-30 in San Diego. Bates Group is proud to be Platinum sponsor of this event.

Visit Bates Compliance at IMPACT® 2019, November 4-7 at the San Diego Convention Center (Booth #1339).

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10-01-19

Hank Sanchez Speaking at SIFMA C&L New York Regional and 2019 NSCP National Conference

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Bates Managing Director and Expert Consultant Hank Sanchez, Esq. will be appearing on the morning general session panel “Hot Topics in Compliance” at the SIFMA C&L New York Regional Seminar, October 22, 2019, at the New York Marriott Marquis. Hank will be joined on the panel by Christina Dugger (J.P. Morgan Chase & Co.), Ben A. Indek (Morgan, Lewis & Bockius), Douglas Siegel (Oppenheimer), William St. Louis (FINRA), and moderator Tracy Calder (LPL Financial LLC).

SIFMA Seminar Details and Registration

 

Hank will also be a featured speaker at the 2019 NSCP National Conference, October 21-23 in Baltimore, MD. He will be speaking on the Wednesday morning Broker-Dealer panel "Advanced Considerations for Performing Due Diligence," alongside Kenneth Cherrier (Comerica). Stop by booth #33 to meet Bates Compliance leaders and to discuss compliance solutions for your firm.

NSCP Conference Details and Registration

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09-27-19

Bates Managing Director Robert Lavigne Quoted in Investment News Article

Bates Managing Director Robert Lavigne Quoted in Investment News Article

Bates Compliance Managing Director Robert “Bob” Lavigne is quoted in a new article from Investment News on the legal battle over Reg BI and what firms should be doing now.

Read the article at Investment News


Coming Up:

Bates Compliance is a proud sponsor of the 2019 NSCP National Conference, October 21-23 at the Hilton Baltimore. Booth #33

Bob Lavigne will be speaking on Senior Investor Protection at the upcoming SIFMA Internal Audit Annual Conference, October 27-30 in Miami.

Bates Compliance will also be exhibiting at IMPACT® 2019, November 4-7 at the San Diego Convention Center.

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09-23-19

Bates Welcomes Our Newest Experts and Consultants

Bates is proud to introduce our newest experts and consultants. Follow the links below to view their full bios, or visit our Expert Search page to view the entire Bates roster of experts and consultants.

 
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Donna L. Bartlett

Broker-Dealer Compliance and Anti-Money Laundering Consulting

Donna Bartlett is a Bates Group consultant based in San Diego County, California. As a seasoned compliance professional with extensive and diverse retail securities experience, she is a capable resource to provide broker-dealer compliance and Anti-Money Laundering (AML) consulting services, including drafting and amending policies and procedures, conducting branch audits, performing internal and supervisory control audits, advising on arbitration/litigation matters and training services, among others.

Ms. Bartlett comes to Bates from First Allied Securities, where she served for over 20 years as Chief Compliance Officer. She previously held the role of First Allied’s AML Compliance Officer, and subsequently supported and collaborated with the firm’s AML officer to ensure the ongoing effectiveness of the firm’s AML Compliance program, including CIP, OFAC, Client Due Diligence regulation, and filing of SARs.

Full Bio

 
 
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FRANK GIORGIO

RIA and Hedge Fund Compliance, Hedge Fund Operations, Hedge Fund Governance

Frank Giorgio is a Bates Group consultant with more than 20 years of compliance, operational, and accounting experience in the alternative investment space. Mr. Giorgio comes to Bates from Providence Investment Management, where he served as CCO from 2010 until 2017. Mr. Giorgio began his career in alternative investments in 1995 at JP Morgan, where he was responsible for the financial accounting functions of the group internal commodity, hedge fund, and private equity fund of funds. He then went on to serve as a Client Service Director for a hedge fund administrator and as the Chief Financial Officer for a multi-strategy fund hedge fund based in in New York.

Mr. Giorgio was also the CFO and Director of Operational Due Diligence of RBC Alternative Asset Management, an internal fund of funds investment manager. He was part of the team that formed RBC AAM and developed the operational due diligence process of the firm.

Full Bio

 
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Richard A. Rogoff

Retail Securities and Financial Services Litigation, Regulatory & Internal Investigations, Broker-Dealer Employment Litigation

Richard A. Rogoff is a Bates consultant and expert with broad trial and regulatory experience in the broker-dealer and investment practice areas. Throughout his career he has represented financial institutions and individuals in securities enforcement and regulatory matters, securities litigation and arbitration, and internal corporate investigations.

Before joining Bates Group, Mr. Rogoff managed in-house litigation and regulatory defense matters for more than 30 years for the retail brokerage businesses at JPMorgan Chase and Morgan Stanley. He is admitted to the bar in Illinois and California.

Full Bio


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WILLIAM WEBB

Compliance, Supervision, BD/RIA, Insurance and Annuities

 William Webb is a financial services executive and consultant based in Chicago, Illinois. Mr. Webb has experience as an expert witness regarding compliance and supervision issues in securities arbitrations and disputes involving investment advisors, broker-dealers, and insurance-affiliated financial services firms. He provides hands-on BD and RIA advice for business formation, compliance and operations, sales and supervision issues, and the intricacies of offering financial services within an insurance-affiliated BD/RIA. As an independent consultant, Mr. Webb has acted as outsourced Financial Principal, CFO and CCO.

Mr. Webb began his career in Chicago with the NASD as a compliance examiner, and later served as a Branch Chief for Broker-Dealer Examinations with the SEC. In that position, he worked on several high-profile cases, including the Orange County bankruptcy. From 2001 to 2012, Mr. Webb was the CFO for Allstate Financial Services as well as Treasurer for Allstate Financial Advisors and Allstate Distributors. Before joining Bates, Mr. Webb designed, implemented, and managed the insurance-affiliated operations Bankers Life Securities (BD) and Bankers Life Advisory Services (RIA).

Full Bio

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09-05-19

Bates Managing Director Hank Sanchez Publishes New Reg BI Article in NSCP Currents

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Bates is proud to share the publication of “With Regulation BI, Are FINRA Rules 2010 and 2111 Dead?” by Managing Director and Expert Consultant Hank Sanchez, Esq. The article was published in the July 2019 issue of NSCP Currents. In it, Hank examines two FINRA rules that are commonly cited in FINRA enforcement matters—FINRA Rules 2010 (Standards of Commercial Honor and Principles of Trade) and 2111 (Suitability)—and discusses whether those rules may become subsumed or nullified by Reg BI.

Download the PDF

 

Click the link/button above to download your complimentary PDF, and don’t miss Hank at the 2019 NSCP National Conference, October 21-23 at the Hilton Baltimore. Hank will be speaking on the Wednesday panel “10A: BD – Advanced Considerations for Performing Due Diligence.” Stop by Bates Group’s booth #33 at the conference to talk with a Bates Compliance Group leader about services and solutions for IAs, BDs, Private Funds and Hedge Funds.

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09-04-19

Bates Expands Financial Crimes Roster with Managing Director Dennis Greenberg

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Bates Group welcomes Dennis Greenberg as the new Managing Director of Business Development for Bates AML and Financial Crimes. Based in New York City, Dennis has a successful history leading teams to initiate and close multi-million-dollar global product and consulting sales, while representing firms including Promontory Financial Group, Crowe Horwath and Wolters Kluwer.

Dennis possesses a proven track record of over 20 years leveraging a C-level contact base to expand new client relationships and revenue from existing clients. He is proficient in identifying and capturing market opportunities to accelerate expansion, increase revenue, and improve profit contributions.

“We are thrilled to have Dennis join the Bates team and our Financial Crimes practice,” said Bates Group CEO Jennifer Stout. “Dennis will be an enormous asset to our clients, particularly those focusing on AML, KYC, Forensic Accounting, white collar crime and expert testimony.”

Full Bio

Contact

Phone: (914) 588-3965

Email: dgreenberg@batesgroup.com

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08-16-19

Expert Spotlight: Greg Kyle Quoted by CBS News

Expert Spotlight: Greg Kyle Quoted by CBS News

Bates Group director and expert Greg Kyle was recently interviewed by CBS News for their MoneyWatch feature. Mr. Kyle was quoted in an article concerning the WeWork IPO filing, drawing a parallel with companies from the dotcom boom. 

Read the Full Article Here.

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08-14-19

Jill Ehret to Speak on Reg BI Panel August 14, 2019 in Los Angeles

Jill Ehret to Speak on Reg BI Panel August 14, 2019 in Los Angeles

Bates Group’s Compliance Director Jill Ehret will be speaking at the 2nd Annual FI Summit on Wednesday, August 14th at the LA Galaxy Stadium. Bates is a proud co-sponsor of this year's event.

Along with her fellow panelists, Jill will be discussing the groundbreaking Regulation Best Interest Rule and its anticipated impact upon broker-dealers, registered representatives, registered investment advisers, and investment adviser representatives. CE and CLE credits will be available for the 3-panel program. A cocktail reception will immediately follow the summit.

Attendance is Free - Click Here to Register


About Bates

Bates Group brings tailored compliance consulting services and solutions to financial services clients on an as-needed or ongoing basis. We offer a suite of Reg BI services and powerful solutions to help your company navigate Reg BI implementation and achieve compliance.

Get the Bates Reg BI Fact Sheet

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08-09-19

Introducing Bates Group’s Managed Document Review Services

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Discovery in today’s world of high volume and increasing scope has created a significant burden for government agencies, law firms and their clients to manage e-discovery under tight deadlines and at reasonable rates.

Bates Group’s new Managed Document Review services enable organizations to leverage the advantages of highly experienced review specialists and technology-enabled e-discovery review solutions allowing you to focus your time and effort on the high-value tasks your legal team was hired to perform.

Our team is led by Managed Review veteran Victoria Wilken-Farrell, who has decades of experience in managing large-scale document reviews for all types of litigation and regulatory investigations for clients in varied industries, including financial services, professional services, high-tech, product liability, intellectual property, bio-tech, and government. 

Let Bates Group support your case discovery needs.

 

LEARN MORE:

Get the Bates Managed Document Review Fact Sheet

 

CONTACT

 

Victoria Wilken-Farrell, Managed Review Team Leader

direct: 971.250.4336

Email: vwilken-farrell@batesgroup.com

 

Alex Russell, Managing Director, Securities Litigation & Regulatory Enforcement

direct: 971.250.4353

Email: arussell@batesgroup.com

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07-24-19

Bates Group Welcomes New Director of People and Culture Josephine Vu

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Bates Group is proud to welcome Josephine Vu as our new Director of People and Culture. As Director, Ms. Vu will lead the firm in developing and executing HR strategy and Bates Group culture initiatives, specifically in the areas of workforce planning, succession planning, talent management, change management, organizational and performance management, training and development, and compensation.

Ms. Vu comes to Bates from FoodCorps, Inc. She has also held HR leadership positions at the American Pharmacists Association and the Atlantic Media Company in Washington, D.C.

Full Bio

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07-23-19

A. Christine Davis to Speak at PLI’s Basics of Accounting for Lawyers 2019

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A. Christine Davis, Bates Group's Director of Forensic Accounting and Financial Crimes, is on the faculty of Practising Law Institute's CLE program "Basics of Accounting for Lawyers 2019," taking place July 23-24, 2019 in San Francisco. The two-day program reviews how some common accounting concepts may emerge in legal work, and what lawyers should consider when encountering them. Ms. Davis will be speaking on the "Accounting Fraud, Damages Calculation and Forensic Investigations" panel, providing insight from her professional experience on the following topics:

  • Financial Statements and other financial documentation in fraud and forensic investigations
  • Using financial statements and other financial documentation in calculating damages
  • Working with financial experts and factors to consider in financial expert selection
About A. Christine Davis

Based in Bates Group’s San Francisco office, Ms. Davis has over 27 years of combined forensic accounting, audit, tax, dispute consulting and litigation support experience. In addition to being a Certified Public Accountant in California, New York and Oregon, and she is a Certified Valuation Analyst and holds the AICPA’s Certified in Financial Forensics credential and Blockchain Fundamentals certificate. A published author and experienced public speaker, Ms. Davis is frequently retained as a consulting and testifying expert for complex commercial litigation and regulatory matters and as a forensic accountant for fraud or accounting investigations. In addition to her role as Director of Forensic Accounting and Financial Crimes, Ms. Davis supports the Securities Litigation practice as a financial, accounting or damages expert.

Attend live at PLI California in San Francisco or view the live webcast online. Attendees can earn one hour of Ethics CLE credit.

Click Here for more information and to register

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07-19-19

Is the Increase in Option-Related Cases Affecting Your Firm and Clients?

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Bates Group is alerting counsel that we are seeing an uptick in option-related cases where firms offered their clients strategies to increase the yield in their investment portfolio, often involving options trading in order to earn premium income to enhance a portfolio’s regular returns.

Examples of these strategies include covered call writing, zero cost collars and the use of so-called “iron condors” – cashless options trading strategies used to generate premium income in addition to the yield on an investor’s current portfolio, while offering downside protection from potential losses.


Bates Group Support:

Bates staff and experts have provided both consulting and testimony services in matters involving options trading within a client account. Bates experts have opined on the appropriateness of the options trading, as well as the role the option positions play within the client’s overall investment strategy and portfolio of holdings. Bates has performed quantitative analyses examining the likelihood that an option position bought or sold by a client will end in a gain or loss, providing a single figure capturing the probability weighted expected value from the purchase or sale of the option position.

Bates experts have also provided in-depth knowledge and analysis concerning commonly employed options trading strategies and the role of these strategies within an overall investment objective, as well as the relative risks created for the client. Bates consultants and experts have also provided analysis and testimony in support of matters involving premium generation strategies employed to generate additional yield on a client’s portfolio, such as those involving iron condors or other means by which the held portfolio serves as collateral for options-related, income-focused trading.

Specifically, Bates can assist in the following ways:

  • Analyzing the trading in claimant’s brokerage accounts to determine the P/(L) associated with the strategy, and quantifying out-of-pocket losses. 
  • Assessing if the strategy changed over time, where the strategies may have failed, and explaining how any losses occurred. This can include an evaluation of whether the stated strategy was deviated from in a meaningful way, leading to losses.
  • Assessing the adequacy of internal and external disclosures.
  • Assessing the net premium received versus the level of risk involved in a position.
  • Estimating position risk and return; forecasting the probability of a loss and the probable size of a loss at the time positions were written. 
  • Assessing the suitability of the strategy and the suitability of the size of the strategy mandate.

The Bates team of consulting and testifying experts bring a clear understanding of the theory behind how these strategies work from an academic and industry perspective, from a business side and in-house perspective during the client education phase, and from a sales practice aspect when clients invest using this strategy.

Contact:

Andrew Daniel, Securities Litigation Expert and Director - adaniel@batesgroup.com

Julie Johnstone, Managing Director, Retail Litigation - jjohnstone@batesgroup.com

Peter Klouda, Securities Litigation Expert and Director, Operations - pklouda@batesgroup.com

Alex Russell, Managing Director, Litigation & Regulatory Enforcement - arussell@batesgroup.com

Learn More About Our Securities Litigation Practice

 

For more information about option-related case support or any of Bates Group's other practice areas and services, click the link below and a Bates representative will be in touch.

contact me about Bates Group's services

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07-09-19

Join Bates Group at the SIFMA Regulation Best Interest Seminar

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Bates Group is a proud sponsor of the SIFMA Regulation Best Interest Seminar on Wednesday, July 10 in Washington, D.C. Speakers will address the final Reg BI rule, form CRS, and the broader regulatory landscape. Look for financial services industry leader and Bates Senior Compliance Consultant Jerry Baker (pictured above) at the seminar!


About Bates

Bates Group’s Compliance team of senior compliance staff and former regulators brings tailored consulting services and solutions to financial services clients on an as-needed or ongoing basis. Bates assists with Reg BI implementation, disclosures, conflicts of interest, supervision, risk assessments, WSPs, annual compliance reviews, mock exams, regulatory remediation, and internal audits. We review and test firms’ programs, policies and procedures, recommending changes based on regulatory requirements and best practices designed to supplement and enhance compliance and supervisory systems and remediate the results of regulatory and internal audit findings.

 

Learn more about Bates Group's Reg BI Services

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05-09-19

Safeguarding Client Information: OCIE Wants Firms to Increase Efforts

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In a new Risk Alert, the SEC’s Office of Compliance Inspections and Examination (OCIE) highlighted privacy and information security issues raised during examinations of registered investment advisers and broker-dealers. The OCIE wants registrants to pay closer attention to all aspects of Regulation S-P, the SEC’s rule that obligates firms to safeguard client information. In addition, the OCIE wants firms to be more diligent about integrating their overall compliance efforts and to better communicate privacy policies to their retail investors—particularly as they relate to electronic and web-based platforms. As Bates Research described in a  previous post, the OCIE is prioritizing the protection of retail investors (see its annual report on market risk). Securing customers’ personal information is at the heart of that protection. In this article, we takes a closer look at the new Alert and the OCIE’s emphasis on improving Regulation S-P compliance.

SEC Rules and OCIE Exam Results

As FINRA states, “protection of financial and personal customer information is a key responsibility and obligation of FINRA member firms.” Regulation S-P requires firms to enact written policies and procedures to protect the confidentiality, security and integrity of client information. The Safeguards Rule requires these policies to “address administrative, technical and physical safeguards.” Among other things, this rule obliges firms to protect against anticipated “threats or hazards” and against any unauthorized access to personal information. Further, the regulation requires firms to issue privacy notices to clients on firm information-sharing practices, to further explain customer rights to opt-out, to develop programs to prevent identity theft and to address potential risks of bad actors intent on stealing account assets or accessing a client account to manipulate the market.

OCIE reports that it found gaps in firm compliance with many of these obligations. The most common deficiencies included failures to have written policies and procedures related to the administrative, technical, and physical elements as required under the Safeguards Rule. But OCIE found many specific failings including, for example, failures in the provision of the required notices, inaccuracies in the content of the notices, failures to provide opt-out information on sharing non-public personal information, as well as policies containing blank spaces that registrants left incomplete.

Just as significant, OCIE reports that many of the written policies were “not reasonably designed” to protect client’s personal information. The agency highlighted a host of examples including failures (i) to protect customer information on personal devices; (ii) on the use of personally identifiable information (“PII”); (iii) in the training and monitoring on the use of unsecured networks and encryption in electronic communications; and (iv) related confidentiality when employing outside vendors. More broadly, the OCIE found examples of firms failing to keep an inventory of all the systems that may access PII; inadequate incident response plans; PII that was stored in unsecure locations, customer login credentials that had been too widely disseminated; and failures to ensure that former employees terminated access rights to PII after their departure.

CyberSecurity

The Regulation S-P issues addressed in the OCIE Risk Alert implicate broader concerns about protection of financial information and cybersecurity. As Bates has reported before, both FINRA and NASAA have addressed related issues (see here and here). Recently, SIFMA published a thinkpiece on battling current risks associated with cybersecurity for financial firms. It points out that “cybersecurity is not just about building defenses around a perimeter…but have expanded to include malicious or destructive attacks, that go beyond stealing money and data.” 

The author concludes that firms must not only address the issue through compliance but through the development of a culture of cyber resiliency:

“Security is not just IT or compliance’s problem, it is everyone in the organization’s problem. And the key to mitigating cyber risk is having everyone in the organization concerned about cyber awareness. Financial services employees understand cyber resiliency is critical to meeting client expectations, delivering client services and safeguarding client data…There is evidence to show that there is a benefit to all parties if they work together—collaboration, not silos—to protect the firm from cyber attacks and the reputational risk from an incident. Training and ongoing communication changes the mentality of employees.”
 

The underlying message of the OCIE’s Risk Alert is that firms must engage in a deep dive to ensure that adequate firm policies exist and are being implemented in a way that can effectively address the risk. SIFMA’s opinion piece takes this a step further, arguing effective risk management requires cultural change that supports but goes beyond integrating administrative, technical and physical safeguards under Regulation S-P.

Conclusion

When the OCIE sends out an alert, it is providing information to help firms adopt and implement effective policies and procedures under the applicable regulation—in this case Regulation S-P. The Alert is also a strong message that the agency has made the subject a priority, thus increasing the likelihood that enforcement efforts are not far behind.

 

Visit Bates Group at the 2019 FINRA Annual Compliance, Booth #7, on May 14th-17th in Washington D.C. and learn more about our compliance and regulatory solutions for your firm.

 

For additional information and assistance, please follow the links below to Bates Group's Practice Area pages:

Bates Compliance Solutions

Regulatory and Internal Investigations

Retail Litigation and Consulting

Institutional and Complex Litigation

Financial Crimes

Insurance and Actuarial Services

Consulting and Expert Testimony

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04-17-19

Bates Welcomes Our Newest Experts and Consultants

Bates is proud to introduce four new experts and consultants: Jennifer Bergenfeld, Pamela O’Neill, Matthew Sekerke and Phil Swatzell. Follow the links below to view their full bios, or visit our Expert Search page to view all Bates Experts.

 
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Jennifer Bergenfeld, Esq.

Regulatory, Compliance, BD/RIA, Legal, Private Equity, Trusts, Fintech

Jennifer Bergenfeld is a Bates Group Expert with over 20 years’ experience as a corporate and securities lawyer with a BD/IA transactional and regulatory focus. Prior to joining Bates, Ms. Bergenfeld was Chief Legal Officer for HSBC Funds and held positions at Emerging Managers Group Funds, AllianceBernstein, Exchange Traded Concepts ETFs and Morgan Stanley. She has managed FINRA/SEC exams, internal and external regulatory and government investigations, remediations, contract negotiations and corporate governance matters, including corporate grant management. A former adjunct professor of business law and ethics for NYU's Stern School of Business, Ms. Bergenfeld is a frequent speaker at industry conferences and executive training programs nationwide.

Full Bio


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Pamela O’Neill

Compliance, Supervision & Controls, Branch Inspections, Regulatory, Training

Pamela O’Neill is a Bates Group supervision and compliance expert with over 35 years of financial services industry experience. Most recently, she was a National Supervision & Controls Executive with Merrill Lynch Global Wealth and Investment Management. Ms. O’Neill spent the first half of her career on the front business lines, directly supervising financial advisors, managers and staff. She also supervised the compliance side of large retail branch offices. Ms. O’Neill’s Compliance experience includes positions at Smith Barney as a Divisional Compliance Officer and Merrill Lynch as a Director/Compliance Officer, where she conducted hundreds of operations and supervision branch exams throughout the country. Later, as a Director, she managed a team of branch examiners and compliance officers who provided guidance for the sales force and managers. Over the course of her career, Ms. O’Neill has managed the remediation of many high risk self-identified, regulatory and corporate audit issues. A frequent attendee at industry conferences and forums, she has also been invited to speak to senior business leaders on supervision and compliance matters.

Full Bio


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Matthew Sekerke

Economist, OTC Derivatives, Mortgage-Backed Securities, Quantitative Analysis, Big Data

Matthew Sekerke is a Bates Group Expert with over fifteen years of financial services industry experience as a consultant, providing financial analysis and predictive modeling. He has earned degrees in Economics, Mathematics and Finance and is the author of Bayesian Risk Management: A Guide to Model Risk and Sequential Learning in Financial Markets (Wiley Finance, 2015), a critical essay on how financial time series models break down over time, and what can be done to monitor and manage the associated operational risks. Mr. Sekerke is a Fellow at the Johns Hopkins Institute for Applied Economics, Global Health, and the Study of Business Enterprise, a CFA charterholder, and a Certified Energy Risk Professional (ERP) and Financial Risk Manager (FRM).

Full Bio


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Phil Swatzell

Retail Sales Practice and Supervision, Suitability, Branch Management, Institutional Sales

Phil Swatzell is a Bates Group expert and consultant with over 35 years of experience in Branch Management, Operations and Controls; Branch Supervision and Sales Supervision; and Recruiting. Mr. Swatzell comes to Bates from CrossFirst Bank in Dallas, where he served as a Senior Advisor. Prior to joining CrossFirst, he was Managing Director and head of the Southwest Region for Credit Suisse Private Banking & Wealth Management.  Over the course of 9 years, he recruited and hired advisors to build a profitable business in the Dallas area. Mr. Swatzell began his career with Salomon Brothers in Dallas, where he spent 10 years before moving to their Chicago office. He has experience in retail securities and wealth management for high net worth individuals, families and small institutional clients. Mr. Swatzell received his B.A. in Finance from Texas Tech University and has held Series 4, 7, 24 and 63 Licenses.

Full Bio

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04-17-19

Bates Group President Ben Pappas Honored as a 2019 “Forty Under 40”  by Portland Business Journal

Bates Group President Ben Pappas Honored as a 2019 “Forty Under 40”  by Portland Business Journal

Bates Group congratulates President Benjamin Pappas on his recognition as a 2019 "Forty Under 40" business leader by the Portland Business Journal. He will be honored along with the other 2019 award winners at the Business Journal's Forty Under 40 event June 21 at The Nines Hotel in Portland.

About Ben:

Ben Pappas is the President of Bates Group, where he uses his strategic planning and finance background to set direction and financial policy while also being an active participant in, and driver of, the company’s overall strategy. Mr. Pappas previously served as Bates' Chief Operating Officer. Prior to joining Bates, Ben was Senior Vice President and Chief Operating Officer of D.A. Davidson Companies’ Equity Capital Markets business, where he was responsible for the implementation of strategic growth initiatives and the development of an annual financial budgeting and forecasting process. He also previously worked as an equity research analyst and strategic planning analyst focused on the technology industry, after beginning his career as a financial advisor at Merrill Lynch.

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04-05-19

Spotlight: Q&A with R. Gerald (“Jerry”) Baker, Bates Group Senior Compliance Consultant

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Bates Research interviews our most senior experts to get their perspective on the latest regulatory and compliance concerns affecting clients today. We sat down recently with R. Gerald (“Jerry”) Baker, a Consultant with Bates Compliance Solutions who has over 45 years of financial services and compliance experience, and asked him to share his observations on some of the current challenges confronting broker dealers and RIAs, including trends, resource constraints and individual and firm accountability.

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Bates Research: Jerry, thanks for sharing your time with us. Let’s start with a bit about you and your background—please share with us some of the highlights.

Jerry Baker: Glad to be with you. I’ve been fortunate to have had an extensive career in our industry. It started on the operations or “back office” side, followed by financial reporting and administrative roles. For a short period I was also a registered representative with two major firms.

My compliance career began in 1966, and I remained in compliance up until my retirement in 2001. I served as the Chief Compliance Officer (“CCO”) for First Union Securities following its acquisition of EVEREN Securities (formed by the consolidation of five broker-dealers owned by Kemper Corporation). Prior to that I served as the CCO for Prescott, Ball & Turben, Roney & Co. and briefly Morgan Stanley. I also co-chaired both SIFMA C&L working groups on its White Papers the Role of Compliance and The Evolving Role of Compliance, and I am a contributing author in the book Modern Compliance. From 2001 until 2014, I served as Executive Director and Special Advisor to SIFMA’s Compliance & Legal Society and was the recipient of the SIFMA C&L Alfred J. Rauschman Award in 2011. In the past fourteen years I have also served as the Independent Consultant required in a number of SEC enforcement settlements.

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BR: You are currently working with clients facing serious compliance challenges. What areas do you see as the most troubling for broker-dealers or RIAs today?

JB: From a year-to-year perspective, broker-dealers and RIAs must pay attention to subject matter priorities that agencies identify through their examinations findings. As a general matter, though, firms are always challenged by costs and resource constraints, which are often affected by their size.

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BR: Let’s talk about specifics. What are some of the top subject matter concerns you are seeing?

JB: There were many highlighted agency priorities this year. Take elder financial exploitation, for example—every industry regulator, including state regulators and attorneys general have announced robust compliance and oversight programs focused on elder abuse by broker-dealers and investment adviser firms and their registered representatives. They’ve prioritized this in their respective examination programs and, as recently seen, they will take both administrative and criminal action against firms and individuals for misconduct affecting seniors.

I am also seeing a good deal of concern with compliance on Mark Up/Mark Down. These compliance issues are particularly challenging and complicated for non-traded securities. I’ve seen this firsthand with closed-end bond funds. I would not be surprised to see more enforcement actions against not just wrong-doers, but also against supervisory and control persons. I warn compliance professionals that they should not feel they are in a safe harbor.

In addition, I would say that regulators are increasingly concerned about compliance with, and the adequacy of, disclosure. Look no further than FINRA’s recent regulatory initiative on 529 Plan Share Class enforcement for a sense of things to come. From a compliance point of view, the not–so-simple point is that firms should be mindful to present the requisite knowledge, support and supervision for all the types of businesses or services they offer.

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BR: Tell us more about what you meant by resource challenges for firms.

JB: Resource constraints are a challenge for every firm, regardless of size. That is to say, how should they best commit financial and software development to regulatory support and compliance programs? Regulators have made it very clear that every firm will be held to a high standard to develop, implement and maintain compliance, supervisory and other internal control programs designed and tailored to its businesses and business model. In the last few years many firms have streamlined their compliance and internal control programs in an effort to manage expenses while still meeting regulatory expectations. A number of times they fall short, which raises questions about the depth of their programs and, therefore, increases risk exposure.

Deep down, firms are always trying to find the right balance as to the resources—personnel, technology as well as outside resources—they can commit. This can present big problems for many firms. Sometimes, they learn the hard way that their “adequate” system” may not meet regulatory expectations. Firms that recognize the potential risk often retain independent third parties to help evaluate the efficacy of their compliance, internal control and supervisory systems. Of course, the best time to do this is before a regulatory action occurs.

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BR: How are these resource and compliance challenges you are seeing affecting RIAs?

JB: I see particular challenges regarding costs and resources in the RIA space. Independent RIAs often do not have the financial or personnel resources to develop meaningful internal supervisory and compliance oversight programs. Even when there is someone named and delegated with these responsibilities, too often the person does not have the necessary experience for the role or the authority that is needed. I have seen an overreliance on cookie-cutter, third-party service providers for support. In many instances this “one-size-fits-all” approach is inadequate because it fails to match the firm’s businesses or business model.

A similar issue, where attempts to keep costs down actually winds up costing more in the long run, is in the area of clearing and operations. Support for these functions is frequently provided by an unaffiliated broker-dealer who has very limited compliance responsibilities. In recent assignments, I’ve seen firms subscribe to the bare minimum of support in an effort to keep costs low.

Some perspective is important here. The independent RIA may be a registered representative with an unaffiliated broker-dealer. The broker-dealer sees the RIA business as an outside business activity and wants to limit its oversight liability in these cases, but FINRA has made it clear that the broker-dealer has supervisory responsibility for what is considered an outside business activity. The dual-registrant business model has its own unique supervisory and compliance challenges, too. Some firms design separate supervisory and compliance structures for each business, while many, particularly those with limited resources, use the same compliance resources for both.

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BR: Robert Cook, President of FINRA, announced at the January 2019 SIFMA C&L luncheon that FINRA is developing its examination program and staffing based on a firm’s size, businesses, resources and regulatory history. Would that address the concerns you are raising?

JB: It would help in many ways. However, it’s important to note that over many years, both FINRA and the NYSE (and legacy NASD), have proposed this concept. Their efforts have never fully materialized or met their intended goals. Hopefully, the newly announced effort will be developed and implemented because both the industry and FINRA will benefit.

As to firm size, it is important to understand that regulators don’t look at how big your firm is as they are focused on the businesses and services you offer and the resources you have versus what they believe are necessary to meet your regulatory obligations.

Certainly having the right budget to meet these obligations is critical. But, as all firms know, they are challenged to manage with what they can afford. This is where Bates and its services often come into play. We can make an assessment of a firm’s supervisory, compliance and internal control systems and also provide support on an as-needed basis to assist in developing, implementing and monitoring programs. This is what I do—conduct independent, first-hand reviews on prioritized areas. That usually results in an initial report, assessment and enhancement recommendations and other evaluations on implementation and continued monitoring.

BR: Thank you very much, Jerry. We appreciate your compliance insights.

 
About Bates Group’s Compliance Solutions

The Bates Compliance Solutions team of experienced industry professionals provide comprehensive offerings for broker-dealer and registered investment adviser clients, assisting them with supervision, compliance, risk assessments, WSPs, AML, and internal audit functions. BCS can perform as-needed or ongoing reviews and guidance to meet your regulatory compliance obligations. Our seasoned professionals closely review and test policies and procedures, supervisory and compliance processes, and the related practices involved in operating your business, recommending changes and industry standards to supplement and enhance clients' compliance and supervisory systems, and to remediate the results of regulatory, litigation, and internal audit findings and decisions.

 
For additional information and assistance, please follow the links below to our Practice Area pages:

Bates Compliance Solutions

Regulatory and Internal Investigations

Retail Litigation and Consulting

Institutional and Complex Litigation

Financial Crimes

Consulting and Expert Testimony

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04-02-19

Bates Director Joe Thomas to Speak at SIFMA’s Senior Investor Protection Regional Workshop

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Bates Group Director Joseph “Joe” Thomas, Senior Investor Expert, will be speaking at the SIFMA Senior Investor Protection Workshop, April 3rd at Edward Jones in Tempe, AZ, on the panel “Protecting Your Senior Clients: Prevention, Identification and Action.” Panelists will discuss promising practices to help prevent, spot and address situations of financial exploitation and cognitive decline.

Joe will be joined by Moderator, Kyle R. Innes, Assistant Vice President, State Government Relations and Assistant General Counsel, SIFMA and Panelists, Marcus N. Allen, AAMS, Regional Branch Supervisor, Vice President, Wealth Brokerage Services, Wells Fargo Advisors; Russell Bloemker, Associate General Counsel, Edward Jones; and  Brad Keely, Sr., Sr. Compliance Manager, Retail Investor Group, Vanguard.

About Joe Thomas: Mr. Thomas is a Bates Group Director based in St. Louis, and an expert on preventing, spotting and addressing situations of financial exploitation and cognitive decline. He has over thirty years of securities industry compliance, supervision, operations and administration experience, and he has provided quantitative and substantive witness testimony and opinions in over 90 retail securities litigation, arbitration, and court matters, many involving claims of elder abuse and fraud. Mr. Thomas also serves on the Public Policy Committee of the National Adult Protective Services Association (NAPSA). FULL BIO

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03-12-19

Bates News and Events This Week

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FSDA Member Spotlight on Jennifer Stout

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Bates CEO Jennifer Stout is the subject of the Florida Securities Dealers Association's (FSDA) March Member Spotlight. Jennifer discusses Bates Group's support of FSDA, our clients and community involvement.

Read the full interview at the FSDA website.

 

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InvestmentNews Interviews Alex Russell

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Alex Russell, Managing Director, Securities Litigation & Regulatory Enforcement, was interviewed by InvestmentNews in an article titled “529 Plan Costs: Advisers, Broker-Dealers Brace for FINRA Crackdown.” The article was published on March 11, 2019 in both the digital and print editions of InvestmentNews. In it, Alex discusses the challenges companies face if participating in the FINRA’s 529 Initiative. 

Read the full article in InvestmentNews.

 

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Susan Harper to Interview NY Attorney General Letitia James

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On March 13th, starting at 5:30 pm, Susan L. Harper, Bates Group’s Managing Director NY/NJ and Chair of the New York State Bar Association's Women in Law Section, will lead a fireside Q&A chat with New York Attorney General Letitia “Tish” James at the Section’s inaugural Trailblazers Series program “Lessons in Leadership.” Attorney General James is the 67th Attorney General for the State of New York. She is an experienced attorney and public servant with a long record of accomplishments, and she is the first woman of color to hold statewide office in New York and the first woman to be elected Attorney General of New York.

Prior to the interview, Attorney General James will be making remarks. An interactive Q&A session with attendees and networking reception will immediately follow.  New York State Bar President Michael Miller, New York Supreme Court Justice Tanya Kennedy, and Sandra Hauser, Partner, Dentons, will be making introductory remarks.

The event is taking place on Wednesday, March 13, 2019, at 5:30 pm at Dentons law firm, located at 1221 Avenue of the Americas (between 46th and 47th Streets) in New York City. 

Click Here for more information or to register.

 

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Bates Group at the 2109 IAA Compliance Conference

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Visit Bates Group at the 2019 Investment Advisor Compliance Conference, Booth #13, to discuss your compliance needs and solutions. March 14-15 in Washington, D.C. 

Conference Details

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03-08-19

Alert: FINRA Releases FAQs with Important Information About Its 529 Plan Share Class Initiative

Alert: FINRA Releases FAQs with Important Information About Its 529 Plan Share Class Initiative

FINRA’s 529 Plan Share Class Initiative (“Initiative”) self-reporting deadlines have been pushed back one month to allow firms additional time to review their supervisory systems, procedures and past transactions to identify sales of 529 plan share classes. The extension also allows firms more time to consider additional information made available by FINRA (Frequently Asked Questions “FAQs”) and to determine whether to self-report.

The Initiative, designed to promote compliance with rules governing 529 plan recommendations and sales, requires firms to identify and remedy potential supervisory and suitability violations and to return money to impacted investors. Firms that participate in the Initiative “will avoid any fine that FINRA might otherwise impose in an Enforcement action concerning the firm’s failure to supervise the suitability of 529 plan share class recommendations. In addition, a firm that participates in this Initiative will have the benefit of a discussion with FINRA about the steps it plans to take to remediate its supervisory failures and pay restitution to customers.”

The new deadlines are now April 30, 2019 for firms to provide FINRA Enforcement with notice that they will self-report, and May 31, 2019 for confirming their eligibility by submitting the additional information specified in Regulatory Notice 19-04.

The 18 FAQs address a series of qualitative and substantive concerns about the Initiative. For example, FINRA provides additional information on the types of 529 plan-related supervisory procedures that participating firms might seek to review, and also commits to working with firms to identify appropriate risk-based ways to analyze transactions, and then to work collaboratively with firms to fix any supervisory deficiencies and remediate affected customers. FINRA also clarifies existing guidance by, for example, asserting that the Initiative is not establishing a per se rule on suitability or changing existing obligations or duties. 

Following the FAQ release, Robert Lavigne, Managing Director, Bates Compliance Solutions, recommends:

"Firms should assess the procedures that were in place during the review period to ensure they were reasonably designed to properly supervise the sales of 529 plans, as well as the share class selection. They should also perform testing to verify there was not a breakdown in the share class selection and approval process that may have led to unsuitable transactions.“
 

Bates Group has been encouraging firms to prepare for this Initiative since its inception. As for the extended deadlines, Alex Russell, Managing Director of Securities Litigation & Regulatory Enforcement at Bates stated:

“Firms participating in FINRA’s 529 Plan Share Class Initiative now have additional time to meet FINRA’s qualitative and quantitative expectations. Addressing the challenges we previously identified, like obtaining plan sponsor data, compilation and formatting, and transaction analysis, remain key to being responsive to FINRA.”
 
 

Bates Group’s 529 Qualitative and Quantitative Support

 
Qualitative Support:

Within the FAQs, FINRA explicitly—in bold print—emphasizes the need to conduct a qualitative review in deciding whether to participate in the Initiative. Bates Group’s experienced team of professionals, including experts experienced in sales practice, supervision, suitability and compliance, supports firms in their qualitative review of their supervision and compliance programs in support of 529 plan sales. Bates performs qualitative reviews of 529 plan share class programs, offering supervisory reviews and assessments to test your firm’s systems and procedures, including suitability of transactions and training.

Quantitative Support:

Bates Group has supported and is engaged to support in-house and outside counsel in response to this and prior regulatory share class initiatives, investigations and arbitrations, and break-even analysis work. This includes mining large datasets and providing clear and usable analysis regarding the relative cost of selecting particular share classes in light of the plan beneficiaries’ ages, the difference in fee levels of the classes, and class breakpoints. In connection with FINRA’s announcement, we can help determine instances where a less-expensive share class of the same fund may have been available and the difference in fees paid by impacted clients.

 

For more information about how Bates Group can help, please contact us today:

 
Alex Russell, Managing Director, Securities Litigation and Regulatory Enforcement

email: arussell@batesgroup.com phone: 971-250-4353

David Birnbaum, Managing Director

email: dbirnbaum@batesgroup.com phone: 917-273-2682

Robert Lavigne, Managing Director, Bates Compliance Solutions

email: rlavigne@batesgroup.com phone: 508-868-6741

Scott Lucas,Managing Director, Regulatory and Internal Investigations

email: slucas@batesgroup.com phone: 971-250-4344

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03-07-19

New CFPB Report finds SARS Filings on Elder Financial Exploitation Quadrupled from 2013 to 2017

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A recent analysis by the Consumer Financial Protection Bureau (CFPB) of Suspicious Activity Reports (SARs) related to elder financial exploitation provides the most detailed look to date at the size and scope of this issue. The Report, issued by the CFPB’s Office of Financial Protection for Older Americans, covers SARs filings between 2013—the date the Financial Crimes Enforcement Network (FinCEN) introduced the category on its electronic forms—and 2017. According to the CFPB, the Report represents the first publicly available analysis of the non-public data provided by financial institutions on senior financial abuse.

Bates Group has been following the issue of senior financial exploitation for some time. The findings from the CFPB analysis affirm previous reports that senior financial abuse is pronounced, but that the current number of SARs filings “likely represent a tiny fraction of actual incidents.” In this article, we review the findings and recommendations contained in the new Report.

The SARs Data

The CFPB Report was based on an analysis of the over 180,000 SARs on elder financial exploitation filed during the period. The numerical data paints a dramatic picture, with activities totaling more than $6 billion. Over the period of review, the number of relevant SARs filings quadrupled to over 63,000 by 2017. By that year, financial institutions reported suspicious activities totaling $1.7 billion.

Almost 80 percent of the SARs filed involved an actual monetary loss to older adults or the financial institution. The findings from these SARs can be broken down into two broad categories affecting: (i) individuals and their losses, and (ii) institutions and their actions.

For older adult victims in general, the average amount lost was $34,200, though losses exceeded $100,000 in 7% of the SAR cases. The CFPB states that, on average, losses were about $50,000 when the older adult knew the suspect and about $17,000 when the suspect was a stranger. Further, senior adults ages 70 to 79 had the highest average monetary loss at $45,300. Thirty three percent of the victims categorized in the SARs were seniors over the age of 80. (For a description of many of the types of financial exploitation, please see previous Bates Research article here.)

As for the financial institutions that submitted the SARs, by 2017, money service businesses comprised 58 percent of the filings, while depository institutions accounted for most of the remainder. The average loss incurred by all institutions was approximately $16,700. For the suspicious activity related to a money service businesses, the CFPB found that 69% of the SARs were scams by strangers, where the average monetary loss (including both individuals and institutions) was $32,800. When the suspicious activity was related to depositary institutions, only 27% of the SARs involved strangers, but the average monetary loss, primarily related to checking and savings accounts, was $48,300.

Another important finding was that under a third of financial institutions actually reported the suspicious activity to a local, state, or federal authority. For money services businesses, the CFPB states that only 1% reported the SARs to authorities.

CFPB Recommendations

The CFPB SARs analysis confirms that the problem of senior financial fraud is prevalent. The information and filing of these SARs is lauded as a “useful and untapped resource for monitoring elder financial exploitation.” The failure to report the suspicious activity to law enforcement or state adult protective services, however, is seen as a significant gap in protections for consumers and represents “a missed opportunity to increase investigation and prosecution.”

The CFPB also concludes that using SARs offers law enforcement a way to tailor “interventions” and develop new strategies in response to the types of suspects and activities, e.g. money services versus depository institutions. As a result, CFPB suggests that law enforcement should mine the Treasury database of SARs, on its own, to enhance investigations and initiate prosecutions.

Conclusion

The CFPB Report is notable for its use of SARs as a new data source to measure aspects of the problem of senior financial exploitation. Last October’s Federal Trade Commission’s Report (see Bates’ coverage) came to similar conclusions on information it collected primarily through the Consumer Sentinel Network, an online database that provides law enforcement agencies with secure access to consumer reports on fraud. Both the FTC and the CFPB are explicit in stating that these databases are not capturing the full scope of the problem.

There is clearly potential, however, in the different informational tools that are now becoming available. These new data sets can provide new and deeper insights into the problem of elder financial exploitation. One of the most significant data points in the CFPB Report, for example, is the increase in the filing of SARs from an average of about 1,300 filed per month in 2013, when the category of elder financial exploitation was added to electronic SARs filings, to about 5,300 filed per month in 2017. As more SARs are filed annually, and as they begin to reflect a greater share of the problem, we should expect the conclusions drawn from them to be more grounded.

 

Bates Group closely follows the regulatory and enforcement developments on senior financial fraud. For a view of the changing federal and state legislative and regulatory landscape on senior investors, download our complimentary white paper. Learn how to protect your company and its most vulnerable investors with Bates Investor Risk Assessment. For more information concerning financial issues related to vulnerable and senior investors, senior investor expert witnesses, financial crimes, damages analysis, and compliance solutions, please contact Bates Group today.

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02-27-19

Four Challenges Facing Firms Ahead of FINRA’s 529 Share Class Initiative April 1st Deadline

Four Challenges Facing Firms Ahead of FINRA’s 529 Share Class Initiative April 1st Deadline

Firms participating in FINRA’s 529 Plan Share Class Initiative should act now to meet the regulator’s approaching April 1st deadline to self-report violations and submit a plan to remediate harmed clients. 

“Given the number of challenges firms face in assessing the potential impact on clients related to 529 plan share class purchases, firms should immediately begin to address the initiative,” warns Alex Russell, Bates Group Managing Director of Securities Litigation and Regulatory Enforcement. These challenges include:

  • Timing – Firms are facing a limited amount of time in which to assess the need to self-report 529-related supervisory failures. Firms must respond by 12:00 am EST, April 1, 2019, to participate in the initiative, with the results of their self-evaluation due by May 3, 2019. Given that the period firms are being asked to review is from January 2013 to June 2018, there is very little time to spare if you think self-reporting might be in your firm’s best interest.
  • Plan Sponsor Data – Firms may need to go to the plan sponsors in order to obtain the transaction-level data necessary to conduct the evaluation and to make a determination as to whether or not to self-report. Given that the data needs extend back to 2013 or earlier, this can be a time-consuming process for the plan sponsors. This adds another time component to the already shortened time frame to make the self-reporting determination, potentially leaving your firm very little time to conduct the actual data analysis.
  • Analyzing the Data Plan Sponsors may provide data back in disparate formats, including different fields, or failing to populate certain fields consistently within their data. Given how far back the request extends, they may have changed formats or their own providers during the period at issue. Compiling the data together into a single usable resource for review can create a strain for firms whose resources already have full-time responsibilities and may not be able to complete the analysis in the short time provided by FINRA. Whether an individual review or a statistics-based approach is adopted, you must review all transactions in some fashion.
  • Failure to Self-Report – Firms who do not self-report will potentially be subject to additional sanctions, whereas those who participate are likely to be required to make restitution payments only. In some instances, the penalties assessed in prior matters have amounted to as much as two thirds of the required restitution, so the possibility of additional sanctions should be a meaningful part of your firm's decision making on whether or not to self-report.

Further details and insight are provided in two recent Bates Group releases: Planning Your Response to FINRA’s 529 Initiative — Q&A with Bates Managing Director Alex Russell and “Bates Compliance and Regulatory Alert: FINRA Rolls Out Its 529 Plan Share Class Initiative - Is Your Firm Ready to Address It?"

Bates is ready to help you and your firm. Contact us with your 529 Share Class questions or for assistance in evaluating your firm's course of action when responding to FINRA’s initiative. Call (503) 670-7772 or email contact@batesgroup.com.

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02-25-19

Planning Your Response to FINRA’s 529 Initiative — Q&A with Bates Managing Director Alex Russell

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Bates Research recently conducted a Q & A session with Alex Russell, Managing Director of Securities Litigation & Regulatory Enforcement at Bates, to discuss FINRA's new 529 Share Class Initiative. Alex talks about responding by FINRA's deadline and potential pitfalls firms should keep in mind when preparing their response.

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Bates Research: What is FINRA's 529 Plan share class initiative -- and deadline?

Alex Russell: FINRA is providing firms with an opportunity to review their activity in and around 529 plans, allowing firms to self-report where supervisory violations may have occurred during the period of January 2013 through June of 2018. Similar in nature to the SEC’s Share Class Selection Disclosure Initiative last year, FINRA is concerned that share class recommendations were made to clients that are inconsistent with the accounts’ investment objectives. In particular, FINRA is asking firms to ensure that 529 plan recommendations took into account breakpoint discounts, sales charge waivers, and other fees in determining suitability. Depending on the facts and circumstances of each client (in particular the age of the plan beneficiary) FINRA believes that economically disadvantageous share classes may have been selected, wherein the expenses incurred by the client are greater than they need to be. Firms must provide a response by April 1, 2019 in order to participate in the self-reporting initiative. 

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BR: What is required to be included a firm's response?

AR: Firms must provide written notification to FINRA by 12:00am EST on April 1, 2019 of their intent to self-report.  A firm that has submitted their intent to self-report then has until May 3, 2019 to provide the following information back to FINRA:

  1. A list of the 529 plans sold by the firm, including the 529 plan name and the dates the firm offered each 529 plan.
  2. The total aggregate principal amount invested in each 529 plan sold by the firm during the disclosure period.
  3. A description of the firm’s supervisory systems and procedures relating to 529 plan sales during the disclosure period.
  4. A description of the changes to the firm’s supervisory systems and procedures that the firm has implemented or will implement in order to strengthen compliance with its supervisory obligations. To the extent the firm identifies changes that have not yet been implemented, the firm should identify the individual supervisor at the firm who is responsible for the implementation.
  5. The firm’s assessment of potential impact on customers of supervision weaknesses, including a description of the firm’s methodology for assessing impact on customers and a description of the firm’s proposal to make restitution payments to harmed customers.
  6. Any other information the firm believes would assist Enforcement in understanding the firm’s assessment of an account’s expected investment horizon, the suitability of the firm’s recommendations, or the reasonableness of the firm’s supervisory system regarding share class recommendations

Bates has been actively assisting clients with item 5 above.

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BR: What are some of the nuances/pitfalls in planning a firm's response?

AR: There are a number of challenges firms face in assessing the potential impact on clients related to 529 plan share class purchases.  One of which is data availability from plan sponsors – sponsors may have difficulty producing the relevant data, especially for older time periods, given different record retention policies, plans changing hands, etc.  Of particular note, while the review period is January 2013 to June 2018, FINRA notes that the period for calculating restitution may extend further into the past (as alluded to in footnote 16 to Notice 19-04) making getting data all the more difficult.  Beyond that firms must also decide whether to review for possible supervisory failures on a client specific basis, or to apply a “statistical approach” that would group multiple clients into different impact categories and proceed to analyze the potential harm to those clients on an aggregated basis.  Considerations such as whether to use a standard estimate for fee differentials, or breakpoints as of a certain point in time, versus using the exact fee rate differentials during the entire review period as well as the breakpoints in place at the time of purchase give firms even more to consider.  Careful curation of the data, as well as access to historical information on share classes, are crucial to successful reporting and are both areas Bates can assist with.

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BR: What are the risks for not responding?

AR: FINRA’s Member Supervision and Enforcement divisions will continue to examine and investigate member firms’ activity around 529 plans throughout 2019.  Firms who choose not to self-report that are later found to have supervisory failures related to 529 plans during the course of an exam will likely result in additional sanctions beyond those made available for firms that do self-report under the initiative.  Under the umbrella of the initiative Enforcement will recommend that participating firms make restitution payments to all impacted clients and accept a censure, but will face no fine.  In some instances, Enforcement may decide that no formal action is necessary and may resolve the matter informally or with no further action taken.  Both the potential for an informal resolution, no further action, or the absence of a fine in the event that action is taken, create a strong incentive for firms that believe they may have had 529 plan supervisory failures during the relevant period to self-report.

 

Support for Firms:

Bates has deep and proven experience and expertise in share class disclosure matters. Most recently, on behalf of over a dozen major national and regional financial institutions, Bates provided important assistance to firms and counsel participating in the SEC’s Share Class Selection Disclosure Initiative and related SEC Examinations.

To support firms facing FINRA’s 529 Plan disclosure and remediation initiative, Bates Group can help by providing solutions to identify and address accounts and clients impacted by share class selection. Bates performs data analysis, examines regulatory reporting, reviews share class selection policies and disclosure practices, identifies methodology and impacted accounts, performs calculations and provides remediation amounts. Most importantly, after consultation with counsel, Bates' disclosure and remediation plan culminates in a report which can be used directly with regulators. For more information, see our original alert here.

Bates is ready to help you and your firm. Please contact us today.

Alex Russell, Managing Director, Securities Litigation and Regulatory Enforcement 
email: arussell@batesgroup.com phone: 971-250-4353
 
David Birnbaum, Managing Director
email: dbirnbaum@batesgroup.com phone: 917-273-2682
 
Robert Lavigne, Managing Director, Bates Compliance Solutions
email: rlavigne@batesgroup.com phone: 508-868-6741
 
Scott Lucas, Managing Director, Regulatory and Internal Investigations
email: slucas@batesgroup.com phone: 971-250-4344

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02-21-19

Latest Developments in Variable Annuities and Life Insurance

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In our last review of developments concerning variable annuities and life insurance, Bates discussed the SEC’s issuance of a comprehensive new rule proposal intended to create a “layered disclosure approach” for regulating these products. That proposal was issued against the backdrop of an ongoing debate among state insurance regulators on revising model legislation on “Suitability in Annuity Transactions.” The National Association of Insurance Commissioners (NAIC) remains determined to create these standards and procedures for providing suitable recommendations to consumers, despite the likely impact and continuing uncertainty created by the unresolved SEC proposed Best Interest rulemaking.  

In this article, we update the most recent SEC action on variable contract disclosure as well as some important private sector activity, notably Ohio National Financial Services’ (“Ohio National”) strategic decision to pull out of the market for variable annuities.

SEC Extends Comment Period for Proposed Rule on Variable Contracts

On February 14th, the SEC announced that it was offering a brief, one-month extension for market participants to provide comments on its proposal to change existing disclosure rules and allow issuers of variable products to fulfill certain compliance obligations by preparing and delivering a “reader-friendly” summary prospectus (see Release and Fact Sheet). The comment period was extended to March 15th .

To date, commenters have been supportive of the concepts of simple summary and layered disclosure. Most communicated that, for various reasons, an extension was warranted. The American Council of Life Insurers, for example, said it needed additional time to consider the “regulatory, structural and financial implications of the proposals for life insurers, salespersons and consumers,” and that “each of these considerations must be analyzed against unique fact patterns, business models, and organizational structures.” The independent, non-profit investor advocacy organization Better Markets expressed concerns about whether simplified disclosure would have any impact at all on investors.

Such a short timetable may or may not result in a commitment by the SEC to do more testing. But as this process continues in its ordinary course, other developments in the variable annuities market may also become a factor.

Market Players Make Decisions

One of these factors may be the continuing fall-out from a move taken by Ohio National, a Cincinnati-based mutual insurance company. In September, 2018, Ohio National announced that after acomprehensive strategic review of [its] businesses, taking into account the continuously changing regulatory landscape, the sustained low interest rate environment, and the increasing cost of doing business …the company will no longer accept applications for annuities or new retirement plans, while continuing to service and support existing clients in both businesses.”

Sheila Murphy, a Bates insurance regulation consulting expert, notes: “most annuity issuers did not anticipate the continued low-interest rate environment they find themselves in. Given the current market, it is likely that issuers will continue to look for ways, such as eliminating trail commissions, to reduce expenses and increase revenues. Such actions may have unforeseen consequences for both market participants and for customers. It won’t be long before a regulator will ask whether a broker will give the same level of advice on an annuity with no trail commission.”

Reportedly, the Ohio National decision already has led to concerns that other insurance carriers would stop writing new business in variable annuities and that advisers and broker dealer firms will not “honor obligations to distributors who selected a trail rather than upfront commission during an annuity sale.” The Ohio National decision is not going down easily. While there are varying opinions as to whether other issuers may or may not pull out of the variable annuities business, one thing is for certain: Ohio National’s attempt to replace the older contracts with new "servicing agreements" which exclude trail commissions is being met with legal resistance by some advisers. All sides are pressing for the courts to weigh in on the rights, duties, and liabilities of the parties.

Conclusion

The specific dispute over commission trails is raising a number of very serious compliance issues, including the regulatory dilemma created if advisers attempt to engage clients without a formal brokerage agreement or insurance relationship in place. More broadly, however, the dispute is serving to highlight some of the key issues regulators have been raising concerning the complexity over variable annuity products and whether investors have any idea what the costs of these products are. Alluding to the recent FINRA 2019 Examination Priorities Letter, one commenter described it like this: “The environment for high-commission variable annuities sales gets a little less friendly by the day…[as] regulators are looking for product sales where pricing and commissions appear excessive, and instances where advisors are doing costly swaps of clients’ existing contracts for new [variable annuities] that add little or no client benefit but generate new commissions and fees.”

Federal and state regulators are already at heightened attention on these investment products. They are (i) in the midst of new proposed rules on variable annuity products and suitability; they are (ii) communicating their concern through Enforcement Priorities Letters; and they are (iii) taking enforcement actions. (Note FINRA’s recent settlement in a case involving failure to supervise and train registered representatives concerning the recommendation and sale of share class variable annuities.) The Ohio National strategic decision and the consequent lawsuits over commissions and how they are handled are not tangential to regulator concerns. Bates will keep following the developments.

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02-15-19

Bates Group’s FINRA 529 Share Class Initiative Support for Firms

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Last week, Bates sent a time-sensitive Alert concerning FINRA’s new Share Class Initiative. The initiative is similar to the SEC’s Share Class Initiative that focused on mutual funds in advisory accounts, except that FINRA’s focus is on 529 savings plans.

Bates has deep and proven experience and expertise in share class disclosure matters. Most recently, on behalf of over a dozen major national and regional financial institutions, Bates provided important assistance to firms and counsel participating in the SEC’s Share Class Selection Disclosure Initiative and related SEC Examinations. As a result of these efforts, companies have saved thousands of dollars in remediation costs and avoided reputational harm.

The deadline to self-report and provide FINRA with a remediation plan is April 1, 2019. FINRA cautions that “if a firm does not self-report under the 529 Initiative but FINRA later identifies supervisory failures by that firm, any resulting disciplinary action likely will result in the recommendation of sanctions beyond those described under the initiative.”

Bates is available to help you and your firm. Please contact us today.

Alex Russell, Managing Director, Securities Litigation and Regulatory Enforcement 
email: arussell@batesgroup.com phone: 971-250-4353
 
David Birnbaum, Managing Director
email: dbirnbaum@batesgroup.com phone: 917-273-2682
 
Robert Lavigne, Managing Director, Bates Compliance Solutions
email: rlavigne@batesgroup.com phone: 508-868-6741
 
Scott Lucas, Managing Director, Regulatory and Internal Investigations
email: slucas@batesgroup.com phone: 971-250-4344
 

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02-13-19

The State of Play on Cryptocurrency Regulation

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For legislators and regulators, writing rules for crypto-related assets requires balancing the tension between innovation and entrepreneurship, and between sound markets and investor protection. In previous articles, Bates Research has described some of the definitional challenges which directly affect which agencies govern crypto assets: the SEC asserts jurisdiction over most initial coin offerings (ICOs) as securities (but not Bitcoin or Ether), while the CFTC asserts jurisdiction over Bitcoin futures and options. To FinCEN the subject is simply a currency (and, thereby, subject to Bank Secrecy Act [BSA] and Know Your Customer [KYC] obligations); to the IRS, it’s just another capital asset. Regulators of all stripes continue to issue warnings, advisories, guidance and in some cases—as in NASAA’s crypto-sweep—take enforcement actions that remind everyone that the States also have an interest in asserting their authority. In this article, we review recent developments in the ongoing debate over regulating crypto, including legislative proposals, and regulatory activity by leadership at the SEC, the CFTC and FINRA.

SEC Commissioner Hester Peirce on First Principles

In a February 8th speech titled “Protecting the Public While Fostering Innovation and Entrepreneurship: First Principles for Optimal Regulation,” SEC Commissioner Hester Peirce described the challenges facing regulators that want to apply old models of regulation to cryptocurrencies. She argued that applying securities laws and legal tests (as to what is or is not a security) to virtual currencies and ICOs will negatively impact cryptocurrency development and investment.

The Commissioner raised many questions as to whether tokens are securities for purposes of raising funds. In a pointed comment, she explained that “enforcement actions are not my preferred method for setting expectations for people trying to figure out how to raise money.” Then she announced that the SEC staff is working on "supplemental guidance" to "help people think through whether their crypto-fundraising efforts fall under the securities laws."

Beyond the token issue, however, Commissioner Peirce questioned how certain crypto trading platforms may differ from exchanges or alternative trading systems designed for traditional securities. She also questioned how traditional regulation may need to change to accommodate these differences. Further, she raised important questions about the regulation of exchange-traded products based on Bitcoin or other cryptocurrencies.

In a final cautionary note she stated: “We owe it to investors to be careful, but we also owe it to them not to define their investment universe with our preferences.”

CFTC Setting Stage for Ethereum Futures

On December 11, the CFTC announced that it was seeking public comments to better understand “the technology, mechanics, and markets for virtual currencies beyond Bitcoin, namely Ether and its use on the Ethereum Network.” Currently, Bitcoin is the only regulated network trading in futures. The outcome of this CFTC effort may be a futures trading framework for Ether that will likely impact the agency’s broader approach to virtual currency futures, options and swaps. Such a result would further strengthen the CFTC’s authority to define and regulate such classes of crypto assets. 

FINRA Seeks Feedback, but Wants Compliance

As Bates Group described previously in July 2018, FINRA issued regulatory guidance stating it was monitoring developments in the digital asset market. As a result, FINRA requested that firms notify it if they or their associated persons or affiliates, “engage[], or intend[] to engage, in any activities related to digital assets…” The Notice stated that firms must disclose “purchases, sales or executions of transactions in digital assets, pooled funds that invest in digital assets; or derivatives tied to digital assets.” FINRA said that firms should provide these updates to their regulatory coordinator until July 31, 2019, along with disclosure of any facilitation activities such as clearing or settlement of digital assets.

In its 2019 Risk Monitoring and Priorities Examination Letter, FINRA alluded to this effort, saying that “some firms have demonstrated significant interest in participating in activities related to digital assets.” FINRA asserted that it will be reviewing “firms’ activities through its membership and examination processes related to digital assets and assess firms’ compliance with applicable securities laws and regulations and related supervisory, compliance and operational controls to mitigate the risks associated with such activities.” Specifically, FINRA noted it will “consider how firms determine whether a particular digital asset is a security and whether firms have implemented adequate controls and supervision over compliance with rules related to the marketing, sale, execution, control, clearance, recordkeeping and valuation of digital assets, as well as AML/Bank Secrecy Act rules and regulations.”

Legislative Proposals

Congressional representatives have also jumped into the debate. While regulators are asking for more input from the market, legislators are offering sweeping solutions. Though the current climate would not suggest that legislation that could significantly alter the crypto landscape can pass, several bills—some bipartisan—were introduced in the waning days of the last Congress. Perhaps the most-discussed bill comes from Representatives Darren Soto (D-FL) and Warren Davidson (R-OH), who introduced the Token Taxonomy Act.

The bill, expected to be reintroduced in the new Congress, would, among other things, (i) amend securities laws to exclude digital tokens from the definition of a security, (ii) adjust taxation of virtual currencies held in individual retirement accounts, (iii) create a tax exemption for exchanges of one virtual currency for another, and (iv) create an exemption from taxation for gains realized from the sale or exchange of virtual currency for other than cash. The bill also serves to define the term “digital token” and to clarify the application of securities laws to certain companies that use blockchain.

The Token Taxonomy Act is a reaction to startups fleeing offshore and to the downturn in the market. That downturn, is generally perceived to be due to SEC securities designations and other uncertainties and costs of U.S. regulation. SEC Commissioner Peirce referred to this legislation in her recent address, noting that Congress has the power to clear up many uncertainties by “simply requiring that at least some digital assets be treated as a separate asset class.”

Other bipartisan bills introduced last year, such as the Virtual Currency Consumer Protection Act and the Virtual Currency Market and Regulatory Competitiveness Act were also intended to reduce regulatory uncertainty, bring business back to the United States, and examine ways to encourage the development of the market.

Conclusion

The debate over current and future government regulation of cryptocurrencies may come down to reworking the definitions and legal tests that force them uncomfortably into traditional regulatory categories. It is also possible that the future may be a prolonged period of uncertainty punctuated by enforcement interpretations, conflicting agency guidance and short-lived rules. There is even a possibility that some legislative action could create an entirely new alternative regulatory framework. What can be discerned from Commissioner Peirce’s insight, the CFTC and FINRA market inquiries, and the recently proposed legislative fixes, is that any or all of these outcomes are possible.

The best that market participants can do is to keep up with these developments, do their best to anticipate regulators’ expectations, and attempt to develop compliance risk frameworks accordingly.

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02-11-19

Bates Group Welcomes New Managing Director Hank Sanchez

Bates Group Welcomes New Managing Director Hank Sanchez

Bates is proud to welcome Hank Sanchez, Esq. as a Managing Director. Mr. Sanchez is a seasoned compliance and legal professional with extensive securities industry experience in risk management, investment advising, financial legal issues, risk assessment, and compliance and due diligence. Prior to joining Bates, Mr. Sanchez served as Managing Director of a compliance consulting firm, where he acted as contract Chief Compliance Officer, testified as an expert witness, acted as an independent consultant on regulatory matters, and developed a Conflicts of Interest program. Previously, he held senior compliance leadership roles at LPL Financial Corporation.

Prior to this, for more than 10 years, Mr. Sanchez was a regulator with both the SEC and FINRA. He is also a FINRA Arbitrator, a frequent speaker at securities industry conferences, and an accomplished writer, whose work has appeared in securities industry-related publications throughout his career.

Full Bio

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02-07-19

New Congress, New Priorities for Financial Services in 2019

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Congresswoman Waters (L), Senator Crapo (R)
 

The priorities of the congressional committees that oversee financial services are changing. The contours of that change are beginning to take shape as Democrats take control in the House of Representatives and leadership from both parties announce committee assignments. This article takes a look at the agendas of Representative Maxine Waters (D-CA), the new Chair of the House Financial Services Committee, and Senator Mike Crapo (R-Idaho), Chair of the Senate Banking Committee. Their dynamic will set the stage for potential political confrontation, possible bipartisan legislation, and certain administrative and regulatory oversight impacting the financial services industry.

Background

It would be hard to overstate the breadth of jurisdiction of the committees these two lawmakers oversee. Together they have oversight over the Federal Reserve, CFPB, the FDIC, the Office of the Comptroller of the Currency, the SEC, HUD, and the Federal Housing Finance Agency, to name only a few. They also have oversight over national security and law enforcement at the Treasury and Commerce Departments, including the Committee on Foreign Investment in the United States (CFIUS); and the Office of Terrorism and Financial Intelligence, (including OFAC and FinCEN, among others). The leadership of these two Committees influence the policy priorities and enforcement actions of these regulators.

House Financial Services Committee

Maxine Waters is not a newcomer to the House Financial Services Committee (HFC). She served on the HFC, the Committee that oversees all U.S. financial services affecting securities, insurance, banking and housing since 1991. Since 1995, she has served as either Ranking Member or Chair of every Subcommittee of the Committee.

Since her appointment as Chair, Representative Waters moved quickly to set her agenda. On January 24th, 2019 Chair Waters announced new leadership for HFC Subcommittees. (She even changed some Subcommittee names and created a new Subcommittee on Diversity and Inclusion.) See here for the appointments and preliminary statements of the Subcommittee Chairs from New York, Missouri, Ohio and Texas. A few days later, Chair Waters announced membership assignments.

New Agenda Prioritizes Consumers, Housing, FinTech and Diversity

In her first meeting, Chair Waters highlighted the broad themes of consumer protection, expanding affordable housing, encouraging responsible innovation in financial technology and promoting diversity in—and financial access to—the financial services system as the key agenda items for the Committee.

On consumer protection, Chair Waters stated that she will seek to strengthen Dodd-Frank financial regulation that protects consumers and investors. She has been a frequent critic of administration efforts to weaken the Consumer Financial Protection Bureau and made clear that she will be using HFC oversight to ensure regulators are fulfilling their obligations as well as holding bad actors accountable.

On housing, Chair Waters said the Committee will focus on affordability and homelessness. She intends to re-raise a bill to provide $13.27 billion in new funding over five years to federal programs and initiatives on the issue. On housing finance, she wants to reform Fannie Mae and Freddie Mac to ensure that underserved borrowers and communities have access to affordable mortgage credit, as well as access to affordable rental housing, and ensure rigorous enforcement of fair housing laws. She said the HFC will be conducting robust oversight of the administration’s activities in the Department of Housing and Urban Development (HUD).

On FinTech, Chair Waters stated that she will focus the Committee on ways to foster "responsible innovation with the appropriate safeguards in place to protect consumers and without displacing community banks and credit unions." In this regard, her focus is on “opportunities for those who have been excluded from access to responsible credit.” Similarly, Chair Waters expressed her intention to shut down abusive payday lending practices and protect minority communities from lending discrimination.

In a speech earlier this year, she also described areas of international concern that the HFC would address, including reviewing governance at the International Monetary Fund and World Bank, Russia sanctions, reauthorization of the expiring Terrorism Risk Insurance (TRIA) and the Charter of the Export-Import Bank.

Senate Banking Committee

Senator Mike Crapo (R-ID) continues his role as Senate Banking Committee (SBC) Chair in the new Congress. His announced priorities reflect continuity, yet with an open offer for bipartisanship. On January 29, 2019, he set forth specific goals to (i) advance bipartisan legislative efforts, and (ii) ensure Committee oversight and federal agency implementation over legislation enacted in the last Congress, notably, the Economic Growth, Regulatory Relief and Consumer Protection Act (EGRRCPA), Foreign Investment Risk Review Modernization Act (FIRRMA), and the Countering America’s Adversaries Through Sanctions Act (CAATSA).

On housing, Chair Crapo’s agenda includes finance reform of Fannie Mae and Freddie Mac, enhancements to HUD’s Family Self-Sufficiency program and streamlined compliance for Public Housing Authorities.

On capital markets reform, Chair Crapo said that he will continue to press for some thirteen bills that would encourage capital formation, reduce burdens for small businesses and improve corporate governance.

On digital security, Chair Crapo relayed that the Committee will consider legislative solutions so that consumers would have more control over their financial data and that any privacy breach would be disclosed to consumers in a timely way. As for FinTech, the Chair committed the SBC to work to ensure that the regulatory landscape welcomes innovation. He pledged that the Committee would “consider appropriate ways to advance innovation and coordination to protect the integrity of the U.S. financial system in a smart way.”

On access to financial services, Chair Crapo said the Committee will continue to examine whether regulation should be tailored for financial companies to ensure they can adequately deliver credit to local communities. He also said the Committee will conduct oversight of financial companies that might “use their market power to manage social policy by withholding access to credit or services to customers and industries they disfavor.” On consumer credit, the Chair noted that the Committee would explore targeted reforms of the credit bureau system, such as improving consumers’ ability to interface with credit bureaus and to dispute inaccuracies.

On international affairs, Chair Crapo stated that the Committee will conduct oversight of agencies tasked with national security and law enforcement missions. He pointed out that the Committee held hearings last year that “lay the groundwork for modernizing the decades-old anti-money laundering and beneficial ownership regime.”

Finally, the Chair stated that SBC will review the efficacy of many expiring programs as part of the reauthorization process for programs such as TIRA (which expires at the end of 2020); the National Flood Insurance Program (NFIP) (which expires end of May); the Export-Import Bank’s charter expires (which expires the end of September 30); the Fixing America’s Surface Transportation (FAST) Act (which expires the end of 2020).

Conclusion

Despite the fact that these leaders are considered to be at two opposite ends of the political spectrum, they both have significant records of legislative success. As their overall agendas suggest, there are identifiable areas of alignment. There may also be areas of common ground on data privacy and security, FinTech, anti-money laundering and housing reform. Their preliminary nods to reaching across the aisle may be nothing more than that, but there may emerge a few bipartisan surprises in 2019.

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02-01-19

FINRA Rolls Out Its 529 Plan Share Class Initiative - Is Your Firm Ready to Address It?

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On the heels of the SEC’s 12b-1 Share Class Initiative, FINRA just announced its own Share Class Initiative. FINRA’s Share Class Initiative sets a deadline of April 1, 2019 for firms to self-report 529 savings plan share class violations and to provide FINRA with a plan to remediate harmed clients.  FINRA seeks to promote compliance with its supervision and suitability rules regarding share-class recommendations to clients with 529 savings plans (“529 plans”). FINRA’s initiative is also intended to allow firms to “identify and remediate any defects” in their systems and procedures and to “compensate any customers harmed by supervisory failures.” See FINRA Regulatory Notice 19-04.

Bates Group’s Proven Experience with the SEC’s Share Class Initiative Will Help Your Firm with FINRA’s 529 Plan Initiative

Bates has deep and proven experience and expertise in share class disclosure matters. Most recently, on behalf of over a dozen major national and regional financial institutions, Bates provided important assistance to firms and counsel participating in the SEC’s Share Class Selection Disclosure Initiative and related SEC Examinations.

Case Studies:
  • Working with data from our clients’ internal systems and/or major custody and clearing firms, we determined the extent of 12b-1 fees received during the applicable time period and identified the availability of lower-cost alternative share classes that were available for purchase. We then provided the correct information for filing with the SEC, assisted in the remediation process to individual accounts, and provided additional reporting by FA and other requested information and schedules as requested by counsel. 
  • As a result of our prior work for clients supporting them through FINRA and SEC examinations and investigations, we are able to determine the cost impact on clients by comparing the share class purchased to lower share classes of the same fund that could have been purchased.  In those instances, we calculated the differential in fees as well as interest on that differential, and assisted in making remediation payments to their impacted clients.
  • We have also assisted clients in dozens of retail litigation cases involving share class suitability.  Many of these disputes contend that investors should have been invested in class A shares instead of the class B or class C shares purchased.  Bates has modeled account profits and losses, sales loads, operating expenses and total cost of ownership (sales loads plus operating expenses) of actual mutual fund positions held (typically B share or C share classes) versus hypothetical investments of the same fund in a different share class (typically A shares) to assist our clients. 

Bates Group’s 529 Disclosure and Remediation Plan

To support firms facing FINRA’s 529 Plan disclosure and remediation initiative, Bates has created a plan that provides essential end-to-end steps and solutions to identify and address accounts and clients impacted by share class selection. We perform data analysis, examine regulatory reporting, review share class selection policies and disclosure practices, identify methodology and impacted accounts, perform calculations and provide remediation amounts. Most importantly, after consultation with counsel, our disclosure and remediation plan culminates in a report which can be used directly with regulators. Our plan includes back-end steps to clear exceptions, track client communications, and update written supervisory policies, procedures, and compliance programs.

FINRA Cautions Against Waiting to Take Action

In its Regulatory Notice, FINRA cautions that “if a firm does not self-report under the 529 Initiative but FINRA later identifies supervisory failures by that firm, any resulting disciplinary action likely will result in the recommendation of sanctions beyond those described under the initiative.” Enforcement also notes that it will provide “no assurance that individuals associated with these firms will be offered similar terms if they sold 529 plans to customers in violation of MSRB rules, or violated any securities laws.”

About Bates Group's Share Class Support:

Regulatory Investigations and Enforcement

Bates Group supports counsel in FINRA and SEC share class investigations and arbitrations, and break-even analysis work. This includes mining large datasets and providing clear and usable analysis as to the relative cost of selecting particular share classes in light of the plan beneficiaries’ age, the difference in fee levels of the classes, and the breakpoints of the classes.  In connection with FINRA’s announcement, we can help determine instances where a less expensive share class of the same fund may have been available and the difference in fees paid by impacted clients.

Compliance Solutions

Bates works with clients to develop programs to help mitigate conflicts of interest associated with mutual fund share class selection. We develop procedures relating to due diligence, approval, ongoing reviews and disclosures. Additionally, we assist firms with testing these and other types of conflicts-related programs to ensure compliance with internal policies and procedures, as well as regulatory requirements and expectations.

Contact Bates today to put our proven Share Class Experience to Work for your firm:

 
Alex Russell, Managing Director, Securities Litigation & Regulatory Enforcement 
email: arussell@batesgroup.com phone: 971-250-4353
 
David Birnbaum, Managing Director
email: dbirnbaum@batesgroup.com phone: 917-273-2682
 
Robert Lavigne, Managing Director, Bates Compliance Solutions
email: rlavigne@batesgroup.com phone: 508-868-6741
 
Scott Lucas, Managing Director, Regulatory and Internal Investigations
email: slucas@batesgroup.com phone: 971-250-4344
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01-24-19

FINRA Highlights Online Platforms, Mark-Up Disclosure & Compliance, RegTech in 2019 Exam Priorities

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In his latest annual priorities letter to members, FINRA Chief Executive Officer Robert Cook emphasized that FINRA will be monitoring firm developments “to identify risks and assess their prevalence and impact.” He noted that the 2019 letter highlights new areas of focus that will allow member firms to determine whether certain issues “are relevant to their businesses” and how they might be best addressed. For the upcoming year, these areas include (i) the distribution of securities through online platforms; (ii) firm compliance with recently effective requirements on mark-up or mark-down disclosure for fixed income transactions; and (iii) firm use of new regulation technology (RegTech) to address compliance risks and challenges.

In addition, Mr. Cook explicitly stated that these highlighted areas do not affect the ongoing monitoring and enforcement efforts detailed in previous priorities letters. In this article, Bates will review the highlights from FINRA’s newly released 2019 Risk Monitoring and Examination Priorities Letter. We once again list and compare the new priorities to preceding years in the attached Bates’ 2019 FINRA Chart.

New Areas of Focus

Securities Distributions through Online Platforms

FINRA is concerned with a host of issues tied to growth in the use of online distribution platforms used to sell and trade securities. According to the letter, FINRA will evaluate how firms that use online distribution platforms “conduct their reasonable basis and customer specific suitability analyses, supervise communications with the public and meet AML requirements.” FINRA also stated that it will review certain specific risks, including those associated with (i) offering documents or communications with the public that omit material information or may contain false or misleading statements, (ii) promises of claims of high targeted returns, (iii) sales to non-accredited investors and non-compliant escrow arrangements; and (iv) excessive or undisclosed compensation arrangements between firms and the issuers.

Mark-up Disclosure for Fixed Income Transactions

In the latest letter, FINRA highlighted its intention to review compliance with mark-up or mark-down disclosure obligations on fixed income transactions effective on May 14, 2018. This does not come as a surprise. In its December 2018 Examination Report (covered by Bates here), FINRA found that firms were facing challenges implementing the new rules, including putting in place confirmation review processes, systems and vendors, as well as inadequate disclosure in Order Entry Systems, customer confirmations, transactions in certain structured notes, and incorrect designations of institutional accounts. In the priorities letter, FINRA stated it will review behavior to determine whether a firm is attempting to avoid their obligations concerning mark-up and mark-down disclosures.

For additional resources, FINRA directs firms to an available Mark-up/Mark-down Analysis Report that provides, among other things, trade details and “graphical displays of data across longer periods of time for trend analysis.” FINRA also refers readers to its Bond Facts Tool for “security-specific product data to help retail investors understand the quality of their fixed income securities transactions (e.g., the time, price and size of other transactions in the same bond).”

Regulatory Technology

Consistent with the intent to monitor firms in order to identify new types of risk and assess their impact, FINRA stated it will use the upcoming period to examine a variety of innovative regulatory technology tools that firms are using for compliance. Specifically, FINRA indicated that it seeks to address risks, challenges and regulatory concerns relating to supervision and governance, third-party vendor management, safeguarding customer data and cybersecurity.

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FINRA Priorities Comparison Chart 2019

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© 2019, Bates Group LLC
Source: 2019 FINRA Regulatory and Examination Priorities Letter (Compiled by Alex Russell, Bates Group LLC)

 

Additional Priorities

The Bates Chart above provides context and comparison for FINRA examination priorities year over year. Though there are fewer identified priorities in this year’s list, there are clearly additional nuances to many prior categories. As a result, this chart serves as a useful reference for firm compliance review. In the 2019 monitoring and enforcement letter, FINRA bundles several of these risks together into broad categories.

Sales Practice Risk

The first category is “Sales Practice Risk,” under which FINRA prioritizes the examinations of a firm’s programs to ensure the suitability of its’ recommendations, particularly regarding complex products, mutual funds, variable annuities, share classes, trade in margin accounts and private securities transactions. (See here for a general Bates discussion on suitability from the 2018 FINRA exam findings.)

FINRA also recommits to prioritizing the protection of senior investors. In 2019, FINRA reemphasizes examining for fraud, sales practice abuses and financial exploitation. In this regard, FINRA noted that it will continue to assess firms’ supervision of accounts “where registered representatives serve in a fiduciary capacity, including holding a power of attorney, acting as a trustee or co-trustee, or having some type of beneficiary relationship with a non-familial customer account.”  

Operational Risk

A second category for examination includes: “Operational Risk,” under which FINRA emphasizes its interest in the supervision of digital assets. For those firms engaging in such business, FINRA makes it clear that it will consider how firms determine whether a particular digital asset is a security and whether firms have implemented adequate controls and supervision over compliance with rules related to the marketing, sale, execution, control, clearance, recordkeeping and valuation of digital assets, as well as AML/Bank Secrecy Act rules and regulations. Other operational risk concerns include examinations of firms to ensure compliance with FinCEN’s Customer Due Diligence (CDD) Rule, which went into effect last May. FINRA stated that its exams this year will focus on suspicious activity monitoring systems.

Market Risk

Under the broad category of Market Risk, FINRA identified best execution compliance (particularly as it relates to order flow and potential conflicts of interest), market manipulation (through enhanced surveillance with an emphasis on correlated Exchange Traded Products), market access (focusing on controls and limits to sponsored access orders), short sales (examining structured aggregation units), and short tenders (including how firms account for their options positions when tendering shares). 

Financial Risk

Finally, under the Financial Risk category, FINRA exams will focus on credit risk, notably, policies and procedures for identifying, measuring and managing risk exposures and the extent to which firms identify and address risks when they extend credit to their customers and counterparties. In addition, FINRA will be evaluating the adequacy of a firm’ funding and liquidity including whether firms are updating their stress test assumptions in light of increased volatility in the market and business activities and arrangements.

Conclusion

This report evidences a shift in FINRA’s annual practice of highlighting examination priorities to alert firms to be prepared to demonstrate adequate compliance on serious issues raised in FINRA’s prior enforcement report and by newly effective regulation. The change in the name of the report and Mr. Cook’s emphasis show that FINRA is adjusting its examination priority notice to incorporate a changing reality. In short, technology developments are moving at such an accelerated pace that FINRA must now monitor firm activity through the exam process just to better understand the nature of emerging risk and how to react to the sweeping technological change.

 

For additional information and assistance, please follow the links below to Bates Group's Practice Area pages:

Bates Compliance Solutions

Regulatory and Internal Investigations

Retail Litigation and Consulting

Institutional and Complex Litigation

Financial Crimes

Insurance and Actuarial Services

Consulting and Expert Testimony

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01-22-19

FINRA Announces 2019 Regulatory and Examination Priorities

FINRA Announces 2019 Regulatory and Examination Priorities

FINRA has announced their regulatory and examination priorities for the upcoming year. You can read the letter, with an introduction by FINRA President and CEO Robert Cook, here.

Stay tuned to Bates Research for our commentary on FINRA’s 2019 objectives and how they may impact your legal, regulatory and compliance matters.

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01-18-19

Bates Group Welcomes New Expert and Consultant Sheila Murphy

Bates Group Welcomes New Expert and Consultant Sheila Murphy

Bates is proud to welcome Sheila Murphy as a new Expert and Consultant. Ms. Murphy brings over 30 years of legal, insurance, regulatory and retail litigation experience. Prior to joining Bates, Ms. Murphy served MetLife in various legal roles. Most recently, as Senior Vice President and Associate General Counsel, Ms. Murphy led the Regulatory and Retail Litigation Unit, which provided strategic advice on litigation and regulatory matters for MetLife's U.S. insurance and financial products businesses.

Her team counseled on broker-dealer, compliance and public policy issues as well as advised on litigation and regulatory matters. Additionally, she headed multi-disciplined task forces on issues relating to risk mitigation; developed and implemented recommendations to enhance compliance policies, procedures, and metrics in tandem with key stakeholders.

During her time at MetLife, Ms. Murphy made contributions in a variety of positions, including as a member of the Legal Affairs Technology Committee and on the Advisory Board to MetLife’s Women’s Business Network and U.S. Task Force on Diversity and Inclusion. Ms. Murphy has received numerous industry awards throughout her career and has been a speaker and panelist for various continuing education and industry-related symposia.

full bio

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01-17-19

New FINRA Report Details Effective Practices for Broker-Dealer Cybersecurity Compliance

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Right before the new year, FINRA published a report on specific cybersecurity compliance concerns raised in recent broker-dealer examinations. The report provides important guidance for broker-dealers to ensure that their compliance programs adequately address particular risks. Specifically, FINRA highlights best practices among firms on (i) branch office controls; (ii) limiting phishing attacks; (iii) mitigating insider threats; (iv) testing compliance networks for security weakness; and (v) controlling risks related to mobile devices. In this article, Bates reviews these elements and what they may mean for your compliance program.

Branch Offices

FINRA expressed concerns over branch office cybersecurity compliance, stemming in part from the autonomy given to branch offices. FINRA observed that such autonomy inhibits the ability of a home office to maintain supervisory control and consistency across a firm. Among others, FINRA cites examples of branches that hire non-approved vendors, purchase assets (such as software) that may not be compatible firm-wide, that fail to follow cybersecurity protocol, and that allow representatives to work from home without adequate technological cybersecurity support.  

FINRA’s primary recommendation is for firms to evaluate whether they need to enhance their branch cybersecurity to protect customer information. Categorically, FINRA says firms should strengthen (and organize) comprehensive written supervisory procedures (WSPs) in order to better define minimum branch cybersecurity controls. This includes, for example, providing branches a list of required and recommended hardware and software options and settings, and lists of approved vendors. In addition, FINRA wants firms to formalize the oversight of these offices by designating a branch office cybersecurity supervisor. Second, firms should develop an inventory of branch-level assets, including data, software and hardware. Such an inventory would serve to help evaluate vulnerabilities to potential attack, and to direct appropriate policy, technical and physical controls to mitigate those risks. Third, firms should maintain branch technical controls, particularly concerning identity and access management protocols for registered representatives. Finally, firms should implement robust review programs in order to “ensure that branches are consistently applying cybersecurity controls across a firm’s branch network.”

Phishing Attacks

FINRA observed that firms are aware of the threat posed by phishing attacks, including both general emails and sophisticated and targeted attacks (aka “spear fishing” or “whale fishing”), but could do more to mitigate the risks. Given the danger that victims may release confidential or personal information, respond with unauthorized wire transfers, or infect systems with malware, ransomware or other viruses, FINRA advises creating or upgrading anti-phishing policies. Among many suggestions, FINRA wants firms to better train and alert system users in how to identify phishing emails, not to open attachments in suspicious emails, and to notify IT administrators and compliance staff of any incidents. Perhaps most importantly, FINRA wants customer-facing employees who have access to valuable personal and financial information, to confirm wire transfers with customers, and to ensure resolution and remediation after an attack.

Insider Threats

Recognizing that insiders are “in a unique position to cause significant harm to an organization,” and that “the vast majority (95-99 percent) of higher revenue firms and 66 percent of mid-level revenue firms” said they address insider threats in their programs, FINRA outlined best practices for managing the exposure potentially created by insiders. These include significant attention to access policies and practices for executive leadership and management, heightened technical controls for individuals with privileged access, technical controls and data loss prevention (DLP) tools, training for all insiders, and measures to identify potentially abnormal user behavior in the firm’s network. FINRA also highlighted firms that cultivated a culture of compliance that encourages suspicious activity reporting and the regular review of higher-risk individuals, “especially in environments where it is difficult to maintain segregation of duties.”

Penetration Testing

FINRA highlights the importance of penetration testing as part of a broker-dealer’s cybersecurity programs. These tests serve to analyze a firm’s network and applications for vulnerabilities and technical gaps. FINRA notes that “100 percent of higher revenue firms include penetration testing as a component in their overall cybersecurity program,” but recognizes that penetration tests “are highly relevant to firms that provide online access to customer accounts.” That said, it is clear that the ability to identify, assess, classify risk and mitigate any security issues through this process is what FINRA wants to see for all firms. To that end, FINRA suggests that firms (i) adopt a risk-based approach to penetration testing; (ii) perform due diligence in the selection of vendors; (iii) establish contracts that prescribe vendor responsibilities; (iv) manage and follow up on test results; and (v) rotate testing providers “to benefit from a range of skills and expertise.”

Mobile Devices

In the report, FINRA addressed the risk of attacks on sensitive customer and firm data through the use of smart phones, tablets and laptops. FINRA noted the particular risk to retail investors who are performing a greater variety of transactions on mobile devices, including trading, money transfers and account monitoring. Here too, FINRA recommends developing a host of policies and procedures to address the protection of customer information and circumscribe the use of personal devices by employees for business without firm approval. FINRA referenced a number of requirements to improve security, including the implementation of password standards, authentications methods, and the installation of security software for mobile devices that are used for firm business. In addition, FINRA noted certain practices firms were using proactively, including the monitoring of the marketplace for malicious applications (in particular ones that can impersonate a firm’s mobile application) and greater communication with the firm’s customers on how they might mitigate risks on their own devices.

Conclusion

In the new report, FINRA makes clear that its current focus on specific technology risks should be considered in the “context of a holistic firm-level cybersecurity program,” the elements of which are contained in FINRA’s 2015 Cybersecurity Practices. That is an important caveat and a telling example of how fluid the compliance oversight of technology risk has become. Combined with instructions for small firms to update their Cybersecurity Checklist based on the new recommendations (contained in the Appendix of the new report), and additional warnings that FINRA’s observations are “not intended to express any legal position, [nor] create any new legal requirements or change any existing regulatory obligations,” the report is a reminder that firms remain responsible for creating compliance programs that address diverse and developing risks in a dynamic environment without any real certainty that they will be enough to withstand regulatory scrutiny.

 

For additional information and assistance, please follow the links below to relevant Bates Group's Practice Area pages:

Bates Compliance Solutions

Regulatory and Internal Investigations

Retail Litigation and Consulting

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01-14-19

Bates Group at the 2019 NYSBA Annual Meeting

Bates Group at the 2019 NYSBA Annual Meeting

Bates is proud to be a Bronze Sponsor of the New York State Bar Association’s Women in Law Section’s Fifteenth Annual Edith I. Spivack Symposium - Secure Your Seat at the Table: Becoming a Leader and an Indispensable Lawyer Who Champions Women,” taking place on January 15th, during the 2019 NYSBA Annual Meeting week, January 14-18, 2019 in New York City.

Join Susan Harper, Esq., Bates Group’s NY/NJ Managing Director and Women in Law Section Chair, at the Symposium when she moderates a panel of senior level attorneys and legislators discussing "Advancing Women's Equality Through Legislative and Policy Initiatives," which includes a discussion on developments on new employment law, investigations and current legislative state and federal ERA efforts.

On Wednesday, January 16th, Susan will also participate on the NYSBA Presidential Summit: "Listening to #MeToo: Why Laws to Prevent Sexual Harassment Have Been Ineffective, and What Attorneys Can Do About It," with panel chair Hon. Colleen McMahon, Chief Judge, U.S. District Court for the Southern District of New York. A reception will follow.

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01-03-19

OCIE to Prioritize Protection of Retail Investors in 2019 Examinations

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The SEC Office of Compliance Inspections and Examinations ("OCIE") will prioritize risks to retail investors in this year’s examinations. That concern is a distinguishing highlight of a new report summarizing OCIE assessments of regulatory issues, market risks and policy developments. OCIE’s conclusions are based on information derived from 2018 examinations, regulator concerns and public comments aired at OCIE outreach programs, as well as tips, complaints and referrals shared with the agency during past year.

Additional featured priorities include continuing risks and concerns related to fee disclosures, share class, and wrap fee programs, anti-money laundering, cybersecurity, digital assets, FINRA and MSRB operations, and issues of compliance by registrants involved in critical market infrastructure. In this article, we review the new report, contrast this year’s priorities with those of the past few years (See Bates Group’s year-to-year SEC OCIE priorities chart, below) and consider some implications so that firms might better prepare and, if necessary, adjust their compliance systems accordingly.  

Why the Report Matters: A Leadership Message

Primarily, the OCIE report serves as an information alert to market participants. Citations to a list of the OCIE’s oversight responsibilities (i.e. more than 13,200 investment advisers, 10,000 mutual funds and exchange traded funds, 3800 broker dealers, 330 transfer agents, 7 active clearing agencies, 21 national securities exchanges, 600 municipal advisors, FINRA, MSRB, the Securities Investor Protection Corporation, and the Public Company Accounting Oversight Board) serves as a not-so subtle reminder of the broad scope and reach of OCIE operations.

Similarly, OCIE leadership reminds us of how aggressive the organization can be. Reciting a list of year-over-year 2018 accomplishments, the report states that the OCIE completed over 3,150 examinations, (a 10 percent increase,) expanded coverage of investment advisers (a 17 percent increase,) increased examinations of investment companies (a 45 percent percent increase,) and conducted over 300 examinations of broker-dealers. The message is clear: firms must take these priorities seriously.

Changes in the Market: An Affirmation of the Risk-Based Approach

OCIE recognizes that the markets it oversees are changing rapidly. A number of metrics are used to make this point. As to investment advisers, OCIE notes a 5 percent increase in the number of registered investment advisers and approximately $84 trillion in assets under management by these advisers. More than 3,700 advisers have over $1 billion dollars in assets under management. The report states that over a third of the investment advisers manage a private fund; more than half have custody of client assets; almost two thirds are affiliated with other financial industry firms; and almost 12 percent provide advisory services to a mutual fund, exchange traded fund, or other registered investment company. As to the broker-dealer community, despite an overall decline, the OCIE reports that almost 100 new firms registered in 2018, about 10 percent were dually-registered as investment advisers, and broker-dealers operated more than 156,000 branch offices.

The OCIE states that it is responding to these market changes by (i) continuing to use a risk-based approach for examining registrants, and (ii) “increasingly leveraging technology and data analytics as well as human capital to fulfill its mission.” Generally, the risk-based approach includes a review of a registrant’s operations and the products it offers. The results are “examinations that address aspects of the SEC’s regulatory oversight, such as the disclosure of services, fees, expenses, conflicts of interest for investment advisers, and trading and execution quality issues for broker-dealers.” OCIE stated that its risk-based examinations are based on “four pillars: promoting compliance, preventing fraud, identifying and monitoring risk, and informing policy.” On its increased reliance on technology, OCIE said it is “continually adding to and refining the expertise, tools, and applications that help identify areas of risk, firms that may present heightened risk of non-compliance, and activities that may harm investors.”

OCIE 2019 Priorities

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SEC Examination Priorities Year-To-Year Comparison Chart
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© 2019, Bates Group LLC
Source: OCIE 2019 National Exam Program Examination Priorities (Compiled by Alex Russell, Bates Group LLC)
 

Bates Group has been tracking the OCIE examination priorities for the past five years (see year-to-year comparison above). The most distinguishing difference in OCIE’s announced priorities for 2019 is the elevation of concern for risk in the products and services sold to Main Street investors. As is apparent in the chart, refocusing on the retail investor allows for firms to reconsider how each of its compliance programs may affect that target audience. Here are a few of the particulars:

Retail Investors

The OCIE focus on the retail investor is consistent with the strategic direction the SEC has taken during the past year. (See here for additional Bates coverage on the SEC Final Strategic Plan.) The 2019 report states that the OCIE will focus examinations on the following categories, among others:  

  • Disclosures related to the calculation of fees, expenses and other charges investors pay for products and services. The OCIE said it would select firms with practices or business models that may create increased risks of inadequately disclosed fees, expenses, or other charges. The OCIE stated further that it “will continue to evaluate financial incentives for financial professionals that may influence their selection of particular share classes,” and will pay particular attention to investment advisers that participate in wrap fee programs.
  • Conflicts of interest - The OCIE was particularly concerned with (i) the use of affiliated service providers and products, (ii) securities-backed non-purpose loans and lines of credit, and (iii) borrowing funds from clients.
  • Custody risks - The OCIE will examine firms for compliance with the Customer Protection Rule which ensures that assets are safeguarded and accurately reported, and prevents them from being used by broker-dealers as working capital.
  • Senior investors and those saving for retirement, particularly the ability to identify financial exploitation. (See here for Bates’ review of risks associated with senior investors and to download our complimentary Elder White Paper.)
  • Portfolio management and trading - the OCIE indicated that it will assess “whether investment or trading strategies of advisers are: (1) suitable for and in the best interests of investors based on their investment objectives and risk tolerance; (2) contrary to, or have drifted from, disclosures to investors; (3) venturing into new, risky investments or products without adequate risk disclosure; and (4) appropriately monitored for attendant risks.”
  • Risks associated with mutual funds and exchange-traded funds - OCIE stated it will focus on risks associated (1) funds that track custom-built or bespoke indexes; (2) ETFs with little secondary market trading volume; (3) funds with higher allocations to certain securitized assets; (4) funds that underperform relative to their peer groups; (5) funds managed by relatively new advisers in the Registered Investment Companies (“RIC”) space; and (6) advisers that provide advice to both RICs and private funds with similar investment strategies. (See here for Bates’ considerations on a recent OCIE alert on mutual funds and ETFs.)
  • Risks re: Microcap Securities - The OCIE will examine broker-dealers that sell stocks of companies with a market capitalization of under $250 million. The chief concern is with the risk of manipulative schemes, short sales and fraud concerning the publication of OTC equity security quotes

Other Highlights

The OCIE also reemphasized several examination priorities that had been highlighted in the past (see year-to-year comparison above). These include:

  • Anti-Money Laundering (AML) - OCIE will examine broker dealers to determine whether their AML programs are in compliance with their regulatory obligations, “including whether they are meeting their SAR filing obligations, implementing all elements of their AML program, and robustly and timely conducting independent tests of their AML program. (Note: Keep an eye out for a new Bates Research publication on the top AML cases brought by regulators in 2018.)
  • Cybersecurity - The OCIE will prioritize examination of compliance with cybersecurity rules in all of its examination programs. In particular, the OCIE will look to ensure the proper configuration of network storage devices, information security, governance, and policies and procedures related to retail trading information security.
  • Digital Assets - The OCIE will “focus on portfolio management of digital assets, trading, safety of client funds and assets, pricing of client portfolios, compliance, and internal controls.”
  • FINRA and MSRB - The OCIE will continue to monitor the regulatory oversight programs conducted by FINRA and the MSRB, including their operations, internal policies, procedure and controls. OCIE also stated it will review the quality of FINRA’s examinations of broker-dealers.
  • Compliance and risk by certain registrants - For entities that provide services considered critical to the functioning of the capital markets, OCIE examiners will review transfer operations, including clearing agencies, exchanges and agents, recordkeeping and the protection of funds and securities. In addition, OCIE will examine internal audit and surveillance programs.
Conclusions

The OCIE warns that the highlighted priorities “are not exclusive” and that the scope of any given examination is the result of a firm specific risk based analysis. That said, the overall message of the report could not be clearer. For market participants under the scope of authority of the OCIE mandate: get every aspect of your compliance programs that cover retail investors in order. 

 

For additional information and assistance, please follow the links below to Bates Group's Practice Area pages:

Bates Compliance Solutions

Bates Investor Risk Assessment for Vulnerable and Senior Investors

Regulatory and Internal Investigations

Retail Litigation and Consulting

Institutional and Complex Litigation

Financial Crimes, AML and Forensic Accounting

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01-02-19

Bates Group Promotes Benjamin Pappas to President

Bates Group Promotes Benjamin Pappas to President

Benjamin R. Pappas has been promoted to President of Bates Group LLC, the leading expert witness and consulting firm for the financial services industry. Bates Group Chief Executive Officer Jennifer L. Stout made the announcement today.

“Ben, who has been Chief Operating Officer since 2016, has brought tremendous energy and commitment to Bates Group. In addition to being a key officer of the company, Ben has successfully led the expansion of our Anti-Money Laundering (AML), Compliance Consulting, and Institutional Litigation practices. The Board and I are eager for Ben to further expand his role and contributions at Bates,” said Stout.

Key responsibilities for Pappas will include executing the company’s overall strategic goals to drive continued growth and success, she said. “I look forward to working with Ben in his new capacity and believe he will provide great value in support of our firm initiatives.”

Pappas’ appointment became effective January 1st. He will continue to report to CEO Stout.

Before joining Bates Group, Pappas was Senior Vice President and Chief Operating Officer of D.A. Davidson Companies’ Equity Capital Markets business, where he was responsible for the implementation of strategic growth initiatives and the development of an annual financial budgeting and forecasting process. Pappas also previously worked as an equity research analyst and strategic planning analyst focused on the technology industry, after beginning his career as a financial advisor at Merrill Lynch.

 

About Bates:

Bates Group LLC has been a trusted partner to our financial services clients and their counsel for over 30 years, delivering superior quality and results on a cost-effective basis. Voted a Best Securities Litigation Consulting Firm by readers of the New York Law Journal and a 2017 NYLJ Hall of Fame service provider, Bates Group provides end-to-end solutions throughout the lifecycle of your legal, regulatory, and compliance matters. With a roster of over 165 financial industry and regulatory experts, Bates offers services in litigation consultation and testimony, regulatory and internal investigations, AML solutions and staffing, compliance solutions, forensic accounting, fraud and financial crimes investigations, damages and big data consulting. Bates is also proud to offer Arbitrator Evaluator™, a new generation of intelligent analytics for identifying and selecting the best arbitrators for your customer and intra-industry cases.

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12-13-18

FINRA Issues 2018 Report on Examination Findings

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In its second annual effort to highlight areas of compliance concern, FINRA published a 2018 Report on Examination Findings. The thorough report details selected observations and findings from broker-dealer firm exams that have “potential significance, frequency and impact on investors and the markets.” Last year’s report led with compliance concerns on anti-money laundering, cyber-security, best execution and outside business activities. In retrospect, these areas of focus were a warning of the kinds of enforcement actions regulators would bring throughout 2018.

The primary areas of focus in this year’s report are suitability for retail customers, private placements, abuse of the authority a client gives to a registered representative, and fixed income mark-up disclosure. FINRA also included within the report case studies that highlight examination findings from a targeted examination (sweep) of volatility-linked products. This article takes a closer look at these FINRA priorities—with links to current Bates Research articles on the substantive issues—and additional FINRA findings on compliance issues raised by this year’s examinations.

Suitability for Retail Investors

In the broadest sense, the theme of the FINRA report is a concern for retail investors and the suitability of products and services offered to them. In its examination of broker-dealer firms, FINRA found (i) continuing instances of unsuitable recommendations to retail investors and (ii) “deficiencies in some firms’ supervisory systems for registered representatives’ activities.”  

FINRA found infractions of all three required suitability obligations: reasonable-basis, customer-specific and quantitative suitability. FINRA found instances where registered representatives “did not adequately consider the customer’s financial situation and needs, investment experience, risk tolerance, time horizon, investment objectives, liquidity needs and other investment profile factors when making recommendations.” In other cases, FINRA found failures to “take into account …cumulative fees, sales charges or commissions” and unsuitable recommendations that resulted in excessive trading or overconcentration in certain complex products (including non-traded real estate investment products [REITs]) and “volatility linked products” (such as leveraged and inverse exchange-traded products [ETPs]), illiquid securities, “variable annuities, “switches” between share classes, and Unit Investment Trusts [UITs]).  As to suitability concerns regarding these latter volatility-linked products, FINRA noted challenges with supervisory systems and other operational issues in instances “when a broker-dealer or associated person has ‘actual or de facto control’ over a customer’s account.” In such instances, FINRA reminded firms of recent guidance on bad actors requiring “special supervisory procedures.”

Private Placements

An increasing concern highlighted by the FINRA report is the failure of firms to conduct reasonable diligence and to supervise brokers engaged in private placements. FINRA found that certain firms failed to perform such due diligence prior to recommending private placement offerings to retail investors. FINRA reminded firms of their obligation to conduct a “reasonable investigation” by evaluating “the issuer and its management; the business prospects of the issuer; the assets held by or to be acquired by the issuer; the claims being made; and the intended use of proceeds of the offering.” Such diligence, FINRA said, works to mitigate conflicts, ensures that offerings are suitable for investors and informs appropriate and comprehensive disclosures. FINRA also warned firms not to over-rely on third parties that provide due diligence reports and to watch for conflicts of third-party diligence providers.

Abuse of Authority

FINRA highlighted the risks for retail investors who give registered representatives the authority to act on their behalf to engage in discretionary trading, “to act as trustees or co-trustees, hold Powers of Attorney or serve as executors or beneficiaries.” FINRA warned of the material risk to the retail investor from unsuitable or excessive trading; they found numerous instances where certain firms exposed investors to unnecessary risks and failed to establish controls to mitigate those risks. For example, FINRA found failures in the authorization process to engage in discretionary trading; expired authorizations; mismarked order tickets that obscure unauthorized discretionary trading; failures to comply with securities’ threshold limitations or other trading restrictions; and other intentional deceptions including falsifying authorization and suitability forms and abuse of trustee status when trading in a customer’s account.

Fixed Income Mark-up Disclosure

FINRA also found that firms were facing challenges implementing new FINRA and MSRB rules on fixed income mark-up disclosures. These challenges include putting in place appropriate confirmation review processes, systems and vendors. The new rules require firms to provide transaction-related mark-up or mark-down information to retail customers for certain trades in corporate, agency and municipal debt securities. FINRA found lapses related to inadequate disclosure in Order Entry Systems, inaccurate disclosures on customer confirmations, disclosure failures related to transactions in certain structured notes, incorrect designations of institutional accounts, and assorted vendor related problems. FINRA cautioned that “firms should consider reviewing samples of their confirmations for all of the required disclosure elements, including the mark-up or mark-down, the time of execution” and security-specific links. FINRA said that firms should also consider whether they are maintaining consistent and correct disclosures for fixed income transactions executed across different vendors, platforms or trading desks.

Other Observations

As noted by Susan Schroeder at a recent 2018 SIFMA C&L New York Regional Seminar, FINRA continues to be concerned about compliance challenges on a host of other issues. Here are the ones designated in the report:

AML – FINRA recognized continuing compliance challenges fulfilling anti-money laundering obligations, particularly in light of the May 11, 2018 effective date of FinCEN’s Customer Due Diligence (CDD) rule. FINRA found general inadequacies of certain firms’ overall AML programs: misallocations of AML trade monitoring responsibilities, failures in data integrity in automated surveillance systems, and inadequate resourcing for AML programs, among others.

Net Capital Rule and Liquidity Requirements – FINRA found compliance issues with net capital rules designed to protect against monetary losses in the event of a “broker-dealer failure.” FINRA also found deficiencies with firms’ liquidity risk management programs which are designed to protect customers by ensuring that a firm can continue to operate under “stressed” conditions.”

Segregation of Client Assets – FINRA found that certain firms failed to comply with the Customer Protection Rule, which ensures that customer cash is not intermingled with the firm’s proprietary business activities.

Operations Professional Registration – FINRA found that some firms continued to permit unregistered staff to engage in activities that would require Operations Professional registration.

Customer Confirmations – FINRA found that certain firms did not maintain adequate supervisory programs relating to confirmations or comply with certain confirmation disclosure requirements for transactions in equity securities.

DBAs and Communications with the Public – FINRA found compliance deficiencies related to requirements to maintain controls, provide adequate disclosures, monitor retail communications, websites, social media accounts, seminars and external email accounts used by representatives when communicating on the firm’s behalf.

Best Execution – FINRA found certain firms that receive, handle, route or execute customer orders failed to meet their duty of best execution in equities, options and fixed income securities trading. The deficiencies included failures to perform execution quality assessments in competing markets, failures to conduct adequate reviews on a type-of-order basis, and failures to consider factors like speed of execution, price improvement and the likelihood of execution of limit orders.

TRACE Reporting – FINRA found that certain firms engaging in institutional sales of fixed income securities did not comply with TRACE reporting rule requirements.

Market Access Controls – FINRA found that certain firms failed to maintain effective pre-trade financial controls or make required intra-day adjustments of pre-trade financial thresholds and oversight of third-party vendors.

Conclusion

The 2018 Report on Examination Findings should be reviewed carefully by broker-dealer firms. It is not just a checklist of every compliance item FINRA is currently assessing, it is a warning to firms about what to watch for in terms of regulatory enforcement. Bates will continue to track regulatory alerts and enforcement actions to help you stay ahead of the curve.

For additional information and assistance, please follow the links below to Bates Group's Practice Area pages:

Bates Compliance Solutions

Regulatory and Internal Investigations

Retail Litigation and Consulting

Institutional and Complex Litigation

Financial Crimes

Consulting and Expert Testimony

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12-06-18

Compliance in the Age of Robo Investment Advice

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In late August, four registered financial service firms settled SEC charges of misleading retail investors about the efficacy of their quantitative models. The SEC alleged that the firms promoted, offered, sold and managed mutual funds, variable life insurance products and annuity investment portfolios that used a faulty “proprietary quant model.” Without admitting or denying the charges, the firms agreed to refund $97 million to retail investors.

Questions about the proper use and regulation of algorithmic models in advisory services are raised with more urgency these days, most recently at the SIFMA New York Regional conference held in early November. In this article, Bates Research takes a closer look at this case and existing SEC compliance guidance on robo-advisory services as well as some of the enforcement concerns in this rapidly expanding marketplace.

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In the case referred to above, the SEC found a host of disclosure issues. These included failures to disclose: (i) that the model was developed by an inexperienced junior analyst; (ii) that the day-to-day manager of the products was not (as communicated) an experienced asset manager; (iii) certain errors when they were discovered, (iv) the decision to discontinue use of the model; (v) errors in model methodology and accuracy; and (vi) known risks or to verify that the models worked as intended. In separate proceedings, the SEC found that the Global Chief Investment Officer and the former Director of New Initiatives were personally responsible for the compliance failings related to the development and use of models.

Notably, according to the Order, the “[r]espondents cooperated with the Commission’s investigation throughout its entirety, and their efforts assisted the Commission staff in its collection of evidence...” That cooperation took the form of voluntarily retaining a compliance consultant “to conduct a comprehensive, independent review related to their respective compliance policies and procedures, internal controls and related practices, with an emphasis on product development, use of investment models and algorithms, due diligence, disclosures in prospectuses and marketing materials, and enterprise compliance functions and the operation of those controls within and among the Respondents.” In addition, the SEC recognized that “[r]espondents began revising and improving their compliance and due diligence policies and procedures related to the use of models and the creation and use of marketing communications, product development, and investment management.”

Existing Guidance for Investors and Firms

The case raises many of the concerns the SEC expressed in an Investor Bulletin and a Guidance Update on robo-advisers in February 2017. In the Bulletin, the SEC Office of Investor Education and Advocacy (“OIEA”) acknowledged that “automated digital investment advisory programs” allow individual investors to create and manage their investment accounts for potentially less money in fees and account minimums, than through a traditional investment adviser. OIEA described a simple process, whereby an investor would complete a questionnaire on financial goals, investment horizon, income, assets, and risk tolerance. Based on such information, a robo-adviser would create and manage an investment portfolio. All of it would be accessible to the investor from a web-portal or mobile device. OIEA’s general advice to investors was to do research, understand the products contained in a robo-advised portfolio, consider how much human interaction is preferred, ask good questions and identify personal investment goals.

OIEA also advised investors to remember that firms providing robo-advisory services have to be registered as investment advisers with either the SEC or one or more state securities authorities. It is this point that underscores the compliance obligations for such firms contained in the industry-issued guidance.

The SEC industry guidance focused on (i) the substance and presentation of disclosures to clients about the investment services offered; (ii) a firm’s obligation to gather client information to support a robo-adviser’s duty to provide “suitable advice;” and (iii) “the adoption and implementation of effective compliance programs reasonably designed to address particular concerns relevant to providing automated advice.” This last area includes the adoption, implementation, and annual review of written policies and procedures “that take into consideration the nature of the firm’s operations and the risk exposures created by such operations;” the designation of a competent and knowledgeable chief compliance officer to be responsible; and additional written policies and procedures that address testing of the algorithmic code, monitoring, oversight of third parties, cybersecurity and the protection of client accounts.

Panelists at the 2018 SIFMA New York Regional Conference deliberated on the compliance challenges presented by the current guidance. One panelist expects regulators to further test the industry on ensuring that the algorithms used are working the way they are supposed to. Others raised practical questions about how compliance officers should best supervise robo-products. Responses ranged from reliance on greater use of IT testing teams, to ensuring that a firm’s legal, compliance and business teams are in sync with each other, particularly before the launch of any new algorithmic trading products. All the while, these panelists were concerned with the kinds of disclosures that adequately communicate—in plain English—the risks and the benefits to the investor.

The Future of Robo-Advising

Though it has been only a short while since the SEC issued its guidance, investments in robo-offerings have grown and the application and use of algorithmic programming expanded. A new report by Charles Schwab cites data that predicts “digital advice users will increase from roughly 2 million to 17 million by 2021.” The report asserts that the use of robo-advisers will have a bigger impact on financial services in the future (say 45 percent of Americans surveyed) than cryptocurrency (29 percent), artificial intelligence (28 percent), or big data (21 percent). Those are the kinds of findings that make regulators take notice.

Perhaps the most striking finding from the survey is that seventy-one percent of people say they want a robo-adviser but also access to human advice, and almost half of those surveyed who are not using a robo-adviser today said they would be more likely to use one if it has quick and easy access to human support. This finding cuts across generational investors. According to the survey results, baby boomers would be more likely to use a robo-adviser if they feel like their information in the service is secure, if the fees are lower than a traditional financial adviser, if the mobile app is easy to use, and if the service has a low investment minimum.

Bates Director of Institutional and Complex Litigation Alex Russell, a specialist in algorithmic trading and testing validation, observed, “If these findings pan out, regulators will ramp up their scrutiny of algorithmic trading platforms.”

Conclusion

The rapid growth and investment in robo-products and advisory services is garnering increasing attention. The recent SEC case puts compliance officers on notice that enforcement regulators are watching.

Bates will continue to follow these market developments. For more information on how Bates Group might help, contact Alex Russell, Director of Institutional and Complex Litigation at 971-250-4353. Mr. Russell provides consulting services related to quantitative financial modeling, trading systems, and derivative strategies and products within both the retail and institutional securities litigation practice areas.

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12-04-18

New Book On Becoming a Financial Industry Expert From Bates Group’s Michael Weiner Now Available

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Renowned Bates Expert Michael D. Weiner discusses his newly published book, In My Expert Opinion: Becoming an Effective Expert in the Financial Services Industry.

Mr. Weiner recently retired after years of service in the financial services industry as a governmental and private attorney, a legal and compliance executive in the Chicago futures and options exchange (CME), as a brokerage house founder, and for the last many years, a full-time consultant and expert witness for Bates Group, assisting counsel in the complex world of financial litigation.

Working as an expert witness, he saw "the good, the bad and the ugly" in his counterparts, and from that experience grew a desire to aid both aspiring experts and their counsel. In My Expert Opinion was written to train experts in the positive aspects of expert witness work, to point out the pitfalls, and to provide a roadmap to a successful career.


Bates Group: What prompted you to write this book?

Michael Weiner: At some point in my retirement, I looked back and realized that I had a wealth of experience that might be useful to an aspiring or less-experienced expert and to the counsel that may want to hire that expert.  In addition, I could recall numerous examples, based on those experiences, which would be good teaching tools.  So writing a "primer" was born from a desire to give back to the financial expert community, to assist those who might be thinking of trying the profession. But, I had little understanding of what might lie ahead.  In my 22 years as a testifying expert, I had seen the full range of opposing experts: from the excellent and articulate to the cringeworthy, who lost cases due to preventable flaws in testimony.  I felt that certain aspects of preparing winning testimony could be learned with direction and practice.  That was the real motivation for the book.  At the same time, Bates was actively working to improve its expert training program, and I was asked to help in the endeavor to prepare aspiring experts to get up to speed.  Thus, the book began as an outline to serve as training material for Bates experts.  As I began to prepare my thoughts, the outline became more and more extensive, so much so that it was too complicated to present in that format.  The outline morphed into a white paper which then grew into a book.

BG: How is this book helpful to experts and clients in their practice?

MW: I have found that virtually everyone who has presented him or herself as a financial expert is, in fact, a substantive expert in his or her own field.  That is a starting point, but it’s not the key to success as a testifying expert or even as a successful consultant in the financial services industry.  Knowing the substance of one's field is a foundation for a successful career, but it must be shaped with the tools to assist counsel and client to obtain a favorable outcome.  The purpose of the book is to help apply the tools to that foundation and give real-life pointers on how to be of maximum assistance to counsel.  Common sense is one aspect, but for those who are unfamiliar with the nuances of the litigation process, there is so much more.  In addition, my desire was to assist not only aspiring or inexperienced experts, but to work hand in hand with counsel who employs experts.  Counsel will learn something of the expert world and will gain insight into the preparation of an expert with the aid of In My Expert Opinion.

BG: What are some of the key topics the book covers? Any interesting “war stories?”

MW: I have laid out fourteen "Essential Rules" for the successful expert.  The majority of the book is spent on detailing how those rules apply, when they apply, and how best to use those rules in practice.  In addition, I found that there are certain characteristics of a successful expert; I explain eleven such characteristics in detail.  For example, one such characteristic is being able to survive cross-examination, and I go into great detail on how to do so not only to "survive" but to thrive.  There are also practical tips such as how to bill clients, how to make the best use of travel, and how and when to integrate oneself into counsel's team.  In essence, the book is a roadmap to a successful career, but since every expert who reads it has differing degrees of experience or confidence, no two people may get the same education.  The book is filled with "war stories."  I labeled them "Personal Asides," and felt that they were the best way to illustrate the points being made. In that way, my personal experience was directly relevant to the subject being discussed.  Many stories were omitted due to being too personal or identifiable; those may be for a second book.

BG: Now that you have completed this book, what are your plans? Speaking, consulting, another book?

MW: I'd like to find a way to integrate the book into CLEs, to get it into the world of law schools and law firms.  I am going to try to make the book and speaking about the book a part of the broader attorney/expert experience.

 

For more information about In My Expert Opinion, click here.

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11-29-18

Best Practices When Working with Expert Witnesses

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Your relationship with your consulting or testifying expert is a critical component to your case. Mastering best practices when working with an expert will better support your case.

We recently polled several of Bates’ financial industry experts, many of whom are former general counsels, branch managers and regulators, to summarize best practices when working with consulting and testifying experts. Here's what they had to say.

Best Practice #1: Engage Your Expert Early  

Engage your expert sooner rather than later in order to gain their best insights and to inform your strategy. Overwhelmingly, our experts say their matters fare better specifically when they can bring their expertise to bear in: (a) your early case evaluation process; (b) before mediating; (c) before determining what documents and materials your client should have; and (d) before determining what documents and other materials you should demand during discovery. One Bates expert notes:  “As a witness, it is important to have access to all pleadings and relative documents early or as they become available, particularly if the client wants a full analysis and assistance in developing the strategy for potentially trying or mediating a case.” Finally, keep in mind that experts’ schedules book up quickly, often months in advance. Make sure you reach out to an expert early to determine their availability before agreeing to hearing or trial dates.

Best Practice #2: Be Alert to Your Expert’s Warnings and Strategic Counsel

An expert is an expert because of their knowledge and experience. To hire an expert and ignore or fail to incorporate their counsel could possibly lead to a critical mistake or oversight of a material issue. As one trial expert stated: “Many attorneys, by the time I am retained, have already decided how to defend their case and are convinced of the strengths and weaknesses. These attorneys are simply ‘checking a box,’ because procedure may require them to have an expert.” This often leads clients to “ignore warnings that invariably surface again later, much to everyone’s detriment.”

This expert further pointed out that: “The best counsel to work with are those that don’t know what they don’t know. These are attorneys who recognize the complexities and nuances of, for example, the retail securities industry, and are willing to learn everything they can to improve their chances for a reasonable settlement or a minimal award. These attorneys value an expert’s input, expertise, advice and opinions. Importantly, they are willing to listen when offered candid criticisms of their cases. This can be truly valuable to counsel.”

Best Practice #3: Do Your Homework

Attorneys and their clients need to do their homework to ensure that there are no contrary sources that may compromise their cases. As one Bates expert stated: “Clients need to have thorough discussions with the experts so they don’t have any memorialized opinions, such as white papers, articles, or accessible transcripts that conflict with the issues of their matter. A client also needs to clearly understand the expert’s background and have thorough discussions about any red herrings in their past that opposing counsel could use to reduce the effectiveness of their role and testimony.” 

Best Practice #4: Be Penny Wise, but not Pound Foolish

Costs are always a concern for an in-house counsel client and outside counsel. As one expert commented: “Clients and counsel too often, in an effort to limit costs, wait until after mediating before retaining an expert or until the deadline for exchanging witness lists and documents is upon them. In my experience, that is a mistake both from a preparation and cost point of view, particularly in cases where you are seeking to settle before hearing or trial. The extra investment incurred by retaining an expert early is typically minimal and more than made up by insights gained during Early Case Evaluation, before mediating and during discovery.”

Best Practice #5: Expert Attendance at the Full Hearing is Beneficial to Your Case

Experts are part of a trial team. To limit their access during the process is to deny their ability to spot problem issues or provide insight. As one substantive expert shared: “A strategy that is becoming more prevalent is the idea that, as an expert, I can be equally effective when attending only one hearing session in order to testify, as opposed to all of the preceding days of the hearing. It is critically important for me to hear and see the testimony of other witnesses, the tactics of opposing counsel, and the reactions and questions of the panel. While I recognize that costs are an issue, I firmly believe that hearing attendance costs for the expert are among the best dollars that can be spent by the client.”

For over 30 years, Bates Group’s quantitative and substantive experts and consultants have been engaged on thousands of financial services cases. Bates Group experts render analysis and support clients on cases concerning industry and sales practices, complex products, and damages assessments, to name a few.

 

Learn more about Bates Practice Areas and Testifying Experts

Retail Litigation and Consulting

Institutional and Complex Litigation

Consulting and Expert Testimony

Search for a Consulting or Testifying Expert

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11-13-18

Bates Group Welcomes New Forensic Accounting Services Team

Bates Group Welcomes New Forensic Accounting Services Team

Bates Group welcomes Christine Davis (pictured) as Director of Forensic Accounting and Financial Crimes. Based in Bates Group’s new San Francisco office, Christine has over twenty-six years of forensic accounting, audit, tax and dispute consulting experience. In addition to being a Certified Public Accountant in California and New York, she is a Certified Valuation Analyst and holds the Certified in Financial Forensics credential issued by the American Institute of Certified Public Accountants. She also holds an arbitrator certificate.

Christine is frequently retained as a consulting and testifying expert for complex commercial litigation and regulatory matters and as a forensic accountant for fraud or accounting investigations. As a financial, accounting or damages expert, she assists in all phases of litigation by providing calculations, analytical insight, discovery assistance, and expert testimony by deposition, in arbitrations and at trial in federal and state courts.

Joining Christine in Bates Group’s San Francisco office is her long-time colleague, Managing Consultant Leonore Ralston. A Certified Fraud Examiner, Leonore is an experienced consulting and testifying expert and has led fraud investigations resulting in federal prosecution.

Learn More - Forensic Accounting

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11-09-18

Bates Welcomes Our New Experts and Consultants

Bates is proud to intrduce four new experts and conultants: Jonathan A. Brogaard, Robert B. Spawn, Steven Sutherland, and Steven Valji. Follow the links below to view their full bios, or visit our Expert Search page to view all Bates Experts.

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Jonathan A. Brogaard

Financial Markets, Market Structure, and Investments

Jonathan Brogaard, Ph.D. is a Bates Group consultant and expert with extensive expertise in U.S. and international financial markets, with a focus on algorithmic and high frequency trading. His research interests include Market Microstructure, Information, Liquidity, and Market Design. Dr. Brogaard is currently an Associate Professor of Finance at University of Utah - David Eccles School of Business in Salt Lake City, where he teaches courses in Business Finance, Financial Management, and Alternative Investments (Hedge Funds and Private Equity). He frequently publishes in top Finance and Economics journals and is in demand as a speaker and presenter at industry seminars and conferences. Dr. Brogaard earned his J.D. from Northwestern University School of Law, his Ph.D in Finance from the Kellogg School of Management at Northwestern University, and is a Chartered Alternative Investment Analyst (CAIA).

Full Bio

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Robert B. Spawn

Recruiting, FA Compensation and Practice Management, Client Suitability and KYC, Branch/Complex/Regional Financial Results and Reporting

Robert Spawn is a Bates Group affiliate expert who uses his 35+ years of financial industry experience to assist clients in matters concerning Employment, Supervision, Suitability, and Branch Management. He has held Retail Wealth Management positions at major financial institutions throughout the United States, including Merrill Lynch, Oppenheimer, UBS, RBC, and JP Morgan. Mr. Spawn has been a FINRA arbitrator since 2010; he is a Certified Trust and Financial Advisor (CTFA) and a Chartered Advisor in Philanthropy (CAP).

Full Bio

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Steven Sutherland, CFE, CPA, CFP®

Wealth Management, Investment Advisory, Mutual Funds & IRAs

Steve Sutherland is a Bates Group consultant and expert with 28 years of financial industry experience as a financial advisor, controller, auditor and business owner. As a CPA and CFP® (certified financial planner), Mr. Sutherland has hands-on knowledge of investment advisory, 40 Act funds, IRAs and retirement plans, insurance/annuities, tax and estate planning. Along with his other certifications, Mr. Sutherland recently received his certified fraud examiner (CFE) designation.

Full Bio

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Steven Valji

Options, Futures, Commodities

Steven Valji is a Bates Group affiliate expert with extensive knowledge and experience in derivatives trading and risk. His expertise includes exchange traded derivative markets, options market making and electronic trading, options pricing models, commodities futures trading, portfolio hedging and market structure. Before becoming an expert witness and consultant, Mr. Valji was a trader with Tullett Prebon Americas Corp./Bridgeton Research Group, a cross-asset derivatives group providing industry research as well as futures and options execution. Prior to joining Tullett, Mr. Valji spent more than twenty years as an options market maker and risk manager with Kottke Associates and with Blue Oak Capital, LLC where he was a member of ICE Futures, U.S. As a member of ICE, Mr. Valji played an active role in self-regulatory activities of the exchange as options floor committee chairman and a member of the settlement committee.

Full Bio

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11-08-18

The Regulatory Landscape is Changing for Variable Annuity and Life Insurance Contracts

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Significant regulatory developments are taking place in the variable annuity and life insurance market that are intended to encourage investors to make more informed decisions about these financial products. Along with the SEC’s announcement of an extensive new rule proposal that would leverage technology and create a “layered disclosure approach” to variable annuities and life insurance contracts, the SEC Office of Investor Education (“OCIE”) issued a Bulletin that offers a basic primer on these instruments.

The issuance of the new proposed rules comes a week after state insurance regulators met to revise the National Association of Insurance Commissioners (NAIC) “Suitability in Annuity Transactions Model Regulation.” (See Bates' article on recent deliberations.) The model regulation sets forth standards and procedures for providing appropriate recommendations to consumers “that result in transactions involving annuity products.” Here is a closer look at these recent developments.

SEC Proposes Rule Changes to Improve Disclosure on Variable Contracts

Weighing in at 480 pages, the new SEC proposal is a disclosure initiative intended to help investors understand key terms, fees and risks associated with variable contracts. The proposal creates a “layered approach to disclosure” similar to the approach which has been in use for mutual funds since 2009. The idea is to require issuers of variable contracts to provide basic information in a “summary prospectus” format with links to additional and more detailed information accessible by the consumer. For existing holders of these variable instruments, issuers would be required to provide an updated summary prospectus which would contain a brief description of changes to the contract that occurred during the previous year along with all the basic information contained in the new summary. SEC Chair Jay Clayton stated that "providing key summary information about variable annuities and variable life insurance contracts to investors is particularly important in light of the long‑term nature of these contracts and their potential complexity."

The proposed amendments affect existing disclosure rules and forms and would permit an issuer of a variable product to satisfy their legal compliance obligations through the delivery to an investor of this “reader-friendly” summary prospectus. Technical aspects of the proposal include: (i) required links to the full statutory contract prospectus; (ii) use of the Inline eXtensible Business Reporting Language format for the submission of other required disclosures; and (iii) revocation of certain rules and forms that have been superseded by law or that have been rendered moot. Comments on the proposal and on the provided samples of the summary prospectus must be submitted before February 15, 2019.

OCIE Investor Bulletin

The OCIE issued a primer on variable life insurance that provides a general description of how variable contracts work and how such a long-term policy is meant to satisfy a consumer’s insurance needs, investment goals and tax planning objectives. The Bulletin describes the features of the contract, including death benefits, accrued cash value that varies according to the amount of premiums paid, fees and expenses, and investment options offered under the policy. The Bulletin also explains the risks of such contracts, including the risks from policy lapse, investment loss and insurance company failure. Perhaps most important, the OCIE urges consumers to review the policy prospectus and to “be prepared to ask your financial professional questions about whether the policy is right for you.” Such guidance relates directly to the ongoing discussion of the suitability obligations of those financial professionals.

Latest Developments on Amending NAIC “Suitability in Annuity Transactions Model Regulation.”

As discussed previously, the NAIC Annuity Suitability working group has been working on revisions to the model regulation since late July. The intent of the working group is to update a rule that would enhance the standard of care for sales of variable annuity products. On October 25, 2018 the working group published the latest revisions to its draft of the model rule which reflect the deliberations from its most recent meetings. Among other things, the draft proposal would require an agent to act with reasonable diligence, care, skill and prudence on behalf of clients and to disclose conflicts of interest as well as cash and non-cash compensation.

Against the backdrop of the SEC’s proposed Best Interest rulemaking, (see Bates’ research articles here and here,) the working group reportedly continued to debate many of the thorny definitional issues that may impact the final model regulation. These include (i) whether a recommendation must be “consistent with” or must be “in furtherance” of a client’s objectives and needs, (the new draft keeps the “consistent with” language”); (ii) the applicability of the model regulation to “in-force” transactions, (the new draft does not apply to in-force policy transactions); (iii) the degree to which a producer must consider recommending other products, (the new draft does not contain references to other products available through the producer); and (iv) the allowable extent to which a producer’s interests may be considered, (the latest draft states that the producer may not place the producer’s or the insurer's financial interest “ahead of the consumer’s interest”).

Conclusion

Given the reprioritized focus on protecting retail investors by both federal and state regulators, enhanced or simplified disclosure of some kind is a certainty. The new SEC disclosure rule on variable contracts is one step in that direction. Publication of the OCIE primer on variable contracts (not a coincidence) serves not only as a useful resource, but also a reminder of the wider debate on raising standards for issuers. It is, of course, unlikely that any final NAIC model regulation on annuity standards will be issued before the SEC resolves its broader rulemaking on Best Interest. According to Mike Lacek, Bates’ Retirement, Insurance and Annuity Consultant, “the NAIC deliberations reflect a real tension underlying efforts to produce a simple rule that can do it all. Until such time as these issues are resolved in a comprehensive and coherent way, companies will have to continue to address the on-going compliance challenges they present.” Bates will continue to monitor developments.

 

More information about Bates Group’s Insurance and Actuarial practice services.

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11-02-18

Leadership Lessons: Jennifer Stout On Building a Winning Team (Video)

25TH ANNIVERSARY VIDEO SERIES

On the occasion of Bates Group President and CEO Jennifer Stout’s 25th anniversary with the firm, we are proud to present several mini-interviews featuring Jennifer as she discusses the evolution of Bates Group, her journey, leadership lessons, and reflections on women as business leaders and owners. In this video segment, Jennifer discusses leadership lessons she has learned over the years that help her connect to clients and support employees and the firm.

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Visit Bates Group on LinkedIn to continue watching our video series

About Bates:

Bates Group has been a trusted partner to our financial services clients and their counsel for over 30 years, delivering superior quality and results on a cost-effective basis. Voted a Best Securities Litigation Consulting Firm by readers of the New York Law Journal and a 2017 NYLJ Hall of Fame service provider, Bates Group provides end-to-end solutions throughout the lifecycle of your legal, regulatory, and compliance matters. With a roster of over 165 financial industry and regulatory experts, Bates offers services in litigation consultation and testimony, regulatory and internal investigations, AML and financial crimes, compliance solutions, and damages consulting.

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10-31-18

Federal Trade Commission Reports on Senior Consumer Fraud

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In a new report to Congress, the Federal Trade Commission (“FTC”) compiled its latest data on the widespread problem of financial fraud perpetrated against elderly consumers. The agency also highlighted 2017-2018 enforcement actions and described its outreach and education initiatives to combat senior financial abuse.

The FTC report, titled “Protecting Older Consumers, 2017-2018,” was prepared as required by the 2017 Elder Abuse Prevention and Prosecution Act (see Bates coverage here.) The FTC is mandated to gather that information under the agency’s consumer protection authority. By statute, the agency is empowered to (i) prevent unfair or deceptive acts affecting commerce; (ii) seek relief for conduct injurious to consumers; (iii) establish rules designed to prevent unfair or deceptive acts or practices; (iv) compile information and conduct investigations, and (v) prepare reports and recommendations to Congress. The report attempted to parse out effects on seniors from its consumer data. This article highlights the findings in the latest FTC report.

Data and Analysis

The information used in the report was collected primarily through the FTC’s Consumer Sentinel Network (“Sentinel Network,”) an online database that provides law enforcement agencies with secure access to consumer reports on fraud. The FTC report states that law enforcement agencies use the network to help identify patterns and trends and problematic business practices of targets under investigation.

Of the nearly 1.14 million submissions to the database in 2017 that related to fraud, almost half included age-related information from which the FTC conducted its analysis. According to the data provided by that portion of the information, total fraud loss reported by consumers ages 60 and older was $252 million. (Note, the FTC’s figure represents consumer fraud and represents a fraction of losses reported by the Department of Justice and SIFMA.)

The primary conclusions from the FTC analysis is that (i) seniors were more likely to report fraud than younger people (over 60-year-old consumers were twice as likely to report fraud as compared to those aged 20-29), (ii) seniors were less likely to indicate that they had lost money (over 60-year-olds indicated a monetary loss 18-20% of the time as compared to 40% for those aged 20-29,) and (iii) the dollar amounts lost for seniors were much higher than the dollar amounts lost for younger people (see chart below.)

MEDIAN INDIVIDUAL MONETARY LOSS REPORTED BY AGE

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Source: “Protecting Older Consumers, 2017-2018,” report to Congress, Federal Trade Commission.

There was no conclusion drawn on the causes for these disparities. The report did suggest that seniors may be more willing to help fight fraud and therefore to report more, that younger consumers may be more inclined to file fraud reports only in instances where they suffered a financial loss, and that the size of the losses reflect older adults having access to more assets through retirement accounts, home equity, social security or pension benefits.

Other Observations on the Sentinel Network Data

The FTC also provided analysis of the Sentinel Network complaints based on types of schemes. The agency concluded that seniors were five times more likely to be defrauded by technical support scams, prizes/sweepstakes/lottery scams, family and friend imposter frauds, and real estate and timeshare resale offers than younger consumers. In contrast, the FTC concluded that seniors were less likely than young consumers to lose money in shop-at-home or catalog sales and government imposter scams and counterfeit check scams.

The FTC reported that seniors lost far more money than young consumers in phone scams. Average losses exceed $1000 for seniors over 60 that were contacted by phone.

MEDIAN LOSS REPORTS BY AGE AND METHOD OF CONTACT

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Source: “Protecting Older Consumers, 2017-2018,” report to Congress, Federal Trade Commission.

Finally, the report analyzed the data as a function of payment method. The report concluded that credit cards and wire transfers were the transaction methods of choice and that wire transfers accounted for an overwhelming amount of the losses incurred by seniors.

TOP PAYMENT METHODS AND TOTAL AMOUNT PAID (Ages 60+)

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Source: “Protecting Older Consumers, 2017-2018,” report to Congress, Federal Trade Commission.

Law Enforcement

The Elder Abuse Prevention and Prosecution Act requires the FTC to report on enforcement actions “over the preceding year in each case in which not less than one victim was an elder or that involved a financial scheme or scam that was either targeted directly toward or largely affected elders.” Though the 63 cases cited in the report were not exclusively about seniors, the agency listed scams (in an appendix) that the agency stated include older adults.

The FTC highlighted cases involving (i) marketers who sold phony debt relief services in Florida); (ii) a tech support scam in Alabama; (iii) misleading claims about pain and memory enhancement supplements; (iv) massive fraud payments through a money transfer system over many years; (v) deceptive prize promotion mass mailings, and (vi) telemarketing fraud related to credit card fraud protection insurance.

Outreach and Education

Finally, the FTC report outlined its outreach and education initiatives in an effort to demonstrate compliance with its senior protection responsibilities under the law. Specifically, the agency highlighted its Every Community Videos Program, which disseminates individual stories and tutorials about financial fraud, and its Pass It On Campaign, a program designed to encourage passing on tips on recognizing and reporting fraudulent schemes.

Conclusion

This new report reinforces common understandings about the threats posed to seniors by consumer fraud. The report is somewhat compromised by the limitations on the data and the parceling out of seniors from the rest of the sample. That said, the FTC asserts that the data from the Sentinel Network informs law enforcement strategy on how to direct resources. Based on the FTC report, therefore, greater scrutiny related to wire transfer agents and credit card fraud may occur. As to protecting seniors against specific types of fraudulent schemes, more accessible information and educating seniors to identify and report scams is the message.

Bates Group closely follows the regulatory and enforcement developments on senior financial fraud. For Bates’ most recent view of the changing federal and state legislative and regulatory landscape on senior investors, download our complimentary white paper. For more information concerning financial issues related to vulnerable and senior investors, including senior investor expert witnesses, damages analysis, and compliance, please contact Bates.

Financial institutions may also be interested in Bates Investor Risk Assessment to protect your vulnerable and elder investors while meeting regulatory expectations.

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10-25-18

SEC Finalizes Its Four-Year Strategic Plan

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In June, Bates reported on an SEC Draft Strategic Plan for Fiscal Years 2018 - 2022. The development of the plan is required by federal statute as a means to assess “agency performance and improvement.” The issuance of the Draft Plan was immediately followed by the submission of testimony by SEC Chair Jay Clayton before the House Committee on Financial Services. At that hearing, Chair Clayton expounded on the short draft strategy, describing in greater detail the future agenda for the agency. Now, after the required comment period, the agency’s Final Strategic Plan has been released. Chair Clayton describes the 11-page plan as a “forward-looking framework” that focuses “on the most important goals and initiatives” for fulfilling the agency’s mission. Here’s a closer look.

The Plan

The final strategic plan identifies three core goals: (i) to “focus on the long-term interests of Main Street investors”; (ii) to respond effectively to new risks from technological “developments and trends in evolving capital markets”; and (iii) to enhance the agency’s “analytical capabilities and human capital development.” These contrast with the much lengthier (60-page) 2014 - 2018 Strategic Plan which sought to “establish and maintain an effective regulatory environment”; to “foster and enforce compliance with the federal securities laws”; to “facilitate access” to useful investment information for investors; and to better manage “human, information and financial capital.”

Goal 1: Refocusing on the Long Term Interests of Retail Investors

The first strategic goal reflects an important reorientation toward the concerns of retail investors. The new plan references the changing marketplace for retail investors including, for example, the changing retirement landscape – the evolution away from 401k plans, and the lack of clarity among retail investors seeking professional advice (“Best Interest”). The plan also referenced the decline in the number of opportunities for Main Street investors to invest in public companies, particularly with respect to emerging and growth sectors, given the decline in the number of companies raising capital through the public securities markets.

As a result, the SEC prioritized a number of long-term efforts to support retail investors. Most notably, the SEC committed to “pursue enforcement and examination initiatives focused on identifying and addressing misconduct that impacts retail investors.” In this regard, the SEC acknowledged that the evolving market continues to provide opportunities for “securities manipulation, fraud, and abuse, while also giving new life to age-old scams like Ponzi schemes.” The SEC committed to expand its enforcement efforts, including, specifically, “in the area of securities custody and penny stock trading.”

The agency also committed to strengthening its focus on retail investors by (i) enhancing outreach, education, and consultation efforts, in order to better understand “the channels retail and institutional investors use to access capital markets and to more effectively tailor policy initiatives to them; (ii) modernizing disclosure (including improvements to the EDGAR system) so that retail investors, can access readable, useful, and timely information to make informed investment decision; and (iii) identifying ways to increase long-term, cost-effective investment options available to retail investors, including by expanding the number of SEC-registered companies.

Goal 2: Adapting to Technology Risk and a Changing Market

The Plan’s second strategic goal reflects an acknowledgement that “increased use of, and reliance on, technology has introduced new risks and, in some cases, amplified better known market risks.” A number of factors are said to be driving the need to better respond to technological risk, such as: (i) increased dependence on data security and transmission to the functioning of the securities markets; (ii) investors moving toward data analytics to inform their investments; (iii) market participants embracing new technologies to improve efficiency and security; and (iv) the vulnerabilities that result from interconnected and interdependent markets. The SEC Strategic Plan seeks to address the consequent “regulatory and oversight challenges” that cyber security and new entrants into the market, like initial coin offerings, pose.

To that end, the Plan prioritizes expanding market knowledge and oversight capabilities to identify, understand, analyze, and respond effectively to these new developments and risks; to fix outdated rules; to address “cyber and other system and infrastructure risks”; and to better prepare for market technological emergencies and crises.

Goal 3: Enhancing Analytical Capabilities

The Plan’s third strategic goal, a commitment to enhance the agency’s analytical capabilities, is a recognition that the changing technological demands of the marketplace requires greater expertise and leadership. To that end, the SEC outlined the following initiatives: (i) recruiting, retaining, and training staff with the right mix of skills and expertise; (ii) building out agency infrastructure to expand and leverage risk analytics and data management programs in order to set regulatory priorities; (iii) continue enhancing the “analytics of market and industry data to prevent, detect, and prosecute improper behavior,” and investing in data and tools to strengthen enforcement efforts; (iv) improving risk management controls to deal with threats to the security, integrity, and availability of the SEC’s systems and sensitive data; and (v) better collaboration and information sharing across the agency.

Conclusion

The new SEC Strategic Plan has not changed much from the draft released in June. Comments demonstrated institutional interests in sync with the SEC Plan. (See, e.g. MSRB’s interesting discussion on retail investor protections and recent enforcement rulemakings.) Some commenters wanted to address more specific concerns – the Financial Services Institute took the opportunity to reinforce their argument for a two-tier disclosure regime pursuant to any forthcoming Best Interest rule. And the U.S. Chamber of Commerce argued that the SEC concentrate on four items: Public Company Regulatory Reform; Modernizing Existing SEC Rules; Disclosure Reforms; and Standards of Conduct for Investment Professionals.

Because the SEC delivered a shorter, yet higher-level plan, it managed to steer clear of many controversial and thorny policy issues. But the document does provide takeaways that indicate important shifts in thinking away from the agency’s previous stated priorities. These include an intentional reorientation to focus on the retail investor; an open-minded approach to better address the many risks raised by innovation and new technology; and a recognition that the infrastructure and personnel of the agency must (and will) improve to adapt to technological change. Market participants would be well advised to stay on a compliance course in sync with these priorities.

Bates Research will continue to keep you apprised.

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10-18-18

New York DFS Asserts Itself in National Annuities Standards Debate

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In a few weeks, a working group of the National Association of Insurance Commissioners (NAIC) will meet again in a continuing effort to complete a revision to the organization’s Suitability in Annuity Transactions Model Regulation. The goal of the working group remains a revision of the standards and procedures for providing appropriate recommendations to consumers “that result in transactions involving annuity products.”

The working group began its efforts in reaction to the Labor Department’s fiduciary rule, which raised investment advice standards for all retirement accounts. Since that time, the fiduciary rule suffered a mortal blow, replaced by new federal regulatory proposals on a yet-to-be-agreed-upon “best interest” standard. The SEC proposals affect the NAIC working group deliberations generally and due to the agency’s regulation of certain insurance products like variable annuities and registered fixed-indexed annuities. Despite the changing context, the working group carried on its deliberations, though its progress took a further detour in July when the New York Department of Financial Services (NYDFS) issued a final regulation establishing its own “best interest” standard of care for recommendations of both annuity products and life insurance products.

New York Department of Financial Services Makes Its Move

The NYDFS final rule requires insurers to establish policies and procedures so that brokers and dealers would put the interests of consumers ahead of their own when making any product recommendation. In a statement released by NYDFS Superintendent Maria T. Vullo, NYDFS stated that the rule “will fill in regulatory gaps to protect New York consumers from the elimination of the federal Department of Labor’s Conflict of Interest Rule, which the Trump Administration failed to protect…” Superintendent Vullo went on to say that the new regulation sets “reasonable limits on compensation and compensation transparency.”

The New York regulation is the first in the United States to impose a "best interest" standard. It requires that insurance companies and distributors selling these products in New York implement new and rigorous policies and procedures by an effective date of August 1, 2019. According to Bates retirement, insurance and annuity consultant Michael Lacek, the impacted policies and procedures include, among others: (1) producer compensation, (2) product offering line-up, (3) collection of specified "suitability" information, (4) suitability review of life insurance, as well as annuity products, (5) supervision, (6) producer training, (7) customer disclosures, and (8) transaction documentation.

NAIC Ongoing Deliberations

The Annuity Suitability working group has been working on a draft of proposed revisions to the model regulation since late July, having issued requests for comments on sections devoted to definitions and the duties of insurers and producers. According to a summary of their last (August) meetings, the working group continues to disagree over key terms including the definitions of “consumer” and “material conflict of interest” and whether any new revisions should apply to current (in-force) annuity owners. These are not idle disagreements. As summarized discussion of the four suggested definitions of “material conflict of interest” resulted in a lack of unanimity about what constitutes a conflict of interest, how to measure its materiality and whether it could be interpreted to include compensation.”

In addition, at the August meeting, Superintendent Vullo made a direct appeal for the inclusion of life insurance in the revisions to the NAIC Model Regulation. The superintendent acknowledged that the working group on annuity suitability had interpreted its existing mandate to apply only to annuities, but asked that the Life Insurance and Annuities Committee, the authorizing NAIC authority, reopen the discussion on inclusion of life insurance in the revisions. She reportedly received a commitment that a discussion of life insurance suitability would be taken up during the next round. Further, according to the summary, several members of the working group have shown interest in revising the draft of the model regulation after conducting a “regulator only in-person meeting.” If the Life Insurance and Annuities Committee agrees with the New York Superintendent, final revisions to the NAIC Model Regulations are not imminent. 

Conclusion

The current deliberations over the scope of the revisions and the standards at issue take place within the broader federal debate over higher standards for broker-dealers of regulated financial products and the intentions of state actors, like those in New York, that regulate fixed annuities, unregistered fixed-indexed annuities and most life insurance.

According to the Chair of the working group, there is hope that a final rule may be ready by NAIC’s fall national meeting in mid-November. Recent deliberations and a newly issued preview of the upcoming meeting suggests that without significant additional compromise, the Annuity Suitability working group may not be ready to present by then.

 “It remains to be seen whether the requirements imposed by the New York regulation will differ materially from the ‘best interest’ regulations currently under consideration by the SEC and the NAIC,” says Bates’ Michael Lacek. “For now, companies should be looking to be in compliance with the actual New York rules coming on-line.”

Bates will continue to monitor developments in order to assist companies in implementing these changing regulatory requirements.

 

More information about Bates Group’s Insurance and Actuarial practice services

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10-16-18

The Evolution of Bates: Jennifer Stout On Driving Change to Meet Client Needs (Video)

25TH ANNIVERSARY VIDEO SERIES

On the occasion of Bates Group President and CEO Jennifer Stout’s 25th anniversary with the firm, we are proud to present several mini-interviews over the coming weeks featuring Jennifer as she discusses the evolution of Bates Group, her journey, leadership lessons, and reflections on women as business leaders and owners. In this first video, Jennifer discusses her two favorite topics – Bates Group and our clients.  In particular, the importance of driving change to meet client and industry needs.

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Visit Bates Group on LinkedIn to continue watching our video series

About Bates:

Bates Group has been a trusted partner to our financial services clients and their counsel for over 30 years, delivering superior quality and results on a cost-effective basis. Voted a Best Securities Litigation Consulting Firm by readers of the New York Law Journal and a 2017 NYLJ Hall of Fame service provider, Bates Group provides end-to-end solutions throughout the lifecycle of your legal, regulatory, and compliance matters. With a roster of over 165 financial industry and regulatory experts, Bates offers services in litigation consultation and testimony, regulatory and internal investigations, AML and financial crimes, compliance solutions, and damages consulting.

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10-12-18

Bates Group Welcomes Retirement, Insurance and Annuity Consultant Michael J. Lacek

Bates Group Welcomes Retirement, Insurance and Annuity Consultant Michael J. Lacek

Bates Group is pleased to welcome accomplished financial services attorney Michael J. Lacek to Bates Group as an Affiliate Consultant and Expert. With over 35 years of litigation and regulatory experience, Mr. Lacek brings a wealth of knowledge and expertise in the areas of retirement and insurance products, including suitability and sales practices of life insurance and annuity products; securities and insurance regulatory matters; and large complex commercial transactions and litigation.

Mr. Lacek has been with MetLife, Inc. since 2001, most recently as Associate General Counsel and Practice Group Lead for MetLife’s Retirement & Income Solutions business, providing legal counsel on compliance with State and Federal regulatory requirements. In prior roles, he headed the legal department for MetLife's Broker-Dealer business and also ran Regulatory Affairs, where he was responsible for all regulatory examinations, investigations, and inquiries regarding MetLife’s affiliated broker-dealers and registered investment advisers and insurance companies.

Full Bio


About Bates

Bates Group has been a trusted partner to our financial services clients and their counsel for over 30 years, delivering superior quality and results on a cost-effective basis. Voted a Best Securities Litigation Consulting Firm by readers of the New York Law Journal and a 2017 NYLJ Hall of Fame service provider, Bates Group provides end-to-end solutions throughout the lifecycle of your legal, regulatory, and compliance matters. With a roster of over 165 financial industry and regulatory experts, Bates offers services in litigation consultation and testimony, regulatory and internal investigations, AML and financial crimes, compliance solutions, and damages consulting.

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10-04-18

NASAA Update: New Leadership, Cybersecurity Model Act for IAs and Heightened Supervision for BDs

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On September 25th, Michael S. Pieciak, Commissioner of the Vermont Department of Financial Regulation (pictured above), took the reins as the 101st president of the North American Securities Administrators Association (“NASAA”). That same day, NASAA’s Investment Adviser Section proposed a model rule that would require investment advisers to adopt policies and procedures regarding information security. NASAA also published the results of a series of “coordinated examinations of broker-dealer firms” that reviewed the heightened supervision plans of firms for registered representatives. Here’s a closer look at these developments.

New Leadership and Priorities

At the 2018 Annual Meeting in Anchorage, Michael S. Pieciak began his one-year term as president of NASAA. Mr. Pieciak, who formerly served as president-elect and chair of the organization’s Corporation Finance Section and Fintech and Capital Formation Committees, announced NASAA’s new leadership team which includes Past President Joseph Borg, Director of the Alabama Securities Commission, and President-elect Frank Borger-Gilligan, Assistant Commissioner of the Tennessee Department of Commerce and Insurance.

In his remarks, Mr. Pieciak set forth his priorities. He stated that cybersecurity, cryptocurrency, financial technology, multi-jurisdictional enforcement matters, standards of care and senior financial fraud would remain primary concerns.

He noted, however, that recent member survey results found that the “preservation of state authority stood head and shoulders above all others as the top priority for our members.” He said that such a concern is well placed, given “broad preemption legislation in recent decades, and renewed threats in recent months.” He pledged to pursue “modernizing our association and promoting uniformity” as the most effective ways… to fight preemption and preserve our authority.” He acknowledged that “determining the most effective strategies… will take considerable thought, time, collaboration and discussion.” As a result, one of his first acts was to direct the NASAA Board to establish a Strategic Planning Committee to review bylaws, committee structure, policies and procedures.

Mr. Pieciak, NASAA’s first millennial president, also voiced his commitment to “focus on millennial investor education, awareness and protection.” He emphasized its importance and tasked NASAA’s Investor Education Section “to expand its ongoing generational outreach initiatives to include resources specifically designed for this younger generation.”

New Proposed Model Rule on Information Security

Also on September 25, NASAA released a new model rule that would require state-registered investment advisors to adopt new policies and procedures regarding information security. The proposal references findings from NASAA’s 2017 Coordinated Investment Adviser Examination Report as well as recent education initiatives, specifically the 2017 Cybersecurity Checklist. The Checklist was intended “to provide direct guidance on ways the [investment adviser] firms can identify, respond, and recover from cybersecurity weaknesses and/or breaches.”

The proposal has three parts. First, the “Proposed Information Security and Privacy Rule” would impose new requirements related to both the physical security of information as well as require the annual delivery of a firm’s privacy policy to clients. Second, a “Proposed Recordkeeping Rule Amendment” would amend the existing NASAA model recordkeeping rule to require that investment advisers maintain the additional records required by the new information security rule. Third, the “Proposed Unethical Business Practices (‘UBP’) Rules Amendment” would amend the existing UBP Model Rules to add to the list of prohibited and unethical conduct a failure to establish, maintain, and enforce a required policy or procedure. The comment deadline is November 26.

NASAA states that the Rule Proposal has three objectives: (i) to address the “need for investment advisers to have policies and procedures” to deal with data privacy and security issues; (ii) to provide a “basic structure for how state-registered investment advisers may design their information security policies and procedures;” and (iii) “to create uniformity in both state regulation and state-registered investment adviser practices.”

New Guidance for Broker-Dealers on Heightened Supervision

In another significant development, NASAA released the findings of examinations of broker-dealer firms on their heightened supervision plans for high-risk registered representatives. NASAA conducted 165 exams of 121 broker-dealers. The results, contained in the Coordinated Examination Report, suggest that firms have more work to do to address the issue.

Nine of the firms had no policies or procedures related to heightened supervision. Thirty-four firms had not established criteria for assessing whether heighten supervisions would be appropriate for new hires and or current associated representatives. About half of the firms that did have heightened supervision procedures did not have policies and procedures in place for removal of a representative from heightened supervision. Among other findings, NASAA representatives said that “less than 25 percent of the examined firms maintained supervisors on site who were responsible for enforcing heightened supervision plans” and “about 20 percent of firms (both large and small) failed to enforce the procedures they had developed.”

As a consequence of these findings, NASAA advised broker-dealer firms to (i) designate individuals with the necessary experience and authority to enforce the plan; (ii) ensure appropriate written documentation that evidences the “representative’s awareness of the conditions of the plan and the supervisor’s awareness of his responsibilities;” (iii) provide periodic review to ensure the effectiveness of any plan; and (iv) ensure that removal procedures are in place. In addition, NASAA recommended that a firm should design its plan so that it would address any underlying conduct subject to review, ensure that the representative’s records are incorporated into any review, and establish the frequency of reviews.

Conclusion

President Pieciak pledged his commitment to fight federal preemption and preserve the authority of state securities regulators. The findings contained in the 2017 and 2018 examination reports suggest how important a role NASAA has in understanding the current state of play at investment adviser and broker-dealer firms. The timing and proposed model rule on information security for investment advisers and the new guidance on heightened supervision for broker-dealers provides a strong indication of how active NASAA intends to be as it asserts its authority within the regulatory framework. Bates will continue to keep you apprised of both state and federal developments.

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09-24-18

Susan Harper to Speak at PLI’s 2018 Securities Arbitration Program on Use of Experts

Susan Harper to Speak at PLI’s 2018 Securities Arbitration Program on Use of Experts

Bates Group Managing Director NY/NJ Susan L. Harper will be speaking on the Practicing Law Institute’s Securities Arbitration 2018 panel, “A Practicum on the Use of Experts,” in New York City, September 26, 2018. The panel will cover the following topics: when to retain an Expert; when to have an Expert create a report or testify; and the do's and don’ts of cross-examining an Expert.

About Bates:

Bates Group has been a trusted partner to our financial services clients and their counsel for over 30 years, delivering superior quality and results on a cost-effective basis. Voted a Best Securities Litigation Consulting Firm by readers of the New York Law Journal and a 2017 NYLJ Hall of Fame service provider, Bates Group provides end-to-end solutions throughout the lifecycle of your legal, regulatory, and compliance matters. With a roster of over 135 financial industry and regulatory experts, Bates offers services in litigation consultation and testimony, regulatory and internal investigations, AML solutions and staffing, compliance solutions, forensic accounting, fraud and financial crimes investigations, forensic accounting, damages and big data consulting.


Learn more about Bates Group’s Litigation Services, including expert witness search, damages analysis, and the new Arbitrator Evaluator™ selection tool.

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09-20-18

FINRA Report Cites Greater Use of RegTech, Warns of Regulatory Implications

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Despite RegTech’s “potential to fundamentally transform how securities industry participants perform their compliance obligations,” RegTech tools also raise “new challenges and regulatory implications” that affect “supervision, vendor management, data privacy and security.” That is the explicit assumption underlying a new FINRA white paper summarizing the results of the SRO’s extensive outreach on the subject.

It also serves as the framework for FINRA’s latest round of requests for comments on how new technologies may affect the regulator’s longstanding goals of maintaining investor protection and market integrity. Comments on the white paper are due on November 30th 2018. Bates Research takes a closer look.

FINRA Establishes a Baseline

FINRA’s white paper is significant in several ways. It serves as a baseline summary of a number of FINRA outreach initiatives underscoring the government’s priority of welcoming technological innovation in the financial marketplace (see, e.g. Bates’ News here). It serves as a marker of the current state of RegTech innovation. It also narrows the definitions of generally used terms and captures informed perspectives on concepts that have until recently been mostly aspirational.

FINRA defines RegTech as a subset of financial technology (FinTech) with an emphasis “on the development of technology tools in the financial industry linked to promoting regulatory compliance.” This is, to some extent, a limitation on the generally accepted understanding of the term, which also includes the use by regulators of technology tools such as “cloud storage and computing, big data analytics, machine learning and natural language processing to enhance its market surveillance and other regulatory functions.” That said, the white paper frames the discussion of RegTech in a way that lends itself to further parsing and possible future regulation.

The paper focuses in three areas: (i) key findings from discussions with market participants, including “broker-dealer firms, vendors, RegTech associations, academics and various other key players;” (ii) the current application of technology tools in key compliance areas; and (iii) and a listing of some of the perceived implications concerning the adoption of these RegTech tools.

Key Findings from FINRA Outreach

RegTech has arrived. That is the chief conclusion of FINRA’s outreach effort. The white paper cites one survey that found that “half (52 percent) of respondents considered that RegTech solutions were affecting how they managed compliance in their firms with almost a fifth (17 percent) reporting they have already implemented one or more RegTech solutions.” Another citation makes this point: “[t]he global demand for regulatory, compliance and governance software is expected to reach USD 118.7 billion by 2020.” FINRA concluded that the “confluence of significant regulatory and technological changes over the past few years (stemming, in part, from the post financial crisis regulation) has created incentives for firms to rethink how compliance functions operate.”

Key Current Compliance Applications

The white paper lists a variety of technologies that have been deployed to date for various compliance functions. They include artificial intelligence, natural language processing, big data and advanced analytics, cloud-based computing, robotics process automation, distributed ledger technology, application program interfaces (APIs) and biometrics.

The white paper highlights five areas where the applications of RegTech are currently used to bolster compliance programs:

  1. surveillance and monitoring - firms are utilizing cloud computing, big data analytics and AI/machine learning to obtain more accurate alerts;
  2. customer identification and AML compliance – firms are utilizing tools that use biometrics, distributed ledger technology, sophisticated data analytics and real-time transaction monitoring for KYC and other purposes;
  3. regulatory intelligence – firms are experimenting with natural language processing and machine learning to read and interpret new and existing regulatory requirements, and then offer gap analyses to help identify potential deficiencies within an organization’s compliance program;
  4. reporting and risk management – firms are automating processes concerning risk-data aggregation, risk metrics creation and monitoring for enterprise and operational risk management; and
  5. investor risk assessment – firms are experimenting with data aggregation and machine learning in combination with behavioral sciences to determine an investor’s risk appetite and tolerance.

FINRA touts the benefits of current RegTech efforts as strengthening a firm’s ability to adopt a proactive risk-based approach to regulatory compliance. It highlights the potential ability of firms to look at data across the organization that could help “break down silos” and “limit potential compliance gaps.” Further, it states that the most widely used form of RegTech today is the automation of processes that increase effectiveness and efficiencies.

Implications

FINRA also considers various implications of all this innovation. The SRO recognizes that firms will encounter risks and “operational challenges” that have implications for (i) supervisory control systems, (ii) outsourcing structures and vendor management, (iii) governance structures; (iv) customer data privacy; (v) interoperability and compatibility of multiple systems; (vi) data quality; (vii) security risk and (viii) personnel training, to name a few. In a broad cautionary note, FINRA warns that “broker-dealers may wish to consider both the benefits and risks associated with any specific tool and consider steps to mitigate risks where applicable.”

Conclusion

The FINRA white paper offers a peek at the challenges regulators face when trying to encourage and embrace technology innovation responsibly. It is certainly true that “RegTech tools may facilitate the ability of firms to strengthen their compliance programs, which in turn has the potential to create safer markets and benefit investors.” It is also true that these tools may present “challenges and regulatory implications” that may overwhelm a firm’s ability to have confidence in its ability to maintain compliance obligations. So, while all of FINRA’s answers seem to lie in the promise and potential of RegTech, FINRA is now beginning to ask tougher questions. Bates Group will keep you apprised.

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09-19-18

Bates In the Media – Spotlight on Managing Director Bob Lavigne

Bates In the Media – Spotlight on Managing Director Bob Lavigne

Bates Managing Director of Compliance Solutions Robert “Bob” Lavigne was quoted in Investment News on September 15, 2018 in an article entitled “SEC Advice Rule Contains a Huge Hole.” The report, which appeared online and in print, addresses the loophole in the SEC’s proposed Regulation Best Interest as it applies to dually registered broker-dealers, RIA firms and professionals.

Read the article here.

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09-14-18

Bates Group Welcomes Financial Services Industry Leader and Consultant Gerald Baker

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Bates Group is pleased to welcome Gerald (“Jerry”) Baker, Financial Services Industry Leader and Consultant, to Bates Compliance Solutions. With over 45 years of Financial Services and Compliance experience, Mr. Baker brings a wealth of industry knowledge and expertise, having developed compliance programs and managed Compliance Department functions at major U.S. securities and financial services firms. He provides compliance and supervisory consulting and training, serving clients at financial services firms, trade associations and regulatory organizations.

Mr. Baker served for over a decade as Executive Director of the Compliance and Legal Society of the Securities Industry and Financial Markets Association (SIFMA) and is a frequent speaker at compliance and industry conferences. He co-chaired the two working groups in the development of the influential 2005 SIFMA C&L Society White Paper on The Role of Compliance and the 2013 follow-up: The Evolving Role of Compliance. He is also a contributing author on the textbook Modern Compliance, Best Practices for Securities & Finance, Vol. 1 (CCH Inc., 2015). In 2011, Mr. Baker received the prestigious Alfred J. Rauschman Award from the SIFMA C&L Society in recognition of his outstanding contributions to the compliance, legal and regulatory community.

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About Bates:

Bates Group has been a trusted partner to our financial services clients and their counsel for over 30 years, delivering superior quality and results on a cost-effective basis. Voted a Best Securities Litigation Consulting Firm by readers of the New York Law Journal and a 2017 NYLJ Hall of Fame service provider, Bates Group provides end-to-end solutions throughout the lifecycle of your legal, regulatory, and compliance matters. With a roster of over 135 financial industry and regulatory experts, Bates offers services in litigation consultation and testimony, regulatory and internal investigations, AML and financial crimes, compliance solutions, and damages consulting. The Bates Compliance Solutions team of experienced compliance professionals provide comprehensive offerings for broker-dealer and registered investment adviser clients, assisting them with supervision, compliance, risk assessments, WSPs, AML, and internal audit functions on an as-needed or ongoing reviews, including guidance to meet clients’ regulatory compliance obligations.

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09-13-18

New Education Requirements on the Horizon for Broker Dealers and (Maybe) Investment Advisers

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FINRA is seeking input on proposed changes to the Securities Industry Continuing Education Program (“CE Program”) just as the SEC is considering responses to its request for comments on whether investment advisers should be subject to similar obligations. Here are the latest developments.

Keeping Up with the “Increasing Complexity of Products and Services”

FINRA requested comment from member firms and other interested parties on enhancements to the CE Program proposed by the Securities Industry/Regulatory Council on Continuing Education (“CE Council”). The CE Council, made up of representatives of the securities industry (including SROs like FINRA), develops uniform continuing education requirements for more than 600,000 securities professionals to ensure they “have the knowledge and skills necessary to help investors and promote the integrity of the U.S. capital markets.” In issuing their proposed enhancements, the CE Council described the “increasing complexity of products and services offered through the U.S. financial markets” and the consequent need to provide timely, effective training to registered persons

Proposals for the Regulatory Element

The CE program is made up of a Regulatory Element and a Firm Element. The Regulatory Element is intended to address new rules and industry standards to “educat[e] registered persons on significant regulatory issues facing the industry.” Proposed enhancements to the Regulatory Element include (i) narrowing the program by creating “targeted learning units” that are more relevant to the registrations held by individuals. The Council is also proposing to make the Regulatory element more timely by (ii) making it an annual requirement rather than every three years (after the second anniversary of an initial registration). Finally, the Council suggests that there are additional efficiencies to be gained by (iii) improving the functional aspects of element systems (notably, the Central Registration Depositary “CRD” and “Financial Professional Gateway”) and by (iv) coordinating the modular approach for the Regulatory Element with the requirements of the Firm Element.

Questions about the Firm Element

The Firm Element program addresses “products, services and strategies offered by the firm as well as firm policies and industry trends.” The CE Council proposed fewer Firm Element enhancements, but asked for more feedback. Specifically, the Council asked for information (i) on the value of the current guidance it provides to help firms meet their obligations; (ii) on current firm education practices (including those containing content outside the CE Program like AML training); (iii) on redundancies or “opportunities for reciprocity with other securities or related credential programs;” and (iv) on how firms develop or acquire the content to meet Firm Element requirements. FINRA reminded its members that should the CE Council recommend program changes, FINRA would issue the requisite Notice with the specific details and any related rule changes. Comments on the CE Councils questions are due by November 5, 2018.

SEC Asks Whether IAs should be Subject to CE Requirements

As part of the SEC Best Interest Rule proposal, (at page 28; see also the latest Bates article on NASAA reaction to the proposal,) the SEC requested comment as to “whether there should be federal licensing and continuing education requirements for personnel of SEC-registered investment advisers.” Though there is general appreciation for the importance of continuing education for investment advisers, two significant groups reacted strongly against the proposed federal mandate.

In a comment submitted by the Investment Adviser Association, President and CEO Karen Barr said that “federal licensing and continuing education requirements are unnecessary and inappropriate.”

She stated: “the Commission’s request fails to appreciate that all adviser personnel are subject to a range of compliance requirements and already receive training on the laws, regulations, and fiduciary obligations applicable to advisers.” President Barr went on to remind the Commissioners that “states license and impose examination or competency requirements on investment adviser representatives.” She also questioned (i) “the Commission’s legal authority to adopt licensing requirements for personnel of investment advisory firms”; and (ii) whether the Commission has “the infrastructure or resources to administer such a program,” strenuously opposing “the Commission turning to FINRA to administer the program.”

Similarly, in his comment letter, NASAA President and Director of Alabama Securities Commission, Joseph Borg stated: “State securities administrators license these individuals; the SEC does not...The SEC already regulates thousands of broker-dealers and investment advisers. It should not stretch its limited resources even further by taking on direct regulatory responsibility for hundreds of thousands of investment adviser representatives. Rather, state securities regulators should continue performing this function. NASAA and its members have developed robust rules and processes (including a testing regime) to oversee investment adviser representatives.”

Conclusion

Efforts to address the increasing complexity of products and services in the financial marketplace through more concentrated and focused continuing education are laudable. Bates has written extensively of the many evolving challenges facing the industry that require real understanding and a continuous updating of expertise. The CE Council and FINRA are asking important questions that are reasonably intended to keep practitioners current in a fast-changing environment. The SEC inquiries, and the consequent reaction by the IAA and NASAA, remind us that the efforts to streamline and enhance the CE program are taking place in the midst of a broader debate on the appropriate regulation of broker-dealers and investment advisers. By the time a proposed rule change is ready, we may know whether the SEC will continue to pursue federal licensure and continuing education for investment advisers. Bates will continue to keep you up-to-date on developments.

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09-11-18

Introducing Bates Investor Risk Assessment - Protect Your Firm and Its Most Vulnerable Investors

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Bates Group LLC announces the introduction of Bates Investor Risk Assessment (BIRA), a unique breakthrough program to protect broker-dealers and registered investment advisors (RIAs) and their vulnerable clients — seniors and retirees, minors, and those with diminished capacity — while continuing to meet regulatory expectations.

"Protecting vulnerable investors is a priority for all firms and regulators. Our exclusive new risk assessment program employs a systematic analytical approach to address the growing risks for these individuals," said Robert Lavigne, Managing Director of Bates Group’s Compliance Solutions.

Through the BIRA program, Bates Group assists broker-dealers and RIAs to proactively identify high-risk accounts so that firms can promptly take preventive measures. The BIRA program focuses on the use of specialized analytics to identify key risk indicators, some of which may lie buried in firm data, and highlight individual at-risk investors, or high-risk areas, for review. Recommendations, including customized models to integrate multiple data types, and addressing issues of governance, escalation protocols, process flows and reporting, may also be developed to help keep firms and their clients from potential exposure and harm.

BIRA helps guard vulnerable investors from potential bad actors and helps protect broker-dealers and RIAs from inefficient use of resources, legal exposure, reputational harm, regulatory penalties, and financial loss.

Bates Group is a national leader in providing vulnerable and senior investor expertise, expert testimony, and analytical techniques to help financial services firms manage risk, minimize regulatory scrutiny, and prevent fraud and reputational harm. For more information, visit the BIRA service page on batesgroup.com or call 1 (888) 960-2809.

About Bates:

Bates Group has been a trusted partner to our financial services clients and their counsel for over 30 years, delivering superior quality and results on a cost-effective basis. Voted a Best Securities Litigation Consulting Firm by readers of the New York Law Journal and a 2017 NYLJ Hall of Fame service provider, Bates Group provides end-to-end solutions throughout the lifecycle of your legal, regulatory, and compliance matters. With a roster of over 135 financial industry experts, Bates offers services in litigation consultation and testimony, regulatory and internal investigations, AML and financial crimes, compliance solutions, and damages consulting.

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09-05-18

What’s In A Name? NASAA Weighs In On Regulation Best Interest

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The North American Securities Administrators Association (“NASAA”) encouraged the SEC “to make significant revisions to its April 18 Regulation Best Interest and related proposals (“Reg. BI”) before adopting them in order to best serve the interests of investors.”

In NASAA’s comment letter on Reg. BI, NASAA President and Alabama Securities Commission Director Joseph P. Borg emphasized that, “given our members’ shared responsibility with the SEC for oversight of the firms and individuals that will be impacted by the Proposals, NASAA is anxious to work closely with the Commission.” President Borg went on to say that he hoped that the “constructive comments are well received and considered fully.”

NASAA represents state, provincial and territorial securities administrators covering all 50 states, the District of Columbia, Puerto Rico, the U.S. Virgin Islands, Canada, and Mexico. NASAA cautioned the SEC to take it slow, be deliberate and, most importantly, to consider “significant improvements” in order to “promulgate final rules that will serve the best interest of investors as the Commission intends.” Bates Research takes a closer look at NASAA’s concerns and its recommendations to the SEC.

The Regulation Best Interest Proposal

As summarized in a previous Bates Research article, Reg. BI comprises three proposals. In brief, proposal one would require a broker-dealer to act in the “best interest” of a client investor and would require suitability determinations, disclosures of “key facts” that may suggest conflicts of interest, and further compliance obligations. Proposal two would provide interpretive guidance for advisers who have fiduciary obligations to investors. Proposal three would require that both broker-dealers and investment advisers provide a new Client Relationship Summary (“CRS”) to retail investors. The CRS defines differences between investment advisers and broker-dealers, based on the types of services offered, and delineates legal standards of care.

Start With the Name

In general, NASAA’s comments urge more definitional clarity. NASAA recommends that the SEC re-label the new regulation as the “Broker-Dealer Standard of Conduct” to reduce the likelihood of any confusion between a broker-dealer’s best interest duties and an investment adviser’s fiduciary duties.

NASAA responded to the proposed SEC approach to broker-dealer standards of conduct with recommendations to clarify and make more expansive the obligations of broker-dealers. For example, NASAA recommends that the broker-dealer’s duty should “encompass all investors and all securities products.” NASAA also recommends greater specificity, including that the SEC (i) clarify the requirements necessary to satisfy the new standards by adding specific factors that must be met; (ii) broaden the broker-dealer conflict of interest mitigation and disclosure obligations; and (iii) address current practices involving certain financial incentives by making them “per se incompatible” with the new standards. (The latter includes a ban on sales contests at broker-dealers and a ban on any preferential treatment to certain customers for investment opportunities.

Clearer Interpretive Guidance From the SEC

NASAA also recommends that the SEC provide much clearer interpretive guidance. The intent behind its guidance recommendations is to set more definitive borders between investment advisory and broker-dealer activities. For example, NASAA wants the SEC to spell out in greater detail how and which titles a broker-dealer may use when holding themselves out in the market. NASAA opposed the SEC position that a broker-dealer could satisfy its best interest duties by recommending securities from a limited number of firm-only products.  NASAA contends that firms need to consider competing asset classes and investment strategies outside their own offerings when counseling clients. This includes considering factors such as cost, complexity, liquidity and risk. NASAA also wants the SEC to spell out clear guidance on the rights and remedies investors will have in pursuing violations of the new standard. While so doing, NASAA wants the SEC to “expressly declare that the new standard is not intended to preempt any state laws or regulations.”

Form CRS: Is It Really Necessary?

NASAA’s official recommendation is that Form CRS undergo testing “to evaluate its usefulness to investors and, at such time as the form is adopted, allow firms some flexibility in implementing the disclosures so as to tailor the content for their customers’ needs.” NASAA, however, also believes that it would be better to simply revise Form ADV and Form BD to “incorporate investor education objectives into these existing forms, rather than bolting an entirely new form onto the existing disclosure structure.” According to NASAA, “Form ADV and Form BD are long overdue for reformatting and rewriting” and updating them “would be the best long-term solution to the problem of investor confusion” and would “reduce or eliminate duplication across these various forms.”  

Finally, with regard to future investment adviser registrations and continuing education requirements, NASAA recommended that the SEC defer to state securities regulators.

Conclusion

NASAA members are significant players in the ultimate resolution of these issues. NASAA’s comments represent a respectful, but firm approach that seeks clarity while asserting state interests. It is clear, however, that the SEC’s proposed rule would look very different than it currently does if the agency were to adopt NASAA’s “significant improvements.” NASAA acknowledged the challenge that the SEC faces:

“The Commission seeks through the Proposals to raise the duties of care owed by broker-dealers, address the confusion among investors regarding the differing conduct standards, and make clearer the various aspects of the fiduciary duty standard applicable to investment advisers, without favoring or disfavoring the broker-dealer or investment advisory business models. We recognize that threading this needle is not easy.”

Bates will continue to follow important developments in this story.

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09-03-18

Bates Welcomes New Financial Crimes Managing Director Edward Longridge

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Bates Group welcomes Edward Longridge as the new Managing Director of Bates’ Financial Crimes practice. Based in New York City, Ed brings nearly 20 years of distinguished experience as an Anti-Money Laundering (AML) Compliance and Financial Crimes leader at major multinational financial institutions.

Ed comes to Bates from Oppenheimer & Co., where he served as the Chief AML Compliance Officer, responsible for managing the firm’s AML, Financial Crimes and Sanctions programs. Prior to Oppenheimer, Ed oversaw Citibank’s OneKYC program for Mexico and Latin America and served as Head of AML Compliance for Deutsche Bank - Private Wealth Management in New York, as well as on Morgan Stanley and Smith Barney KYC/AML teams in London.

At Bates Group, Ed will lead the Financial Crimes team, providing AML and regulatory response consulting, fraud investigations and forensic accounting services, and white-collar crime consultation and testimony support.

“Ed brings unparalleled insight and understanding of the AML and Financial Crimes space, which will benefit our clients tremendously. We welcome Ed to Bates Group and to our Financial Crimes team,” said Jennifer Stout, President & CEO, Bates Group.

Full Bio

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08-15-18

Treasury, OCC and FINRA Set the Stage for Fall Fintech Debate

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As the summer winds down, regulators are positioning themselves for more oversight of the financial technology (“fintech”) sector. On July 30, the U.S. Treasury Department released a national agenda on how it intends to regulate fintech companies, encourage innovation and harmonize federal efforts with state regulators. The Office of the Comptroller of the Currency (“OCC”) followed up the Treasury report with an announcement that it will begin to accept applications for special-purpose national bank charters for certain types of fintech companies. And on the same day as Treasury came out with its recommendations, FINRA issued a “Special Notice” seeking comment on fintech innovation in the broker-dealer industry. How are these developments going to impact the industry? Here’s a closer look.

Treasury Weighs In

In a new report designed to “facilitate U.S. firm innovation by streamlining and refining the regulatory environment,” the U.S. Treasury Department made over 80 recommendations to “enable U.S. firms to more rapidly adopt competitive technologies, safeguard consumer data, and operate with greater regulatory efficiency.” The report, titled “A Financial System That Creates Economic Opportunities: Nonbank Financials, Fintech, and Innovation,” contains recommendations that work together to form a comprehensive national framework for companies active in the fintech sector. The report was compiled to address recent trends and data on the financial services industry.

Here are a few of those statistics (From page 5 of the report):

  • More than 3,330 new technology-based firms serving the financial services industry were founded from 2010 to the third quarter of 2017, 40% of them are focused on banking and capital markets.
  • $22 billion has been raised to finance these firms in 2017, a thirteen-fold increase since 2010
  • Technology-based firms account for 36% of all U.S. personal loans, up from less than 1% in 2010.
  • Fintech services reach 80 million members, while consumer data aggregators serve more than 21 million customers.

In addition, the report highlights key trends that led to the Treasury recommendations, including:

  • the rapid growth of technology-enabled platforms to address banking challenges;
  • the combination of non-bank, stand-alone solution providers and new platforms that provide support for, or interconnectivity with, traditional financial institutions through partnerships, joint ventures or other means;
  • the entrance of large technology companies with access to large stores of consumer data into the financial services industry; and  
  • the reaction to “technology-enabled competitors” by mature firms which have launched new platforms aimed at reclaiming market share.

Treasury: Core Recommendations

The core recommendations of the Treasury report include (i) supporting the issuance of special purpose national bank charters; (ii) enabling bank sponsorships and partnerships with third-party fintech companies; (iii) supporting the development of mechanisms to enable consumers to provide third parties with access to information; (iv) harmonizing federal and state fintech regulatory regimes; and (v) encouraging the development of a regulatory “sandbox” for financial innovation.

The Treasury report also makes specific recommendations on a host of important issues affecting fintech, including: the Payday Lending Rule (Treasury recommends that it should be rescinded); the retail payments system (Treasury says fix it and make it faster); data access (Treasury recommends governance reform, improve disclosures and regulate it); and wealth management and digital financial planning (Treasury recommends designate a single regulator or maybe a special SRO to oversee financial planners), to name a few. For additional detail, please note this additional Treasury-prepared fact sheet. The Treasury acknowledged the significance of digital currencies and blockchain, but opted to defer recommendations until other federal efforts in this area are complete.

OCC Follows Suit

Coinciding with the publication of the Treasury report, the OCC announced that it would begin to accept applications for special-purpose national bank charters. OCC also issued guidelines in the form of a Licensing Manual Supplement: Considering Charter Applications from Financial Technology Companies, which “describes OCC policies and procedures used in the charter application process and…discusses the factors that the OCC considers in deciding whether to grant a charter.”

States Are Not Enthusiastic

In a section of the report titled “Aligning the Regulatory Framework to Promote Innovation,” Treasury identifies several approaches to provide “clarity and flexibility” for firms seeking to provide financial services. One is that state regulators harmonize “the existing patchwork of state licensing and oversight of nonbank financial services companies.” In this regard, Treasury supports establishing a “Fintech Industry Advisory Panel” to improve state regulation, align multi-supervisory processes and redesign the Nationwide Multistate Licensing System. Treasury also recommends that states work to coordinate financial service examinations for individual firms.

These recommendations come with a not-so-subtle warning. “Treasury recommends that if states are unable to achieve meaningful harmonization across their licensing and supervisory regimes within three years, Congress should act to encourage greater uniformity in rules governing lending and money transmission to be adopted, supervised, and enforced by state regulators.” (p. 70)

States are already expressing substantial discomfort with this approach as well as with Treasury’s support of federal special-purpose bank charters. Critics argue that: (i) states will lose state charter revenue to the federal government; (ii) states are better at regulating consumer-facing financial entities; and (iii) “because national charters preempt state regulations, national banks may not be held accountable to the same kinds of consumer protection laws that state banks are, like usury limits.” These and other objections will likely be litigated by state regulators upon the OCC’s acceptance of its first application.

FINRA Asks for Feedback

On July 30, FINRA issued a Special Notice asking market participants how it could best support fintech innovation while protecting investors. Specifically, FINRA requested comment on the provision of data aggregation services, supervisory processes concerning the use of artificial intelligence and the development of a taxonomy-based, machine-readable rulebook. Comments are due by October 12, 2018. The Special Notice is the latest effort by FINRA’s Innovation Outreach Initiative, which was set up in 2017 to enable FINRA to better track fintech developments.

Conclusion

The Treasury report, the OCC Policy Statement accepting fintech charter applications, early reaction by the states and FINRA’s request for comments provide a framework for the debate to come. All of these perspectives laud the potential for innovation and prioritize enabling it. The data and trends that were cited to support Treasury’s recommendations serve to highlight the importance of reducing encumbrances to fintech platforms in order to pass potential benefits through to consumers and investors. But there were few, if any, statistics or trends cited on the downside risk tradeoffs to consumers and investors. Headlines suggest that financial firms will bear the compliance and enforcement burdens that come from the uncertainty created by the regulatory regime to come. That said, the foundation has been laid for the fall debate over national regulation of fintech. Bates Group will keep you apprised of new developments.

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08-14-18

Bates Welcomes New Experts

Bates would like to introduce two of our newest experts, Olie Jolstad and Ed Laskowski. Follow the links below to view their full bios, or visit our Expert Search page to view all Bates Experts.

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Olie Jolstad, SCLA, FACFEI

Property and Liability Insurance, Claims Handling, Agent/Broker, Procurement and Standard of Care

 

Olie Jolstad is a Bates Group expert and consultant with four decades of experience in the property and liability insurance industry. Mr. Jolstad brings his respected reputation and expertise to matters wide-ranging in complexity concerning coverage disputes, broker/agent procurement duties, claims handling practices, standards of care, and insurance industry customs, practices, and standards. Mr. Jolstad has consulted on behalf of policyholders and insurance carriers in hundreds of cases throughout the United States, Cayman Islands, Bermuda, and London.

He has served as an expert in over 160 litigated cases and is qualified to testify in state and federal courts on matters regarding insurance industry customs, practices, standards, standards of care, claims handling practices, and agent/broker procurement of insurance coverage.

Full bio

 

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Edmund "Ed" Laskowski

Compliance and Regulatory Response, Suitability and Supervision, Branch Management

 

Edmund (Ed) Laskowski is a Bates Group Expert and Consultant based in the greater NYC area.  Mr. Laskowski utilizes his 30-plus years of Financial Services and Compliance experience to assist clients in the areas of Brokerage Services, Mutual Funds and Annuities. He has also represented firms as an industry fact witness in FINRA arbitrations and federal court trials. Ed comes to Bates from TD Ameritrade, where he supervised branch office and phone center operations, instituted compliance and regulatory programs, and developed supervision and monitoring policies/procedures during TD Ameritrade’s recent acquisition of Scottrade.

Prior to TD Ameritrade, Mr. Laskowski served as VP of Distribution Compliance and, later, Shared Regulatory Services at Fidelity Brokerage Services. In addition to these Compliance roles, he was a Branch Manager at Fidelity Investments for 12 years. During this period, he built and ran Fidelity’s flagship office at Rockefeller Center as well as the state-of-the-art “Branch of the Future” office at the Wall Street Investor Center. Mr. Laskowski holds a certified regulatory and compliance professional designation from the Wharton School of Business and is a graduate of the accelerated leadership program at Cornell University.

Full Bio

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08-09-18

SEC Regulation Best Interest: Next Round

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As the deadline for comments on SEC Regulation Best Interest draws to a close, echoes from the debate on the Department of Labor (“DOL”) fiduciary rule can be heard in new concerns being raised before the Commission. In a recent speech getting a lot of attention, SEC Commissioner Hester Peirce undertook an analysis of the proposed regulation. Bates Research takes a look at that and some other notable recent reactions.

Regulation Best Interest Refresher

The SEC Best Interest Rule (“Reg. BI”) has three parts. The first part requires a broker-dealer to act in the “best interest” of a client investor. This new standard would require suitability determinations, disclosures of “key facts” that may suggest conflicts of interest, and further compliance obligations. The second part provides additional interpretive guidance for advisers who have fiduciary obligations to investors under law. The third part requires that both broker-dealers and investment advisers provide a new Client Relationship Summary (“CRS”) to retail investors. The CRS highlights key differences between investment advisers and broker-dealers, based on the types of services offered, and delineates legal standards of care. The short form also defines certain terms that may confuse investors (e.g., the difference between “adviser” and “advisor”) and restricts their use.

Commissioner Hester Peirce Addresses Reg. BI Concerns

As described previously, despite the vote in favor of releasing the package of proposals, a number of Commissioners expressed reservations about the particulars. In a recent address titled: What’s in a Name? Regulation Best Interest v. Fiduciary, Commissioner Peirce expanded on her previously stated objections. Terms like “best interest” and “fiduciary,” she argued, are fundamentally inexplicable as to the obligations broker-dealers and advisers owe to clients. She stated that “a fiduciary under the Employee Retirement Income Security Act (“ERISA”), for example, means something other than a fiduciary under the Investment Advisers Act of 1940.” She also cited DOL guidance reflecting the broadening of the “definition of ‘fiduciary’ for purposes of its 2016 rulemaking.” Commissioner Peirce asserted that the definitions are so malleable that proposed Reg. BI would arguably "subject broker-dealers to an even more stringent standard than the fiduciary standard outlined in the Commission’s proposed interpretation.”

She contended that using such terms may not only be confusing, but may actually prove to be “harmful” to the market and to investors and ultimately may cost more. 

The consequence is that the rule may motivate brokerage firms to deregister, as investors flee to advisers who offer their services on a fee basis rather than a transaction basis. She put it this way:

“We are already seeing this dynamic at work. Brokers are taking a hard look at the existing regulatory framework coupled with FINRA arbitrations in which sometimes a fiduciary standard is applied. Then they look over the fence to the adviser world with its principles-based fiduciary standard, less frequent exams, absence of arbitration, and predictable revenue streams. Having engaged in this comparative exercise, many firms and individual financial professionals say farewell to FINRA, hop on the fiduciary bandwagon, and never look back. Regulation Best Interest could exacerbate this trend.”
 

Commissioner Peirce recommends an alternative whereby a new rule would be built on the foundation of the current "suitability standard," which has proven to be both understandable and effective. Further, she argued, any standard to be imposed on broker-dealers should be explicit and not implied.

Other Reactions

The Commission received thousands of comments on proposed Reg. BI. Organizationally, advocates staked out familiar positions first formulated by their advocacy or objection to the DOL Fiduciary Rule. SIFMA, for example, issued a statement after a June 14th Investor Advisory Committee Meeting supporting the new rule:

“SIFMA commends the SEC for proposing a new best interest standard under the Exchange Act that not only clearly and significantly raises the bar from the current suitability standard under FINRA Rules, but also incorporates the intended principles and goals of the former DOL fiduciary rule that it is replacing. By any measure, the SEC’s proposed best interest standard materially exceeds the existing FINRA suitability standard to the benefit, and for the protection, of retail customers.”
 

In their substantive comment submitted on August 7, SIFMA stated that “certain key changes must be made to the Proposals to make them workable for the industry and to avoid unintended consequences, such as decreased choice for retail investors and a shift away from the brokerage model.”  

SIFMA's proposed detailed modifications to the rule could, if implemented, harmonize certain definitions with FINRA, such as the definition of a “retail customer.” Further, SIFMA suggested clarification and guidance on certain disclosures and other obligations, including “material conflicts of interest.” SIFMA also recommended the adoption of “a simplified and more flexible approach” for the Proposed Form CRS.

The Investment Adviser Association (“IAA”) stated that it supported the “goals” of the rule, but requested substantial changes to it. As to the proposed Advisers Act Interpretation, IAA rejected the position that it was either necessary or beneficial to codify the fiduciary duty in a rule, since the “principles based duty has successfully served as the bedrock principle of investor protection of clients of investment advisers for more than 75 years.”

As to Reg. BI, IAA recommended that the Commission make the “scope and application of Reg. BI” clearer, ensure that “advisory activities that broker-dealers agree to provide a retail client, including ongoing monitoring for purposes of recommending changes in investments, …be covered by either Reg. BI or the Advisers Act fiduciary standard,” and “define advice that is considered not to be “solely incidental” to brokerage activities.” 

With respect to Proposed Form CRS, the IAA commented that it “may exacerbate the investor confusion it is intended to address” and urged the SEC to conduct investor testing and publish the results of the Form to ensure its effectiveness. Further, IAA also recommended that the SEC display educational comparisons between investment adviser and brokers on the SEC’s website and streamline the proposed Form to “focus on critical aspects of the relationship and services being offered by each firm to investors.”

A contrary position on Reg. BI was voiced by Senators Elizabeth Warren, Sherrod Brown and Cory Booker in a letter to FINRA President Robert Cook on July 20. They asked him to provide FINRA's interpretation of the SEC's proposal. They raised concerns that the proposed standard “is long, complicated, and, in some important ways, ambiguous…[and that] SEC Commissioners themselves disagree about whether it is similar to the DOL rule and "definitely a fiduciary principle," or whether it "essentially maintain[s] the status quo."

Conclusion

These reactions represent round one in the battle to develop acceptable standards for broker-dealers and advisers. Many of these positions are extensions of long-standing disagreements voiced during the fights over the DOL fiduciary rule. But the spectrum of opinions presented by these comments will serve to frame the rounds to come – and, in the end, may lead to some new (and possibly some old) approaches on this hotly debated issue. Bates will keep you apprised.

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07-26-18

Eight Recent Developments on Cryptocurrency

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Activity around the regulation of cryptocurrency continues apace. Only a short time ago, we reported on Operation Cryptosweep, a coordinated effort by NASAA and state securities regulators to crackdown on fraudulent cryptocurrency-related investment products. Today, we review a number of newsworthy developments that may affect the regulation of a technology that has defied easy categorization and oversight. Here’s a roundup:

1. Russian Agents, Bitcoin and the 2016 Presidential Campaign

The revelation contained in the Special Counsel’s indictment of Russian intelligence agents, that Bitcoin was used to finance and obscure an operation intended to undermine the 2016 U.S. elections, has begun to reverberate in policy debates. It served as the backdrop to recent congressional hearings and prompted a letter by Representative Emanuel Cleaver to FinCEN to “initiate an investigation of the cryptocurrency industry and articulate further guidance to help prevent financial crimes” such as those implicated in the Russia probe.

2. Congressional Hearings on Digital Currency and Policy

Meanwhile, in two separate hearings, representatives debated fundamental questions about the government’s role in the development of the digital currency markets and whether the Federal Reserve should issue its own form of cryptocurrency. At a July 18th hearing before the House Financial Services Subcommittee on Monetary Policy and Trade, academics and experts debated the viability and security of digital currencies, the pros and cons of a "widely accessible, retail-oriented central bank digital currency that could be used by the public for person-to-person and retail transactions," and the potential effects of such currencies on traditional banking structures.

At a House Committee on Agriculture hearing on the same day, Daniel Gorfine, Director, LabCFTC and Chief Innovation Officer, warned against "hasty regulatory pronouncements" that might “miss the mark, have unintended consequences, or fail to capture important nuance regarding the structure of new products or models." Former CFTC Chair Gary Gensler expressed an alternative concern that failure to enact reasonable regulation would “trigger a brain drain of crypto entrepreneurs from the US.” Witnesses testified uniformly that digital assets did not fit neatly into existing regulatory frameworks. (1)

3. Executive Order Establishing a Task Force on Market Integrity

On July 11th, President Trump signed an Executive Order establishing a Task Force on Market Integrity and Consumer Fraud. The Task Force, under the direction of the Attorney General, will be made up of regulators and cabinet secretaries who will provide guidance and coordination in fighting financial fraud, specifically—and for the first time—including cyber fraud.

4. CFA Institute Introduces Crypto Into Exam Curriculum

The CFA Institute, the global association of investment professionals that administers industry certifications, just added cryptocurrency and blockchain as a new subject category to its Chartered Financial Analyst Exams. The new subject matter, named “Fintech in Investment Management,” falls under the Level I and II Exam categories. As one report noted, this development “might be the definitive sign that cryptocurrencies have arrived on Wall Street.”

5. CFTC Issues Guidance on Cryptocurrency Futures Trading

Since our last review of federal regulatory activity, the CFTC issued guidance for exchanges and clearinghouses to list virtual currency products. The guidance is intended to help with the design of management programs that address risks associated with virtual currency derivative products. Specifically, the guidance provides for (i) enhanced market surveillance, (ii) close coordination with the CFTC, (iii) the application of the large trader reporting threshold for any virtual currency derivative contract, (iv) a mandatory request for comment on issues relating to a proposed listing, and (v) a required CFTC staff governance review concerning adherence to internal governance procedures for new contract approval.

6. CFTC Warns Customers on Purchasing Digital Coins

On July 16th, the CFTC issued a customer advisory on Initial Coin Offerings and other crypto-related transactions. The agency warned virtual currency customers “to use caution and do extensive research before purchasing virtual coins or tokens.” Specifically, the CFTC urged customers to treat any coin or token that includes “any promises or guarantees of future value as a ‘red flag.’” The CFTC recommended customers “conduct extensive due diligence on any individuals and entities listed as affiliates of a digital coin or token offering,…ask whether the digital coins or tokens are securities and if the offering is registered” with the SEC, and find out “what rights the digital coin or token provides.” 

7. FINRA Asks Firms to Report Cryptocurrency Activities

On July 6th, FINRA issued a regulatory notice encouraging each member firm “to promptly notify FINRA if it, or its associated persons or affiliates, currently engages, or intends to engage, in any activities related to digital assets, such as cryptocurrencies and other virtual coins and tokens.” The notice requires member firms to provide updates to their regulatory coordinator about any crypto related activities until July 31, 2019.Among other activities firms must disclose are “purchases, sales or executions of transactions in digital assets, pooled funds that invest in digital assets; or derivatives tied to digital assets.” The FINRA notice also recommends “disclosure regarding custody of digital assets; acceptance of cryptocurrencies from customers; mining of cryptocurrencies; the acceptance of orders in cryptocurrencies and/or other virtual coins and tokens; quotations in cryptocurrencies and other virtual coins and tokens.” Lastly, FINRA expects firms to disclose any provision or facilitation of “clearance and settlement services for cryptocurrencies” or “recording cryptocurrencies and other virtual coins and tokens using distributed ledger technology or any other use of blockchain technology.”

8. International Developments

The Financial Stability Board, ("FSB") the international organization established by the G20 to monitor and make recommendations about the global financial system, published a framework to monitor the financial stability implications of developments in crypto-asset markets. The framework sets out the metrics that the FSB will use to monitor developments in crypto-asset markets as part of the FSB’s ongoing assessment of vulnerabilities in the financial system. The metrics include the use of data on liquidity, trading volumes, pricing, clearing and margining for crypto-asset derivatives. As stated in the framework, “the use of leverage, and financial institution exposures to crypto-asset markets are important metrics of transmission of crypto-asset risks to the broader financial system.” The report also recaps the work of other international standards-setting bodies such as the Committee on Payments and Market Infrastructures, IOSCO and the Basel Committee on Banking Supervision.

Conclusion

Certain developments, both small and large, domestic and international, feed the sense that the forward march of blockchain is inevitable. Regulators seem attuned to the complexities and the challenges that cryptocurrency presents. It is not yet clear, however, how the pieces will fit together, or if an intervening political event will cause disruption. Bates Group will continue to monitor the regulatory landscape and keep you apprised of these fast moving developments.


(1) For additional discussion on regulatory classification of digital currency as commodities at the hearing see here. For a recent analysis about the classification of certain products as a security see here.

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07-19-18

FINRA Dispute Resolution Updates (and More)

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FINRA recently issued a new fraud warning to member firms, highlighted certain changing rules and procedures for arbitrators, reminded arbitrators to stay current on their disclosures and offered up year-to-date statistics on dispute resolution. Here’s a summary.

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FINRA Issues New Fraud Warning

In its ongoing efforts to advise member firms of new risks and new forms of fraud, FINRA issued an Information Notice warning of a new imposter scam. This one involves fraudsters impersonating FINRA personnel in order to obtain a firm’s confidential or other information. FINRA is urging firms to “verify the identity of [any] caller or sender before providing any information or responding to an email.”

Recent incidents include a firm receiving a call from an imposter using a phony FINRA telephone number and email who was seeking contact information of firm personnel. Other incidents concern suspicious calls made from outside the United States seeking sensitive information. FINRA reminded firms that it “does not use overseas telephone numbers or foreign email domains” and urged member firms to be wary of communications that do not end in @finra.org or that contain attachments or embedded links. Further, FINRA recommends contacting a Regulatory Coordinator if any questions arise “regarding the legitimacy of any communication that purports to be from FINRA.”

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Update: Rules Affecting Small Claims Adjudications and Fees

A number of rule changes concerning procedures and fees were highlighted in the latest issue of the FINRA arbitration and mediation newsletter, The Neutral Corner.

Proposal for Small Claims Adjudications

In May, the SEC approved rule changes that would create a new option for small claims (less than $50,000) adjudications. Claimants will still have the option to proceed under current procedures, which allow for in-person hearings without time limits and permit questioning of opposing parties’ witnesses.

Claimants will now also have a new available option of a “Special Proceeding,” in which an arbitrator may hear the case by telephone conference call, (unless the parties agree to another method) and claimants have time limitations to present their cases (two hours for presentation, a half hour for rebuttal and closing). Arbitrators will also have time limits on follow-up questions (three hours). Under the new procedures, the parties may not question an opposing party’s witnesses or call an opposing party as a witness, and the hearing will be completed in one day with no more than two hearing sessions. The Special Proceeding is a format intended to quicken the pace of arbitrations and to reduce costs. The new rule is effective September 17, 2018. FINRA says it will offer training to arbitrators on the Special Proceeding.

Proposal on Late Cancellation Fees for Prehearing Conferences

A new FINRA rule change would impose fees for the late cancellation of a prehearing conference. The fees would be imposed if a party or parties to a FINRA arbitration cancel a scheduled conference on short notice (i.e., within three business days). In such circumstance, FINRA would issue a $100 per-cancellation fee per each arbitrator, and a $100 honorarium for each arbitrator that was scheduled to attend the conference. FINRA extended the time for further SEC action on this rule change until August 1, 2018.

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Update: Arbitrator Disclosure

The Neutral Corner published answers to several questions on disclosure obligations, and FINRA reminded arbitrators to update their disclosure reports (“ADRs”) regarding any activity on social media.

FINRA responded to one question by confirming that it proactively reviews ADRs and conducts internet searches “on Google, publicly available information in databases such as Lexis and state and federal court sites to ensure that required information has been disclosed on the ADR.” FINRA also stated that “for arbitrators who have CRD records, we compare the information in CRD against the ADR.” FINRA urged arbitrators to update their disclosure reports by providing current information to parties so as “to minimize the likelihood of future motions to vacate.”

As to social media, FINRA stated that “even if you no longer use the accounts [on Twitter, Linked In or any other social media] or have never posted information on them, you should disclose them.” FINRA expressed an intention to “alert parties upfront of any information available about arbitrators and let them determine whether they think it might affect an arbitrator’s ability to serve impartially.”

Finally, FINRA noted that “even if arbitrators are not currently assigned to cases, their disclosure reports may be sent to parties in their hearing locations during arbitrator selection.” As a result, FINRA asserted that “arbitrators are encouraged to review and affirm regularly the accuracy of their disclosure reports using the DR Portal.”

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FINRA Highlights Dispute Resolution YTD Statistics

Also highlighted in the The Neutral Corner were some year-to-date trends deduced from FINRA’s published Dispute Resolution Statistics site. FINRA noted that from January through May 2018, there was a 40 percent increase in arbitration case filings compared to the same five-month period in 2017 (from 1,365 cases in 2017 to 1,908 cases in 2018). Claims initiated by customers also grew by 32 percent year over year. Intra-Industry cases increased by 54 percent year over year.  Topping the list of the 15 Controversy Types in Customer Arbitrations so far this year is Breach of Fiduciary Duty (997 cases, up from 714 same time, last year) followed by Suitability (870 cases, up from 606 as of May, 2017) and Misrepresentation (844 cases, up from 593 same time, last year.) Topping the list of the 15 Controversy Types in Intra-Industry Arbitrations though May of this year is Breach of Contract (141 cases, down from 175 same time, last year) followed by Promissory Notes (107 cases, down from 116 cases same time, last year) and Libel, Slander and Defamation (78 cases, up from 44 cases by this time last year).

 

Conclusion

In the last few weeks, FINRA has provided arbitrators with best practice recommendations, procedural rule reminders and updated dispute resolution statistics. Bates Group will continue to track these and other arbitration-related procedural developments.

Visit Bates Group's Securities Litigation & Consulting Practice page and learn about Arbitrator Evaluator™, the next generation of intelligent analytics for identifying and selecting the best arbitrators for your customer and intra-industry cases.

 

Join Bates Group at PLI’s Securities Arbitration 2018 program on September 26, 2018.

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07-12-18

Private Placements Drawing Attention

Private Placements Drawing Attention

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A recent analysis undertaken by the Wall Street Journal (“Journal”) found that securities firms selling private placement investments employ an “unusually” high number of high risk brokers. The reporting has raised red flags for regulators who have committed themselves and their agencies to weeding out bad actors and recidivist brokers that, in some cases, allegedly targeted senior investors. The Journal report has led Massachusetts securities regulators to look into a handful of firms that sell private placement investments within the state. Such scrutiny comes at the close of the comment period for FINRA’s “bad actor” rule proposals. Here are the latest developments.

Wall Street Journal Report

Investigative journalists from the Journal, who purportedly reviewed over 1 million regulatory records, “identified over a hundred firms where 10% to 60% of the in-house brokers had three or more investor complaints, regulatory actions, criminal charges or other red flags on their records.” The reporters reviewed some 320,000 private placement filings, also known as “SEC Regulation D” filings, from 2008-2018 and found that these firms collectively sold investors more than $60 billion worth of private placements investments. The growing market for private placements in 2017 was more than $710 billion, according to the report, and “sales for the first five months of this year are on track to top that record-setting tally,” according to the Journal.

Only about “4 out of 10 brokerages sell private placements,” however, the analysis found that “these brokerages account for more than half of the 94 firms that FINRA expelled since 2013.” Furthermore, the Journal reported that most of the firms that employ these troubled brokers were small- to mid-size. The bigger firms, they noted, “have proportionally fewer brokers dealing direct with investors.”

Legal and industry insiders are quick to point out, however, that “the fact that a broker-dealer employs agents with a disciplinary history does not necessarily mean that private placements are being sold through improper sales practices or to accounts for which such investments may not be suitable.” (Other criticism of the Journal analysis can be found here.)

In a follow up Journal article, NASAA expressed a commitment to “work even closer with federal law enforcement to target bad actors.” FINRA reaffirmed existing commitments to making private placements an examination priority and an area of focus in the oversight of the brokerage industry, and SEC Chair Jay Clayton stated at a recent public forum in Atlanta that the SEC is “looking at our private placement rules; they can use a sprucing up.”

Massachusetts Inquiry

Responding to the Journal analysis, on July 2, 2018, Secretary of the Commonwealth William F. Galvin announced that the State of Massachusetts will further look into the sales of private placement investments. Secretary Galvin asserted:

“Private placements are risky investments that reward the salesperson handsomely with high commissions. Firms offering these to the public, especially seniors, have an obligation to see that they are sold to benefit the investor, not the broker. Individuals with a history of disciplinary actions magnify the risk of unsuitable sales in connection with private placements.”

FINRA High Risk Broker Proposals: Comments Are In

The comment period for FINRA’s proposed rules on high risk brokers expired on June 29. The self-regulatory organization will now determine whether to issue final rules or amend the proposals based on the comments, which were varied. As previously reviewed by Bates Group, the proposals would: 1) reinforce certain firm supervisory obligations concerning associated persons with a history of past misconduct, 2) impose new restrictions on member firms that hire or employ high-risk brokers and 3) revise quantitative suitability standards.

Conclusion

The Journal analysis was an inconvenient reminder that issues inherent in the hiring of high risk brokers will never be fully eliminated. Now that more attention is being paid to private placements by at least one state regulator, and it is on federal regulators’ radars, it may be time to expect an increase in regulatory activity. Bates will keep you apprised.

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06-28-18

SEC Roundup: Strategic Plan Unveiled, Town Hall Kick-Off, Supreme Court & ALJs, New Elder Report

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Just as the SEC was articulating a long-term agenda before Congress and pursuing a first-of-its-kind proactive investor advisory public outreach, the agency was forced to react to a new ruling by the Supreme Court declaring SEC hiring practices for Administrative Law Justices unconstitutional. In this article, we break down these recent developments and highlight a new independent analysis on elder financial exploitation published by the SEC Office of the Investor Advocate.

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SEC Issues Draft Strategic Plan, Chair Clayton Testifies

On June 20th, the SEC issued a "Draft Strategic Plan" for FY 2018 through FY 2022. As required by federal statute, the plan sets forth the long-term priorities of the agency. The SEC draft plan is oriented to the protection and education of retail investors. The plan prioritizes improving SEC education and outreach efforts in order to expand investor understanding and access to the capital markets. It also calls for increasing investment opportunities available to retail investors. For firms, it emphasizes enforcement and exam initiatives and the streamlining of disclosure requirements.

The draft plan sets forth various steps the agency would take to keep pace with evolving markets and to improve operations and overall agency effectiveness. Among them, the SEC would expand its use of analytics to address cyber security risk and would enhance the monitoring of clearing, settlement and electronic trading. The draft plan also prioritizes improving the training, development and deployment of human capital. The SEC has invited public comment.

On June 21st, SEC Chair Jay Clayton followed up with testimony before the House Committee on Financial Services. Articulating the core principles in the draft plan, the Chairman prioritized the agency’s commitments to serve Main Street investors; to innovate and respond to market developments and trends; and to leverage staff expertise and data and analytics to improve performance (for more on SEC analytics, see Bates News coverage “Former SEC Enforcement Chief Discusses How Big Data Drives Investigations and Prosecutions”) . He also cited recent successful initiatives that demonstrate these commitments. Among others, he referred to initiating the “Best Interest” rulemaking proceedings to enhance the standards of conduct for broker-dealers and investment advisers (see Bates News report here), clarifying the application of federal securities laws to digital assets, mutual fund disclosure initiatives, and harmonizing rules governing security based swaps.

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SEC Investor Advisory Committee Holds (Out-of-) Town Hall on Regulation Best Interest and Proposed Form CRS

On June 13, all five SEC Commissioners attended an “Investing in America” Town Hall in Atlanta, Georgia “to meet with, and hear from, Main Street investors.” In large part, the SEC “message” was the meeting itself, which communicated the new strategic priority and demonstrated the agency’s commitment to travel outside of Washington D.C. to meet with the investing public. The Investor Advisory Committee agenda included discussions of the SEC’s proposed Regulation Best Interest and proposed Form CRS Relationship Summary.

As reported, Chair Clayton emphasized how critical it is for investors to determine whether or not a financial professional is registered, because “the risks you are taking in dealing with them go up dramatically” if they are not. He urged attendees to understand “how each is compensated”…because “when you understand someone’s incentives, you have a much better relationship with them.” Mr. Clayton asserted that the SEC is working to develop databases of investment professionals who have had “bad actions” and to making that information more available and accessible to the public. The other Commissioners raised various investor issues of concern including portfolio diversification and risk associated with ETFs (Commissioner Piwowar) and FinTech and digital information protection (Commissioners Stein and Peirce).

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Supreme Court Throws a Curve

In the midst of the SEC’s strategic planning and public outreach, the Supreme Court issued a ruling affecting the agency’s administrative proceedings. The Supreme Court found that the practice employed by the SEC for hiring Administrative Law Judges (“ALJs”) was unconstitutional. In Lucia v SEC, the Supreme Court determined that ALJs are "Officers of the United States" and must be appointed consistent with the provisions set forth in the constitution, that is “by the President, the head of a department, or a court of law." The SEC must now determine how to “cure” the constitutionality question and how to proceed with pending and future administrative proceedings. As a result, on June 21st, the SEC issued an Order staying all proceedings before an administrative law judge ("ALJ") for 30 days, “or [until] further Order of the Commission."

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One Additional Noteworthy Development

As part of a series of independent reports published by the Office of the Investor Advocate, SEC Engagement Advisor Stephen Deane authored a white paper on elder financial exploitation. In the paper, Mr. Deane concluded that three interrelated risk factors contribute to the crisis: the health effects of aging, financial and retirement trends and demographic trends. He found that financial impairment is one of the earliest signs of cognitive and physical decline. Compounding these infirmities are the relative wealth of older generations and financial and pension trends that reflect the shift from defined wealth plans to defined contribution plans. He notes: “the shift … has placed responsibility onto the elderly themselves to manage their retirement savings—ironically, just at a time in their lives when their ability to do so may become impaired.” Mr. Deane argues that the dramatic increase in the demographic size of the elderly population threatens “to spur parallel growth in elderly financial exploitation.” The well-resourced paper winds up asking some very challenging ethical questions about the difficulty in developing regulatory remedies to address this growing issue. 

Conclusion

The SEC’s open draft plan and inclusive public outreach campaign are noteworthy attempts to gain support for an agenda that prioritizes the protection and education of Main Street investors in the face of a technologically evolving market, cyber threats and dwindling regulatory resources. The Supreme Court decision serves notice that the challenges can come from anywhere. The white paper reminds us that the fundamental issues are not going away. Bates will keep tracking these strategic and tactical issues as they arise. For review of the SEC’s 2018 National Exam Program Priorities please see this webinar led by Bates Compliance Solutions Managing Director Bob Lavinge.

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06-17-18

This Week: Bates Leaders and Experts to Speak at ACFE Global Fraud Conference

This Week: Bates Leaders and Experts to Speak at ACFE Global Fraud Conference

Connect with Bates Group at the 29th Annual ACFE Global Fraud Conference, June 17-22, 2018 at the Mandalay Bay Resort and Casino in Las Vegas, NV. The ACFE annual conference is attended by over 3,000 professionals across multiple industries. Bates Director Alex Russell, CFE, CFA, will be presenting the Data Analytics and Anti-Fraud panel “Errors, Biases and Algorithms: How to Interpret Automated Results,” while Financial Crimes Director Geoff WInkler, CFE, will moderate the Emerging Issues Panel "How to Detect and Prevent Fraud in Loyalty Programs." Fraud Expert Jacqueline Bloink, CFE, RHIA, will also be speaking on the Best Practices panel “Forensic Medical Coding and Billing for the CFE.”

Alex Russell, CFE, CFA

Alex Russell is Bates Group’s Director of Institutional and Complex Litigation. He is responsible for managing cases related to institutional disputes involving trust or banking entities; cases related to investment banking, sales and trading; and cases involving high net worth individuals. He also manages matters involving the assessment of economic damages. He provides quantitative witness testimony in the securities litigation practice area, and substantive testimony related to valuation practices and mathematical modeling in the field of finance. Mr. Russell is the co-leader of Bates Group’s Big Data practice and is an adjunct professor of finance at both Linfield College and in the Graduate School of Management at Willamette University.

Geoff Winkler, CFE

Geoff Winkler is Director of Bates Group's Financial Crimes practice, leading a team of legal and financial industry professionals who specialize in managing complex investigations, forensic accounting, fiduciary and insolvency services, and securities litigation support. Geoff has lectured extensively on the topics of fraud, anti-money laundering, business law, and business ethics and has published dozens of articles on topics ranging from elder care abuse to SEC reforms, and managing expert witnesses to analyzing new DOL rules. Before coming to Bates, Geoff was a business consultant and turnaround professional, and he is recognized as a Certified Fraud Examiner by ACFE. He earned his BA (Politics), MBA and JD from Willamette University in Oregon, and is an Adjunct Professor of business law, business ethics, and American government for Chemeketa College.

Jacqueline Nash Bloink, CFE, RHIA

Bates Expert and Consultant Jacqueline Nash Bloink has worked in the health care industry since the mid-1990s in such roles as practice administrator, coding manager, auditor, instructor/instructional designer and director of compliance. Her passion is health care compliance and fighting health care fraud. Ms. Bloink is a published author and national speaker on the topic of health care compliance and health care fraud. She is currently an adjunct Professor for the University of Arizona and a consultant who specializes in assisting businesses, organizations and legal teams with various projects that involve provider education, health care coding, compliance or fraud.

 

Geoff Winkler will also be available on site to answer your questions about Bates Group's Financial Crimes services, including:

  • Investigation Services and Support
  • White Collar Crime Consulting and Testifying Experts
  • Anti-Money Laundering Investigations
  • Forensic Accounting
  • Asset Tracing
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06-11-18

Meet Our New Experts

We are pleased to introduce Bates Group's newest experts & consultants: Jacqeuline Bloink, Ben Cooper, Craig Hurwitz, Lynn Jones, Jan Kostyun and W. Scott Simon. Follow the links below to view their full bios on our Expert Search page.

 

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Jacqueline Nash Bloink, RHIA, CFE - Healthcare Compliance, Fraud, Medical Coding/Billing Forensics 

 

Bates Group expert and consultant Jacqueline Bloink is a Healthcare veteran, with nearly thirty years’ industry experience in diverse roles, including administration, coding and billing, corporate responsibility auditor and compliance director. An accomplished Healthcare Compliance Consultant, she has extensive medical coding, reimbursement, fraud, and compliance expertise, which she uses to consult and provide expert witness testimony on industry matters. Her consulting work has provided additional experience as a Telehealth Compliance Officer, Provider Educator for a large children’s hospital and Designs Provider/Patient Programs for a national healthcare organization.

A published author and national speaker, Ms. Bloink is well versed on the topic of healthcare compliance and fraud. She has been a co-presenter along with CMS and the OIG on the topic of Healthcare Compliance (2014) and Co-contributor / author of the American Academy of Professional Coders (AAPC) 2017 Compliance curriculum. In 2017, she assisted Association of Certified Fraud Examiners (ACFE) with the implementation of the international Healthcare Fraud Discussion Forum.

Full Bio

 

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Ben Cooper - Securities and Financial Services Litigation, Regulatory and Internal Investigations, Compliance

 

Bates Group consultant and expert Ben Cooper is a securities regulation and litigation attorney based in Washington, D.C. He brings more than 20 years of experience in the securities industry as founder of a registered investment adviser, an attorney with an AmLaw 100 firm, in-house with a Fortune 50 law department, and as Chief Legal Officer of a large independent broker-dealer/RIA network. Mr. Cooper consults on behalf of the Bates Group in complex litigation, regulatory and internal investigations and compliance matters and is available as an expert witness in securities litigation on a number of subjects including suitability, direct investments, leveraged and inverse ETFs and U5 disclosures.

Mr. Cooper is a graduate of the Northwestern University School of Law and received his undergraduate degree from the University of Michigan. He is admitted to practice law in Georgia and Illinois and has held FINRA Series 7 (General Securities RR), 24 (Principal) and 65 (Investment Adviser) licenses.

Full Bio

 

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Craig Hurwitz, CFA - Trading Processes and Controls, Fraud Assessment, FA/Client Experience, Suitability/Fiduciary Duty, Investment Management & Trust

 

Craig Hurwitz is a Bates Group expert and consultant and a seasoned Asset and Wealth Management professional with deep subject matter expertise in Trading Processes, Risks and Controls, Investment Management and Strategy, Wealth Management, Fiduciary and Trust, Ultra High Net Worth (UHNW) and Family Office. He has extensive behind-the-scenes exposure to the target operating models and risk taxonomies of many of the world's largest banks, broker/dealers, RIAs, asset management firms, Sovereign Wealth Funds, and Family Offices. He has the added experience in executive leadership, change management, team building, and management of P&L.

Before joining Bates. Mr. Hurwitz most recently served as a Senior Advisor to the Monitor for a top-5 global bank under a Department of Justice Deferred Prosecution Agreement. He was responsible for evaluating global trading processes to monitor the bank’s vulnerability to further potential incidents of fraud. From 2010 to 2015, Mr. Hurwitz served as Director with PricewaterhouseCoopers.

Mr. Hurwitz is a CFA charter holder and holds memberships in the CFA Institute, the New York Society of Security Analysts, and the CFA Society of Cincinnati. He previously held FINRA Series 7, 63, 65, and 66 licenses.

Full Bio

 

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Lynn Jones, CPA, CFE - Investigative Accounting, Economic Damages, Professional Standards

 

Lynn Jones is a Bates Group affiliate expert with more than 30 years of experience in public accounting and consulting and 10 years of university-level teaching experience. He has been involved in numerous consulting projects involving investigative accounting, loss claims, the determination of economic damages, business valuation, and fraud investigations. 

Mr. Jones has testified as an expert in a number of commercial litigation matters on topics including methods used to perpetrate fraud, financial statement manipulation, auditing procedures, professional ethics for public accountants and business valuation. Additionally, he is a published author and has been a featured speaker at industry conferences and panels. His teaching experience includes positions at UCLA, the University of Texas at Dallas and Tulane University, where he is a current adjunct faculty member.

Full Bio

 

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Jan Kostyun - Telephone Consumer Protection Act (TCPA) Compliance and Litigation, Software Copyright 

 

Bates financial services expert Jan Kostyun has over 35 years of experience in computer systems and software development, enterprise architecture, and telecommunications including extensive experience in both wireless and wireline disciplines. Mr. Kostyun’s extensive experience has enabled him to provide expert opinions, reports and analysis in legal matters covering trade secret misappropriation, copyright infringement, software financial valuation and damage assessment, patent infringement, and litigation involving the Telephone Consumer Protection Act (TCPA).

Mr. Kostyun is also recognized as an industry expert in the field of Local Number Portability (LNP) and the process of customer movement between cellular carriers, as well as significant experience in landline number portability and number pooling. He has a wide range of experience in database technologies as well as data analysis.

Full Bio

 

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W. Scott Simon - ERISA, Uniform Prudent Investor Act and Restatement (Third) of Trusts, Fiduciary Duties/Responsibilities and Investments, Retirement Plans, IRAs, Trusts

 

W. Scott Simon is a Bates consultant and expert on fiduciary investment issues in litigation and arbitrations, providing services including pre-litigation case evaluation, assistance with litigation support work and trial preparation, advice regarding legal arguments as well as deposition and trial testimony. He is the 2012 recipient of the Tamar Frankel Fiduciary of the Year Award for his many “contributions to advancing the vital role of the fiduciary standard to investors, capital markets and to society.”

Mr. Simon is also the author of two books and has written the monthly “Fiduciary Focus” column on fiduciary investment issues for Morningstar Advisor since 2003. He is a member of the State Bar of California, a Certified Financial Planner® and an ACCREDITED INVESTMENT FIDUCIARY ANALYST™ (AIFA®). Since 2004, Mr. Simon has been a principal at Prudent Investor Advisors, an SEC-regulated registered investment advisory firm. His work runs the gamut from authorships, speeches, and expert witness and consulting work concerning fiduciary investment issues to individually counseling participants in retirement plans.

Full Bio

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