Advisers transitioning from wirehouses and independent broker-dealers must heed a warning from the SEC contained in its 2022 Examination Priorities that is pertinent to their transition. The SEC noted that it will be scrutinizing whether advisors migrating from the broker-dealer model to the investment adviser model have evaluated their existing client accounts to determine whether it is in the client’s best interest to move from a brokerage account to an advisory account. As such, it will be important for transitioning advisors to evaluate the type and frequency of services and investments currently offered and to be offered for each client and to document why, if applicable, it is advisable for the client to move from a brokerage account to an advisory account. Of course, client preferences should be solicited and documented in such analysis. The failure to demonstrate that an adviser conducted such an evaluation could lead to allegations that the adviser breached its fiduciary duty of care to its clients.
Category Archives: Enforcement
A Tale of Two Enforcement Actions Against Compliance Officers: An analysis applying the NSCP Firm and CCO Liability Framework
From Brian Rubin and Amy Albanese in this month’s column for NSCP Currents:
Many compliance officers believe they have targets on their backs. Indeed, according to industry-wide surveys conducted by the National Society of Compliance Professional (NSCP), 72% of compliance professionals are concerned that regulators have expanded the role of compliance officers and the scope of their responsibilities in imposing personal liability and 63% believed that personal liability will be imposed even where compliance did not participate in the violations caused by the company or other executives. Is it any surprise that compliance officers seem to believe that regulators look at them the same way that Mrs. Gamp viewed the living young man: “He’d make a lovely corpse.”
SEC Examination Priorities for 2022 – Key Takeaways
On March 30, 2022, the SEC’s Division of Inspections and Examinations (“staff”) published its examination priorities for 2022 (“Examination Priorities”). The central theme of the priorities for investment advisers seems to focus on the increasingly complex nature of the investment advisory industry, and the priorities focus principally on private funds, environmental, social and governance (ESG) investing, retail investor protections, information security and operational resiliency, emerging technologies, and crypto-assets.
For a summary of the priorities and guidance for mitigating regulatory risk in the coming year, read more here.
Analysis of FINRA Disciplinary Actions Shows Huge Surge in Financial Sanctions
By reviewing FINRA’s monthly disciplinary reports, press releases and online database, Eversheds Sutherland (US) Partners Brian L. Rubin and Adam C. Pollet identified the following key takeaways:
- In 2021, fines and restitution spiked despite a decrease in the number of cases compared with 2020
- FINRA continues to target specific areas, such as anti-money laundering violations, which for the sixth year in a row resulted in the largest amount of fines.
- Regulators appear to be gearing up for actions involving RegBI/Form CRS
How NSCP CCO Framework Could Have Altered FINRA Charges
Every year, FINRA brings hundreds of cases, many alleging that firms have inadequate policies and procedures. In the overwhelming majority of those cases, the Chief Compliance Officer (CCO), who FINRA considers to be “a primary advisor to the member on its overall compliance scheme and the particularized rules, policies and procedures that the member adopts,” is not charged. With regard to Anti-Money Laundering (AML) cases, AML compliance officers (AMLCOs) are also infrequently charged. Questions that always follow such cases include the following: When are violations “firm issues” and when should the compliance officer get charged?
Despite the relatively small percentage of cases brought against compliance officers, they are (unsurprisingly) concerned about being in the cross hairs of regulators, and being subject to personal liability. Compliance officers are usually the firm’s central point of communications with regulators, responsible for responding to regulatory inquiries, producing documents, and answering questions. In many investigations, they must provide on-the-record testimony, even if the case does not directly involve their core functions.
Due to these concerns, on January 10, 2022, the National Society of Compliance Professionals (NSCP) proposed a “Firm and CCO Liability Framework” (NSCP Framework) to “provide guidance to regulators, chief compliance officers (CCOs), and firms regarding perceived or actual CCO liability.” The NSCP Framework developed nine questions to be “considered by regulators where a compliance failure may have occurred,” to evaluate CCO liability.