RISK ALERT: ADVISER BEST EXECUTION PRACTICES

The SEC National Exam Program has issued a new Risk Alert addressing some of the most common deficiencies associated with advisers’ best execution obligations identified by OCIE staff.  In addressing the deficiencies, the alert reminds advisers of existing requirement that in determining best execution an adviser must seek to obtain the execution of transactions for clients in such a manner that the client’s total cost in each transaction is the most favorable under the circumstances. “[T]he  determinative factor [in an adviser’s best execution analysis] is not the lowest possible commission cost but whether the transaction represents the best qualitative execution for the managed account.” The SEC has brought enforcement actions against advisers who fail to meet this standard.

Common adviser best execution deficiencies that were observed by the staff include:

failure to demonstrate periodic and systematic evaluation of the execution performance of broker-dealers used to execute client transactions.

failure to consider the full range and quality of a broker-dealer’s services in directing brokerage.

failure to seek or consider the quality and costs of services available from other broker-dealers.

advisers who failed to provide full disclosure of best execution practices.

•failure to provide full and fair disclosure in Form ADV of their soft dollar arrangements.

•advisers who did not “appear to make a reasonable allocation of the cost of a mixed use product or service according to its use or did not produce support, through documentation or otherwise, of the rationale for mixed use allocations.”

•advisers that appeared to fail to have adequate compliance policies and procedures or internal controls for best execution.

advisers who failed to follow their policies and procedures regarding best execution, including failing to seek comparisons from competing broker-dealers to test for pricing and execution, not allocating soft dollar expenses in accordance with their policies, and not conducting ongoing monitoring of execution price, research, and responsiveness of their broker-dealers.

Advisers should remember that as fiduciaries, they have a duty to obtain best execution in client transactions. The alert list several actions advisers may want to consider when cleaning up such deficiencies.  Actions that might be taken by advisers include, amending their best execution or soft dollar arrangements disclosures, revising compliance policies and procedures, and changing their practices regarding best execution or soft dollar arrangements.

SEC and FINRA To Hold 2014 Regional Outreach to Broker-Dealers

Broker-dealers are reminded, beginning this  spring, the SEC’s Office of Compliance Inspections and Examinations (OCIE), and the SEC’s Division of Trading and Markets, is partnering with FINRA to sponsor regional compliance outreach programs for broker-dealers. The programs will take place in Denver, Los Angeles, Chicago, Miami, Philadelphia, and New York.  Registration is open to all broker-dealer risk, audit, legal, and compliance professionals. Continue reading “SEC and FINRA To Hold 2014 Regional Outreach to Broker-Dealers”

The End of Not Opposing Expungements in Return For Settlement?

Thinking of conditioning the settlement of  a customer arbitration claim on the customer agreeing to expunge her complaint against you? Think again.  The FINRA is now awaiting the SEC’s approval of a FINRA rule proposal that would prohibit associated persons from conditioning settlements of customer disputes on, or otherwise compensating customers for, an agreement not to oppose a request to expunge information from an associated person’s Central Registration Depository (CRD) record. Continue reading “The End of Not Opposing Expungements in Return For Settlement?”

Cyber-Security: FINRA’s Targeted Examination Letter

The IPR Blog: FINRA's Targeted Examination LetterAs we posted earlier in outlining  FINRA’s  2014 Regulatory and Examination Priorities Letter, one focus included FINRA’s concern for the integrity of member firms’ policies, procedures and controls that are supposed to protect sensitive customer data.  In the letter, FINRA states that it will examine and conduct targeted investigations and followed up by issuing  a separate notice concerning  Targeted Examination Letters that some firms may get seeking information about how the firm addresses the issue of cyber-security threats, vulnerabilities, and management of related risks.  The cyber-security topics FINRA will examine or assess include a firm’s

Continue reading “Cyber-Security: FINRA’s Targeted Examination Letter”

An Outline of The SEC’s 2014 Examination Priorities

Last week I wrote about FINRA’s 2014 exam priorities. This week, the SEC announced its 2014 examination priorities covering a number of topics important to investment advisers, investment companies, broker-dealers, clearing agencies, exchanges and other self-regulatory organizations, hedge funds, private equity funds, and transfer agents.

While the SEC makes clear the list is not exhaustive, areas that firms will see heightened scrutiny include fraud detection and prevention, corporate governance and enterprise risk management, technology controls. Included also are issues concerning the growing relationship between broker-dealers and investment advisers, new rules and regulations, and retirement investments and rollovers. Continue reading “An Outline of The SEC’s 2014 Examination Priorities”

FINRA’s 2014 Broker-Dealer Exam Focus

As it does every year since 2006, the FINRA has just released its 2014 Regulatory and Examination Priorities letter  highlighting significant risks and regulatory issues for member firms and how FINRA plans to address such matters in its examination of broker-dealers.  The hope is that broker-dealers will use the letter to identify risk exposures to enhance their supervisory, compliance and risk management programs to protect investors, the integrity of the markets and themselves.  Unfortunately, for some the letter goes unheeded until later the firm is ”shocked” to learn during a FINRA cycle exam that the examination staff is spending so much time reviewing the firm’s records on an issue raised in the letter. Continue reading “FINRA’s 2014 Broker-Dealer Exam Focus”

Reminder: SEC National Compliance Outreach Program

Advisers are reminded the SEC’s annual compliance outreach program National Seminar will be held on January 30, 2014, at its headquarters in Washington, D.C. Investment adviser and investment company senior officers, including chief compliance officers (CCOs) are invited to register and attend.

This year’s agenda will likely include panel discussions with SEC staff from the Office of Compliance Inspections and Examinations (OCIE), Division of Investment Management, and Division of Enforcement’s Asset Management Unit and investment adviser personnel. The agenda’s topics will include SEC exam priorities in 2014, private fund advisers, registered investment companies, valuation, and the role of the CCO. Continue reading “Reminder: SEC National Compliance Outreach Program”

Compliance Risks With Leveraged and Inverse ETF Sales

FINRA has ordered Atlanta-based broker-dealer, J.P. Turner & Company, L.L.C. to pay $707,559 in restitution to 84 customers for sales of unsuitable leveraged and inverse exchange-traded funds (ETFs) and for excessive mutual fund switches.

FINRA’s action against J.P. Turner is another reminder of the need for broker-dealers to carefully scrutinize the suitability of such non-conventional investments products like inverse exchange-traded funds.

While FINRA mutual fund switch violation cases (a practice FINRA has addressed repeatedly) are more common, inverse ETFs sales practice violations case have not been as prominent, but should come as no less a surprise. Continue reading “Compliance Risks With Leveraged and Inverse ETF Sales”

More SEC Guidance To Avoid Blowing The Venture Fund Adviser Registration Exemption

The SEC has just published additional guidance for those venture capital funds advisers relying on an exemption to not  register as investment advisers under the Investment Advisers Act of 1940, and who may worry that the way they  structured a fund (or whether certain actions discussed below) might jeopardize the ability to rely on the exemption. In response to such inquiries, the SEC’s Division of Investment Management has provided additional guidance in the form of five examples or “scenarios” for advisers relying on the “venture capital fund” exemption or “VC Exemption” where they advise one or more venture capital funds. First, some background:

Continue reading “More SEC Guidance To Avoid Blowing The Venture Fund Adviser Registration Exemption”

NEW REGISTRATION RULES FOR MUNICIPAL ADVISORS

As they were required to do under the Dodd-Frank Act, the SEC announced that it has now voted to adopt permanent rules requiring municipal advisors to register.  Previously, and immediately after Dodd-Frank,  municipal advisors were placed under a temporary registration requirement, and following it, more than 1,100 municipal advisors registered with the SEC.

The permanent rule, the SEC says, will address the long concern about the fallout from losses suffered, in part, by municipalities purchasing complex derivatives products and relying on the advice from unregulated advisors — advisors, who municipalities may not have been aware, may have had conflicts of interest.   In addition to defining the term “municipal advisor,” and who is exempted from that definition, the rule  identifies when a person is considered to be providing “advice.”   For example, the SEC says, other than general giving information, a  person recommending to a municipal entity advice based on a particular need related to municipal financial products or related to the muncipalities’ issuance of municipal securities would be considered providing muncipal advice. 

The SEC’s Press Release states that the new rules will be effective 60 days after publication in the Federal Register.