The SEC recently adopted amendments to its final rule to the Advisers Act Rule 205-3, which pertains to performance fees that advisers are allowed to charge to “qualified clients.” These “qualified clients” must have at least $1 million in assets-under-management (AUM) with the adviser, which a change from the previous requirement of $750,000. Also, they must have a net worth of more than $2 million, with the exception of their primary residence and certain debt secured by that property. This is a change from the previous benchmark of $1.5 million in net worth and previously did not distinguish the primary residence as separate. 

FINRA has updated the TRACE New Issue Form available through the Firm Gateway. The form now accommodates entries for Corporate Bonds, Agency Debt, Equity-Linked Notes and Church Bonds to be added to the system without requiring FINRA Operations. The new issues will be electronically delivered to the TRAQS database for use in trade reporting TRACE-eligible securities.

Changes have been made to the way Corporates, Agencies, Equity-Linked Notes and Church Bonds are entered on the form. Firms should familiarize themselves with the new form before January 30, 2012. Securitized Product (MBS, CMO/ABS) entries will remain as currently designed.

Note: All existing New Issue Forms in a "DRAFT" status will be deleted from the Firm Gateway as of the close of business on January 27, 2012.

Firms subject to the requirements of FINRA Rules 6730 and 6760 must use the updated form to submit new issue information to FINRA beginning January 30, 2012.

View a table of the required fields for the TRACE New Issue form, and a mock-up of the form itself.

For assistance with this latest FINRA announcement contact the professionals at Cobia Compliance by clicking here.

 

In a recent SEC administrative hearing, an investment adviser principal was found guilty of violating the anti-fraud statutes of the Advisers Act. This came as a result of the principal misrepresenting the performance of his account. Lets take a look at some of the details of the case to see what lessons can be learned.

The principal was found by the SEC to have manually adjusted the asset prices that came from an independent custodian and other sources that were input into his company’s record-keeping and reporting system, then recalculating the performance so it showed to be more favorable. The principal argued that his adjustments were justified due to the fact the system could not factor in certain events such as recent corporate transactions, stock performance, and cash flows into its performance analysis. He further argued that because the system did not take these events into account, as he felt they should, the price information from the system was inaccurate, thus not reflecting the performance as he saw it. The judge ruled that the firm had already made the necessary adjustments to the data input into the system to account for the events the principal described, and the performance figures the principal used could not be calculated by any legitimate method.

There were also a number of compliance problems found with the adviser’s compliance program. First, the principal kept no records to justify why he made the adjustments and what data he was using to determine the price. It was found that there was no supervisory review of the client letters the principal was sending out that showed the inaccurate performance data. Also, the principal received no formal training on client letters upon his hiring at the firm and was only given old letters to use as templates. There were also no written procedures on client letters or on calculating performance prices, in fact, it was found that the firm was in violation of Rule 206(4)-7 by not conducting the required annual reviews. Finally, when other firm employees discovered the altered figures, they did not speak up because they feared termination due to the fact the principal was a partner with the firm.

The primary lesson that can be learned here is, had the firm had the appropriate compliance measures in place the inaccuracies would have been discovered much earlier and could have been corrected. If the principal been given the proper training, he may have avoided the situation altogether. If the firm had the required supervisory review and performed the required annual reviews, the problem would have been found by an independent 3rd party and other employees wouldn’t have felt threatened. The team at Cobia Compliance is prepared to partner with your firm to provide the necessary compliance measures needed to avoid cases like this. Click here for a consultation to see how we can assist you.

NASD Rule 2821 establishes sales practice standards regarding purchases and exchanges of deferred variable annuities. The rule addresses four main areas of concern. First, the rule has requirements governing borker recommendations, including suitability and disclosure obligations. Second, it includes various principal review and approval obligations. Third, the rule requires member firms to establish and maintain supervisory procedures reasonably designed to achieve compliance with the standards set forth in the rule. And fourth, the rule has an important training component requiring member firms to develop and document specific training programs designed to ensure compliance with the requirements of the Rule and that associated persons understand the material features of deferred variable annuities.

Cobia has the experience and expertise to help ensure that your firm complies with the requirements of Rule 2821 and the SEC approved amendments. Cobia offers a turn-key option combining all four elements covering suitability and disclosure, principal review and approval, written supervisory procedures, and training.

 

In September 2009, FINRA issued Regulatory Notice 09-57 to notify members that the Securities and Exchange Commission (the "SEC") approved amendments to the Trade Reporting and Compliance Engine ("TRACE") Rules and FINRA Rule 7730 relating to TRACE. The Rule became effective March 1, 2010 but many firms are still struggling to implement TRACE into their daily operating procedures.

Prior to the new Rule, most church bonds were not considered TRACE eligible since they were not being DTC registered. However, FINRA has made clear that the new rule applies, whether or not the bonds are trading through traditional brokerage channels or whether a check is being submitted to the broker-dealer and then forwarded to a trust company without passing through a traditional brokerage account. The change is due to the inclusion of primary market transactions in the new definition of TRACE eligible securities.

With most church bond broker-dealers not having formal clearing arrangements, this rule change represents either the commitment of additional personnel to manually enter transactions via the TRACE website or the commitment to a significant investment in either technology or a formal clearing arrangement to facilitate automated reporting. The timing of the reporting is also important as there is a fifteen minute window to report a trade once it has been paid. This will be another significant adjustment for firms who receive most payments via the U.S. mail rather than by wire transfer.

While this is a time of uncertainty for many firms, FINRA staff have expressed a willingness to assist the church bond industry in the transition. They have expressed a desire to better understand our business and the hardship imposed by the new rule. If you would like to be included in future conference calls and/or correspondene on this issue, please email your contact information to info@cobiacompliance.com.

 

 

 

Just a friendly reminder that it is FINRA renewal season for broker-dealers and investment advisers. Preliminary Renewal Statements are already available on Web CRD and IARD. 

Additionally, a new "CRD Renewal" contact has been added to the FIRNA Contact System. Firms can now designate who receives renewal notifications, such as the person responsible for paying the registration renewal fees.

Should you need assistance with renewals or any other compliance matters, please give Cobia a call at 713-481-1884.

 

As the summer draws to a close, families around the country begin thinking about the start of a new school year. Clearly, this is a time of beginnings. Students from pre-school through college gear up for the start of a new year of teachers, books, classes, books, friends and more.

For those with firm element continuing education responsibilities at a broker-dealer, this time of year is typically spent on endings. With roughly 2/3 of the year gone by, the focus is usually on wrapping up the plan for the current year. While it is important to ensure that all covered persons complete their requirements for the current year, this is also the perfect time to start working on the needs analysis for the 2010 firm element continuing education plan. Starting work early allows the firm to have the plan ready to roll out right at the first of the year. This gives the covered persons plenty of time to complete the plan. It also permits the firm to set a deadline which allows sufficient time to chase down the tardy finishers prior to having to impose any sort of disciplinary action.

The firm analysis is the cornerstone of a firm element continuing education plan. If the needs analysis fails to address all of the relevant areas of the firm's business, the plan is likely to be found wanting during the next regulatory examination. Below, I have listed some of the key factors to consider when preparing the needs analysis. Of course some of these factors may be inapplicable to a particular firm. Like most of compliance, these factors must be tailored to the specifics of a firm's business.

• The Firm Element Advisory - Semi-annually, the Securities Industry/Regulatory Council on Continuing Education publishes the Firm Element Advisory. This document lists a number of potential topics and relevant regulatory resources. It is available through the FINRA website or directly from the Council at www.cecouncil.com.
• New Products - One of the best ways to protect the firm and demonstrate that the needs analysis was tailored is to address new products being offered by the firm. This should include any new products offered during 2009 as well as any anticipated new offerings for 2010.
• Regulatory Examinations - If the firm was examined by FINRA, the SEC or another regulatory body and deficiencies were noted, determine if there is a way to address them in the needs analysis.
• Office Audits - Look back over the office audits conducted during 2009. If there is a discernible pattern pattern of issues that were uncovered, look for ways to address them in the 2010 plan.
• Customer Complaints and Disciplinary Actions - Review the customer complaints received by the firm and those instances where the firm took disciplinary action against covered persons. Are there common themes that should be addressed in 2010?
• Regulatory Element Continuing Education Results - Take a look at the data provided by FINRA for registered representatives who completed regulatory element continuing education during the past year. While the categories are broad, this can still be useful quantitative data.
• Survey of Covered Persons - One of the easiest areas to overlook. Ask the covered persons what they liked and disliked about the current plan and those where they feel they need further education. As a bonus, surveys will strengthen buy-in of the covered persons for the plan.

The Red Flags rule sets out how certain financial institutions, including certain broker-dealers must develop, implement, and administer their identity theft program. Your program must include four basic elements:

1. It must include reasonable policies and procedures to identify the "red flags" of identity theft you come across in your business' day to day operations.
2. Your program must be designed to detect the red flags you've identified.
3. Your program must spell out appropriate actions your firm will take when you detect red flags.
4. You must identify how you will re-evaluate your program periodically to reflect new risks for this crime.

Additionally, the program must be approved by your firm's Board of Directors or senior-level employee and identify who is responsible for implementing and administering the program.

FINRA provides additional guidance to broker-dealers on their website at www.finra.org and in Regulatory Notice 08-69.