All posts by Clifford E. Kirsch

With more than 25 years of experience, Cliff regularly counsels clients on the design and distribution of investment products including wrap-fee programs and other advisory products, mutual funds, bank collective investment funds and insurance products. He also focuses on issues related to the design and implementation of compliance programs at financial services firms.

Enforcement appears as messages disappear part II: Steep penalties imposed in personal messaging cases

Sixteen firms settled with the Securities and Exchange Commission and Commodity Futures Trading Commission for failing to maintain and preserve business-related communications.

  • Total civil penalties for these settlements and similar actions brought in December 2021 exceed $2 billion.
  • The settlements stem from a risk-based investigation into whether broker-dealers, swap dealers, and other registrants are retaining business-related communications made on personal devices.
  • Companies can take certain proactive measures now to ensure their record retention policies and controls sufficiently mitigate risk stemming from employee use of text messaging applications, including third-party platforms such as WhatsApp, on their personal devices.

Read more here.

Susan Schroeder: Avoiding Regulation by Enforcement

FINRA’s head of enforcement’s speech yesterday at SIFMA AML was noteworthy.  Schroeder signaled a commitment by FINRA to avoid regulation by enforcement.  She said “(t)ransparency is particularly important in Enforcement. In order for the industry to be able to follow a rule, FINRA’s expectations have to be clear and rule violations have to be foreseeable. We want to avoid any perception of “rulemaking by enforcement.” That is why as we continue to integrate two enforcement teams, we are also thinking about our internal processes when we bring a case. In particular, we are considering how to identify any novel issues early, and ensure that we flag and discuss these issues with the rest of FINRA to develop the most effective regulatory response on behalf of the organization. Enforcement actions are one type of tool that FINRA can use to effect compliance. Other departments have other tools, and we want to make sure that we consult and collaborate early and often with our FINRA colleagues to consider issues holistically, and to think about the range of actions we might take, from an enforcement action to a Regulatory Notice or even a new rule.

Susan Schroeder’s SIFMA AML Remarks

12b-1 fees — A Brand New Twist

Under a new self-reporting initiative just announced by the SEC staff, the SEC’s Enforcement Division will recommend “standardized, favorable settlement terms” to investment advisers that self-report that they failed to disclose conflicts of interest associated with the receipt of 12b-1 fees.  This is the latest effort by the SEC to crack–down on inadequate disclosure of adviser receipt of 12b-1 fees in connection with advisory accounts where a lower -cost share class of the same mutual fund was available for the advisory clients. The SEC States that among other things, the Division will recommend settlements that will require the adviser to “disgorge its ill-gotten gains and pay those amounts to harmed clients. ”  The plus:  no civil monetary penalty. Investment advisers must notify the Division of Enforcement of their intent to self-report no later than June 12, 2018.

Read More Here.

The Final Rule: Considerations and Analysis of the DOL’s 18-Month Transition Period Extension

The Department of Labor (DOL) extended until July 1, 2019, the date for compliance with the full conditions in its new “investment
advice” fiduciary definition and related exemptions (Final Rule), which became generally applicable on June 9.  After considering the commentary it received, DOL has extended the Transition Period as proposed, without change. Thus, the same transition rules and standards in effect on June 9 will remain in effect until July 1, 2019.  Of particular note, the DOL explained that:
• It needs more time to “carefully and thoughtfully review” the commentary it has received and to honor the President’s directive, as well as to coordinate with the SEC, FINRA, NAIC and other regulators.
• It anticipates proposing a new streamlined class exemption in the near future, which presumably would address innovative products being developed in response to the Final Rule.
• It “sees no compelling reason” to further extend the “grandfathering exemption” (although it did solicit supplemental comments on this point going forward). The applicability date for determining whether a transaction may be grandfathered remains June 9, 2017.

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Additional contributor to this post:

W. Mark

Mixed Results for FINRA’s Disciplinary Actions in First Half of 2017

A midyear analysis of the disciplinary actions reported by FINRA from January through June 2017 indicates:

  • Certain program areas and restitution are up, but fines and the number of disciplinary cases are significantly down
  • FINRA appears to be focusing on more “nuts and bolts” issues like trade reporting, record retention, and supervisory policies and procedures
  • Despite an overall reduction in fines and the number of disciplinary actions, firms should still concentrate on core issues like suitability and books and records, among others

Read More Here

Additional contributor to this post:

Brian L.