Announcements and analysis of key fintech, regulatory and compliance issues as they unfold.
Compliance Bulletin: IIROC Releases its 2018/19 Compliance Priorities Report
The Investment Industry Regulatory Organization of Canada (IIROC) published its annual Compliance Priorities Report a review of the issues and trends identified through the past year’s compliance and registration activities, that also provides a preview of areas of regulatory focus for the coming year.
Among IIROC’s areas of focus for the coming year are:
Implementing changes to risk models to ensure IIROC’s compliance resources are focused on the greatest risks to investors and market integrity;
Continuing to support firms’ cybersecurity resiliency by compiling and reviewing the results of IIROC’s second survey on cybersecurity preparedness conducted in late 2018; and,
Ensuring IIROC-regulated firms demonstrate a commitment to a strong compliance culture.
Read more here: https://www.iiroc.ca/Documents/2019/4CD4FE39-3B08-47BF-85F4-9112B1C271B8_en.pdf
Compliance Bulletin: SEC Operations During Government Shutdown
The U.S. Securities and Exchange Commission (“SEC”) has announced that it is operating under its “OPERATIONS PLAN UNDER A LAPSE IN APPROPRIATIONS AND GOVERNMENT SHUTDOWN“. If an examination has been announced or you are expecting an examination, you may use this time to continue to prepare for your examination. Once the shutdown has ended, you may want to reach out to your SEC Examiner an seek guidance regarding any changes to the scope and time of your examination. You can read more about the SEC’s shutdown operation plan here: https://www.sec.gov/files/sec-plan-of-operations-during-lapse-in-appropriations-2018.pdf
Regulatory ALERT: The SEC’s Compliance Inspection Priorities for 2019
The Securities and Exchange Commission (“SEC”) announced the 2019 examination priorities for compliance examinations and inspections late Thursday, December 20th, 2018. Examination priorities include: Market Infrastructure, Retail & Senior Investors, Digital Assets, Cyber-security, and Anti-Money Laundering Programs.
You may read the announcement here: https://www.sec.gov/news/press-release/2018-299
Regulatory Notice: SEC AML No-Action Relief Letter Extended – “CIP Reliance Letter”
The Securities and Exchange Commission (“SEC”) extended its long standing No-Action Relief Letter that allows broker-dealers to rely on SEC registered investment advisers to perform some or all of their customer identification program (“CIP”) rule, 31 C.F.R. § 1023.220 (“CIP Rule”), and/or the portion of the customer due diligence rule regarding beneficial ownership requirements for legal entity customers, 31 C.F.R. § 1010.230.
This December 12, 2018 CIP No-Action Relief Letter will expire in December of 2020 or earlier if the AML program rule for investment advisers becomes effective.
You may view the No-Action Relief Letter here: https://www.sec.gov/divisions/marketreg/mr-noaction/2018/sifma-120718-17a8.pdf
Regulation Effective: FINRA NTM 17-30 – Qualification and Registration
Among other new and consolidated rules, effective October 1, 2018, firms are required to designate:
“(1) a Principal Financial Officer with primary responsibility for financial filings and the related books and records; and
(2) a Principal Operations Officer with primary responsibility for the day-to-day operations of the business, including overseeing the receipt and delivery of securities and funds, safeguarding customer and firm assets, calculation and collection of margin from customers and processing dividend receivables and payables and reorganization redemptions and those books and records related to such activities.
This requirement replaces the current requirement that dual members of FINRA and the NYSE designate a Chief Financial Officer (CFO) and a Chief Operations Officer (COO) and that other FINRA members designate a CFO.” FINRA NTM 17-30
Regulatory Notice: FINRA Examination Restructuring FAQs & SIE Exam
FINRA has published interpretive FAQS regarding exam restructuring, the SIE (Securities Industry Essentials) exam and registration rule consolidation. This compliance advisory addresses the rules and interpretations below:
Former, Current and Future Registrations
Permissive Registrations
Affiliate Waiver Program
FINOP Registrations
Principal Registrations
Regulatory Notice: MSRB Notice 2018-18 Municipal Advisory General Compliance Advisory
The Municipal Securities Rulemaking Board (MSRB) disseminated a Compliance Advisory today as a compliance resource to assist municipal advisors in their continuing compliance efforts. The Compliance Advisory addresses the rules and regulations noted below
MSRB Rule G-44: Supervisory and Compliance Obligations of Municipal Advisors
MSRB Rule G-20: Gifts, Gratuities and Non-Cash Compensation
MSRB Rule G-37: Political Contributions and Prohibitions on Municipal Advisory Business
MSRB Rule G-17: Conduct of Municipal Advisory Activities
MSRB Rules G-2 and G-3: Standards of Professional Qualification and Professional Qualification Requirements
MSRB Rule G-10: Municipal Advisory Client Education and Protection
MSRB Rules G-8 and G-9: Books and Records to be Made by Municipal Advisors and Preservation of Record
MSRB Notice 2018-18 – https://www.msrb.org/~/media/Files/Regulatory-Notices/Announcements/2018-18.ashx
Conference: 2018 National FINRA Conference
Join us at the FINRA National Conference in Washington, D.C., May 21st-23rd, 2018 to learn more about industry hot topics, including AML, Suitability, Trading and Markets, Capital Markets and much more.
https://www.finra.org/industry/2018-finra-annual-conference
New Regulation: FinCEN Customer Due Diligence (CDD) Rule, Effective May 11th
The Customer Due Diligence (CDD) Final Rule, issued by the Financial Crimes Enforcement Network (FinCEN) in 2016, will take effect this Friday, May 11, 2018. The Rule codified many of the existing regulatory expectations already associated with a robust anti-money laundering due diligence program and established a fifth pillar, which requires financial institutions to identify and verify the beneficial ownership of “legal entity customers”.
FinCEN, “Customer Due Diligence Requirements for Financial Institutions; Correction,” Federal Register, September 28, 2017, https://www.federalregister.gov/documents/2017/09/28/2017-20777/customer-due-diligence-requirements-for-financial-institutions-correction
FinCEN, “Frequently Asked Questions Regarding Customer Due Diligence Requirements for Financial Institutions,” July 19, 2016, https://www.ffiec.gov/bsa_aml_infobase/documents/FAQs_for_CDD_Final_Rule_%287_15_16%29.pdf
Summary of FINRA Rules Effective in 2018
Financial Exploitation of Specified Adults (new FINRA Rule 2165) and Customer Account Information ( amended FINRA Rule 4512) – became effective February 5, 2018
FinCEN Customer Due Diligence Rule (CDD Rule) – effective on May 11, 2018
Customer Confirmation (Amendments to FINRA Rule 2232) – effective on May 14, 2018
Margin Requirements (Amendments to FINRA Rule 4210) – effective on June 25, 2018
https://www.finra.org/
Industry Report: The SEC’s Office of Compliance Inspections and Examinations (OCIE) annouces its 2018 examination priorities.
The Securities and Exchange Commission’s Office of Compliance Inspections and Examinations (OCIE) today announced its 2018 examination priorities. OCIE publishes its exam priorities annually to improve compliance, prevent fraud, monitor risk, and inform policy. Of particular interest this year will be matters involving critical market infrastructure, duties to retail investors, and developments in cryptocurrency, initial coin offerings, and secondary market trading.
The report also highlights:
Compliance and Risks in Critical Market Infrastructure
Retail Investors, Including Seniors and Those Saving for Retirement
Cybersecurity
Anti-Money Laundering Programs
Read more here:
https://www.sec.gov/news/press-release/2018-12
https://www.sec.gov/about/offices/ocie/national-examination-program-priorities-2018.pdf
Industry Report: SEC Enforcement Division Announces Its 2018 Priorities And 2017 Results
The Securities and Exchange Commission’s Division of Enforcement (the “Division”) has published its annual report for fiscal year 2017 (the “Report”). The Report is available at the following link: https://www.sec.gov/files/enforcement-annual-report-2017.pdf. The Report discusses the Division’s key initiatives and results in 20171 and its priorities for 2018.
The five principles that guide the Division’s decision making:
Focus on individual accountability.
Keep pace with technological change.
Impose sanctions that most effectively further enforcement goals.
Constantly assess the allocation of Division resources.
Read the linked Annual Report to learn more.
Industry Report: FINRA 2018 Regulatory and Examination Priorities Letter
The 2018 Regulatory and Examination Priorities Letter identifies topics that FINRA will focus on in the coming year, and these include some new topics as well as others that remain ongoing areas of focus. The areas of focus include:
Fraud
High-Risk Firms and Brokers
Business Continuity Planning
Technology Governance
Cybersecurity
Anti-Money Laundering
Liquidity Risk
Sales Practice
And more… https://www.finra.org/industry/2018-regulatory-and-examination-priorities-letter
Industry Report: Report from FINRA Board of Governors Meeting – December 2017
FINRA’s Board of Governors approved several rule proposals to be published by FINRA for comment or filed with the SEC during the December, 2007 Board Meeting, including:
Enhancing the audit trail for Treasury securities transactions
Facilitating capital formation
Strengthening investor-protection requirements in FINRA’s suitability rule
Streamlining restrictions on registered individuals’ outside business activities and private securities transactions
Aligning communications and research rules with the FAIR Act
Setting fees for the new Securities Industry Essentials examination.
Read the press release here: https://www.finra.org/newsroom/2017/report-finra-board-governors-meeting-december-2017
Industry Report: 2017 FINRA Examination Findings Report
FINRA has issued their annual Examination Findings Report. This year’s report highlights a number of familiar regulatory concerns, such and Outside Business Activities, Private Securities Transactions and AML. The Report also includes some relatively new examination findings, including those related to Cybersecurity as well as Alternative Investments Held in IRAs. Here is an excerpt:
“Firms with effective cybersecurity programs typically established strong governance structures and processes (scaled to the firm) that addressed cybersecurity in a risk management context. Firms escalated risk acceptance decisions and problems to the appropriate levels for resolution, as well as to inform future program development. Measures firms implemented included regular risk assessments with detailed, time-bound follow-up action plans to resolve higher-risk concerns. Firms supported these assessments with regular vulnerability and penetration tests. Firms also required employees to participate in regular, role-specific and generic cybersecurity training and testing, for example, through phishing email exercises…”
(https://www.finra.org/industry/2017-report-exam-findings)
Industry Report: SIFMA’s US Securitization Report, First Half 2017
SIFMA’s US Securitization Report, First Half 2017
Part 1: Securitization Market Trends
“Securitization issuance, including agency and non-agency mortgage-backed securities (MBS) and asset-backed securities (ABS), totaled $1.2 trillion in the first half of 2017, a decline of 13.3 percent from 2H’16 ($1.4 trillion) but an increase of 17.4 percent increase from 1H’16 ($1.0 trillion). The increase was driven by the increase in ABS issuance, particularly CLO refinancings. Non-agency ABS and MBS issuance volumes rose by 91.3 percent and 28.0 percent, respectively, in 1H’17 from 1H’16, while agency volumes for 1H’17 fell 0.2 percent from 1H’16.”
– https://www.sifma.org/resources/research/us-securitization-report-first-half-2017/
Regulatory Release: FINRA NTM 17-32 (Volatility-Linked Exchange Traded Products)
FINRA NTM 17-32 (Volatility-Linked Exchange Traded Products)
“Volatility-linked ETPs are complex products that are not suitable for all investors. Firms are reminded of their obligation to vet complex products, to put reasonable supervisory controls in place, and to train their registered representatives and supervisors to ensure that suitability and other obligations under FINRA rules are met.”
https://www.finra.org/sites/default/files/notice_doc_file_ref/Regulatory-Notice-17-32.pdf
https://www.finra.org/sites/default/files/notice_doc_file_ref/Regulatory-Notice-17-32.pdf
Capital Markets and Crowdfunding Update
Treasury Issues Recommendations on Capital Markets Regulatory Reform, October 6th, 2017
Page 40:
Crowdfunding
The crowdfunding rules implementing Title III of the JOBS Act became effective in May 2016. In the 12-month period following effectiveness, 335 companies filed crowdfunding offerings with the SEC and there were 26 portals registered with FINRA for unaccredited investors. Of the filed crowdfunding offerings, 43% were funded, 30% of campaigns ended unsuccessfully, and the others are still ongoing. Total capital committed was in excess of $40 million. On average, each funded offering raised $282,000 and included participation from 312 investors.
However, in conversations with Treasury staff, market participants have expressed concerns about the cost and complexity of using crowdfunding compared to private placement offerings. Participants cited regulatory constraints, such as disclosure requirements and issuance costs, as well as structural factors, such as the challenges associated with having a large number of investors, as potentially limiting the use of this capital raising method. Some participants also expressed concern that unless crowdfunding platforms can demonstrate clear advantages relative to the ease and availability of private placements, such as meaningfully increasing the amount of investor capital available from unaccredited investors, crowdfunding may lead to adverse selection where only less-attractive companies pursue funding from less sophisticated investors, who may lack the expertise to properly evaluate such investments.
Recommendations
Treasury recommends allowing single-purpose crowdfunding vehicles advised by a registered investment adviser, which may mitigate issuers’ concerns about vehicles having an unwieldy number of shareholders and tripping SEC registration thresholds (2,000 total shareholders, or over 500 unaccredited shareholders). These vehicles could potentially facilitate the type of syndicate investing model that has developed in accredited investor platforms, whereby a lead investor conducts due diligence, pools the capital of other investors, and receives carried interest compensation.
However, risks exist that such vehicles may weaken investor protections by creating layers between investors and the issuer, and present potential conflicts of interest. Appropriate investor protections are critical in the crowdfunding market given the participation of unaccredited investors. Therefore, Treasury recommends that any rulemaking in this area prioritize alignment of interests between the lead investor and the other investors participating in the vehicle, regular dissemination of information from the issuer, and minority voting protections with respect to significant corporate actions.
Treasury recommends that the limitations on purchases in crowdfunding offerings be waived for accredited investors as defined by Regulation D. Crowdfunding might become more attractive if a company can more easily reach its fund-raising goals. Treasury further recommends that the crowdfunding rules be amended to have investment limits based on the greater of annual income or net worth for the 5% and 10% tests, rather than the lesser. The current rules unnecessarily limit investors who have a high net worth relative to annual income, or vice versa, which is inconsistent with the approach taken for Regulation A Tier 2 offerings.
Treasury also recommends that the conditional exemption from Section 12(g) be modified by raising the maximum revenue requirement from $25 million to $100 million. The higher threshold will allow crowdfunded companies to stay private longer. These companies likely lack the necessary size to be a public company and should not be forced to register as public companies until reaching higher revenues. Finally, Treasury recommends increasing the limit on how much can be raised over a 12-month period from $1 million to $5 million, as it will potentially allow companies to lower the offering costs per dollar raised.
Conference: 2017 NSCP National Conference
Join us at the National Society of Compliance Professionals (NSCP) in Washington, D.C., October 16-18th to learn about hot topics in AML, Municipal Advisory, Crowdfunding and Capital Markets and much more.
Municipal Advisory SEC Examination Update
https://www.bondbuyer.com/news/sec-lawyers-say-mas-need-to-work-on-compliance
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