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Regulatory Update December 2017

  • Fiduciary Rule Delayed — Yet Again: The final exemptions related to the Department of Labor Fiduciary Rule were once again officially delayed.  This means that full compliance with the Fiduciary Rule’s Best Interest Contract Exemption and Prohibited Transaction Class Exemption 84-24 will take effect on July 1, 2019.  However, all registered investment adviser firms still need to comply with the current requirements of the Fiduciary Rule which went into effect on June 9, 2017.  This means that RIAs should adopt impartial conduct standards, develop a process for documenting that IRA rollover transactions are in the best interest of the client, and educate, train, and supervise their financial advisers.  Check out our blog post for more details.   Contributed by Jaqueline M. Hummel, Partner and Managing Director


  • SEC’s Enforcement Activity shows Fewer Cases Brought in 2017: The SEC brought slightly fewer enforcement actions (754 versus 868) and imposed less “monetary relief” ($3.789 billion versus $4.084 billion) in 2017 than in fiscal year 2016.  However, there was an increase in the amount of cases involving violations of public companies and against public company auditors.  For 2018, the SEC will continue to focus its efforts on preventing harm to retail investors with a new Retail Strategy Task Force. The Division of Enforcement has also said it will increase its efforts to hold individuals accountable for wrongdoing.   Contributed by Jaqueline M. Hummel, Partner and Managing Director


  • FINRA Reminder Regarding Sales Practice Obligations Related to Volatility-Linked Exchange-Traded Products (“ETPs”): Volatility-linked ETPs are complex products and are not suitable for all investors.  FINRA Notice 17-32 provides readers with important information regarding the risks associated with volatility-linked ETPs and reminds firms of their obligation to conduct due diligence on complex products, train registered representatives and supervisors on the product’s main features and risks, and establish reasonable supervisory control procedures to ensure suitability and communications requirements are satisfied. Contributed by Rochelle Truzzi, Senior Compliance Consultant



  • SEC’s New Shaming Approach: SEC Chairman Jay Clayton recently announced that the Commission will be creating a website that will contain a searchable database of individuals who have been barred or suspended as a result of federal securities law violations.  This “Bad Actors” website will make it easier for investors to maintain awareness of who the repeat offenders are and avoid them. The website will be a valuable resource for investors to use in their efforts to protect their businesses and clients.  Contributed by Alison R. Palmeri, Esq. Compliance Associate


  • SEC issues New Risk Alert on Observations from Municipal Advisor Examinations: Following an examination of 110 municipal advisors, the Office of Compliance Inspections and Examinations (OCIE) has issued a risk alert with its observations. The areas where deficiencies were most apparent were: registration, books and records, and supervision. Municipal advisors should review their compliance programs and policies & procedures for weaknesses and improve their programs where necessary, in addition to staying on top of newly adopted regulatory changes.  Contributed by Alison R. Palmeri, Esq. Compliance Associate


  • FINRA Firms Must Comply with FinCEN’s Customer Due Diligence (“CDD”) Rule by May 11, 2018: Firms will need to amend their AML Programs in order to address FinCEN’s enhanced customer due diligence requirements.  Covered financial institutions will be required to establish written procedures designed to identify and verify the identity of the beneficial owners of all legal entity customers at the time a new account is opened on or after May 11, 2018 (exclusions and exemptions are available).  FinCEN provides an optional Certification Regarding Beneficial Owners of Legal Entity Customers to aid firms in documenting their obligations under the new rule.  AML Programs will need to be amended to includes risk-based procedures for conducting ongoing customer due diligence (known as the “Fifth Pillar”).  FINRA Notice 17-40 provides a summary of the Fifth Pillar’s Requirements which includes the use of a documented customer risk profile, ongoing monitoring or customer activity, and updating of customer information.  Also, please see FinCEN’s FAQ Regarding Customer Due Diligence Requirements for Financial Institutions, published on July 19, 2016.  Contributed by Rochelle Truzzi, Senior Compliance Consultant


  • We’re From the Government and We’re Here to Help You: Acting Director of the SEC’s Office of Compliance Inspections and Examinations (“OCIE”) Peter Driscoll talked about the OCIE’s efforts to “empower CCOs” through its outreach events and publications, including its annual Exam Priorities and more frequent Risk Alerts.  He said:


“We believe the transparency in these types of risk alerts provide CCOs with clear information about common compliance issues.  In turn, we hope they and the advisers they work for will use this information to improve compliance in these important areas and that investors are better protected as a result.” 


Our advice:  pay careful attention to the four risk alerts published this year, and make sure you are addressing the issues discussed.   Contributed by Jaqueline M. Hummel, Partner and Managing Director

Lessons Learned from Recent SEC and FINRA Cases:

Would you throw away your livelihood for $300,000?  How Cherry Picking Can Ruin Your Life:   Managing Director and owner of Canterbury Consulting, Inc. (“Canterbury”), Kenneth P. Krueger, used his position to allocate profitable trades to his personal accounts, and unprofitable trades to 42 brokerage and advisory client accounts.  The SEC nailed Canterbury for “failure to supervise” and barred Krueger from the industry.   From January 2013 through November 2014, Krueger used an omnibus account to execute block trades.  When a security went up in value on the day of the purchase, Krueger would sell the security the same day and allocate a disproportionate number of profitable day trades to his personal accounts.  And how much did he get in ill-gotten gains? He received $266,169 in excess profits, and $43,482 in commissions and advisory fees from the harmed accounts.  The SEC forced Krueger to disgorge these funds and pay a civil penalty of $80,000.  He was also barred from the industry.  It appears that Krueger’s age (74) and ill health were taken into consideration when determining the appropriate penalty.  Canterbury was also forced to pay $207,102 to account holders injured by Krueger’s trading activity and pay a civil penalty of $172,986.  The firm did get credit (presumably) for its remediation efforts; which included hiring an outside consultant to perform an internal review, taking swift action against Krueger after the review, and promising to reimburse clients.

In this case, no one was reviewing Krueger’s trading activity, so it was easy for Krueger to go undetected for more than a year.  He only got caught because the prime broker terminated Kruger’s use of the block trading account.  It is also noteworthy that Krueger was the only one who used block accounts for trading — just another reason for firms to avoid “one offs”.   Interestingly enough, the SEC made sure to point out that Krueger already had some black marks on his record going back to 1973.  None of the violations were especially serious, but the message is clear — if you have an employee with a history of bad acts, you should be watching his activity.   Contributed by Jaqueline M. Hummel, Partner and Managing Director

FINRA fines Horner Townsend & Kent (“HTK”) $275,000 Over Activities Related to VA Sales and Private Securities Transactions:  In October, HTK, a FINRA member firm since 1969, signed a Letter of  Acceptance, Waiver and Consent (“AWC”) accepting FINRA’s findings that the firm, “failed to reasonably supervise representatives’ sale of multi-share class variable annuities,” and “failed to adequately supervise representatives’ private securities transactions.”  From April of 2016 through June of 2015, approximately 47% of the firm’s VA sales were L-share contracts.  L-shares offer a shorter surrender period than the more common B-share contracts and charge, on average, 30-50 basis points more.  The firm failed to provide training to registered personnel regarding the fees, surrender charges, suitability and supervision of multi-share class VAs.  The procedures manual did not address suitability considerations for sales of different VA share classes.

In addition, HTK failed to develop written procedures and supervise the private securities transactions of its representatives who were dually registered as investment advisors with third-party advisory firms, as required by FINRA Rule 3280 (NASD 3040 at the time of the violations).

The bottom line:  The firm’s WSPs are an essential tool in the implementation of solid sales and supervisory practices with regards to all products and services offered by the firm.  A firm’s WSPs should include reasonable, but specific, guidance regarding suitability determinations, monitoring procedures (e.g., including report names, red-flags, alert parameters), disclosures to clients (when, what and how), notification requirements to the firm regarding conflicts of interest (how, when, to whom), and review/approval process for conflicts of interest.  Contributed by Rochelle Truzzi, Senior Compliance Consultant

Worth Reading:

 Getting buy in from HR to Hire Ethical Employees:  Michael Volkov talks about screening job candidates for integrity, not just a good skill set.

How Hiring Business Experts Can Increase the Impact of your Compliance Team:  Matt Kelly shares what he learned at a recent conference — how bringing in a staffer who understands the business process can help you find weaknesses in controls.

Behind the Statistics of the Annual SEC Enforcement Report:  Urska Velikonja provides some insight into the SEC’s Enforcement Report.  In sum, the more things change, the more they stay the same.

 Filing Deadlines and To Do List for December


  •  Annual Renewal Program for IARD System: The IARD Renewal Program facilitates the annual renewal of investment adviser (IA) firms and their IA representatives’ (IARs) registrations with jurisdictions/states. Preliminary renewal statements for the IARD system will be available November 13, 2017, and will be accessible only through the E-Bill System.  Renewal statements reflect the registration renewal fees and annual system processing fees for all IARs and state-registered IA firms.  Deadline for the receipt of preliminary statement payment is December 18, 2017.  Questions?  Check out the FAQs.


Hardin Compliance Consulting provides links to other publicly-available legal and compliance websites for your convenience. These links have been selected because we believe they provide valuable information and guidance.  The information in this e-newsletter is for general guidance only.   It does not constitute the provision of legal advice, tax advice, accounting services, or professional consulting of any kind.