For some time now, NASAA, FINRA and the SEC’s Division of Enforcement have been focused on cases involving sales of securities to at risk investors, including senior citizens. In various published remarks, NASAA representatives have noted that approximately one-third of the enforcement actions in recent years have involved sales made to senior citizens. In October 2016, FINRA filed with the SEC proposed rules that would amend Rule 4512 and adopt new Rule 2165. These proposals address a number of the concerns raised by FINRA’s Notice to Members 15-37.
The FINRA proposal would amend existing customer account information rules to require brokers to attempt to obtain the name and contact information for a “trusted contact person” upon opening an account. A broker would not be required to attempt to obtain the name of or contact information for a trusted contact person for accounts in existence prior to the effective date of the proposed rule change until the time that it updates the information for the account either in the course of its normal business, or until it is otherwise required to do so under applicable laws or rules.
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The Financial Industry Regulatory Authority, Inc. (“FINRA”) recently filed an immediately effective proposal with the Securities and Exchange Commission (“SEC”) to adopt new rules aimed at certain abusive forms of electronic trading. The proposed rules prohibit two specific types of disruptive quoting and trading activity, and permit FINRA to bring expedited cease and desist proceedings against violations, even if there is no showing of improper intent. The proposal was published by the SEC on November 21, and will become operative on December 15 (see SR-FINRA-2016-043, available here).
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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.
On November 10, 2016, the SEC announced charges against an Israeli-based firm related to its sale of binary option trading. The SEC fined the firm more than $1.7 million for failing to register the binary options as securities, failing to register as a broker-dealer for its sales of binary options to U.S. investors, and for misleading investors in its disclosures related to the risks associated with binary option trading.
In connection with this enforcement action, the SEC also issued an “Investor Alert” on the same day, warning potential investors that many binary option trading contracts are not properly registered with the SEC and may be associated with fraudulent investment schemes.
On November 2, 2016, FINRA announced fines against eight firms, totaling $6.2 million, related to supervisory failures for sales of L-share variable annuities. FINRA has been focused on L-share variable annuity sales, because they are often sold with long-term minimum income riders, which may be incompatible with the higher up-front fees and shorter surrender periods normally associated with the L-share class. Rather than claim that these products were unsuitable for certain investors, FINRA’s enforcement action alleges that firms did not have adequate supervisory systems in place to monitor the L-share variable annuity sales. Moreover, many of the eight fined firms did not have supervisory systems reasonably designed to identify “red flags” related to the L-share variable annuity sales (e.g., the “red flag” of L-shares sold to senior investors with long-term riders).
Industry experts anticipate further FINRA enforcement actions related to the sale of L-share variable annuities, and many firms have gradually been eliminating L-share classes from their fund lineups in response to this recent regulatory scrutiny.