FINRA Sanctions Eight More Firms.  FINRA’S  recent announcement that it had sanctioned eight more firms and 10 individuals, and ordered restitution totaling more than $3.2 million, for selling interests in private placement offerings without having a reasonable basis for recommending the securities is yet another warning to firms that fail to conduct adequate due diligence on alternative investment products.

NASD Conduct Rule 2310 requires member firms, when making a recommendation to a customer to purchase or sell a security, to have reasonable grounds to believe that the recommendation is suitable for the customer.  What this means, under FINRA rules, is that member firms who sell alternative investments such as Regulation D offerings must be able to demonstrate that they have an understanding of the potential risks and rewards of the security.  That demonstration must go beyond simply reading prospectuses, private placement memoranda, and other scripts passed along from issuers or participants in the offering process.

The eight firms and their reps FINRA snctioned sold interests in several high-risk private placements, including those issued by Provident Royalties, LLC, Medical Capital Holdings, Inc. and DBSI, Inc., which ultimately failed, causing significant investor losses.  The oft-forgotten message FINRA makes with these cases is that firms have at least two continuing responsibilities with alternative securities offerings.  The first is that member firms need first to document for themselves, and convey to their clients, an understanding of the inherent risks of private offerings; and the second is, after doing so, ask themselves whether these products are suitable for their customers.  Failing to conduct adequate due diligence makes this impossible to do since a selling firm may have no reasonable grounds to believe that the Regulation D offfering is suitable for any customer.

As with these cases, FINRA has shown no reservation in imposing supervisory liability , under Rule 3010, on principals of these firms for failing to conduct meaningful due diligence prior to approving such offerings for sale to customers.


In its continual focus on the importance of effective risk management for broker-dealers (as well as investment advisers) the Securities and Exchange Commission’s Office of Compliance Inspections and Examinations and FINRA have issued a National Exam Risk Alert aimed at providing broker-dealer firms with information on developing effective policies and procedures for branch office inspections.  In addition to reminding firms of their supervisory obligations under FINRA’s supervision rule, the alert notes some common deficiencies found during SEC and FINRA examination of branch office audit practices and emphasizes the need for firms to adopt a comprehensive risk approach to compliance practices. 

The Alert, including FINRA’s Regulator Notice 11-54 , contains a number of best practices that Chief Compliance Officers and other compliance professionals of broker-dealers should consider incorporating as part of their mandated supervisory oversight of branch offices.  The Alert warns that some practices FINRA and SEC examiners have observed, including

  • firms utilizing generic examination procedures for all branch offices, regardless of business mix
  •  leveraging  novice or unseasoned branch office examiners who lack the experience or understanding of the business to challenge assumptions, and
  •  devoting minimal time to each exam and little, if any, resources to reviewing the effectiveness of the branch office exam program

will not be tolerated.  In short, the alert is a reminder that the SEC and FINRA view branch office inspections as integral to determining whether a firm’s culture of compliance eliminates risks to the firm and its clients or contributes to violations of the securities laws.

Study: Recent Disciplinary Actions Against Chief Compliance Officers

Study reminds CCOs they risk permanently tattooing their reputations for violations……..

A study recently released by the law firm Sutherland Asbill & Brennan, covering the period November 2010 through June 2011, found the SEC and FINRA bringing disciplinary actions against Chief Compliance Officers for conduct ranging from failure to supervise registered representatives to failure to supervise anti-money-laundering. See more…

FINRA Orders Raymond James to Pay $1.69 Million for Charging Unfair Commissions

Yet another example of “Fair Prices and Commissions Rule” violation……

FINRA has now ordered Raymond James & Associates, Inc. and Raymond James Financial Services, Inc. to pay restitution of $1.69 million to more than 15,500 investors who were charged unfair and unreasonable commissions on securities transactions. FINRA also fined the two entities $225,000 and $200,000, respectively, and is requiring the each firm to calculate and repay additional overcharges from Nov. 1, 2010, through the date that they each revised their schedule.

FINRA charged that from Jan. 1, 2006 to Oct. 31, 2010, the two companies used automated commission schedules for equity transactions that charged more than15,500 customers nearly $1.69 million in excessive commissions on over 27,000 transactions involving, in most instances, low-priced securities. FINRA found that the firms’ supervisory systems were inadequate because the firms established inflated schedules and rates without proper consideration of the factors necessary to determine the fairness of the commissions, including the type of security and the size of the transaction. See more…

FINRA Webinar to Examine Enforcement Trends

FINRA will host a live one-hour webinar on October 12, 2011(1:30 PM (EST)/ 10:30 AM (PT) examining recent enforcement actions against broker-dealers and registered representatives. The program will provide an overview of new developments and trends. In addition, panelists will discuss improving broker-dealer compliance programs by applying lessons learned from enforcement actions. See more…

NASAA Will Continue IARD System Fee Waiver

The North American Securities Administrators Association (NASAA) recently announced that it will waive the initial set-up and annual system fees paid by investment adviser firms (IAs) and investment representatives (IARs) to maintain the Investment Adviser Registration Depository (IARD) system. Noting that state securities regulators were sensitive to the cost of compliance borne by investment advisers, many of which operate small businesses in local communities, Jack Herstein, NASAA President and Assistant Director of the Nebraska Department of Banking & Finance Bureau of Securities stated that “any cost savings that can be achieved without weakening investor protection will benefit both investors and small businesses in a struggling economy.” See more…

Will FINRA Become the New Regulator for Investment Advisers?

Yesterday, in front of the House Financial Services Capital Markets SubCommittee, Richard Ketchum, CEO of the Financial Industry Regulatory Authority (FINRA) testified that FINRA is prepared to assume the regulation of investment advisers. Ketchum noted that while the SEC oversees more than 11,000 investment advisers, but in 2010 conducted only 1,083 exams of those firms due to lack of resources. Noting two studies related to the regulation of broker-dealers and investment advisers that were completed by the SEC in January, Ketchum stated, “the average registered adviser could expect to be examined less than once every 11 years.” This means that “[w]hile the SEC examines only about 9 percent of investment advisers each year, 55 percent of broker-dealers are examined each year by the SEC and FINRA,” he said.

The SEC’s study on investment adviser exams concluded that, going forward, the Commission would not have sufficient capacity to conduct effective registered investment advisers examinations with adequate frequency. Further, the study found that enhanced examination responsibilities given the SEC under Dodd-Frank meant that an increase in agency examination staff “is unlikely to keep pace with the growth of registered investment advisers.”

Making the argument that if FINRA were to become the SRO for investment advisers, Ketchum pledged that FINRA would establish a separate entity with separate board and committee governance to oversee any adviser work, and would plan to hire additional staff with expertise and leadership in the adviser area. He argued that FINRA possessed the experience operating a nationwide program for examinations and had the ability to leverage existing technology and staff resources to support a similar program for investment advisers. See more…

FINRA Regulatory Notice 11-39: Social Media Websites and Use of Personal Devices for Business Communications

Following its January 2010, Regulatory Notice 10-06, providing guidance on communications with the public through social media sites, FINRA has issued Regulatory Notice 11-39 providing further clarification about application of FINRA rules to new technologies. The notice addressed a number of topics, including recordkeeping, supervision, third-party posts, third-party links and websites, and associated persons accessing social media sites from personal devices.


FINRA reminds members that their obligations to keep records of communications made through social media depend on whether the content of the communication constitutes a business communication. The SEC has stated that the content of an electronic communication determines whether it must be preserved.


As part of its responsibility under NASD Rule 3010, a firm’s registered principal must, prior to use, review any social media site that an associated person intends to use for a business purpose. FINRA has noted that a registered principal must review an associated person’s proposed social media site in the form in which it will be “launched.” Under NASD Rule 2210, unscripted participation in an interactive electronic forum comes within the definition of “public appearance.”

To monitor these fora, FINRA recommends that firms adopt risk-based supervisory procedures utilizing post-use review, including sampling and lexicon-based search methodologies, of unscripted participation in an interactive electronic forum. FINRA requires that any procedure that a firm adopts be reasonably designed to ensure that interactive electronic communications do not violate FINRA or SEC rules. Static posting is deemed an “advertisement” under NASD Rule 2210 and therefore requires a registered principal to approve the posting prior to use.

Links to Third-Party Sites

FINRA warns members that a firm may not establish a link to any third-party site that it knows or has reason to know contains false or misleading content. FINRA concludes that a firm could be deemed to have become “entangled” with a third-party site if, for example, it participates in development of the content on the third-party site.

Data Feeds

The notice also addresses FINRA’s requirement that firms adopt procedures to manage data feeds into their own websites. FINRA is requiring that firms regularly review data feeds for red flags that indicate that the data may not be accurate, and take immediate steps to correct any inaccurate data.

Finally, in a “Q&A format, the notice provides additional guidance regarding, recordkeeping, supervision, third-party posts, third-party links and websites, and associated persons accessing social media sites from personal devices. See more…

Enhancing CCO Effectiveness: Seven Things CCO’s Should Remember

As we mentioned in our July 25, 2011 post, prior to delving into the actual work, skills and knowledge required of a Chief Compliance Officers to an investment adviser, the very first step a CCO should take is to make sure she understands the framework and principles that guide the work they do. Not surprisingly, given the demands of their position, even experienced CCOs ignore or forget some of these clearly written admonitions about the CCO function that routinely appear in canned written compliance policies and procedures that they pass out to registered adviser personnel. As a reminder, periodically, we’ll post rules CCOs should never forget. We follow now with a third rule.

Rule Number Three: Communicate your role to your Boss(es)

To avoid the appearance that you are doing more than administering the compliance program, take the time to carefully define, in writing, your job responsibilities and take steps to ensure that person(s) who supervise you know them and understand the roles and limitations of the job. Then, periodically, take the time to remind them again and again. Were I to give a quiz to all of the managers who supervise CCOs, asking about the CCO role and what a CCO does, I venture, most of them (who have not served in that capacity or have no prior legal or compliance background) would, unfortunately, fail. Even more unfortunate, is that they and other employees believe that you are somehow, by definition, responsible for the day-to-day oversight of others. When you’re perceived as the person responsible for “signing-off” on the actions of others, you open yourself up for assuming supervisory responsibility, and thus liability, for those employees.

The New Whistleblower Protection Rule

The SEC’s new whistleblower program officially became effective on August 12, and the SEC has launched a new webpage for people to report a violation of the federal securities laws and apply for a financial award.

Following enactment of Section 922 of the Dodd-Frank Wall Street Reform and Consumer Protection Act, the Office of the Whistleblower was established by the SEC to administer its whistleblower program. The SEC has appointed Sean McKessy as its head. Under the program, the SEC may provide monetary awards to eligible individuals who come forward with high-quality original information that leads to an SEC enforcement action in which over $1,000,000 in sanctions is ordered. The webpage notes that the range for awards is between 10% and 30% of the money collected. See More…