Category Archives: Standard of Care

DOLFR Delay Proposal

A proposal seeking to delay the applicability date of Department of Labor’s fiduciary duty rule (“DOLFR”), which impacts the compensation received by broker-dealers and investment advisers for the distribution of covered retirement accounts, was published on Thursday, March 2, 2017.  According to the federal register’s notice, the applicability date (which had been scheduled for April 10, 2017) was proposed to be delayed by 60-days to June 9, 2017.  The proposal allows for a 15-day comment period from the March 2, 2017 publication date, which would end on March 17, 2017.  The proposal also invited comment on a February 3, 2017 Presidential Memorandum to the Secretary of Labor, requesting broader review of DOLFR and its related exemptions.

For more on the DOLFR, including legal alerts and commentary, see www.dolfiduciaryrule.com.

SEC Guidance on Robo-Advisers

The SEC staff’s recent guidance on robo-advisers is the most comprehensive SEC guidance to date concerning the considerations robo-advisers should keep in mind in meeting their legal obligations under the Advisers Act. The staff notes that robo-advisers, like all registered investment advisers, are subject to the substantive and fiduciary obligations of the Advisers Act. The staff further  indicates that because robo-advisers rely on algorithms, provide advisory services over the internet, and may offer limited, if any, direct human interaction to their clients, their unique business models may raise certain considerations when seeking to comply with the Advisers Act.

Continue reading SEC Guidance on Robo-Advisers

The Custody Rule Clarified (Again)

In a recent Risk Alert, the staff of the Office of Compliance Examinations and Inspections (“OCIE”) of the Securities and  Exchange Commission (“SEC”) observed that one of the most frequent deficiencies identified in OCIE examinations was the failure of investment advisers to recognize that they might be deemed to have custody of client assets for purposes of Rule 206(4)-2
(“Custody Rule”) under the Investment Advisers Act of 1940 (“Advisers Act”). On February 21, the staff of the SEC’s Division of Investment Management provided additional guidance under the Custody Rule that addressed three situations where there have been significant questions as to whether an investment adviser has custody of client assets:

  • when the adviser has limited authority to transfer client assets pursuant to a standing letter of instruction or other similar asset transfer authorization arrangement (“SLOA”) established by a client with a qualified custodian;
  • when an agreement between the client and its custodian appears to provide the adviser with access to client assets—even if the investment adviser is not a party to such agreement; and
  • when the adviser has the authority to move money between the client’s own accounts (“first-person transfers”).

Read More Here.

Additional contributor to this post:

Gregory T. Larkin,  gtlarkin@debevoise.com

FINRA Investor Study

Recently, FINRA published a report regarding its investor survey (FINRA Investors in the US 2016).  The report summarizes findings from an online survey addressing investor relationships with broker-dealers and advisers, investor understanding of fees charged for investment services and investor literacy.  The survey finds that a very small percentage of investors own “complex securities,” such as REITs, options and structured notes, which have been a focus of regulatory attention.  Most investors own principally individual stocks and mutual funds.  More than half of those investors surveyed rely on the services of a broker or other professional adviser for some of their investment decisions, with the percentage being somewhat higher for investors aged 55 and higher.  Approximately 16% of those surveyed use robo-advisers.  In making investment decisions, 49% expressed a preference for paper deliver of documents.  An overwhelming percentage of investors (68%) rely on information from the company in which they are investing in order to make their investment decisions.  The investor literacy component of the survey questions revealed that many investors do not have a complete understanding of concepts like short selling and buying stocks on margin, which suggests that broker-dealers and investment advisers have continued work ahead of them in terms of investor education.

 

Ensuring Adequate Cybersecurity Procedures and Systems

On November 14, 2016, FINRA fined a registered broker-dealer $650,000 for failing to safeguard confidential customer data against foreign hackers.  Confidential customer information was stored on the firm’s electronic system without adequate protection from cyber hackers, which resulted in the exposure of confidential information for approximately 5,400 firm customers.  Although there was no evidence that the exposure of this customer information resulted in any distinct customer harm, FINRA insisted that the firm’s cybersecurity procedures and systems were inadequate.  The firm’s prior disciplinary history (similar fine in 2011) was also an important factor in FINRA’s decision to levy this $650,000 punishment.