Recent Regulatory Actions Against Broker-Dealers

Variable Annuity Exchanges:  $Six Million is the Costs for Failing to Consider and Accurately Describe their Costs and Benefits

Fifth Third Securities, Inc. Action

For the second time, the FINRA has sanctioned Fifth  Third related to its sale of variable annuities.  This time, Fifth Third failed to ensure that its reps obtained and assessed accurate information when recommending VA exchanges.  FINRA also found that the firm’s reps and principals were not adequately trained in how to conduct a comparative analysis of the material features of its VAs, causing the firm to misstate the costs and benefits of exchanges, thus making the exchange appear more beneficial to its customers.  To make matters worse, the firm’s principals approved approximately 92 percent of the exchange applications submitted for review. FINRA reviewed a sample of VA exchanges Fifth Third approved from 2013 through 2015, and found  that Fifth Third misstated or omitted at least one material fact relating to the costs or benefits of the VA exchange in approximately 77 percent of the sample.

FINRA fined Fifth Third Securities, Inc. $4 million and required restitution to customers of approximately $2 million.  So what went wrong?  FINRA found Fifth Third’s practices included

  •  overstating the total fees for existing VA or misstating fees associated with various additional optional benefits, known as riders;
  • failing to disclose that existing VAs had an accrued living benefit value, or understating that a customer would forfeit a living benefit value, upon executing an exchange; and
  • representing that a proposed VA had a living benefit rider when it did not.

Compared to FINRA’s fine against MetLife Securities, Inc., ($20 million and order to pay $5 million to eligible customers,  for similar behavior, around the same time two years ago) Fifth Third fared better.  Do these firms believe that such fines (which could have easily been avoided) are simply a cost of doing business? Or maybe Fifth Third believes for namesake that, next time, a “third” time violation may be just the charm.

Recent Regulatory Actions Against Advisers

SEC v. Visium Asset Management LP

Visium has agreed to settle charges related to asset mismarking and insider trading by its managed hedge funds and portfolio managers who inflated the value of securities held by hedge funds it advised causing the funds to falsely inflate returns, overstate aggregate net asset value, and pay excess fees. Based on confidential information from a former FDA official working as a paid consultant to Visium, certain Visium portfolio managers traded in the securities of pharmaceutical companies in advance of two generic drug approvals by the U.S. Food and Drug Administration. Among other violations, the SEC found that Visium failed to enforce its own valuation and insider trading policies and procedures that might have prevented mispricing and the insider trading.

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?”

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”

Reminder: Broker-Dealer and Investment Adviser 2014 Renewals

In Regulatory Notice 13-76, FINRA reminds broker-dealers and investment advisers that the 2014 Renewal Program began on November 11, 2013, when FINRA made the online Preliminary Renewal Statements available to all firms on Web CRD/IARD.

Beginning  November 1, 2013, firms could begin submitting post-dated Form U5, BR Closing/Withdrawal, BDW and ADV-W filings via Web CRD/IARD.  FINRA’s 2014 Renewal Program Calendar reminds of  critical renewal dates. First, Preliminary Renewal States were available beginning November 11, 2013 on Web CRD/IARD. Second, by December 13, 2013, full payment of Preliminary Renewal Statements is due. Third, on January 2, 2014, Final Renewal Statements are available on Web CRD/IARD. Fourth, full payment of Final Renewal Statements is due by January 10, 2014.

FINRA also warns firms that failure to remit full payment of their Preliminary Renewal Statements to FINRA by December 13, 2013, may cause the firm to become ineligible to do business in the jurisdictions where it is registered, effective January 1, 2014 and be subject to late fees.