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Compliance Alerts

End-of-Year Compliance Responsibilities

Registered Investment Advisers (RIAs) and broker-dealers have a number of annual duties that must be completed prior to the end of the year.  With the new year fast approaching, compliance professionals and risk managers need to ensure that these duties are completed.  Listed below are some of the responsibilities that broker-dealers and investment advisers should complete prior to the end of the year. 

  • Registrations and Renewals- Broker-dealers have until December 12th, 2011 to pay their Preliminary Renewal Account.  Failure to pay by the deadline may endanger your firm's ability to do business in jurisdictions in which it has previously done business.  Although there are a number of ways to pay, firms need to make sure that there are sufficient funds in their CRD Daily Account. 
  • Annual Certifications (NASD Rule 3012 and FINRA Rule 3130)- Pursuant to NASD Rule 3012, broker-dealers are required to submit to senior management a report that details the firm's system of supervisory controls, summarizes test results and recommends any procedural updates.  FINRA Rule 3130 requires the firm's CEO to certify that the firm has a process in place to establish, maintain and review all policies and procedures in place.  These policies should be reasonably designed to achieve compliance with all applicable rules.    Note that although these reports are often completed in tandem, they are separate reports. 
  • Anti-Money Laundering (AML) Review- Every broker-dealer is required to perform an annual review of their Anti-Money Laundering Compliance Program (AMLCP).  The review must be done by a qualified individual who has a working knowledge of the Bank Secrecy Act (BSA).  The review can be performed by an outside consultant or someone employed by the firm.  However, it cannot be performed by the Anti-Money Laundering Compliance Officer (AMLCO) or someone that reports to the AMLCO.  Also, FINRA allows firms that do not have any customers to perform this review once every two years. 
  • Written Supervisory Procedures (WSPs) Review- A review of WSPs is included in the Supervisory Controls Report discussed in FINRA Rule 3012.  Firms should make sure that all business areas and new regulatory items are addressed in the WSP review.  Firms may want to review their WSPs more frequently than annually especially if a new business line or product has been added or if a regulatory exam is anticipated in the next 6 months.  Click here to use FINRA's WSP Checklist as a resource when reviewing your firm's WSPs. 

  • Continuing Education- All FINRA firms need to complete their Firm and Regulatory Element Continuing Education obligations by year end.  The Securities Industry/Regulatory Council on Continuing Education released their Fall 2011 Advisory that provides topics that firms may want to include in their Firm Element Continuing Education Program.  Click here to read the entire notice. 

  • New Rules and Trends-  As a best practice, firms should review new rules and trends in compliance as well as their firm's applicable business lines.  In 2012, changes to the suitability rule, increased risk management duties and alternative investments will require attention.  FINRA releases their Annual Regulatory and Examinations Priority Letter, which details expected trends and new rules for the coming year.  Click here for the 2011 letter and expect FINRA to release it's 2012 letter early in the year. 

  • Branch Office Reviews-  FINRA firms must perform inspections of all offices of supervisory jurisdiction (OSJ) and branch offices that supervise one or more non-branch locations on an annual basis.  Each branch office that does not supervise non-branch locations must be inspected at least once every three years. 

  • Annual Compliance Meeting- Pursuant to NASD Rule 3010(a)(7), broker-dealers are required to complete an annual compliance meeting.  Although all registered representatives and principals are required to be present, attendance through the Internet is acceptable in most circumstances. 

Investment Advisers

  • Registrations and Renewals-  Investment advisers have until December 12th, 2011 to pay their Preliminary Renewal Account.  Failure to pay by the deadline may endanger your firm's ability to do business in jurisdictions in which it has previously done business.  Although there are a number of ways to pay, firms need to make sure that there are sufficient funds in their IARD Daily Account.
  • Annual Certifications (Rule 206 (4)-7 of the Investment Advisers Act)- Investment advisers are required to review their policies and procedures on an annual basis.  This review should determine the effectiveness of the implementation of these policies and procedures.  The review should also include any compliance matters as well as material changes to the adviser's business.  Although the rule requires only an annual review, most advisers perform work related to the annual certification on an ongoing basis. 
  • Anti-Money Laundering (AML)- Although not required to complete an annual AML review, many investment advisors face questions about their AML efforts from investors and counter-parties.  Firms may want to consider completing an AML Risk Assessment that focuses on the adviser's customer base, business activities and nature of the firm's transactions.  
  • New Rules and Trends- As a best practice, investment advisers should stay abreast of new rules and trends in compliance as well as their firm's applicable business lines.  In 2012, the impact of Dodd-Frank legislation, ongoing changes to the Custody Rule and the use of social media will require attention.   
  • Code of Ethics Updates- Pursuant to Rule 204A-1, investment advisers are required to establish maintain and enforce a written code of ethics.  This includes ensuring that supervised persons have read and understand the code of ethics.  Firms are also required to obtain a holdings report from each access person on an annual basis as well as a quarterly transaction report. 
For questions regarding these, or other compliance issues, contact MCD Consulting at info@mcd-consulting.com or 815-295-3994.

FINRA Adds Operations Professional Designation While Consolidating Continuing Education Rule

Through Regulatory Notice 11-33, FINRA provided notification of establishment of an Operations Professional (Series 99) registration category.  The regulatory notice also adopts FINRA Rule 1250 (Continuing Education Requirements) in the consolidated FINRA rulebook. 

FINRA Rule 1230(b)(6) establishes a new Operations Professional registration category.  Individuals that engage in or supervise activities such as client on-boarding, account transfers and prime brokerage must register as an Operations Professional (for a complete list of covered activities
click here).  Additionally, an employee with the authority to commit the firm's capital or commit the firm to a material contract must register as an Operations Professional. 

IMPORTANT NOTE:  Individuals required to be registered as Operations Professionals are eligible for an exception if they hold ONE of the following registrations:

Series 4, 6, 7, 9/10, 14, 16, 24, 26, 27, 28, 37, 38, 51, 53          

While many employees will be eligible for this exception, firms must request this exception via the CRD system for each eligible employee.  Simply holding one of the above-mentioned registrations does not complete the exception request. 

Firms must identify all employees required to be registered as an Options Professional by October 17, 2011.  Firms have until December 16, 2011 to either request exceptions for all identified employees or register for the Series 99 exam.  Employees that do not receive an exception or pass an examination by October 17, 2012 must cease functioning as an Operations Professional.  

Firms should review the duties of associated persons and non-registered senior management prior to the 10/17/11 deadline to determine if any non-registered employees are required to take the Series 99 exam.  Additionally, firms should determine which covered persons are eligible for exceptions and apply for those exceptions by December 16, 2011.   

To read the entire Regulatory Notice, click here.   

For questions regarding this, or other compliance issues, contact MCD Consulting at info@mcd-consulting.com or 815-295-3994.

New Implementation Dates for FINRA Consolidated Suitability and KYC Rules

In an effort to give firms additional time to update procedures and modify systems, FINRA has pushed backed implementation of consolidated Suitability and KYC Rules from October 7, 2011 to July 9, 2012. 

New FINRA Rule 2090 (Know Your Customer) requires firms to use "reasonable diligence" to gather "essential facts" that firms must use to properly perform the following functions:
  • Effectively service customer accounts
  • Carry out special handling instrcutions
  • Understand the authority of each person acting on behalf of the customer
  • Comply with applicable laws, regulations and rules
FINRA Rule 2111 (Suitability) requires firms to use reasonable diligence to gather the following new investment profile factors:
  • Age
  • Investment Experience
  • Time Horizon
  • Liquidity Needs
  • Risk Tolerance
These factors are in addition to the existing investment profile factors firms are required to obtain under current NASD and NYSE Rules.  These existing profiles are:
  • Other Holdings
  • Financial Situation & Needs
  • Tax Status
  • Investment Objectives
Firms need to examine their account opening and maintenance procedures to determine what updates to WSPs and automated systems need to be made to ensure that all required information is gathered and utilized prior to the July 2012 deadline. 

In general, firms must review the following areas to ensure compliance with FINRA Rules 2090 and 2111:
  •  Account Opening Procedures
  • New Account Forms
  • Account Update and Maintenance Procedures
  • Documentation of Recommendations and Strategy
  • Documentation and Record Retention Policies & Procedures
To view the entire Notice to Members, click here. 

For questions regarding this, or other compliance issues, contact MCD Consulting at info@mcd-consulting.com or 815-295-3994.

Firm Element Advisory Update

The Securities Industry/Regulatory Council issued its Spring 2011 firm element advisory update.  The Securities Industry Council publishes their semi-annual advisory in order to highlight possible subject matter for inclusion in Firm Element training plans.   The Council reviews industry trends and regulatory publications to identify relevant topics. 

The council identified the following topics that firms may want to cover in their 2011 Firm Element Training Plan:

1.  Alternative Invesmtents
2.  Anti-Money Laundering (AML)
3.  Business Continuity Planning (BCP)
4.  Social Media
5.  Variable and Deferred Variable Annuities
6.  Municipal Security Due Diligence
7.  Senior Investor Issues

When completing their Firm Element, it is highly recommended that firm's first examine internal factors specific to their business.  Firms would be wise to start with the following internal items :

1.  Covered job functions and responsibilities
2.  Experience level and disciplinary history of the firm's personnel
3.  Products and services offered
4.  Recent regulatory actions, complaints and arbitrations against the firm
5.  Recent examination findings (formal and informal actions)
6.  Recent changes to regulatory rules and regulations
7.  Recent changes to firm policies and procedures
8.  Regulatory Element performance
9.  Internal feedback and input

For questions regarding the Firm Element or any other compliance issue, contact MCD Consulting at info@mcd-consulting.com or 815-295-3994

SEC Likely to Extend Registration Deadline for Hedge Funds to 2012


The SEC will likely extend the registration deadline of many previously unregistered hedge funds.  The Dodd-Frank Act originally called for many hedge funds to register with the SEC prior to July 21, 2011.  On April 12, 2011 David Plaze, Associate Director of the SEC, this deadline would likely be pushed to "first quarter 2012".  If the extension falls through, many hedge funds would have to register with the SEC by July 21, 2011

Although the deadline is likely extended, hedge fund managers and administrators need to be ready to complete the registration process and handle increased compliance responsibilites.  Newly registered hedge funds and private equity funds will now be subject to all applicable provisions of the Investment Adviser's Act.  

If managers have not already done so, they should research industry best practices and incorporate these practices into their current business model.  Other preliminary steps include establishing a tone of compliance and incorporating the CCO into the investment process.  

Managers should also begin planning for the registration process.  Each newly registered firm willneed to complete the following steps:
  • Designate Chief Compliance Officer and begin creating a culture of compliance
  • Develop polices and procedures related to all business and operational areas
  • Gather and analyze information to complete Form ADV Parts 1 & 2
  • Complete and submit entitlement forms to obtain IARD account
  • Finalize and implement policies and procedures
  • Submit Form ADV and finalize registration
It is important that firms realize that there is no compliance "grace period".  Once the firm has filed its Form ADV and completed registration, the SEC expects the firm to be fully compliant.  

For questions regarding this or any other compliance issue, contact MCD Consulting at 815-295-3994 or info@mcd-consulting.com 


FINRA Requests Comments on Two Important Issues

Through Notices to Members (NTM) 11-11 and 11-14, FINRA has requested comments on two important issues. 

NTM 11-14 requests comments on a proposed new rule to clarify a member firm's obligations and responsibilities.  Specifically, the NTM makes clear that member firms are responsible for adherence to applicable rules and regulations even if all, or part, of the function has been outsourced to a third-party service provider.

Under the proposal, firms must have supervisory procedures, including due diligence measures, to ensure compliance AND they must assess whether the service provider(s) (including consultants) are capable of performing the functions and activities in question. 

Perhaps the biggest changes in the proposal are the additional restrictions and obligations of clearing firms.  Along with the obligations discussed above, there are certain functions that clearing firms CANNOT outsource.  Although these functions are not traditionally outsourced by clearing firms, personnel transitions could result in inadvertent rule violations under the current proposal. 

If proposed FINRA Rule 3190 is approved, FINRA member firms should update their procedures to include due diligence measures and a thorough review of all functions and activities completed by third-party service providers. 

The comment period for NTM 11-14 expires on May 13, 2011.  To read the entire NTM, click here. 

NTM 11-11 presents a concept proposal regarding conflicts of interest surrounding debt research reports.  Specifically, the proposal aims to apply the same rules and disclosure requirements to debt research that currently apply to equity research, which are set forth in NASD Rule 2711.

The concept proposal includes an exemption for "institutional research" that is not intended for retail investors.  Under the proposal, institutional research would only require a general "health warning". 

Although the general concept makes sense, there are potential stumbling blocks.  For instance, the definition of "debt security" used in the NTM specifically excludes municipal securities.  Given the poor fiscal health of many municipalities and states, municipal bond defaults could rise significantly.  Consequently, it would be wise for municipal research to be subject to any new regulation.  The NTM does not discuss the possibility of the MSRB creating equivalent rules. 

Additionally, details about the "institutional research" exemption are not clear.  It is unknown whether firms will be required to "opt-in" or "opt-out" of this exemption.  Also to be determined is whether firms and fund managers will be able to opt-in/out on a fund-by-fund basis. 

The comment period for NTM 11-11 expires on April 25, 2011.  To read the entire NTM, click here. 

Comments regarding either NTM can be submitted to FINRA by email at pubcom@finra.org

For questions regarding this compliance alert or other issues, contact MCD Consulting at 815-295-3994 or info@mcd-consulting.com

FINRA Scrutinizes AML Transaction Reviews
A review of recent FINRA disciplinary actions revealed that a number of firms and individuals were fined for inadequate Anti-Money Laundering Compliance Programs (AMLCP). Specifically, firms were cited for failing to properly identify and analyze transactions to determine if they are suspicious and, therefore, required to be reported through a SAR filing. Other AML violations included failure to adequately review wire activity and failure to perform an independent AML review. 
During January and February 2011, fines related to AML violations imposed on individuals ranged from $10,000-$20,000. During the same period, fines imposed on firms ranged from $10,000-$175,000. 
Firms need to ensure that all transactions are subjected to the firm’s AML transaction monitoring system, regardless of department or producer. Often, inadvertent gaps in a transaction monitoring system occur due to non-AML exceptions (new product, heightened supervision of a producing manager, etc.)  
Additionally, the firm’s Independent AML Review should discuss the sampling technique used during the transaction review. A strong transaction monitoring system and rigorous sampling are two important components of a successful AMLCP. 
For questions regarding this compliance alert or other issues, contact MCD Consulting at 815-295-3994 or info@mcd-consulting.com  



 Investment Adviser “Pay to Play Rule” Effective 3/14/2011


The SEC adopted a new rule that aims to curb “pay to play” practices among investment advisers and politicians who oversee and control public pension funds.


 Effective March 14, 2011, SEC Rule 206(4)-5 goes into effect.  Pursuant to the rule, investment advisers may not make direct and indirect contributions to government officials.  A “contribution” is defined as a gift, loan, advance, deposit of money or valuables, subscription, payment of campaign debts or payment/reimbursement for expenses incurred by successful candidates.  A “government official” is defined as anyone, who at the time of contribution is a candidate for or incumbent of an elective office that is directly or indirectly responsible for, or has authority to influence, the hiring of advisers- or who appoints those who do.  

The rule prohibits contributions by imposing a two year ban on compensated advisory services after an IA’s contribution.  Additionally, the rule prohibits bundling of contributions and any covered employees from soliciting or coordinating payments to government officials in geographic locations where the IA is soliciting public pension business.  Finally, the rule prohibits payments to third-party solicitors who are not regulated persons that are already subject to “pay to play” provisions (associated representatives of IAs and broker/dealers).

Are there any exceptions?
Yes.  The rule permits individuals (not the firm) to make total contributions of up to $350 per election to a candidate for whom the individual is entitled to vote.    The rule also permits individuals (not the firm) to make total contributions of up to $150 per election to a candidate for whom the individual is not entitled to vote.  

Finally, if the firm does discover a contribution for less than $350, the two year ban does not occur if the contribution is returned.  The contribution must be discovered within 4 months of the date of the contribution and returned within 60 days of discovery for the 2 year ban to be avoided.  

What actions should investment advisers take? 

With the 3/14/2011 deadline fast approaching, IA compliance officers should make sure that their firm’s code of ethics and supervisory procedures are updated to cover the rule.  Specifically, firms should implement policies and procedures that either require pre-approval or prohibit political contributions by firm personnel.  Additional steps your firm may want to take include the following:

  • Create attestations for firm personnel regarding political contributions
  • Creating pre-clearance policies and procedures for political contributions
  • Regular and rigorous audits of firm payables to ensure no un-approved political contributions are made. 


The following articles may be helpful while creating supervisory structures and internal controls related to the rule:


NSCP Currents Summer 2010

MAPERS Winter 2011 (See pages 26-27)

For questions regarding this rule and its implementation, contact MCD Consulting at 815-295-3994 or info@mcd-consulting.com


FINRA Releases 2011 Annual Regulatory and Exam Priorities Letter


FINRA’s Annual Regulatory and Exam Priorities Letter was released on February 8, 2011.  FINRA’s annual letter discusses areas of regulatory and compliance significance.  The letter was also discussed at the SEC/FINRA CCOutreach BD National Seminar held February 8, 2011 in Washington D.C. 


Listed below are some of the areas discussed in the letter:


·        Electronic Communication and Social Media

Firms are reminded that they are required to create and maintain a system to retain and supervise all communications related to their business, regardless of medium or origination point.  Obviously, this can be difficult when dealing with social media, interactive forums, text messages, etc. 

·        High Yield Investments
Due to today’s low interest environment, customers seeking higher returns have started to turn to high-yield municipal, corporate and other credit securities.  Firms are reminded that they must ensure that investors are informed about the risks and characteristics of high yield investments.    

·        Municipal Securities

Municipal Securities are an exam priority due to the low interest rate environment and the current fiscal crises at the state, local and municipal levels.  Firms must perform an independent analysis of the municipal securities they recommend and sell.  A firm must document its rationale for determining suitability as well as use available information to establish a fair price in a customer transaction.  FINRA specifically states that a firm may not rely solely on a security’s credit rating to perform this analysis. 

·        Vulnerable Customers

FINRA advised firms to pay particular attention to supervisory responsibilities and systems when dealing with vulnerable customers (retired, elderly and/or ill customers).  Firms should be particularly careful that registered reps do not place these customers into inappropriately risky products through misleading or incomplete sales pitches. 

·        Branch Office Audits

Although not mentioned in the letter, Susan Axelrod, Executive Vice President, FINRA Member Regulation, stated that if violations were found at the branch office level during a regulatory exam, FINRA personnel may question the viability of the firm’s branch office audit program. 

·        Private Placements
FINRA will continue its focus on the retail sales of private placements.  In the recent past, FINRA has cited firms for violations relating to the supervision, suitability and advertising of private placements.  Firms engaging in private placements are reminded to maintain strong supervisory and compliance program regarding these securities. 

·        Funding & Liquidity

Per NTM 10-57, FINRA is placing regulatory emphasis on the firm’s funding and liquidity risk management.  Specifically,  FINRA will review the firm’s risk management program to ensure that the firm can operate during future credit market crises.  
  • Anti-Money Laundering (AML)  AML Compliance was specifically addressed during the CCOutreach National BD Seminar.  Best practices recommendations included timely communication with a firm’s clearing firm.  Specifically, panel members recommended that firms review their clearing agreement to ensure that the delineation of duties between the firm and its clearing partner are clear.  Also, Michael Rufino, COO, Member Regulation Sales Practices, recommended that firms supplement their AML programs with non-AML exception reports created by the clearing firm such as:

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