REMINDERS
FINRA – Boston District
Preventive Compliance Meeting
10/29/07 10:00-11:00 am
Moderators: Kathryn Traverse and Tina Farley
Speakers: Patricia Albrecht – Supervisory Controls
Laura Gansler - Responsibility to Senior Investors
Allister Johnston – Common Violations, Procedures Updates
Supervisory Controls:
Common exam findings included:
- confusion on the requirements for 3012/3013 and confusing this with 3010
- failure to perform 3013 certifications or completing and presenting the report to senior management
- 3012 – failure to have procedures in place or failure to test and report, failure
- Failure to identify 20% heightened supervision threshold requirement
- 3012 – failure to file intent to rely on limited size and resources exception – this is not an exemption to the requirement
- Failure to document why exception needed
There is a three-fold approach to the rules:
3013 – CEO certifies the process to adopt adequate supervisory procedures
3010 – establishes the written supervisory procedure (wsp’s); adopts procedures
3012 – test/verify wsp’s and amend them if needed
Why 3013? This rule arose from the various financial scandals in 2000 and the need for meaningful communication/supervision. Under 3013 you must:
- designate CCO to FINRA through the contact system and Schedule A of the Form BD. There can be more than one CCO but they must be a principal of the firm and must have access to consult with the CEO.
- Annual report to detail processes in place to get to the wsp’s
- CEO certification – annually that processes detailed in annual report and has meeting with CCO during the year to review - new amendment also allows for co-CEO’s
3012 – Three requirements:
a. designate principal to establish, maintain, enforce wsp’s and amend when needed, submit the annual report. You do not have to test all the wsp’s but you need to have risk based analysis of your procedures.
b. day-to-day review of producing managers are required by someone senior – confusion on producing managers – a producing manager has two requirements (they have supervisory responsibility, and they are servicing customer accounts) This is the rule where the limited size and resources exception can be used. Documentation is required as to why this exception is relied upon. There is also a heightened supervision requirement of this rule. This is not tied to compensation but the amount of revenues the managers procedures as compared to the amount of revenue the supervisor oversees. If this is greater than 20% over the course of a rolling 12 month period, heightened supervision is required. The definition of heightened supervision is set by the firm. There is no exception for sole proprietors in this rule.
c. procedures designed to monitor: transmittal of funds or securities, customer change of address, change of investment objective, etc. This is where customer notification falls.
NTM on Senior Investors
The purpose of this NTM 07-43 was to state FINRA’s interest and best practices when dealing with seniors. Two issues are covered: suitability of recommendations and communications (senior designations and sales seminars for retirees).
In suitability it applies across the board regardless of investor but seniors are particularly vulnerable as life stage changes. Their investment horizon, risk tolerance, tax status, liquidity may all change. Some products have been seen that pose potential risk to seniors. Some include illiquidity products: Variable Annuities; Variable Life Settlements; mortgage home equity to purchase securities; using retirement savings to invest in high risk vehicles, etc.
In communications: senior designations can be utilized but not in a misleading way – firm’s must know what reps are – rule 2210 prohibits misleading communications
Rep must get approval for designations. There are high pressure sales seminars – “free lunch” seminars are not prohibited but exaggerated claims and language are.
Suggestion is for firms to have committees to help if they see situations of financial abuse or diminished capacity. There is an interpretative letter on the website on professional designation guidance.
FINRA does not have a specific definition of Senior – They encourage the individual brokerage firm to determine their own definition. It is also important to note that not all seniors are in the same life stage and treatment may vary as some are more tolerant of risk than others.
AML
In terms of policies and procedures – the NASD template is outdated and there are specific items such as Section 311 of the Patriot Act – prohibitions against Bank of Delta Asia, etc. and correspondence accounts that are not currently addressed. Firms should be aware of this when utilizing the template to develop their AML plan. FINRA’s definition and the Treasury Departments definition of Correspondence Accounts are different. The Treasury Dept. sees these accounts as established by a foreign bank or handling financial transaction.
There are two parts of Section 312 Patriot Act, Treasury Rule 31 BFR103.176 which need to be addressed. The first part was 7/06 and the second 9/10/07. Foreign financial institutions have a broad definition: foreign banks, branch or office outside US; if company was located in the US would be a broker dealer; foreign company as currency dealer. There will be enhanced due diligence requirements after 2/8/08 for correspondent accounts and after 5/8/08 for certain foreign banks.
Common Issues for Formal Violation
Repeat violations
Not having adequate procedures to detect/monitor suspicious activities and not having procedures consistent with the risk of the firm’s business.
Failure to check FinCEN
Failure to timely file SAR’s, undetected SARs
Year-End Reminders
Conduct annual AML exam
Test wsp’s and complete 3013 certification
Firm element and annual compliance meeting