SEC

Mar

2014

FINRA Will Renew Push for Shift in Investment Adviser Oversight

From the Desk of Jim Eccleston at Eccleston Law Offices:

FINRA plans to renew its lobbying efforts for legislation that would shift oversight of financial advisers away from the SEC and into the hands of a self-regulating body, Investment News reports.

In 2012, FINRA first attempted to push such legislation. Its efforts were resisted by advisors and the measure died. FINRA backed down when the new Congress convened last year and the champion of the SRO bill, Rep. Spencer Bachus, R-Ala., relinquished his seat as chairman of the House Financial Services Committee.

FINRA is motivated to expand its regulatory authority because the brokerage industry is shrinking.

Over the past two years, FINRA has maintained that it isn’t mounting a lobbying campaign to become the adviser SRO and isn’t engaged in talks with the House or Senate. But FINRA has repeatedly stated that adviser oversight should be increased.

Both FINRA and the Investment Adviser Association (“IAA”) agree that there is a regulatory gap regarding investment advisers. The SEC currently examines only about 8 percent of the nearly 11,000 registered investment advisors in the country on an annual basis.

The SEC’s failure to examine more investment advisers largely is due to a lack of resources. In adopting the current budget, Congress denied the SEC’s request to hire an additional 250 investment adviser examiners.

The restrictive budget leaves the door open for FINRA and its allies to argue that inadequate adviser oversight should be addressed by contracting out this critical function to a private organization like FINRA.

The attorneys of Eccleston Law Offices represent investors and advisers nationwide in securities and employment matters. Our attorneys draw on a combined experience of nearly 50 years in delivering the highest quality legal services.

Mar

2014

Sarbanes-Oxley Whistleblower Protections can Include Private Company Employees

From the Desk of Jim Eccleston at Eccleston Law Offices:

On March 4th, the U.S. Supreme Court ruled that the whistleblower protection provisions of the Sarbanes-Oxley Act protect the employees of a public company’s private contractors. The plaintiffs were employees of the investment advisor to a mutual fund. They claim they were wrongly fired after reporting a putative fraud concerning the mutual funds. Defendants sought dismissal, contending that the Act’s whistleblower protections did not cover plaintiffs because plaintiffs were employed by the advisor, a private company, and not the SEC-registered mutual funds. The Supreme Court disagreed. It held that when read as a whole, the Sarbanes-Oxley Act includes the employees of a public company’s contractor.

Feb

2014

The SEC Discloses Specifics of New Advisor Exams

From the Desk of Jim Eccleston at Eccleston Law Offices:

The “Never-Before Examined Initiative” is aimed at targeting unexamined advisors that have been registered with the SEC for three or more years.

Two approaches include risk-assessment and focused reviews. The risk-assessment approach includes a high-level examination of an advisor’s overall business activities with a particular focus on its compliance program. The focused review will look at higher-risk areas of the advisor’s business operations including filings and disclosure, marketing, portfolio management as well as safekeeping of client assets.

Specifically, the SEC details the following:

Compliance Program. Registered investment advisers are required to adopt and implement written policies and procedures that are reasonably designed to prevent violations of the Advisers Act.

Filings/Disclosure. Investment advisers must disclose all material facts regarding conflicts or potential conflicts of interest so that clients can make an informed decision regarding entering into or continuing an advisory relationship.

Marketing. Investment advisers must utilize fair and balanced marketing materials to solicit new clients or retain existing clients.

Feb

2014

FINRA Moves Forward with SEC Approvals Related to BrokerCheck, Arbitration and Expungement

From the Desk of Jim Eccleston at Eccleston Law Offices:

FINRA’s board authorized FINRA to seek comment on a revised proposal to amend Rule 2210 (communications with the public) to require firms to include a readily apparent reference and link to BrokerCheck on any member firm’s website that is available to retail investors.

The board also authorized FINRA to file with the SEC proposed amendments to the customer and industry codes of arbitration procedure to refine and reorganize the definitions of “nonpublic” and “public” arbitrator.

In addition, the board authorized FINRA to file with the SEC proposed Rule 2081, which would prohibit conditioning an arbitration settlement on the expungement of the customer dispute information.

Finally, the board authorized FINRA to file with the SEC proposed amendments to Rule Series 9800 (temporary cease and desist orders), Rule Series 9550 (expedited proceedings) and related rules in the Code of Procedure.

Feb

2014

Due Diligence Risk Alert Issued to Adviser Selecting Alternative Investment

From the Desk of Jim Eccleston at Eccleston Law Offices:

The SEC is concerned with the due diligence process that investment advisors perform when they recommend or place clients’ assets in alternative investments such as hedge funds, private equity funds, or funds of private funds.

The SEC’s alter notes current industry trends and practices, and highlights certain deficiencies in several of the advisory firms examined.

According to the SEC, investment advisors tend to seek information and data directly from the managers of alternative investments, and then use third parties to supplement and validate that information. In addition, they perform additional quantitative analysis and risk assessment of alternative investments and their managers.

Notably, one deficiency is that many investment advisers failed to review their due diligence polices and procedures in their annual review.

Another deficiency is that many investment advisors do not follow their due diligence procedures described in their advisors’ Form ADV.

Oct

2013

Jim Eccleston: FINRA’s Proposed Procedure for Reps Not Named in Arbitration to Obtain Expungement of U-4 and U-5 Filings

From the Desk of Jim Eccleston at Eccleston Law:

FINRA has proposed new rules that would permit unnamed financial advisers who are the “subject of” allegations of sales practice violations made in investment-related customer-initiated arbitration claims, but who are not named as parties to the arbitration, to seek expungement relief by initiated In reexpungement proceedings at the conclusion of the underlying customer-initiated arbitration case. Specifically, the following are the new proposed FINRA rules: Rule 12100(z) (“Unnamed Person”); Rule 12806 (“Expungement of Customer Dispute Information by Persons Named as Parties); Rule 13100(cc) (“Unnamed Person”); Rule 13806 (“Expungement of Customer Dispute Information by Persons Named as Parties); and Rule 13807 (“Expungement of Customer Dispute Information by an Unnamed Person”).

The current Code of Arbitration Procedure for Customer Disputes and the Code of Arbitration Procedure for Industry Disputes do not provide unnamed persons with express procedures to seek expungement of those types of allegations. The SEC is expected to set an approval date of early 2014.

There are several benefits for brokers. First, the new rules would allow unnamed brokers to use this explicit procedure instead of having to intervene in the arbitration filed by the investor or initiate a new arbitration case in which the broker requests expungement relief and names the investor or firm as the respondent. Another benefit is that the expungement proceedings would commence only after the underlying customer arbitration is concluded. Another benefit is the possibility that the arbitrator reviewing the In reexpungement proceedings will already be familiar with the case. Under the proposed rules, the public chairperson of the underlying arbitration would handle the In reexpungement proceedings.

While our adviser clients currently do have avenues for expungement, FINRA’s new rule proposals greatly would expedite and simplify the entire process.

The attorneys of Eccleston Law represent investors and advisers nationwide in securities and employment matters. Our attorneys draw on a combined experience of nearly 50 years in delivering the highest quality legal services.