FINRA Podcast. FINRA s Monthly Recap May Hello and welcome to FINRA s Monthly Recap Podcast from Washington, D.C. I m

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1 FINRA Podcast FINRA s Monthly Recap May 2016 Hello and welcome to FINRA s Monthly Recap Podcast from Washington, D.C. I m Nico James. KEP: And I m Kenneth Edward Piner. Today is June 1, First up, Notices. FINRA updated firms on the amount of money it will collect in 2016 to fund the Governmental Accounting Standards Board called GASB. Under an SEC order, FINRA collects the GASB accounting support fee on a quarterly basis for member firms that report trades to the Municipal Securities Rulemaking Board. You can read more about the changes to the fee in Regulatory Notice KEP: FINRA reminded firms of their obligations when reporting Large Options Positions. Firms are required to report such positions to the Large Options Position Reporting System. Regulatory Notice was issued in the context of recent disciplinary actions related to Large Options Positions. It has an overview of the Options reporting requirements and consolidates and summarizes previously issued guidance. Starting November 11, under a newly approved rule, when a registered representative changes firms, the new firm is responsible for delivering a FINRA created educational communication to the rep s former customers in two cases. The first is if the firm or rep individually contacts a former customer to transfer assets. The second is if a former customer transfers assets to an account assigned or to be assigned to the representative. Even absent individual contact. You can learn more about the new rule in Regulatory Notice KEP: FINRA issued guidance about Stop Order use during volatile market conditions. As detailed in Regulatory Notice 16-19, FINRA encourages firms to review their practices

2 with an emphasis on educating investors about the risks and benefits of Stop Orders. This may include targeted registered representative education as well as prominent risk disclosures to customers who can enter stop orders directly online. It may also include a customer base review and systemic safeguards around specific order types. The SEC approved amendments to FINRA s Order Audit Trail System commonly called OATS. The changes require firms that report information to OATS to include the identity of any U.S. registered broker-dealers that are not FINRA members as well as any broker-dealer not registered in the U.S. that has received an identifier from a selfregulatory organization. Firms can report the identities using either the broker-dealer s central registration depository number or SRO assigned identifier. You can learn more about the amendments in Regulatory Notice KEP: The SEC also approved a new rule that requires alternative trading systems to submit more order information to FINRA. As detailed in Regulatory Notice 16-21, on November 7, 2016, they will be required to report a number of ATS specific data elements in existing OATS reports for orders and NMS stocks. FINRA reminded firms that it is phasing out test center delivery of the regulatory element of continuing education as part of the transition to C E online. As detailed in a May 16 information notice the change is effective July 1, KEP: Turning now to Resources for Firms. FINRA marked the 20 th anniversary of the securities industry continuing education program with a video documenting its evolution. The video features conversations with former SEC Chairman Arthur Levitt and FINRA Chairman and CEO Rick Ketchum and it includes excerpts from a group interview with over 30 key figures from the program s history. And as Arthur Levitt notes, that history has led to a successful continuing education program. -2-

3 AL: As I think back on my years at the commission, I have to say that this program I view as one of the highlights of our commission. The beginning of what s turned into an enormously successful program that the industry can be proud of. KEP: You can watch the video on the continuing education section of our website. FINRA issued a targeted examination letter in connection with the mutual fund waiver sweep. FINRA is concerned with whether firms made sure mutual fund sales charge waivers were provided to eligible accounts, like retirement accounts and charitable accounts when offered by the mutual fund carrier. KEP: FINRA released a cyber-security checklist for small firms. It s meant to help small firms set up a cyber-security program for identifying threats, protecting from intrusions, detecting when systems have been compromised and planning a response. It s important to note, the checklist is not exhaustive and does not create a safe harbor with respect to any laws or regulations. But it can help small firms get their bearings and serve as a foundation for a cyber-security program tailored to each firm s unique profile of risks and needs. In response to the popularity of the first phone-in workshop about upcoming trace and RTRS reporting and dissemination changes, FINRA and the Municipal Securities Rulemaking Board are hosting a second one on June 7. The free 75 minute call starts at 1:30 PM Eastern. FINRA and MSRB staff will talk about the changes coming July 18. KEP: The accounting details in firm s flux funding and renewal accounts are now available on E-bill. They were previously only available on Web CRD and will remain there until June 17. Thereafter, they will only be on E-bill which offers enhanced ways to access that accounting information. -3-

4 FINRA s Board of Governors met May 6th to discuss a number of issues, including several rule-making items. You can learn more about it in FINRA Chairman and CEO, Rick Ketchum s video report with lead Governor Jack Brennan. In it they talk about topics like, disruptive quoting and motions to dismiss arbitration. And, as Rick says, being able to quickly shut down disruptive quoting and trading is critical. RK: Now the most important part of this rule-making action is it also provides the ability for FINRA, in these circumstances when the activity occurs again and again and again, with the right protections, to bring expedited proceedings. Cause as you know, the time it takes to demonstrate and prove manipulative intent is long if the activity continues on. The chance to be able to react quickly and to stop the activity is really the important part of this rule-making. KEP: Next stop: Education. FINRA s Annual conference took place in Washington, D.C. on May 23 rd through 25 th. At it FINRA s Chairman and CEO, Rick Ketchum talked to attendees about the importance of having a culture of compliance. And as he says, the tone at the top must come from actions, not just words. RK: For a good culture to flourish, a firm s management must articulate and practice high standards of ethical behavior that are expected and visible throughout the organization. So it s essential that a firm s senior manage/leadership own the culture. They must assess whether they are effective role models of the behaviors and values they expect in their staff. A CEO s behavior tells employees what matters and what behaviors are rewarded and punished. FINRA released the third volume in its e-learning course series for retail registered reps to understand their role related to anti-money laundering. It includes scenarios illustrating the importance of staying alert and reporting suspicious activity. -4-

5 KEP: FINRA is offering 3 more sessions of the 2016 Foundations of Web CRD and AIRD training. The 2-day hands-on program is meant to help, not only people who are new to those systems, but anyone who wants a refresher. Two sessions will be in California in June and one more will be in Maryland in September. Space is limited so please register early. The FINRA Institute at Wharton Certified Regulatory and Compliance Professional Program is set for its two parts this year, in July and November. This executive educational experience covers the theory and practical application participating in intensive instruction, discussion and case studies. This year, the foundational week one will be July 17 th through 22 nd with the second capstone week November 6 th through 11th. Both courses take place on the University of Pennsylvania campus. KEP: FINRA s 2016 Fixed Income Conference is set for September 7 in New York City. At it panels will focus on what is happening in the fixed income markets and how regulators and firms are responding. Later in the fall, FINRA and SIFMA are teaming up for a Senior Investor Protection Conference, October 20 th and 21 st in Washington, D.C. It will bring together financial advisors, regulators, compliance officers, attorneys and academic experts to discuss strategies for preventing senior investors from being exploited. KEP: And shortly after that, FINRA s 2016 Small Firm Conference is on November 9 th and 10 th in Phoenix, Arizona. Each panel kicks off with FINRA staff highlighting key rule requirements followed by small firm panelists giving step-by-step approaches to complying with those rules. You can register for all these events and find other resources on the Education Section of our website. -5-

6 KEP: Now let s move on to FINRA News. FINRA sanctioned MetLife Securities with FINRA s largest ever fine related to variable annuities. The firm made negligent material misrepresentations and omissions in variable annuity replacement applications for tens of thousands of customers. Each one made the replacement appear better for the customer even though the recommended annuities were generally more expensive than those the customer already held. Over a five year period MetLife approved nearly all replacement applications submitted to them for review even though nearly ¾ of them had materially inaccurate information. The firm also failed to supervise sales of a rider that was its bestselling variable annuity feature and it failed to make sure its registered representatives got accurate details about the replacement annuities and failed to train them to compare the relative cost and guarantees of different ones. As a result of these violations FINRA fined the firm $20,000,000 and ordered $5,000,000 in payments to its customers. FINRA fines Stevens Incorporated for inadequate supervision of internal flash s sent out by its research department to give out details about companies and industries the firm covered. These failures created the risk that the flash s could include material non-public information that might be misused by sales and trading people. Firm personnel forwarded details from these s to customers in various ways. Even though the s were labeled for internal use only, Stevens firm s policy did not allow this behavior but the firm lacked effective monitoring or supervisory systems to detect or prevent them. As a result of the violations the firm was fined $900,000 and will stop distributing flash s. And it was required to conduct comprehensive review of its policies, procedures and training in the research area. KEP: FINRA fined Raymond James for systemic anti-money laundering compliance failures. The firm failed to establish and implement adequate AML procedures and as a result, the -6-

7 firm failed to prevent or detect, investigate and report suspicious activity for several years. These failures are especially concerning given the firm was sanctioned in 2012 for inadequate AML procedures. Due to these failures, FINRA fined the firm $17,000,000 and the firm s former AML compliance officer was also fined $25,000 and suspended for 3 months. FINRA filed a complaint charging Lawson Financial Corporation, and its Chief Executive Officer, with fraudulent municipal bond sales. The complaint alleges the firm sold millions of dollars of municipal bonds while hiding the financial difficulties faced by the charter schools and assisted living facilities selling the bonds. In addition, the complaint charges that the firm s CEO and COO engaged in self-dealing by abusing their positions as co-trustees of a charitable remainder trust to prop up the struggling offerings. KEP: And now for Investor News. FINRA released a new investor podcast about putting together a financial emergency kit. It lists five things to add to the kit to help you prepare for a natural disaster. And as FINRA s Mike Rote says, you might not be able to rely on digital records during a crisis. MR: Be sure your financial emergency kit includes paper or electronic copies of important financial records. A short list of these records includes: mortgages, property deeds, power of attorney documents and insurance policies. Also include recent statements for bank accounts, credit cards, brokerage accounts and investments that might be held outside a brokerage firm, like mutual funds or 529 college savings plans. Research from Stanford, the FINRA foundation and AARP found that emotions increase susceptibility to fraud in older adults. The research team looked at how adults over age 65 reacted to misleading advertisements compared to how adults between age 30 and 40 reacted. Some participants were induced to feel excitement or anger before being shown -7-

8 the ads while a control group was not induced to feel any emotion. They found that both excitement and anger increased intention to purchase the items compared to no emotional arousal, but only in the older adults. The research is a step towards understanding how fraud works. KEP: FINRA issued a new investor alert about crowd funding and the JOBS Act. Under new rules effective May 16 th the general public will be allowed to invest in start-up company capital raising through crowd funding. This is when the internet is used to raise capital through limited investments from a large number of investors. The alert summarizes how crowd funding works and it offers tips to help investors decide if crowd funding is right for them. And that s all for your May 2016 FINRA Monthly Recap. We hope you found this podcast helpful, if so, be sure to share it with your colleagues. KEP: Until next time, for all of us at FINRA, I m Kenneth Edward Piner. And I m Nico James. KEP: Thanks for listening. -8-