All posts by Clifford E. Kirsch, Editor

Eversheds Sutherland 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.

FINRA’s diversity and inclusion efforts

FINRA has recently taken steps to advance diversity and inclusion in the broker-dealer industry, including issuing Regulatory Notice 21-17, on April 29, 2021, seeking comments. FINRA stated that it is committed to supporting diversity, inclusion and equal opportunity efforts by the industry. The request for comment noted that regulatory agencies such as FINRA have an opportunity to evaluate how their rules and actions may have unintended disparate impacts on those within the industries they regulate and how they may unintentionally impede diversity and inclusion. In connection with these efforts, FINRA requested comments by June 28, 2021 “on any aspects of our rules, operations and administrative processes that may create unintended barriers to greater diversity and inclusion in the broker-dealer industry or that might have unintended disparate impacts on those within the industry.”  Subsequently, on May 20, 2021, FINRA chair, Eileen Murray, participated in a virtual fireside chat at FINRA’s Annual Conference with FINRA CEO, Robert Cook, during which Ms. Murray discussed her hopes to see more accountability and standardization in the reporting of diversity and inclusion efforts within firms in the industry, and that tying executive compensation to diversity goals would make a “world of difference.”

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DOL warns the ERISA fiduciary debate is far from over

The FAQ’s recently posted by the Labor Department on its latest ERISA fiduciary investment advice guidance warn that this project is far from over, and are troubling in a number of respects.

  • DOL is compelling the regulated community to comply with its recent guidance by December 20 notwithstanding its intention to change the governing rules in the near term.
  • DOL is on the path to recreating its vacated 2016 rule (other than the private right of action for IRA owners).
  • DOL may be steering financial services providers to a fiduciary model, notwithstanding how they are treated by their primary regulation.
  • In sum, the signals point to DOL resuming its 2015-2016 effort to restructure the financial services industries.
  • Given the range of best interest standards recently extended to financial services providers under other bodies of law, there cannot be an updated empirical record that justifies further regulation by DOL.

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“Luke, I am your father.” (Or not.) Collective False Memory and SEC and FINRA Enforcement Issues from November and December 2020

Often, there are quotes, spellings, symbols, events, or experiences that many of us “know” occurred, but which did not actually happen. This phenomenon is known as the “Mandela Effect,” or “collective false memory.” Its name derives from the false recollection of many people that Nelson Mandela died in the 1980s in prison when, in fact, he lived until 2013.   One example of such a false memory is the iconic quote, “Luke, I am your father,” which Darth Vader proclaimed to his son, Luke Skywalker, in the 1980 classic film “Star Wars: Episode V—The Empire Strikes Back.”  However, that line was never uttered. The correct quote is, “No. I am your father.”

To be clear, we don’t think the securities regulators have false collective memories—other than, possibly, believing this line: “It’s easy for you to produce that information to us. You can just push a button.” And we don’t think the securities industry has such false memories either—other than possibly believing that the SEC sanctioned firms for using the word “may.” (Wait. That really did happen. ) Nonetheless, we thought it would be fun to explore this phenomenon and see how it fits with enforcement matters. After all, it’s important to examine ourselves and our surroundings to better understand what happened and why.

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On the right track: Securities & Exchange Commission adopts rules to streamline private offering exemptions

On November 2, 2020, the Securities and Exchange Commission (the SEC) voted to adopt final amendments (the Amendments) 1 to “simplify, harmonize, and improve certain aspects of the exempt offering framework.” 2 The Securities Act of 1933, as amended (the Securities Act), requires that every offer and sale of securities be registered with the SEC, unless an exemption from registration is available. The current exempt offering framework includes ten exemptions or safe harbors from the registration requirements of the Securities Act, each with distinct requirements. The goal of the Amendments is to reduce unnecessary complexity within the exempt offering framework and to allow market participants (including business development companies, or BDCs) to navigate through the exempt offering framework more easily.

To summarize, the Amendments:

  • clarify the ability of issuers to move from one exemption to another;
  • revise certain offering and investment limits to address inconsistencies in current rules;
  • set clear and consistent rules governing offering communications between investors and issuers (e.g., “test-the-waters” and “demo day” activities); and
  • harmonize certain disclosures, eligibility requirements and bad actor disqualification provisions.

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Appeals Court Disregards FINRA Rule in CCO Case

In a recent review of a disciplinary action charging a chief compliance officer (CCO) with committing “should have known” liability, the DC Circuit Court of Appeals, in a per curium opinion, ignored the FINRA rule that the CCO allegedly violated. The decision raises questions about how FINRA will charge firms and compliance officers for “should have known” violations.

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