Broker-Dealers, have you ever thought about what a state regulator considers when initiating an enforcement action?
There are a number of considerations that a state regulator takes into account in a regulatory action. Below are a few of them taken from the NASAA Broker-Dealer Section Report on Principal Considerations for Regulatory Actions. We urge you to contact us if you have been contacted by a regulator. Hiring counsel experienced in these matters and doing so promptly can greatly help you going through an investigation and/or an enforcement action.
• Did the firm have adequate written supervisory policies and procedures in place to identify and prevent the alleged misconduct? The regulator will consider whether the firm’s internal compliance procedures were sufficient to detect the misconduct by reviewing the firm’s WSPs. If the firm’s procedures were inadequate, has the firm adopted new and more effective internal controls and procedures designed to prevent the misconduct?
• Did the firm conduct a thorough review of the misconduct? A regulator will consider what steps the firm took to reasonably identify the extent of the misconduct and identify all the parties involved. Did the firm spend the time and resources required to find the problem and address it?
• Were there “red flags” present that the firm missed? Are the firms WSPs adequate in regards to “red flags”? Remember, adequate WSPs are supposed to prevent and detect misconduct and identifying red flags and having procedures in place to address them is a good tool in your prevention and detection efforts.
• How did the firm respond to the State’s requests in the investigation and did they cooperate? This doesn’t mean you have to jeopardize any defense. But having good counsel to help you respond to a regulator’s inquiry and advocate on your behalf is an important component when on the receiving end of an enforcement action.
These are just a few of the considerations. You can see how important it is to have knowledgeable counsel to help you respond to an audit or enforcement inquiry. If you find yourself contacted by a regulator we urge you to contact us to ensure you have experienced counsel assisting you.
Showing posts with label ComplianceAlert. Show all posts
Showing posts with label ComplianceAlert. Show all posts
Monday, September 28, 2009
Thursday, July 9, 2009
SEC REGULATORY OVERVIEW: COMPLIANCE EXAMINATIONS
Through routine compliance examinations, the SEC keeps a close eye on SEC-registered investment advisors, investment companies, broker-dealers, and other types of registered firms to ensure that these firms are maintaining compliance with federal securities laws, and also to identify any potential weaknesses in the SEC’s compliance and supervisory controls.
In June 2007, the SEC for the first time issued its "ComplianceAlert," which provides financial firms with a periodical summary of select compliance areas the SEC examiners are concerned with, thereby providing firms with a forewarning of these problem areas so that they can review and modify their practices where necessary. In its most recent ComplianceAlert, dated July 2008, the SEC noted concern over the following selected practices by SEC-registered firms:
(a) Investment Advisors/Mutual Funds
a. Personal Trading by Advisory Staff—SEC compliance examiners reviewed advisors’ international compliance controls surrounding their employees’ trading and trading by the firms for their own proprietary accounts.
b. Proxy Voting and Funds’ Use of Proxy Voting Services—SEC compliance examiners reviewed practices with respect to the use of third-party proxy voting services, including oversight and operational aspects of mutual funds’ proxy voting, and how advisors managed conflicts of interest in proxy voting.
c. Valuation and Liquidity Issues in High Yield Municipal Bond Funds—SEC compliance examiners reviewed the portfolio composition, valuation and transaction activity of high yield municipal bond funds.
d. Soft Dollar Practices of Investment Advisors—SEC compliance examiners reviewed the soft dollar arrangements maintained by registered investment advisors, including the arrangements these advisors may have with both third-party and proprietary providers.
(b) Broker-Dealers
a. Examinations of Securities Firms Providing “Free Lunch” Sales Seminars—SEC, compliance examiners, in coordination with FINRA and NASAA, performed over 100 examinations of broker-dealers, investment advisors and other financial services firms that offer “free lunch” sales seminars targeting seniors in particular.
b. Valuation and Collateral Management Processes—SEC compliance examiners, in coordination with FINRA, reviewed large broker-dealer firms to assess their valuation and collateral management practices as they related to subprime mortgage-related products, including the firms’ controls around the valuation process.
c. Broker-Dealers Affiliated with Insurance Companies—SEC compliance examiners conducted targeted reviews of a number of broker-dealer subsidiaries of insurance companies.
d. Supervision of Solicitations of Advisory Services—SEC compliance examiners reviewed broker-dealer firms that had designated their registered representatives as “solicitors” for an investment advisor, including how supervision was implemented for these registered representatives’ activities as solicitors.
e. Mortgage financing as Credit for the Purchase of Securities—SEC compliance examiners conducted risk-targeted examinations of broker-dealer firms to evaluate their practice of recommending that their customers finance the purchase of their securities by obtaining a second or reverse mortgage on their home through a bank affiliated with the broker-dealer.
f. Office of Supervisory Jurisdiction Supervisory Structure—SEC compliance examiners reviewed broker-dealer firms’ supervisory and compliance controls under an Office of Supervisory Jurisdiction (OSJ) structure, including each firm’s supervisory structure and practices, and its supervision of its branch offices.
(c) Transfer Agents
a. Practices with Respect to “Lost SecurityHolders”—SEC compliance examiners reviewed transfer agents in order to understand current practices with respect to the search process performed for “lost” securityholders and the use of third-party “search firms” that search for lost securityholders.
Notably, not all of the above-referenced practices are legal requirements, but instead some are merely suggestions by the SEC compliance examiners. Based upon the SEC’s June 2007 and July 2008 release dates for its prior ComplianceAlert letters, it is likely that the 2009 alert will be released shortly. We will provide you with a summary of the SEC’s most recent compliance concerns at that time.
In June 2007, the SEC for the first time issued its "ComplianceAlert," which provides financial firms with a periodical summary of select compliance areas the SEC examiners are concerned with, thereby providing firms with a forewarning of these problem areas so that they can review and modify their practices where necessary. In its most recent ComplianceAlert, dated July 2008, the SEC noted concern over the following selected practices by SEC-registered firms:
(a) Investment Advisors/Mutual Funds
a. Personal Trading by Advisory Staff—SEC compliance examiners reviewed advisors’ international compliance controls surrounding their employees’ trading and trading by the firms for their own proprietary accounts.
b. Proxy Voting and Funds’ Use of Proxy Voting Services—SEC compliance examiners reviewed practices with respect to the use of third-party proxy voting services, including oversight and operational aspects of mutual funds’ proxy voting, and how advisors managed conflicts of interest in proxy voting.
c. Valuation and Liquidity Issues in High Yield Municipal Bond Funds—SEC compliance examiners reviewed the portfolio composition, valuation and transaction activity of high yield municipal bond funds.
d. Soft Dollar Practices of Investment Advisors—SEC compliance examiners reviewed the soft dollar arrangements maintained by registered investment advisors, including the arrangements these advisors may have with both third-party and proprietary providers.
(b) Broker-Dealers
a. Examinations of Securities Firms Providing “Free Lunch” Sales Seminars—SEC, compliance examiners, in coordination with FINRA and NASAA, performed over 100 examinations of broker-dealers, investment advisors and other financial services firms that offer “free lunch” sales seminars targeting seniors in particular.
b. Valuation and Collateral Management Processes—SEC compliance examiners, in coordination with FINRA, reviewed large broker-dealer firms to assess their valuation and collateral management practices as they related to subprime mortgage-related products, including the firms’ controls around the valuation process.
c. Broker-Dealers Affiliated with Insurance Companies—SEC compliance examiners conducted targeted reviews of a number of broker-dealer subsidiaries of insurance companies.
d. Supervision of Solicitations of Advisory Services—SEC compliance examiners reviewed broker-dealer firms that had designated their registered representatives as “solicitors” for an investment advisor, including how supervision was implemented for these registered representatives’ activities as solicitors.
e. Mortgage financing as Credit for the Purchase of Securities—SEC compliance examiners conducted risk-targeted examinations of broker-dealer firms to evaluate their practice of recommending that their customers finance the purchase of their securities by obtaining a second or reverse mortgage on their home through a bank affiliated with the broker-dealer.
f. Office of Supervisory Jurisdiction Supervisory Structure—SEC compliance examiners reviewed broker-dealer firms’ supervisory and compliance controls under an Office of Supervisory Jurisdiction (OSJ) structure, including each firm’s supervisory structure and practices, and its supervision of its branch offices.
(c) Transfer Agents
a. Practices with Respect to “Lost SecurityHolders”—SEC compliance examiners reviewed transfer agents in order to understand current practices with respect to the search process performed for “lost” securityholders and the use of third-party “search firms” that search for lost securityholders.
Notably, not all of the above-referenced practices are legal requirements, but instead some are merely suggestions by the SEC compliance examiners. Based upon the SEC’s June 2007 and July 2008 release dates for its prior ComplianceAlert letters, it is likely that the 2009 alert will be released shortly. We will provide you with a summary of the SEC’s most recent compliance concerns at that time.
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