Publication Highlights New Regulatory and Sale Practice Issues for Financial Advisors

From the Desk of Jim Eccleston at Eccleston Law LLC:

The Securities Industry/Regulatory Council recently published its Firm Element Advisory(FEA). The purpose is to highlightcurrent regulatory and sales practice issues for possible inclusion in compliance and training programs at financial services firms. Let’s take a look at the more important categories.

The first important category relates to alternative investments. The FEA notes that FINRA has issued an Investor Alert on alternative funds to inform investors of the characteristics and risks of those investments. The warning states thatalternative funds may carry additional risks, besides the usual market and investment specific risks of traditional mutual funds.Strategies often target specific returns or benchmarks, and seek to mitigate or provide exposure to asset classes and risks. In addition, the FEA points out that FINRA has published guidance to firms about supervisory controls for complex products, which may include,but is not limited to, products such as structured notes, inverse or leveraged exchangetraded funds, hedge funds and securitized products, including asset-backed securities. The intricacy of those products may impair the ability of investors to understand how the products will perform over a variety of time periods and in differing market environments, and can lead to inappropriate recommendations and marketing.

The second important category relates to business continuity. The FEA observes thatFINRA, the SEC and the CFTC (Commodity Futures Trading Commission) issued a joint advisory on business continuity planning to encourage firms to review their business continuity plans and to provide best practices to help improve responses to, and to reduce recovery time after, significant large-scale events.

The third important category relates to customer accounts. The FEA cites FINRA Regulatory Notice 13-45, which reminds firms of their responsibilities. The regulatory noticeaddresses firms’ recommendations to participants in employer-sponsored 401(k) retirement plans who terminate their employment and must determine how to invest their plan assets

The fourth important category relates to dispute resolution. First, the FEA states that FINRA has reminded firms that it is a violation of FINRA Rule 2010 to include confidentiality provisions in settlement agreements or any other documents, including confidentiality stipulation made during a FINRA arbitration proceeding, which prohibit or restrict a customer or any other person from communicating with the SEC, FINRA or any federal or state regulatory authority regarding a possible securities law violation.  Second, the SEC approved amendments to the arbitration codes to provide that any document that a party files with FINRA that contains an individual’s Social Security number, taxpayer identification number or financial account number must be redacted to include only the last four digits of any of these numbers.Finally, the SEC approved FINRA Rule 2081, which prohibits member firms and associated persons from conditioning or seeking to condition a settlement on an agreement relating to expungement of customer dispute information.

The fifth important category relates to registration and disclosure. The FEA reports that the SEC approved FINRA’s proposal to require broker-dealers to perform public record background checks on their FINRA registration applicants within 30 days of filing.

The sixth important category relates to the publicly available financial advisor employment and regulatory reporting database, known as BrokerCheck. The FEA notes that the SEC approved changes to expand the categories of civil judicial disclosure permanently included in BrokerCheck.

Finally, a seventh important category regards sales practice and supervision. The FEA has focused on FINRA’s examination approaches, common findings and effective practices for complying with its suitability rule. FINRA has emphasized that firms must know their customers and must comply with their suitability obligations. FINRA Rule 2090 (Know Your Customer) requires a firm to use “reasonable diligence, in regard to the opening and maintenance of every account, to know (and retain) the essential facts concerning every customer.” FINRA Rule 2111 (Suitability) requires a firm or associated person 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 the reasonable diligence of the member or associated person to ascertain the customer’s investment profile.

As one can see, there have been numerous important developments. Firms will need to use the FEA as an aid to develop and update their compliance and training programs. 

The attorneys of Eccleston Law LLC represent investors and advisers nationwide in securities and employment matters. Our attorneys draw on a combined experience of nearly 65 years in delivering the highest quality legal services.

Related Attorneys: James J. Eccleston

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