Best Practices for Retail Non- Deposit Investment Programs

Transcription

1 Best Practices for Retail Non- Deposit Investment Programs Louis Dempsey, Renaissance Ben Marzouk, Eversheds Sutherland David Porteous, Faegre Baker Daniels

2 Agenda Regulatory Developments Focus on Fixed Income, Interest Rate Sensitive & Structured Products Compensation Practices Training Compliance Oversight

3 Regulatory Developments SEC Share Class Disclosure Initiative Background: > SEC Division of Enforcement announced the Initiative on February 12, > Encourages self-reporting of share class disclosure violations in exchange for favorable settlement terms. > Applies to RIAs only. Initiative is squarely focused on comparatively more expensive share classes with 12b-1 fees selected for clients without adequate disclosure. > Query: Does disclosure alone cure Section 206 violations for recommending a more expensive share class when less expensive option is available? SEC action against Ameriprise (Feb. 28, 2018)

4 Regulatory Developments Offerings of ICOs and Cryptocurrencies SEC DAO Report (July 25, 2017) > Status of ICOs as securities requiring SEC registration. > Howey test. > Impact for future ICOs? SEC Division of Investment Management Letter to ICI (Jan. 18, 2018) > Mutual funds are ETFs pegged to cryptocurrency markets. > Concerns regarding valuation, liquidity, and market manipulation. > Request to halt cryptocurrency fund registration requests. Query: Allow reps to purchase? Allow customers to purchase?

5 Focus On Fixed Income Products FINRA Comments and other enforcement actions indicate that FINRA believes firms should: Have robust product review, approval, and monitoring process to assess product specific risks and provide centralized guidance Develop customized training/guidance for RRs, managers, and Principal Review that flow out of the due diligence process Inadequate to rely on sponsors + access to RRs must be supervised so: Know what sponsors are selling and advising RRs Control sponsor conflict of interest Ensure consistency with firm s analysis of risks Have product-specific suitability metrics including for Principal Review review Have product expertise in Principal Review review process Particular concern for bank-channel and older, less sophisticated or more conservative customers who may be chasing rates or not understand risks

6 FINRA Annual Examination Priority Guidance Examiner Focus Areas Regarding Interest Rate Sensitive Products Concentration Risk concentrated positions in interest rate sensitive products Long Duration Risk re: FI Products & Bond Funds if rates rise (including from changes in monetary policy), such products could lose a substantial portion of their value regardless of credit quality of underlying portfolio assets Long Holding Periods to Maturity should match customer risk tolerance, time horizon, liquidity needs High-Yield, Municipal, Other FI may be particularly sensitive to rate changes RR Training & Guidance will look for firm training to ensure RRs Understand such products and risks Make suitable recommendations, and Have proactive conversations with customers about such risks Customer Guidance & Disclosure will look for quality of disclosures re: same

7 Common SEC Exam Questions Regarding Product Sales, Disclosures and Account Types Provide any written disclosures and any scripts used during the Examination Period regarding: a. distribution options (i.e., maintaining assets in a former employer s plan, transferring assets to a new employer s plan, rolling assets over to an IRA, or taking a lump sum distribution), the tax implications of those options, and other considerations (e.g., required minimum distribution requirements, availability of penalty-free withdrawals, protection of assets from lawsuits, and estate planning); b. conflicts of interest or financial interests that Registrant or its representatives have in recommending any specific product or account type; c. the various types of account options available to clients (i.e., IRA Rollover), including the account- level fees and expenses and services provided.; and d. the various investment options available to clients (i.e., structured products, REITs, variable annuities, mutual funds, and ETFs), including information regarding productspecific fees and expenses, revenue sharing, loads, commissions, and other charges.

8 SEC Data Analysis Of Structured Securities Product Transactions By Investment Objective Predominant types of customers that had purchased SSPs at each firm and branch office Focused on branch offices and representatives that had highest numbers of sales that merited further review Trends among customer investment objectives: More SSPs sold to customers in its most conservative investment objective ( Income ) than in the most aggressive ( speculation ) ($96mm income to $11 mm speculative )

9 Regulatory Developments SEC and State Fiduciary Developments SEC: > June 1, 2017 SEC Chairman Jay Clayton invites public comment on proposed rulemaking for uniform standard of conduct for BDs and IAs. > Coordination with DOL? States: > Certain states already impose fiduciary standards through either unethical business practices rules/regulations, or court decisions. > Nevada financial planner amendment. > Several other states taking steps to impose fiduciary duty on financial services providers (e.g., New York, New Jersey, Connecticut, Maryland). > Disclosure-based fiduciary vs. explicit fiduciary standards.

10 Compensation Practices Sales Contests [Loop in DOLFR treatment; Scottrade enforcement action by Massachusetts proves DOLFR still has teeth] Referral Payments Regulation R Revenue Shares Management Overrides

11 Training Acceptable referral and sales practices Who receives training? Reps Principal Review Desk Managers Who performs training? (third party vendors / product sponsors) If training is provided by vendors / product sponsors, is it supervised? Know what sponsors are selling and advising reps Supervision of training Product committee review and approval of marketing and advertising materials used Training should flow from customer profile identified for sale of product and making sure there is clear messaging regarding customer profile and interaction with management and PRD regarding questions Focus on messaging to bank-channel customers how would this be understood by someone less familiar with market risk?

12 Compliance Oversight and Auditing Titles [Note: Received attention from Clayton and SEC Speaks; BDs calling themselves FAs etc ] FINRA Regulatory Notice re: OBA/PST streamlined new rule proposal What how and when to examine investment program?

13 IDENTIFYING PRODUCTS FOR FURTHER ANALYSIS Materiality as measured as overall percentage of sales (e.g., rollover / breakpoint cases) Regulatory attention level Macroeconomic environment triggering heightened risk E.g., interest rate future guidance and potential impact on product performance and customer impact Degree of unrealized losses in product class Underperformance or uneven performance Products that people may be using differently than intended (e.g., unsolicited liquidations in specific products prior to term or recommended holding period) Complaint trending Substantial Switch Activity (to/from) documentation of comparison Analysis of sales against higher-risk suitability factors including Age, risk profile, investment objective, other factors

14 Questions?