Financial Services Industry Digest

October 2017

Greensfelder's Financial Services Industry DigestWelcome to Greensfelder's Financial Services Industry Digest. If you have any questions, please contact your regular Greensfelder attorney or any member of our Securities & Financial Services industry group

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Fiduciary Updates: Although the DOL has yet to finalize its 18-month delay proposal, there have been several developments on the fiduciary front:

  • SEC: Chairman Jay Clayton told lawmakers that the SEC is working on a fiduciary rule proposal and coordinating with the DOL. He laid out four principles to inform such a proposal: It must preserve choice; it must be clear so that investors know what kind of person they are dealing with; it must achieve consistency between retirement accounts and non-retirement accounts; and the SEC, DOL, and states must be coordinated in how they approach the fiduciary standard. Clayton also told representatives on the House Financial Services Committee that he was concerned about state fiduciary laws like the one passed in Nevada earlier this year.
  • CFA Letter: The Consumer Federation of America sent letters to DOL Secretary Acosta, Clayton, and FINRA CEO Robert Cook asking that they investigate whether brokerage firms are violating the DOL Fiduciary Rule by shifting “investors into fee accounts when they would be better off in commission accounts.”
  • Nevada Fiduciary Update: The Nevada Securities Division held a fiduciary workshop Oct. 6 in which representatives of various firms and industry groups, as well as a law professor and several individual financial advisors, offered comments on what they hoped the potential Nevada fiduciary rule would look like. The comments were not in response to a specific rulemaking proposal, and representatives of the Securities Division did not pose questions that clarified in what direction the rulemaking is heading. The NASAA Model Fee Disclosure Schedule was referenced in one question, and the CFA Letter in another, but it was unclear what import, if any, those references had. The Nevada Securities Division anticipates hosting at least one more fiduciary workshop. 
  • Wagner Legislation: Rep. Ann Wagner (R-MO) introduced H.R. 3857 entitled Protecting Advice for Small Savers Act of 2017, which would establish a best interest standard for broker-dealers and prohibit the DOL from regulating broker-dealer conduct as ERISA fiduciaries, toward the end of September. The bill is not expected to become law.

Joseph Borg headshotNASAA Priorities: Alabama Securities Commissioner Joe Borg became the first three-time North American Securities Administrators Association (NASAA) president at the NASAA Annual Conference in Seattle during the last week of September. His acceptance speech highlighted the possibility of a model cybersecurity rule and the problem of unpaid arbitration awards. A couple of other tidbits we picked up at the conference: It also sounds like FINRA and NASAA are working on a Form U4 revision related to unpaid arbitration awards and that the Broker-Dealer Section may update its recent study on senior investor-related practices and procedures at broker-dealers. The conference also involved the release of various work product by state regulators:

  • The Broker-Dealer Section noted that 27 firms are now using the Model Fee Disclosure Schedule;
  • The Investment Adviser Section released a cybersecurity checklist to help investment advisers conduct risk assessments and found over 700 cybersecurity deficiencies as part of its 2017 coordinated exam of state-registered investment advisers;and
  • NASAA released its annual Enforcement Report, highlighting that state regulators ordered more than $230 million in restitution in 2016.

Deepening Circuit Split on Constitutionality of ALJs: In Burgess v. FDIC, the Fifth Circuit suggested that FDIC administrative law judges are “inferior officers,” not mere employees. The Fifth Circuit opinion aligns with Tenth Circuit’s decision in Bandimere v. SEC, which held that SEC ALJs are inferior officers. The D.C. Circuit, on the other hand, has held that both FDIC SEC ALJs are constitutionally hired because they are not inferior officers. We wrote about the D.C. Circuit’s decision in Lucia v. SEC in July when the court deadlocked about whether to rehear the case en banc. Lucia has now petitioned the Supreme Court for review, and the Burgess decision increases the likelihood that the court takes the case to determine whether ALJs are inferior officers subject to the Appointments Clause.


SEC Enforcement: The SEC created within the Enforcement Division a new Cyber Unit and a Retail Strategy Task Force. The Cyber Unit will target misconduct including market manipulation schemes involving false information spread through electronic and social media, hacking to obtain material nonpublic information, intrusion into retail brokerage accounts, and other key areas. Robert A. Cohen has been appointed chief of the Cyber Unit. Meanwhile, the Retail Strategy Task Force will leverage data analytics to develop initiatives to identify misconduct impacting retail investors. The news release specifically mentions unsuitable structured products to microcap pump-and-dump schemes. SEC Chair Jay Clayton also said that the SEC is considering compiling data on unregistered individuals who commit retail securities fraud.

SEC Cyber: The SEC disclosed that hackers may have been able to profit from hacking into EDGAR, the SEC’s public company filing database. The breach involved the disclosure of personally identifiable information for two individuals. It also raised question about the SEC’s ability to protect the data it will begin receiving next year as part of the Consolidated Audit Trail. SEC Chair Jay Clayton recently said the agency is analyzing whether it needs to delay CAT for data security reasons. (Speaking of CAT, FINRA CEO Robert Cook gave a speech last month describing the market surveillance FINRA does and the questions the consolidated audit trail raises about how and who should surveil the market after it is implemented.)

FINRA Rule Proposals Authorized: The FINRA Board of Governors authorized FINRA to publish for comment amendments to Rule 3110 (Supervision) that would provide firms flexibility to conduct remote office inspections of branches where no more than three associated persons, none of whom have a disciplinary history, work and where no customer funds or securities are handled. The Board also authorized FINRA to publish for comment potential revisions to Rule 8312 that would, among other things:

  • provide additional investment adviser information through BrokerCheck about individuals and firms with broker-dealer and investment adviser registrations;
  • make publicly available limited data sets of BrokerCheck information on individuals, similar to what is currently provided by the SEC through the Investment Adviser Public Disclosure site; and
  • allow firms to include in BrokerCheck a comment about arbitration awards pertaining to the firm.

Advertising Rule Risk Alert: The Office of Compliance Inspections and Examinations (OCIE) at the SEC issued a risk alert about the most common deficiencies it sees related to the Advertising Rule during exams. Major themes in the risk alert were advisers presenting performance results without deducting fees and advisers presenting cherry-picked past investment selections. Read our full summary here.

IA Exams: SEC Chair Jay Clayton said the agency was examining 14 to 15 percent of IAs each year, up from 10 percent several years ago. He also said having a self-regulatory organization for IAs is “not a bad idea” but not a priority.

FINRA Exam Restructure: The SEC approved a FINRA rule proposal to streamline competency exams, with changes set to take effect Oct. 1, 2018. The changes are meant to reduce duplicative testing and cut outdated registration categories. New representative-level applicants must pass a general knowledge exam and a revised representative-level qualification exam appropriate to their job functions. News release | Notice

Covered Agency Transactions: FINRA made available frequently asked questions and delayed the implementation date of FINRA’s rule changes to Rule 4210 until June 25, 2018, that established margin requirements for covered agency transactions. Regulatory Notice 17-28


NASAA Board: At the NASAA annual meeting, Michael Pieciak, commissioner of the Vermont Department of Financial Regulation, became NASAA president-elect. Among other NASAA changes, Bryan Lantagne, First Deputy Secretary and Massachusetts Securities Division director, and Tanya Solov, Illinois Securities Division director, joined the NASAA board. Frank Borger-Gilligan, Tennessee Department of Commerce & Insurance assistant commissioner for securities, is the new Broker-Dealer Section chair.

SEC Update: Bridget Fitzpatrick has been named Chief Litigation Counsel of the SEC, and David Gottesman will continue to serve as the agency’s Deputy Chief Litigation Counsel. In addition, Ken C. Joseph, head of the Investment Adviser/Investment Company Examination Program in the New York Regional Office, is leaving the agency and will be replaced by Thomas J. Butler, who was previously director of the SEC's Office of Credit Ratings since 2012. The SEC also began a nationwide search to fill a new senior executive position, the Advocate for Small Business Capital Formation. 

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Cheaper Share Classes: The SEC charged SunTrust Investment Services with collecting more than $1.1 million in avoidable fees from clients by improperly recommending more expensive share classes of mutual funds that charged 12b-1 fees without informing investors that they were eligible for mutual fund shares that did not charge the 12b-1 fee. SunTrust agreed to pay a penalty of more than $1.1 million to settle the charges; it had separately began refunding the overcharged fees plus interest to affected clients after the SEC started its investigation. Order

UIT Rollovers: FINRA fined Morgan Stanley Smith Barney LLC $3.25 million and required the firm to pay $9.78 million in restitution to more than 3,000 customers for failing to supervise its representatives’ short-term trades of unit investment trusts (UITs). According to the AWC, firm representatives executed short-term UIT rollovers, including UITs rolled over more than 100 days before maturity, in thousands of customer accounts, which caused investors to pay higher sales charges. The AWC also said Morgan Stanley did not adequately supervise representatives’ sales of UITs or conduct training specific to UITs.

Read FINRA’s September report of monthly disciplinary actions here.

If you have any questions, please contact your regular Greensfelder attorney or any member of our Securities & Financial Services industry group.

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