Is your small broker-dealer drowning in boxes and boxes of paper? Do you cringe every time you think of storing yet another 50+ page document? Are you interested in exploring the benefits of cloud-based storage? If you answered “yes” to any of these questions, you must first consider your firm’s regulatory requirements for electronic storage media.
It’s that time of the year again! As the fourth quarter ticks by, we have compiled a helpful end of year to-do list to aid small broker-dealers in addressing and closing out important annual compliance requirements.
In the recent “2019 Report on FINRA Examination Findings and Observations,” one of the topics highlighted was the use of digital communications. This can include a wide range of social media, email, text messaging, and various other digital tools. The regulatory requirements pertaining to the usage of digital communications are outlined in Exchange Act Rule 17a-3 and 17a-4 and FINRA Rules 3110(b)(4) and 4510. These rules require procedures pertaining to the usage of these types of communications, as well as the appropriate maintenance of the communications in the form of books and records.
At the end of each calendar year, the Office of Compliance Inspections and Examinations (“OCIE”) staff of the United States Securities and Exchange Commission (“SEC”) publish a list of topics for the next year’s examination priorities. Not so surprisingly, the first item for the 2019 exam priorities listed is “fees and expenses”. This topic was also the highlight of an OCIE Risk Alert in April 2018 as one of the most frequent compliance issues identified in Examinations of Investment Advisers.
Today, investment advisers and broker-dealers face many challenges when providing advice to and working for senior investors. Many seniors are living with or approaching diminished capacity due to Alzheimer’s, dementia, and/or other health-related issues. Unfortunately, these health issues create vulnerability for financial exploitation from caregivers, family members, neighbors, friends, medical professionals, lawyers, clergy, bank employees, or financial service professionals.
Investment Adviser Principal and Agency Cross Trading practices was the topic of a recent OCIE Risk Alert. The Investment Adviser’s Act Principal Transactions Section 206(3) indicates “Investment Adviser’s acting as a principal for his own account, knowingly to sell any security to or purchase any security from a client, or acting as broker for a person other than such client, without disclosing to such client in writing before the completion of such transaction the capacity in which he is acting and obtaining consent of the client to such transaction” are prohibited unless the appropriate disclosures and consent procedures are addressed and completed according to the compliance requirements.
Beginning in 2017, the United States Security and Exchange Commission (“SEC”) initiated a series of examinations aimed at compliance policies and procedures regarding individuals within these firms that had a prior disciplinary history.
It is evident that the U.S. Securities and Exchange Commission (SEC) and Financial Industry Regulatory Authority (FINRA) are constantly putting efforts forward to navigate the unchartered waters of cryptocurrency. Just days before Blockstack’s Reg A+ token offering received SEC approval, the SEC and FINRA issued a joint statement to provide guidance and encourage innovation and ongoing discussions with market participants on the idea of the custody of cryptocurrency for broker-dealers.
Last month, the U.S. Securities and Exchange Commission (SEC) finally gave a blockchain startup company, Blockstack, approval to sell bitcoin-like digital tokens directly to investors— to some extent. The SEC has previously sued and fined several cryptocurrency companies for initial coin offerings (ICO) that the agency said violated securities law.
Thanks to technology, a majority of the gathering and reviewing of information during the due diligence process can typically be done so remotely by officers or committees of the broker-dealer. However, an operational due diligence process is not complete without an on-site visit.