Moderator: Clifford Kirsch, Partner, Sutherland Asbill & Brennan LLP November 3-4, BISA Regulatory & Compliance Summit

Transcription

1 Moderator: Clifford Kirsch, Partner, Sutherland Asbill & Brennan LLP November 3-4, 2014 BISA Regulatory & Compliance Summit

2 Supervisory Issues Facing Bank Broker Dealers Sales to Seniors Qualified Plan Rollovers Brokerage v. Advisory Accounts; Supervision of Advisory Accounts FINRA s New Supervision Rule Alternative Investments Conflicts/Best Interests OBAs/ Independent Advisor Platform Cybersecurity Check Handling Broken Windows/ Defective Compliance Procedures 2

3 Sales to Seniors SEC/FINRA 2013 Sweep What can we Expect re Examinations? Will regulators expect that firms will establish procedures based on a hard line cutoff age (e.g., 65)? What are the expectation regarding determining diminished capacity? If the registered representative wants to reach out to family members or other trusted advisers of the customer, how will the concerns related to the customer s privacy rights be balanced? 3

4 Qualified Plan Rollovers- RN The RN notes that some firms generate exception report if a customer adds significant assets to an IRA The RN calls for targeted training of Registered Representatives The RN indicates that marketing material related to IRA rollover services offered by the broker-dealer must be balanced by a discussion of other available options and how they compare to the IRA offered, particularly with regard to fees 4

5 Brokerage v. Advisory Accounts What are the expectations re firms polices and procedures with respect to brokerage v. an advisory account? How important is it to determine a customer s anticipated level of trading? From FINRA s Conflicts Report: Firms that are dually-registered should consider whether a commission-based or fee-based account is more appropriate for a customer. A commission-based account may be more cost-effective or appropriate for customers with low trading activity. A clear conflict exists where a registered representative recommends that a client move mutual fund shares to an advisory account, shortly after recommending the purchase of the mutual fund. What sort of ongoing client outreach by financial advisers do regulators expect in connection with advisory accounts? 5

6 Supervision of Advisory Accounts Low Level of Advisory Services Low Trading Large Cash Positions Unassigned Accounts Third Party Advisory Platforms Co-Advisory Solicitor Programs 6

7 FINRA s Supervision Rule Amendments Effective December 1, 2014 Philosophy of Rule/ Risk- Based Approach in Certain Respects What Changes/ What Stays the Same Impact on Supervision of Non-Securities Transactions 7

8 Supervision of Alternative Investments Massachusetts 2013 exam sweep looking at brokerdealers sales of alternative investments to seniors. The alternative investments seem to include REITs, oil and gas partnerships, private placements under Rule 506, structured products, tenancy-in-common and other securities What are regulators looking for? 8

9 FINRA s 2013 Conflicts Report Advocates that broker-dealers adopt a best interests of the customer standard Leadership that single mindedly drives the distribution of proprietary products may undermine the effectiveness of new product review processes intended to protect customer interests. (p. 6); FINRA encouraged by those firms who have adopted an open architecture platform. 9

10 FINRA s 2013 report on conflicts of interest in the brokerage industry (cont d) An effective practice with respect to disclosure is to require investors to attest to their understanding of more complex products before purchase. The process of going through this attestation may reinforce to customers the need to understand the products they purchase. 10

11 FINRA s 2013 report on conflicts of interest in the brokerage industry (cont d) With respect to the impact of disclosure on conflicts, FINRA sets forth a test to determine whether such disclosure might be viewed as effective. FINRA indicates that, in the event that there is a reasonably foreseeable adverse product outcome the question would be whether an investor could legitimately say I did not realize that could happen on the basis of the information the firm provided apart from the prospectus (emphasis added). (p. 13) 11

12 FINRA s 2013 report on conflicts of interest in the brokerage industry (cont d) Product manufacturing firms and product distribution firms establishing a formalized process for identifying and managing conflicts of interest (p. 19, p23) In the context of firms that engage in both product manufacturing and private wealth management, operating such private wealth businesses with appropriate independence from the other business lines (p. 23); and For firms with revenue sharing or preferred partnering arrangements, providing disclosure of such arrangements in advance of executing the transaction. 12

13 FINRA s 2013 report on conflicts of interest in the brokerage industry (cont d) For firms with revenue sharing or preferred partnering arrangements, providing disclosure of such arrangements in advance of executing the transaction. FINRA appeared to be concerned about general disclosure of such arrangement (i.e., those appearing in the account opening documentation) as not necessarily placing the disclosure in the context of a specific customer decision. (p. 24) 13

14 FINRA s 2013 report on conflicts of interest in the brokerage industry (cont d) FINRA notes that financial compensation is a major source of conflicts of interest. (p. 26) FINRA observed that the use of neutral compensation grids can help reduce the incentives for registered representatives to prefer certain products (e.g., equities, mutual funds, variable annuities) over other by paying a flat fee percentage of generated revenue regardless of what product is recommended. FINRA recommends that firms should take measures to mitigate biases that differences in compensation by product may create. 14

15 OBAs; Independent Advisers OBA Review and Approval Disclosure Of OBAs Supervision of OBAs Broker-Deal 15

16 CyberSecurity Increase frequency and sophistication of cyberattacks How will regulators assess that broker dealer security systems and procedures are up to date? 16

17 Check Handling Receipt of Check in Field Then Advisers Act Custody Implications BD implications Receipt of Check in Field- Now Advisers Act Custody Implications Broker-Dealer Disclosure re Compliance Report or Exemption Report Exam Implications -- Compliance, Exemption and Form Custody 17

18 Focus on Broken Windows / Defective Compliance Procedures SEC will be on the look-out for small violations because they may be an indication of larger problems How will this play out in the exam process? 18

19 QUESTIONS 19