Announcements and analysis of key fintech, regulatory and compliance issues as they unfold.
Regulatory Update: FINRA Publishes 2019 Report on Examination Findings and Observations
FINRA today published its 2019 Report on FINRA Examination Findings and Observations. The report reflects key findings and observations identified in recent examinations, and contains effective practices that could help firms improve their compliance and risk management programs. It summarizes findings and observations across a range of topics, including:
Sales Practice and Supervision
Firm Operations
Market Integrity
Financial Management
Learn more here: https://www.finra.org/media-center/newsreleases/2019/finra-publishes-2019-report-examination-findings-and-observations
Conference: Join Halyard at the NSCP’s 2019 Annual National Conference
Join Halyard at the National Society of Compliance Professional’s (NSCP) premier event in Baltimore, MD, October 21-23 — From discussing best practices for implementing regulatory changes to exploring the benefits of diversity and inclusion, attendees will receive great insight and practical tools to take back to their firms. Whether hearing from expert panels, engaging in hands-on learning in labs, or sharing with other compliance professionals in forums and talk groups, we’re confident you’ll leave the National Conference more prepared for the future.
For more information, visit the NSCP’s Conference Page and Speaker’s Page here.
Regulatory Update: MSRB Rule G-17 and Response to Comments on SR-MSRB-2019-10
In response to suggestions from commenters, the Municipal Securities Rulemaking Board (MSRB) filed with the U.S. Securities and Exchange Commission (SEC) amendments to its proposal to revise 2012 interpretive guidance under MSRB Rule G-17, on conduct of municipal securities and municipal advisory activities. Among other revisions, the amendment would clarify when underwriters in a syndicate must provide disclosures to an issuer regarding the specific characteristics of a recommended transaction and exclude dealers serving as a primary distributor in a continuous offering of municipal fund securities from the disclosure requirements of the notice.
Read the MSRB’s response to comments here.
View the amendment here.
Resources: FINRA Releases Reg BI and Form CRS Firm Checklist
“FINRA is providing this checklist to help members assess their obligations under the SEC’s Regulation Best Interest (Reg BI) and Form CRS Relationship Summary (Form CRS). This checklist explains key differences between FINRA rules and Reg BI and Form CRS. The checklist is not a substitute for any rule. Only the rule can provide definitive information regarding its requirements. Interpretive questions should be directed to the SEC, at IABDQuestions@sec.gov. You should carefully review the SEC’s new rules and interpretations, related Federal Register notices and the SEC’s Small Entity Compliance Guides, which provide important information on the new obligations.” – FINRA
Access the Checklist here: https://www.finra.org/sites/default/files/2019-10/reg-bi-checklist.pdf
Regulatory Update: FINRA NTM 19-31, Disclosure Innovations in Advertising and Other Communications with the Public
FINRA issued this Notice in an effort to responds to questions that FINRA has received regarding how they can comply with FINRA rules when communicating with customers—particularly when using websites, email and other electronic media—while ensuring fair and balanced presentations. These questions include:
Q1. Technology and advances in communication have provided members with new ways of communicating with investors. How does FINRA view innovative design techniques in member communications?
Q2. Many disclosures in marketing materials have become quite extensive. Are all of these disclosures required by FINRA?
Q3. Is it necessary to disclose risks, costs or other drawbacks in a communication that are unrelated to its content?
Q4. If disclosures are integrated into the body of a marketing message or other communication, must they be as extensive as disclosures presented in a separate footnote or disclaimer?
Q5. Members communicate with the public in a number of ways in addition to marketing messages. How does FINRA consider disclosures for non-promotional communications like educational materials or reference resources?
Read the NTM here: https://www.finra.org/rules-guidance/notices/19-31
Regulatory Update: MSRB Rule G-40 – Advertising Rules for Municipal Advisors Effective
The MSRB Rule G-40, advertising by municipal advisors (the “advertising rules”) is effective today, August 23, 2019. Note that the MSRB also amended the advertising rules regarding the supervisory pre-approval requirements to interactive marketing content and published FAQs on social media. These rule aspects and guidance will also be incorporated into updated policies and procedures. Read the Rule. – http://www.msrb.org/Rules-and-Interpretations/MSRB-Rules/General/Rule-G-40-8-23-2019.aspx Read the notice. – https://msrb.org/~/media/Files/Regulatory-Notices/Announcements/2019-07.ashx?la=en Read the FAQs. – https://msrb.org/~/media/Files/Resources/FAQs-on-Use-of-Social-Media-under-MSRB-Advertising-Rules.ashx?la=en Read the rule filing. – https://msrb.org/~/media/Files/SEC-Filings/2019/MSRB-2019-05.ashx
Regulatory Update: FINRA Notice 19-26 – Regulation Best Interest Resources
The Securities and Exchange Commission’s (SEC’s) adoption of a best interest standard of conduct for broker-dealers and a relationship summary (Form CRS) delivery obligation, and provides an SEC email address where members may submit questions about the new requirements.
FINRA Assistance to Firms
FINRA has created a webpage for Reg BI where members can obtain information about the new rules. FINRA will produce written and online content to assist firms, as appropriate. Moreover, FINRA plans to hold in-person meetings and workshops to assist firms with their implementation efforts. FINRA will announce these initiatives through various communication channels, including website announcements and emails to firms. http://www.finra.org/industry/regulation-best-interest
SEC Resources
Regulatory Update: FINRA Issues Private Placement Guidance
FINRA issued Guidance that covers a range of private placement topics, from the basic question of “What is a private offering?” to more technical discussions on broker-dealer compliance with FINRA’s private placement rules under FINRA Rule 5122 and Rule 5123. This FAQ covers a number of topics, including whether a placement agent can file on behalf of other placement agents, the types of offering materials that must be filed and certain supervisory review requirements.
FINRA now has the following private placement resource materials:
Guidance
Firm Guidance – Private Placement Filings
This reference guide covers a range of private placement topics, from the basic question of “What is a private offering?” to more technical discussions on broker-dealer compliance with FINRA’s private placement rules.
July 16, 2019
Rule Interpretation
Interpretive Letter to Brian Sweeney, Trustmont Financial Group, Inc.
Request for Interpretive Guidance on FINRA Rule 2111 (Suitability) in Relation to EB-5 Program Securities Transactions
August 26, 2013
FAQ
Private Placement Frequently Asked Questions (FAQ)
Frequently asked questions about private placements.
Regulatory Update: Regulation Best Interest (“Reg BI”) – effective and compliance dates announced
Regulatory Update: Regulation Best Interest (“Reg BI”) – effective and compliance dates announced
The SEC has published Regulation Best Interest (“Reg BI”) in the Federal Register. Reg BI and Form CRS will become effective on September 10, 2019, with full compliance required by June 30, 2020.
Reg BI establishes an express best interest obligation for broker-dealers (“BDs”). The rule is estimated to become effective in approximately one year. The rule becomes effective 60 days after of being published in the Federal Registered, subject to a transition period until June, 2020.
The rule sets forth a number of obligations for broker-dealers, including:
The Disclosure Obligation
The Care Obligation
The Conflict of Interest Obligation
The Compliance Obligation
Background: Regulation BI was approved by the SEC in a 3 to 1 vote on June 5, 2019. The regulation was first proposed on April 18, 2018, and the SEC collected comments and held hearings on the proposal for the following five months. In a press release issued by the SEC, the Commission said, “Regulation Best Interest will enhance the broker-dealer standard of conduct beyond existing suitability obligations and make it clear that a broker-dealer may not put its financial interests ahead of the interests of a retail customer when making recommendations.”
The SEC has published Regulation Best Interest (“Reg BI”) in the Federal Register. Reg BI and Form CRS will become effective on September 10, 2019, with full compliance required by June 30, 2020.
Reg BI establishes an express best interest obligation for broker-dealers (“BDs”). The rule is estimated to become effective in approximately one year. The rule becomes effective 60 days after of being published in the Federal Registered, subject to a transition period until June, 2020.
The rule sets forth a number of obligations for broker-dealers, including:
The Disclosure Obligation
The Care Obligation
The Conflict of Interest Obligation
The Compliance Obligation
Background: Regulation BI was approved by the SEC in a 3 to 1 vote on June 5, 2019. The regulation was first proposed on April 18, 2018, and the SEC collected comments and held hearings on the proposal for the following five months. In a press release issued by the SEC, the Commission said, “Regulation Best Interest will enhance the broker-dealer standard of conduct beyond existing suitability obligations and make it clear that a broker-dealer may not put its financial interests ahead of the interests of a retail customer when making recommendations.”
Regulatory Update: Regulation BI
The SEC has adopted Regulation Best Interest (“Reg BI”) that establishes an express best interest obligation for broker-dealers (“BDs”). The rule is estimated to become effective in approximately one year. The rule becomes effective 60 days after of being published in the Federal Registered, subject to a transition period until June, 2020.
The rule sets forth a number of obligations for broker-dealers, including:
The Disclosure Obligation
The Care Obligation
The Conflict of Interest Obligation
The Compliance Obligation
Background: Regulation BI was approved by the SEC in a 3 to 1 vote on June 5, 2019. The regulation was first proposed on April 18, 2018, and the SEC collected comments and held hearings on the proposal for the following five months. In a press release issued by the SEC, the Commission said, “Regulation Best Interest will enhance the broker-dealer standard of conduct beyond existing suitability obligations and make it clear that a broker-dealer may not put its financial interests ahead of the interests of a retail customer when making recommendations.”
Speaking Engagement: NSCP National Conference – Best Practices for Broker-Dealers and Municipal Advisors
Join Brandon Klerk, founder of Halyard Compliance, at the NSCP National Conference in October for an engaging discussion and overview of the SEC, FINRA and MSRB regulatory notices. Come and hear how firms are finding solutions and responding creatively to stay compliant and evolve compliance and risk programs.
Learning Objectives:
• Hear an overview of recent SEC, FINRA and MSRB regulatory notices and guidance
• Share how other firms are implementing regulatory notice requirements and guidance to stay current; including trusted contact rules.
• Learn about pending rule-making and further guidance released to help comply
• Receive pointers for compliance manuals and written supervisory procedures enhancements
https://national.nscpconferences.org/
Regulatory Update: Funding Portal Enforcement Actions (Regulation CF Regulatory Enforcement)
Since funding portal rules and regulations are still relatively new, there have not yet been many examples of FINRA or SEC enforcement actions related to funding portal activities. To keep you informed, DreamFunded Marketplace LLC, was sanctioned by FINRA and its co-founder and CEO were banned from association with any FINRA funding portal member. The Compliant (linked here) cites (10) ten potential regulatory violations and the recently released Hearing Panel Decision (linked here) provides valuable insights into FINRA’s interpretations of the applicable rules and regulations in light of the facts and circumstances of this particular matter.
The topics that are discussed in this enforcement announcement include communication materials related to tombstone, video clips, issuer forecasts, offering pages and more. The discussion also addresses topics ranging from failure to respond to FINRA requests to failure to supervise investments and offerings. The following is a listing of the alleged violations that are also discussed in the Hearing Panel Decision.
Failing to Provide Documents and Information – (FINRA Funding Portal Rules 800(a) and 200(a) and FINRA Rule 8210)
False or Misleading Issuer Communications – (FINRA Funding Portal Rules 200(c)(3) and 200(a) and Regulation Crowdfunding Rule 301(c)(2))
False or Misleading Funding Portal Communications – (FINRA Funding Portal Rules 200(b), 200(c)(2), and 200(a)
No Reasonable Basis for Believing Issuer Compliance (Regulation Crowdfunding Section 301(a) and FINRA Funding Portal Rule 200(a))
Failure to Perform Meaningful Background Checks – (Regulation Crowdfunding Rule 301(c)(1) and FINRA Funding Portal Rule 200(a))
Failure to Provide Investors With Notice of Material Changes – (Regulation Crowdfunding Rule 304(c)(1) and FINRA Funding Portal Rule 200(a))
Failure to Provide Investors With Notice of Change of Offering Deadlines – (Regulation Crowdfunding Rule 304(b)(2) and FINRA Funding Portal Rule 200(a))
Failure to Provide Investors With Notice of Required Information – (Regulation Crowdfunding Rule 303(d) and FINRA Funding Portal Rule 200(a))
Failure to Provide Investors With Notice of Completion of Transactions – (Regulation Crowdfunding Rule 303(f) and FINRA Funding Portal Rule 200(a))
Supervision (FINRA Funding Portal Rules 300(a) and 200(a) and Regulation Crowdfunding Rule 403(a))
Conference: Join Halyard at FINRA’s 2019 Annual National Conference
Join Halyard at FINRA’s premier event in Washington, D.C. — the Annual Conference provides the opportunity for practitioners, peers and regulators to exchange ideas on today’s most timely compliance and regulatory topics. The conference offers industry professionals a variety of sessions related to current trends in technology, cybersecurity, risk management and much more.
For more information, visit FINRA’s conference page.
Regulatory Update: FinCEN Affirms Its Regulatory Framework for Virtual Currencies and a New Warning of Threats Posed by Virtual Currency Misuse
FinCEN issued the following two notices that reaffirms its longstanding position on digital currencies:
FIN-2019-G001 – Guidance Notice – Application of FinCEN’s Regulations to Certain Business Models Involving Convertible Virtual Currencies. “The Financial Crimes Enforcement Network (FinCEN) is issuing this interpretive guidance to remind persons subject to the Bank Secrecy Act (BSA) how FinCEN regulations relating to money services businesses (MSBs) apply to certain business models.”
FIN-2019-A003 -Advisory Notice – Advisory on Illicit Activity Involving Convertible Virtual Currency “FinCEN is issuing this advisory to assist financial institutions in identifying and reporting suspicious activity concerning how criminals and other bad actors exploit convertible virtual currencies (CVCs) for money laundering, sanctions evasion, and other illicit financing purposes, particularly involving darknet marketplaces, peer-topeer (P2P) exchangers, foreign-located Money Service Businesses (MSBs), and CVC kiosks. Virtual currencies, particularly CVCs, are increasingly used as alternatives to traditional payment and money transmission systems. As with other payment and money transmission methods, financial institutions should carefully assess and mitigate any potential money laundering, terrorist financing, and other illicit financing risks associated with CVCs. This advisory highlights prominent typologies and red flags associated with such activity and identifies information that would be most valuable to law enforcement, regulators, and other national security agencies in the filing of suspicious activity reports (SARs).”
Regulatory Update: FINRA NTM 19-18 Provides Guidance Regarding Suspicious Activity Monitoring and Reporting Obligations
FINRA is issuing this Notice (NTM 19-18) to provide guidance to member firms regarding suspicious activity monitoring and reporting obligations under FINRA Rule 3310 (Anti-Money Laundering Compliance Program).
Potential Red Flags in Customer Due Diligence and Interactions With Customers
Potential Red Flags in Deposits of Securities
Potential Red Flags in Securities Trading
Potential Red Flags in Money Movements
Potential Red Flags in Insurance Products
Other Potential Red Flags
For more information, see FINRA NTM 19-18 here: https://www.finra.org/sites/default/files/notice_doc_file_ref/Regulatory-Notice-19-18.pdf
Regulatory Update: OCIE Risk Alert regarding Regulation S-P – Privacy Notices and Safeguard Policies
The SEC’s Office of Compliance Inspections and Examinations (“OCIE”)* provided a list of compliance issues related to Regulation S-P, the primary SEC rule regarding privacy notices and safeguard policies of investment advisers and broker-dealers. The list includes:
-Privacy and Opt-Out Notices.
-Lack of policies and procedures;
-Policies not implemented or not reasonably designed to safeguard customer records and information.
View the OCIE Risk Alert here:
https://www.sec.gov/files/OCIE%20Risk%20Alert%20-%20Regulation%20S-P.pdf
Speaking Engagement: Best Practices for Adapting to Regulatory Notices (Broker-Dealers and Municipal Advisors)
Join Brandon Klerk, founder of Halyard Compliance, at the NSCP National Conference in October for an engaging discussion and overview of the SEC, FINRA and MSRB regulatory notices. Come and hear how firms are finding solutions and responding creatively to stay compliant and evolve compliance and risk programs.
Learning Objectives:
• Hear an overview of recent SEC, FINRA and MSRB regulatory notices and guidance
• Share how other firms are implementing regulatory notice requirements and guidance to stay current; including trusted contact rules.
• Learn about pending rule-making and further guidance released to help comply
• Receive pointers for compliance manuals and written supervisory procedures enhancements
Regulatory Update: MSRB Announces the Effective Date of new Municipal Advisor Advertising Rules
The MSRB announced the effective date for amendments to MSRB Rule G-21 regarding advertising by municipal securities brokers and dealers as well as new MSRB Rule G-40, regarding advertising by municipal advisors (the “advertising rules”). The effective date is now set for August 23, 2019.
Note that the MSRB also amended the advertising rules regarding the supervisory pre-approval requirements to interactive marketing content and published FAQs on social media. These rule aspects and guidance will also be incorporated into updated policies and procedures.
Read the notice. – https://msrb.org/~/media/Files/Regulatory-Notices/Announcements/2019-07.ashx?la=en
Read the FAQs. – https://msrb.org/~/media/Files/Resources/FAQs-on-Use-of-Social-Media-under-MSRB-Advertising-Rules.ashx?la=en
Read the rule filing. – https://msrb.org/~/media/Files/SEC-Filings/2019/MSRB-2019-05.ashx
Digital Currency News: Wyoming State Law Recognizes Property Rights of Digital Assets
On February 14, 2019, Wyoming passed resolution SF0125 -Digital assets-existing law. The Act states that “digital assets are property within the Uniform Commercial Code” and recognizes property rights in the direct ownership of digital assets. The Act has an effective date of July 1, 2019.
“AN ACT relating to property; classifying digital assets within existing laws; specifying that digital assets are property within the Uniform Commercial Code; authorizing security interests in digital assets; establishing an opt-in framework for banks to provide custodial services for digital asset property as directed custodians; specifying standards and procedures for custodial services under this act; clarifying the jurisdiction of Wyoming courts relating to digital assets; specifying applicability; authorizing the promulgation of rules; and providing for an effective date.”
Ref: https://www.wyoleg.gov/Legislation/2019/SF0125
Regulatory Update: 2019 Annual Risk Monitoring and Examination Priorities Letter
FINRA’s 2019 Risk Monitoring and Examination Priorities Letter is available, which describes areas where FINRA has identified opportunities for improvement in compliance, supervisory and risk management programs. These areas include:
Online Distribution Platforms
Fixed Income Mark-Up Disclosure
Regulatory Technology
Suitability
Senior Investors
Outside Business Activities and Private Securities Transactions
Supervision of Digital Assets Business
Customer Due Diligence and Suspicious Activity Reviews
Best Execution
Market Manipulation
Market Access
Financial Risks
You may view it here: https://www.finra.org/industry/2019-annual-risk-monitoring-and-examination-priorities-letter
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