Articles Tagged with FINRA

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This is a reminder that the 2016 IARD account renewal obligation for investment advisers (including exempt reporting advisers) starts this November. An investment adviser must ensure that its IARD account is adequately funded to cover payment of all applicable registration renewal fees and notice filing fees.

Key Dates in the Renewal Process:

November 16, 2015 – Preliminary Renewal Statements which list advisers’ renewal fee amount are available for printing through the IARD system.

December 18, 2015 – Deadline for full payment of Preliminary Renewal Statements. In order for the payment to be posted to its IARD Renewal account by the December 18 deadline, an investment adviser should submit its preliminary renewal fee to FINRA through the IARD system by December 14, 2015.

December 29, 2015 – January 2, 2016 – IARD system shut down. The system is generally unavailable during this period.

January 4, 2016 – Final Renewal Statements are available for printing. Any additional fees that were not included in the Preliminary Renewal Statements will show in the Final Renewal Statements.

January 15, 2016 – Deadline for full payment of Final Renewal Statements.

For more information about the 2016 IARD Account Renewal Program including information on IARD’s Renewal Payment Options and Addresses, please visit http://www.iard.com/renewals.asp

Please contact us if you have questions.

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This is a reminder that the 2015 IARD account renewal obligation for investment advisers (including exempt reporting advisers) starts this November.  An investment adviser must ensure that its IARD account is adequately funded to cover payment of all applicable registration renewal fees and notice filing fees.

Key Dates in the Renewal Process:

November 10, 2014 – Preliminary Renewal Statements which list advisers’ renewal fee amount are available for printing through the IARD system.

December 12, 2014 – Deadline for full payment of Preliminary Renewal Statements.  In order for the payment to be posted to its IARD Renewal account by the December 12 deadline, an investment adviser should submit its preliminary renewal fee to FINRA through the IARD system by December 10, 2014.

December 28, 2014 – January 1, 2015 – IARD system shut down.  The system is unavailable during this period.

January 2, 2015 – Final Renewal Statements are available for printing.  Any additional fees that were not included in the Preliminary Renewal Statements will show in the Final Renewal Statements.

January 16, 2015 – Deadline for full payment of Final Renewal Statements.

For more information about the 2015 IARD Account Renewal Program including information on IARD’s Renewal Payment Options and Addresses, please visit http://www.iard.com/renewals.asp

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Written by: Jessica M. Brown and Jay B. Gould

On March 10, 2014, Financial Industry Regulatory Authority, Inc. (“FINRA”) submitted a proposed rule to the Securities and Exchange Commission (“SEC”) that would require disclosure to certain clients and FINRA regarding the details of a broker-dealer representative’s financial recruiting incentives (the “Proposed Rule”). The Proposed Rule is intended to ensure that the former clients of a representative who has changed firms are aware of: (i) the recruitment compensation that induced the representative to change firms, and (ii) all of the costs and potential risks associated with transferring their assets to the new firm (the “Recruiting Firm”). In addition to disclosures to clients, the Proposed Rule would require the Recruiting Firm to report to FINRA at the beginning of a representative’s employment, any significant total compensation increases the representative will receive in the first year, compared to the representative’s compensation the prior year.

Under the Proposed Rule, if a Recruiting Firm directly or through the representative, tries to induce the representative’s clients from a prior firm to transfer assets to the Recruiting Firm, the Recruiting Firm would be required to disclose to the potential client if the representative has received, or will receive, $100,000 or more in either (i) aggregate “upfront payments” or (ii) aggregate “potential future payments.” Upfront payments include compensation received upon commencement of association or specified amounts guaranteed to be paid at a future date (e.g. cash, deferred cash bonus, transition assistance, forgivable loans, equity awards, loan-bonus arrangements, or ownership interests. Potential future payments include those offered as a financial incentive contingent upon the representative meeting performance-based goals, allowance for additional travel or expense reimbursement in excess to what is typical for similarly situated representatives, or a commission schedule for a representative who is paid on a commission basis in excess of what is typically provided to similarly situated representatives.  Where the Recruiting Firm partnered with another entity, such as an investment adviser or insurance company, to recruit a representative, the disclosed upfront payments and potential future payments would include any payments from those third parties connected to the recruitment.

The amount of recruitment compensation received would be disclosed separately for aggregate upfront payments and aggregate potential future payments using ranges for each: $100,000 to $500,000; $500,001 to $1,000,000; $1,000,001 to $2,000,000; $2,000,001 to $5,000,000; and above $5,000,000. In addition to the amounts that must be disclosed, the Recruiting Firm would be required to disclose the basis for determining the upfront and potential future payments. Pursuant to the Proposed Rule, disclosure would not be required to be disclosed to clients that meet the definition of an “institutional account” under FINRA Rule 4512(c), however accounts held by natural persons would not qualify for the institutional account exception under the Proposed Rule.

Client disclosures, pursuant to the Proposed Rule, would also be required to include whether transferring assets from the representative’s prior firm to the Recruiting Firm would cause the client to incur any costs the Recruiting Firm would not reimburse. Further, if the assets are not transferrable, the Recruiting Firm would be required to disclose the costs the client may incur, including taxes.

The Proposed Rule would require the disclosures be made to the client at the time of first individualized contact by the representative or Recruiting Firm that attempts to convince the client to transfer assets. Written disclosures would be required if the contact is in writing. If the contact is oral, the disclosures would be made orally with written disclosures to follow. The disclosure requirement would be mandated for the representative’s first year with the Recruiting Firm.

The second component of the Proposed Rule would require the Recruiting Firm to report to FINRA if it reasonably expects the total compensation paid to the representative, in his/her first year, to increase the representative’s prior year’s compensation by the greater of 25% or $100,000. The compensation information reported to FINRA would not be available to the public under the Proposed Rule.

The SEC will review the Proposed Rule and is expected to seek public comment. The Proposed Rule has not yet been published on the SEC’s website as of the date of this posting.

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Written by: Jessica M. Brown

The Securities and Exchange Commission (the “SEC”) approved two new Financial Industry Regulatory Authority (“FINRA”) rules as part of FINRA’s ongoing rulebook consolidation process. The two new rules approved by the SEC on December 23, 2013 consolidate a number of existing NASD and NYSE rules and interpretations regarding supervision into the new FINRA Rules 3110 and 3120. The new rules will require broker-dealer firms to bring their current supervisory system and written policies and procedures into compliance with a handful of new requirements. Firms should be aware of the impact the new rules have on: (i) which personnel may act in a supervisory role; (ii) who may conduct office inspections; (iii) how certain internal communication must be reviewed; and (iv) additional requirements in regards to monitoring and reporting insider trading.

Supervisory Personnel

FINRA Rule 3110 requires a broker-dealer to have a supervisory system that designates at least one principal on-site to supervise the activities in each of the broker-dealer’s offices of supervisory jurisdiction (“OSJs”). The designated on-site principal for each OSJ must have a “regular and routine” physical presence and, absent certain circumstances, should not be responsible for the supervision of more than one OSJ.

Inspections of Offices

FINRA Rule 3110 requires broker-dealers to, at minimum, inspect (i) supervisory branch offices and OSJs annually, (ii) non-supervisory branch offices every three years, and (iii) non-branch locations (including “home offices”) on a “regular periodic schedule” which period should not be longer than three years.

Conflicts of Interest with Inspections

The new FINRA Rule 3110(c)(3) requires broker-dealers to establish policies and procedures that are reasonably designed to prevent conflicts of interest from compromising office inspections. Broker-dealers may not permit, except under certain special circumstances, an associated person to perform the inspection of a location where that person is assigned to or is directly/indirectly supervised by, or reports to, a person assigned to that location.

Investment Banking/Securities Transactions

New Rule 3110(b)(2) requires a principal to perform a written review of transactions related to the broker-dealer’s securities or investment banking business. The review does not need to be detailed for each transaction if the broker-dealer’s review system meets certain criteria.

Written and Electronic Communication Review

The new FINRA Rule 3110(b)(4) requires supervisory procedures be in place to review written and electronic communications which relate to the broker-dealer’s securities or investment banking. Further, broker-dealers must put procedures in place to review internal communications which may contain subject matter needing to be reviewed for compliance with securities laws and FINRA rules. While the supervisor is ultimately responsible, Rule 3110(b)(4) permits the delegation of certain communication review duties to unregistered personnel.

Insider Trading

In order to identify potential insider trading or other types of manipulative or deceptive devices, new FINRA Rule 3110(d) requires broker-dealers to have procedures in place to supervise the broker-dealer’s transactions and well as those of its associated persons or family members of the associated persons. In the event of a questionable trade, the broker-dealer must promptly perform an internal investigation. If the broker-dealer is engaged in investment banking services, it must supply FINRA with a quarterly report concerning insider trading investigations in the prior quarter, as well as a report within five days of the completion of an internal investigation where violations of insider trading policies were found.

Annual Report

New FINRA Rule 3120 requires broker-dealers to test and verify supervisory procedures and provide senior management with an annual report. Further, the annual report to senior management of a broker-dealer with more that $200 million in gross annual revenue must detail the reports made to FINRA concerning customer complaints and internal investigations, as well as information on the previous year’s compliance procedures.

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This is a reminder that the 2014 IARD account renewal obligation for investment advisers starts this November.  An investment adviser must ensure that its IARD account is adequately funded to cover payment of all applicable registration renewal fees and notice filing fees.

Key Dates in the Renewal Process:

November 11, 2013 – Preliminary Renewal Statements which list advisers’ renewal fee amount are available for printing through the IARD system.

December 13, 2013 – Deadline for full payment of Preliminary Renewal Statements.  By December 10, 2013, an investment adviser should have submitted to FINRA through the IARD system, its preliminary renewal fee in order for the payment to be posted to its IARD Renewal account by the December 13 deadline.

January 2, 2014 – Final Renewal Statements are available for printing.  Any additional fees that were not included in the Preliminary Renewal Statements will show in the Final Renewal Statements.

January 10, 2014 – Deadline for full payment of Final Renewal Statements.

For more information about the 2014 IARD Account Renewal Program including information on IARD’s Renewal Payment Options and Addresses, please visit http://www.iard.com/renewals.asp

 

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Written by:  Jessica R. Bogo

A Financial Industry Regulatory Authority (“FINRA”) hearing panel held that FINRA’s own rules prohibiting judicial class action waivers in broker-dealer customer arbitration agreements are preempted by the Federal Arbitration Act and unenforceable. Once this decision becomes final, it will likely change the landscape of broker-dealer arbitrations. Many other broker-dealers will adopt a judicial class action waiver in their customer arbitration agreements and end decades of securities class action lawsuits, which generally provide little benefit to class members.

In a thoughtful 48-page decision, a FINRA hearing panel on Thursday, February 21, 2013 followed the U.S. Supreme Court’s holding in AT&T Mobility LLC v. Concepcion, 131 S.Ct. 1740 (2011) (“Concepcion”) and held that FINRA Rules prohibiting broker-dealers from adopting judicial class-action waivers in customer arbitration agreements are unenforceable and preempted by the Federal Arbitration Act (“FAA”). For more background on Concepcion and recent California litigation post-Concepcion, please see our prior client alerts including, “Recent Maverick Ruling in CA Appellate Court Finds Concepcion Does Not Overrule Gentry.”

The decision arises from a Complaint filed on February 1, 2012 by FINRA’s Department of Enforcement against Charles Schwab & Co., Inc. (“Schwab”). In September 2011, Schwab added a provision to its pre- dispute arbitration agreements requiring customers to “waive any right to bring a class action, or any type of representative action” against Schwab or any related third party “in court.” The Complaint alleged that the waiver violated FINRA’s Rules prohibiting self-regulatory organizations (“SROs”) from adopting pre-dispute arbitration agreements that prohibited customers from filing judicial class actions.

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Written by: Louis A. Bevilacqua

On January 10, 2013 the Financial Industry Regulatory Authority (“FINRA”) issued a voluntary Interim Form for funding portals (the “Interim Form”). The Interim Form is designed for prospective crowdfunding portals under the Jumpstart our Business Startups Act (the “JOBS Act”), which was enacted on April 5, 2012. Title III of the JOBS Act, which relates to crowdfunding, requires the Securities and Exchange Commission (the “SEC”) and FINRA to promulgate rules before crowdfunding portals can commence operations. The Interim Form permits companies that intend to become funding portals under Title III of the JOBS Act to voluntarily submit to FINRA information regarding their business. FINRA expects that the information received will help it develop rules specific to crowdfunding portals.

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As the new year is upon us, there are some important annual compliance obligations Investment Advisers either registered with the Securities and Exchange Commission (the “SEC”) or with a particular state (“Investment Adviser”) should be aware of.

See upcoming deadlines below and in red throughout this document.

The following is a summary of the primary annual or periodic compliance-related obligations that may apply to Investment Advisers.  The summary is not intended to be a comprehensive review of an Investment Adviser’s securities, tax, partnership, corporate or other annual requirements, nor an exhaustive list of all of the obligations of an Investment Adviser under the Investment Advisers Act of 1940, as amended (the “Advisers Act”) or applicable state law.  Although many of the obligations set forth below apply only to SEC-registered Investment Advisers, state-registered Investment Advisers may be subject to similar and/or additional obligations depending on the state in which they are registered.  State-registered Investment Advisers should contact us for additional information regarding their specific obligations under state law.

List of annual compliance deadlines in chronological order:

State registered advisers pay IARD fee November-December (of 2012)
Form 13F (for 12/31/12 quarter-end) February 14, 2013
Form 13H annual filing February 14, 2013
Schedule 13G annual amendment February 14, 2013
Registered CTA Form PR (for December 31, 2012 year-end) February 14, 2013
TIC Form SLT Every 23rd calendar day of the month following the report as-of date
TIC Form SHCA March 1, 2013
Affirm CPO exemption March 1, 2013
Registered Large CPO Form CPO-PQR December 31 quarter-end report March 1, 2013
Registered Small CPO Form CPO-PQR year-end report March 31, 2013
Registered Mid-size CPO Form CPO-PQR year-end report March 31, 2013
Registered CPOs filing Form PF in lieu of Form CPO-PQR December 31 quarter-end report March 31, 2013
SEC registered advisers and ERAs pay IARD fee Before submission of Form ADV annual amendment by March 31, 2013
Annual ADV update March 31, 2013
Delivery of Brochure April 30, 2013
Form PF Filers pay IARD fee Before submission of Form PF
Form PF (for advisers required to file within 120 days after December 31, 2012 fiscal year-end) April 30, 2013
FBAR Form TD F 90-22.1 (for persons meeting the filing threshold in 2012) June 30, 2013
Form D annual amendment One year anniversary from last amendment filing

 

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Written by: Jay Gould and Peter Chess

Effective December 3, 2012, hedge funds and other private funds that rely on Section 3(c)(1) of the Investment Company Act (“3(c)(1) Funds”) and which sell their interests through third party marketers, must ensure that their private placement memoranda (“PPM”) are filed with FINRA, the Financial Industry Regulatory Authority.  The Securities and Exchange Commission recently approved new FINRA Rule 5123, Private Placements of Securities, which is part of an ongoing approach by FINRA to enhance oversight and investor protection in private placements.  Under Rule 5123, each firm that sells a security in a private placement, subject to certain exemptions, must file a copy of the offering document with FINRA within 15 calendar days of the date of the first sale.  If a firm sells a private placement without using any offering documents, then the firm must indicate that it did not use an offering document.  The rule also requires firms to file any materially amended versions of the documents originally filed.  Rule 5123 exempts some private placements sold solely to qualified purchasers, institutional purchasers and other sophisticated investors.

For hedge funds and other  private funds that have hired a third party marketer, the fund manager must make sure that the agreement with the marketer, which is required to be a registered broker dealer, obligates the marketer to file the PPM with FINRA and amend the filing if the PPM is materially revised.  The marketing agreement, or “placement agency agreement” as it is sometimes called, should indemnify the fund manager for the failure of the marketer to make these filings.      

Rule 5123 will become effective December 3, 2012, and the full text of the FINRA regulatory notice regarding Rule 5123 is available here.

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Written by: Jay Gould and Peter Chess

The Financial Industry Regulatory Authority (“FINRA”) released new guidance last month regarding new FINRA Rule 2111 (the “Suitability Rule”), which requires a broker-dealer to have a reasonable basis to believe that a recommended transaction or investment strategy involving a security or securities is suitable for the customer, based on the information obtained through reasonable diligence by the broker-dealer.  The Suitability Rule codifies and clarifies the three main suitability obligations that previously had been discussed largely in case law:

  • Reasonable-basis suitability.  A broker must perform reasonable diligence to understand the nature of the recommended security or investment strategy involving a security or securities, as well as the potential risks and rewards, and determine whether the recommendation is suitable for at least some investors based on that understanding.
  • Customer-specific suitability.  A broker must have a reasonable basis to believe that a recommendation of a security or investment strategy involving a security or securities is suitable for the particular customer based on the customer’s investment profile.
  • Quantitative suitability.  A broker who has control over a customer account must have a reasonable basis to believe that a series of recommended securities transactions are not excessive.

In general, the Suitability Rule retains the core features of the previous National Association of Securities Dealers (“NASD”) suitability rule, NASD Rule 2310.  However, the new Suitability Rule imposes broader obligations on firms regarding recommendations of investment strategies.  Existing guidance and interpretations regarding suitability obligations continue to apply to the extent that they are not inconsistent with the new rule.  The guidance provided by FINRA on the Suitability Rule includes the following:

  • The suitability requirement that a broker make only those recommendations that are consistent with the customer’s best interests prohibits a broker from placing their interests ahead of the customer’s interests.
  • The customer’s investment profile is critical to the assessment of the suitability of a particular recommendation.
  • The recently passed Jumpstart Our Business Startups Act (the “JOBS Act”) does not affect the suitability obligations regarding private placements, including those private placements made in reliance on the JOBS Act’s elimination of the prohibition on general solicitation.
  • The term “investment strategy” is to be interpreted broadly and would apply to cases where the strategy results in a securities transaction or even mentions a specific security.
  • The extent to which a firm needs to document its suitability analysis depends on an assessment of the customer’s investment profile and the complexity of the recommended security or investment strategy.
  • Although the reasonableness of a firm’s effort to perform “reasonable diligence” will depend on the facts and circumstances, asking a customer for the information ordinarily will suffice.

The institutional-customer exemption under NASD Rule 2130 and its definition of “institutional customer” has been replaced with the more common definition of “institutional account.”  In addition, the new institutional-customer exemption focuses on whether (1) a broker has a reasonable basis to believe the institutional customer is capable of evaluating risks independently and (2) the institutional customer affirmatively indicates that it is exercising independent judgment (a new requirement).