What: FINRA has proposed to amend Rule 3240 to strengthen the general prohibition against borrowing and lending arrangements between registered persons and customers.

Who: FINRA member broker-dealers.

When: The proposal to the SEC was initially filed on January 2, 2024. If the SEC approves the change, FINRA will announce the effective date in a Regulatory Notice.

Why: FINRA cited anecdotal evidence from member firms, law clinics, and previous enforcement cases as well as its experience in examining and enforcing for compliance with Rule 3240 that it believed suggests that there is some ambiguity about the scope of Rule 3240 and certain risks to investors due to conflicts of interest and the superior information that registered persons have about potential risks and returns.

How: Among various changes, the proposal adds several new limitations: 1) clarifying that the prohibition applies to arrangements that precede a new broker-customer relationship, 2) extending the rule to arrangements entered into within six months following the end of broker-customer relationship, and 3) to arrangements with parties related (family and businesses) to the registered person and customer. The proposal also narrows existing exceptions based on certain personal and business relationships.

Why it matters: Firms should monitor further developments with this proposal. If the SEC ultimately approves the requested rule change, written supervisory procedures and controls related to this topic will need to be reviewed and may require modifications for compliance with the final requirements. In addition, assuming the final rule change tracks with the proposal, there may be potential operational and training considerations (e.g., account opening and pre-existing arrangements, account terminations and subsequent arrangements, and related-party arrangements).

CRC keeps its thumb on the pulse of the evolving regulatory landscape. Keep an eye out for additional information, including updated guidance, risk alerts, and CRC’s thoughts on how to ensure successful compliance with evolving regulatory expectations within your firm’s existing regulatory compliance program.

Contact Mitch Avnet for further details: (646)346-2468 | mavnet@compliance-risk.com

The post Regulatory News Update: Proposed Amendment to FINRA 3240 (Borrowing From or Lending to Customers) appeared first on Compliance Risk Concepts.

On September 20, 2023, the SEC adopted amendments to the Investment Company Act “Names Rule,” as well as related disclosure and reporting requirements.

Principal Elements

Expands Scope

• The rule’s 80% investment policy requirement will be expanded beyond its current scope, to apply to any fund name with terms suggesting that the fund focuses on investments that have, or investments whose issuers have, particular characteristics.
• This coverage will include, for example, fund names with terms such as “growth” or “value,” or terms indicating that the fund’s investment decisions incorporate one or more ESG factors.

Temporary Departures from the 80% Investment Requirement

• The amendments retain the names rule’s current requirements for a fund to invest in accordance with its 80% investment policy “under normal circumstances” (the “80% investment requirement”), and for the 80% investment requirement to apply at the time a fund invests its assets.
• The amendments add a new provision that requires a fund to review its portfolio assets’ inclusion in its “80% basket” at least quarterly.
• The amendments include specific time frames—generally 90 days—for getting back into compliance if a fund departs from the 80% requirement as a result of drift or in other-than-normal circumstances.

Derivatives

• The amendments generally require funds to use a derivatives instrument’s notional amount to determine the fund’s compliance with its 80% investment policy, with certain adjustments.
• The amendments include a limited modification to this approach that would exclude certain currency hedges from the names rule compliance calculation.

Unlisted Registered Closed-End Funds and BDCs

• The amendments generally prohibit an unlisted registered closed-end fund or BDC that is required to adopt an 80% investment policy from changing that policy without a shareholder vote.
• The amendments permit these funds to change their 80% investment policies without such a vote if:
  • the fund conducts a tender or repurchase offer with at least 60 days’ prior notice of the policy change,
  • that offer is not oversubscribed, and
  • the fund purchases shares at their net asset value.

Enhanced Prospectus Disclosure

• The amendments to funds’ prospectus disclosure requirements that will require a fund to define the terms used in its name, including the criteria the fund uses to select the investments that the term describes.

Plain English Requirements for Terms Used in Fund Names

• The amendments to the names rule effectively require that any terms used in the fund’s name that suggest either an investment focus, or that the fund’s distributions are tax-exempt, must be consistent with those terms’ plain English meaning or established industry use.

Form N-PORT Reporting Requirements

• The amendments to Form N-PORT for funds will require funds to report the value of the fund’s 80% basket, and whether an investment is included in the fund’s 80% basket.
• The amendments also include a new reporting item to include the definition(s) of terms used in the fund’s name. Funds will have to report this information for the third month of every quarter, instead of for each month as proposed.

Recordkeeping

• The final rules include recordkeeping provisions related to a fund’s compliance with the rule’s requirements.

Compliance Date

Tiered Compliance Period

• The compliance date for the final amendments is December 10, 2025 for larger entities, and June 10, 2026 for smaller entities.
  • Larger entities are funds that, together with other investment companies in the same “group of related investment companies” (as such term is defined in rule 0-10 under the Investment Company Act [17 CFR 270.0-10]) have net assets of $1 billion or more as of the end of the most recent fiscal year
  • Smaller entities are funds that together with other investment companies in the same “group of related investment companies” have net assets of less than $1 billion as of the end of the most recent fiscal year

Compliance Cost Estimates

The SEC project direct compliance costs broadly attributable to the following activities:

• reviewing the final rule’s requirements;
• determining whether to change a fund’s name or comply with the new requirements, as applicable;
• developing new (or modifying existing) practices, reporting, and recordkeeping requirements to align with the requirements of the final rule;
• integrating and implementing those practices, reporting, and recordkeeping requirements to the rest of the funds’ activities; and
• preparing new training materials and administering training sessions for staff in affected areas.

The SEC estimated that the initial costs to establish and implement practices designed to meet the requirements of the final amendments as described in the adopting release will range from $50,000 to $500,000 per fund, depending on the particular facts and circumstances of the fund. The SEC believes the costs would be closer to the lower end of the range for funds whose current practices are more similar to the requirements of the final rule and for a fund that only incurs costs associated with analyzing the requirements of the rule.

The SEC also concluded that some funds may change their name rather than comply with the amended rule, which it estimated would result in a total direct burden of $75,000 to $250,000 as a one-time cost, including analyzing the rule and deciding to change their name.

CRC keeps its thumb on the pulse of the evolving regulatory landscape. Keep an eye out for additional information, including updated guidance, risk alerts, and CRC’s thoughts on how to ensure successful compliance with evolving regulatory expectations within your firm’s existing regulatory compliance program.

Contact Mitch Avnet for further details: (646)346-2468 | mavnet@compliance-risk.com

The post SEC Adopts Amendments to Names Rule appeared first on Compliance Risk Concepts.

Celebrating our 10th anniversary this year, Compliance Risk Concepts (CRC) remains committed to helping businesses succeed while maintaining regulatory compliance. As we reflect on the past decade, we are proud to have assisted numerous clients in reaching their financial, operational, and strategic goals.

"Celebrating CRC's 10-year anniversary is an amazing milestone for the company and for me, personally," said Mitch Avnet, Founder and Managing Partner. Avnet leveraged his 20+ years of in-house expertise and practical experience in professional services by identifying a gap in the industry: organizations needing comprehensive compliance support.

"We are businesspeople who know compliance," continued Avnet. "This unique commercial approach to solving compliance issues, combined with our proactive focus on our clients' future needs, separates us from the 'check-the-box' providers. Our practical, in-depth risk assessments focus on our clients' risk postures and have been our driving force since day one."

The CRC Advantage

What sets CRC apart is our team—business professionals armed with extensive compliance knowledge ready to help our clients navigate increasingly complex laws and regulations. Unlike conventional "check- the-box" providers, CRC thrives on critical thinking and risk assessment, tailoring solutions based on each client's risk appetite.

From thoroughly understanding each client's unique business model to assessing potential risks and creating comprehensive plans to mitigate exposure, CRC has successfully enabled its clients to achieve long-term, strategic, and scalable success.

Service That's Not "One-Size-Fits-All"

With the intensity of regulatory scrutiny at an all-time high, financial institutions must re-examine their compliance approach. For small businesses challenged with handling compliance matters without a dedicated in-house team, we offer ongoing, routine compliance services at a fraction of the cost of traditional resources. Larger organizations with an established in-house team can leverage our services to help manage workload surges and ensure all aspects of business compliance are adequately addressed.

Reflecting on a Decade of Growth

Principal Roland Reyes shared his excitement about the milestone: "The growth of our company is a testament to our team's professionalism, hard work and dedication. It is a pleasure every day to work alongside the best and brightest. It has been an incredible ten years. I am excited to see what the next will bring."

Culture of Collaboration

Our COO, Jaclyn Bowdren, believes this anniversary validates CRC's core values. "CRC's team is what sets us apart," said Bowdren. "CRC fosters a collaborative environment, where our team members work together to provide the best advice and guidance for our clients. We understand our clients and provide solutions that balance their risk with their commercial interests. We always strive to be valued partners to our clients; this has been pivotal to our success."

"I plan to continue work to build upon the success of CRC by listening to our team and clients to find additional opportunities for improvement and growth. I could not imagine working with a better group of people, and I look forward to seeing how we can work together to further build this incredible company."

Building a Future of Trust and Growth

Adding another perspective, Debbie Nathanson, our Senior HR Advisor, identifies industry expertise, client trust, and supportive team culture as the drivers of our success. She joined CRC about 2.5 years ago, and the team has since doubled in size. "Ten years is a milestone that announces staying power in the industry," said Nathanson. "It tells current and future staff that exciting times are still to come, and CRC will only become an even better place to work."

"CRCs success is a direct result of industry expertise, amazing client relationships and a truly unique and supportive employee culture. We know what we are doing. Our clients like and trust us. Our team likes and trusts each other. The future of CRC is supported by our past. We will continue to hire experienced professionals, provide expert advice and service, and respect each other."

Delivering on Our Promises

David Amster, Principal, aligned with the team's sentiments, commenting, "CRC's tenth anniversary validates the value proposition on which the firm has focused since day one; we expertly balance compliance solutions that keep our clients out of the regulatory crosshairs without hampering their business interests. CRC has thrived for a decade because that is what we've consistently delivered."

"CRC's success is firmly rooted in our culture," Amster continued. "We're professionals who deeply believe that our company's success is driven by helping our clients succeed. But while we're acutely serious about the quality of our work product, we love to laugh and don't take ourselves all too seriously."

Looking to the Future

As we celebrate this milestone, we look forward to the coming years with enthusiasm, fully committed to continuing to deliver exceptional compliance support services. With a team of senior compliance professionals and executives, CRC helps clients establish, maintain, and enhance their compliance programs.

Thanks to our incredible team, valued clients, and all those who have supported and helped shape CRC over the years, we're proud to celebrate this 10-year milestone in our journey. Contact us to learn more about partnering with CRC.

The post Celebrating a Decade of Success and Growth: Compliance Risk Concepts Turns 10 appeared first on Compliance Risk Concepts.

September 29, 2023

Bloomberg reported that Citadel has indicated it is planning to push back against the SEC if it moves against the firm, going so far as to take the SEC to court. Such a court case would be a first among firms against whom the SEC has made allegations of untracked communications.

This update follows a Reuters article earlier in the week that identified Citadel among a group of more than two dozen investment advisers from whom the SEC has reportedly requested messages on personal devices or applications of a selection of employees, including senior management.

The SEC’s approach appears to put senior executives at risk as a matter of course in these investigations. As noted in the reporting, the general review of business communications on personal devices opens the door to a range of inquiry. This transforms what may have been seen as a books and record issue into an entry point for the SEC to take an interest in the underlying substantive communications, which could relate to any aspect of the business, transactions, dealings with customers, etc.

Additionally, executives who are found to have violated their employer’s compliance policies regarding off-channel communications may face employment consequences.

CRC will continue to monitor developments in what could result in the first legal challenge to the SEC’s recent off-channel communications approach to investment advisers, however, despite the potential for a legal challenge from the industry, any resolution is speculative and does not change the reality for firms at the present. Our view is that firms should be very focused on taking steps now to understand and mitigate their risks related to electronic communications to better position themselves ahead of a regulator request or examination.

CRC keeps its thumb on the pulse of the evolving regulatory landscape. Keep an eye out for additional information about this developing situation, as well as the SEC’s continued focus on electronic communications, including updated guidance, risk alerts, and CRC’s thoughts on how to ensure successful compliance with evolving regulatory expectations within your firm’s existing regulatory compliance program.

Contact Mitch Avnet for further details: (646)346-2468 | mavnet@compliance-risk.com

The post Regulatory News Update: Citadel Prepared to Take Legal Action Against SEC Amid WhatsApp Probe appeared first on Compliance Risk Concepts.

September 2023

Overview & Summary

On Sept. 6, 2023, the Securities and Exchange Commission’s Division of Examinations issued a Risk Alert detailing the Division’s examination selection process for SEC-registered investment advisers. 

Given the size and variety of the adviser population, the Division utilizes a risk-based approach for both selecting advisers to examine and in determining the scope of risk areas to examine. The Risk Alert highlights the Division’s risk-based approach for both (A) selecting Advisers to examine and (B) determining examination focus areas and documents. The Division leverages technology to collect and analyze large sets of industry- and firm-level data to help identify risks and better understand the firm’s business during examinations. The Division also reviews disclosure documents and various filings with regulators (e.g., Form ADV) and other regulatory filings.

A. Selecting Firms to Examine

Some of the reasons the Division may select an adviser to examine include, but are not limited to, one or more of the following: the firm’s risk characteristics; a tip, complaint, or referral; or the staff’s interest in a particular compliance risk area.

There are also firm-specific risk factors that the staff considers when selecting advisers for examination, such as those related to a particular adviser’s business activities, conflicts of interest, and regulatory history. In the Risk Alert, the Division lists 11 firm-specific factors it may consider: (1) prior examination observations and conduct, such as when the staff has observed what it believes to be repetitive deficient practices during more than one review of a firm, significant fee- and expense-related issues, and significant compliance program concerns; (2) supervisory concerns, such as disciplinary history of associated individuals or affiliates; (3) tips, complaints, or referrals involving the firm; (4) business activities of the firm or its personnel that may create conflicts of interest, such as outside business activities and the conflicts associated with advisers dually registered as, or affiliated with, brokers; (5) the length of time since the firm’s registration or last examination, such as advisers newly registered with the SEC; (6) material changes in a firm’s leadership or other personnel; (7) indications that the adviser might be vulnerable to financial or market stresses; (8) reporting by news and media that may involve or impact the firm; (9) data provided by certain third-party data services; (10) the disclosure history of the firm; and (11) whether the firm has access to client and investor assets and/or presents certain gatekeeper or service provider compliance risks.

B. Selecting Examination Focus Areas

Once an adviser is selected for examination, additional risk assessment occurs to determine the scope of the examination, such as selecting areas of the business that examiners will review. This involves requesting documents with respect to the firm’s operations, disclosures, conflicts of interest, and compliance practices related to core areas, including custody and safekeeping of client assets, valuation, portfolio management, fees, expenses, brokerage, and best execution.

The Risk Alert includes an attachment that outlines the types of information and documents the staff requests during a typical exam. The list includes (1) general information about the Adviser’s business and investment activities, (2) information about the assessment of risks and the implementation of a written compliance program and internal controls, (3) information with respect to advisory trading activities, and (4) information for compliance testing in particular areas.

The Division is providing this information so that advisers may prepare themselves for an examination. Although the Division continuously refines and enhances its risk assessment process, the information shared herein also may assist firms in their compliance efforts.

Our Take

This SEC Risk Alert lays out how the SEC approaches the selection of firms for examination, as well as their selection examination focus areas. In doing so, the SEC has essentially established a  step-by-step guide for Advisers to follow relative to examination preparedness.CRC recommends that firms consider partnering with an established compliance team who can help you navigate and prepare for future examinations. A mock examination utilizing the document request areas outlined within the Risk Alert should serve as an accurate predictor of overall examination preparedness.

Opportunities for CRC to Assist Your Firm

• CRC will conduct a mock examination to identify any gaps or weaknesses relative to your firm’s examination preparedness.
• CRC is available for general and ongoing outsourced support with respect to SEC-registered investment advisers.
• CRC can proactively conduct a review of your existing compliance program to identify opportunities to potentially implement enhancements in preparation for regulatory examinations.
• CRC is available to assist with examination responses.

Please contact Mitch Avnet for more information.

Mitch Avnet at mavnet@compliance-risk.com or (646) 346.2468

The post News Update: SEC Provides Road Map for Investment Advisory Firm Examinations appeared first on Compliance Risk Concepts.

What: SEC voted in a split 3-2 decision on July 26^th to release a proposal requiring the elimination or neutralization of conflicts related to conducting investor relations via artificial intelligence, predictive data analytics, etc.

Who: Proposed rules would apply to both Investment Advisers and Broker-Dealers

When: The proposal is currently open for comment. Initial comment period will close 60 following publication to the Federal Register (September 26^th)

Why: Per the release, the proposal is designed to address situations where AI-driven technology places a firm’s interests ahead of the interests of customers, clients, and/or investors by optimizing, predicting, guiding, or directing their behavior to purchase certain investments, deploy strategies, or otherwise make investment-related decisions.

How: If adopted as written, the proposed rules will have implications for firms deploying AI solutions, and may impact or potentially come into conflict with existing suitability and Reg BI policies, procedures, and practices. Advisers and Broker-Dealers will need to examine relevant policies related to the identification, resolution, and disclosure of conflicts of interest, as well as all AI-driven investment practices and existing Reg BI and suitability practices.

CRC keeps its thumb on the pulse of the evolving regulatory landscape. Keep an eye out for additional information about the SEC’s AI-driven conflicts proposed rule, including updated proposals, rule finalization details, and CRC’s thoughts on how to ensure successful integration of new or updated rules within your firm’s existing regulatory compliance program.

Contact Mitch Avnet for further details: (646)346-2468 | mavnet@compliance-risk.com

The post Regulatory News Update: SEC Announces Rule Proposal Targeting AI-Driven Conflicts of Interest appeared first on Compliance Risk Concepts.

The list of firms that have been charged in less than 12 months with recordkeeping failures for off-channel electronic communications continues to grow. Last month, the SEC charged HSBC Securities (USA) Inc. and Scotia Capital (USA) Inc. for widespread and longstanding failures by both firms and their employees to maintain and preserve electronic communications, which resulted in multimillion dollar SEC enforcement penalties for both broker-dealers. Their employees often communicated about securities business matters on their personal devices, using messaging platforms, such as Whatsapp. Most of these messages were not preserved and involved employees at multiple levels of authority, including supervisors and executives.

The SEC’s investigation of HSBC Securities (USA) Inc. and Scotia Capital (USA) Inc., both registered broker dealers, uncovered pervasive and longstanding use of off-channel communications at both firms. Messages sent through unapproved communications methods, such as WhatsApp and those sent from unapproved applications on personal devices, were not monitored, subject to review, or archived. According to the resulting SEC orders, the firms failed to implement a system of follow-up and review to determine that supervisors were reasonably following the firms’ policies and also failed to implement sufficient monitoring to assure that its recordkeeping and communications policies were being followed.

The recent actions follow enforcement activity against several other firms for recordkeeping failures in September 2022, in which those charged firms agreed to pay combined penalties of more than one billion dollars. However, it appears that one meaningful contrast between those earlier cases and the recent actions are that the published orders in 2022 reported that it was the SEC that discovered the misconduct through its investigations, but, in the recent actions both firms self-reported after having already initiated a review of their recordkeeping failures and begun a program of remediation prior to contacting the Division of Enforcement. One may draw the conclusion that the repeated references to proactive steps by HSBC and Scotia in identifying and addressing the recordkeeping issues were a relevant consideration that may help to explain the difference in the scale of the monetary penalties when comparing the two clusters of cases. In 2022, all but one of the charged firms had penalties of at least $50 million (most were $125 million), and while still significant, HSBC and Scotia were penalized $15 million and $7.5 million respectively.

Likewise, CRC believes that the best approach to regulatory compliance is a proactive one. The SEC’s 2023 Examination Priorities report identified electronic communications as an examination focus area for both broker-dealers and registered investment advisers. Rather than scrambling to rectify issues or meet deadlines after an examination has begun, a thorough, active compliance program that considers and incorporates regulatory developments is in a better position to satisfy regulators and preserve operations so they can best serve their clients.

What can firms do?

In one of the recent orders, the SEC highlighted several remedial steps taken by the firm, which included:

• Clarifying the application of relevant policies;
• Enhancing training to reinforce the requirement to use authorized communications channels; and
• Providing clear messaging to employees from senior management regarding the use of unauthorized communication channels.

In addition to these shorter-term steps, the recent firms were also required to conduct reviews or assessments of:

• Supervisory, compliance, and other policies and procedures;
• Training and employee certifications;
• Surveillance program measures;
• Technological solutions to meet record retention requirements;
• Measures used to prevent the use of unauthorized communications methods for business communications by employees;
• Electronic communications surveillance routines to ensure that electronic communications through approved communications methods found on personal devices are incorporated into the overall surveillance program; and
• The framework to address instances of non-compliance by employees with the firm’s policies and procedures concerning the use of personal devices for business communications in the past.

For more information about how CRC can help your firm, please contact:

Mitch Avnet

p. (646) 346-2468  

mavnet@compliance-risk.com

David Amster

p. (917) 568-6470

damster@compliance-risk.com

CRC is a business-focused team of senior compliance consultants and executives who furnish top-tier compliance advisory services to clients on an as-needed, project or part-time basis. We provide our clients with the critical skills and expertise required to establish, maintain and enhance a balanced and effective compliance operational risk management program. We help organizations demonstrate a commitment to a strong risk management culture. We bring a unique tailored approach to help our clients succeed in today’s challenging regulatory and economic environment, enabling and empowering our clients to manage the “cost of compliance” without sacrificing the necessary infrastructure and control environment.

The post SEC Recordkeeping Enforcement Continues to Result in Large Penalties for Off-Channel Communications appeared first on Compliance Risk Concepts.

Overview

At the end of January, the SEC’s Division of Examinations published a Risk Alert to highlight observations from examinations related to Regulation Best Interest. The primary takeaway: generic policies and procedures or those that merely regurgitate the rule do not meet the “reasonably designed” standard under the Compliance Obligation of Reg BI. A firm’s policies should be highly specific to the firm itself, its products, its clients, Further, firms should be taking the next step with their policies and procedures to ensure that policies, procedures, and training materials are providing sufficient guidance to Financial Professionals (FPs) and other staff about how to meet their obligations.

Deficiencies and Weaknesses Highlighted in the Risk Alert

Specific areas which were highlighted as wide-spread weaknesses and deficiencies across policies and procedures:

• Disclosure Obligation
  • Not identifying when disclosures should be created or updated and who is responsible for doing so.
  • Failing to have a process to demonstrate that disclosure had been provided to retail customers.
  • Only posting Regulation Best Interest disclosures on their website or referencing in disclosures in other documents delivered to customers.
  • Not having policies and procedures to ensure that FPs with multiple licenses were disclosing their capacity to retail customers prior to or at the time of the recommendation.
  • Lacking guidance to FPs about oral disclosures when there were differences between specific FP conflicts and a firm’s standard disclosures – e.g., circumstances requiring additional disclosures and how to maintain a record of making oral disclosures.
• Care Obligation
  • Directing FPs to consider reasonably available alternatives and/or costs without providing any guidance how to do so.
    • If systems were put in place to allow FPs to evaluate costs or alternatives, firms failed to mandate their use or could not determine if the systems were used.
  • Directing FPs to document the basis for their recommendation but without providing instructions as to when it is necessary and what information is appropriate to include.
• Conflict of Interest Obligation
  • Policies and procedures did not specify how conflicts of interest are to be identified or addressed. Firms failed to provide a structure to identify and address conflicts (e.g., a conflicts officer or committee or a particular unit within Compliance).
  • Generic conflict language (e.g., we have conflicts related to compensation differences) without reflecting all conflicts of interest associated with the recommendations made by a firm or its FPs.
  • Inappropriately relying on disclosure to “mitigate” conflicts that appeared to create an incentive for FPs to place their interest ahead of the retail customer without establishing any mitigation measures (i.e., modifying practices to reasonably reduce conflicts of interest) at the FP level.
• Training and Testing
  • Relying heavily on surveillance systems that existed before the effective date of Regulation Best Interest without considering whether those systems needed modification in order to effective monitor Reg BI compliance – e.g., failing to consider new obligations regarding rollovers, account recommendations, implicit hold recommendations, and account monitoring (if agreed to).
    • Relying on surveillance systems that did not capture hold recommendations or recommendations that are not accepted by the retail customer, which resulted in those recommendations going unreviewed.
  • Relying on locally stored documents that limited surveillance regarding Care Obligation to branch examinations.
  • Relying on Reg BI training that did not provide employees with the specific tools, methods, or policies and procedures that they could use to comply with Reg BI.

Our Take

CRC believes that the best approach to regulatory compliance is a proactive one. Staying ahead of the curve by taking note of statements and guidance released by regulators and using them as a barometer to assess the current regulatory climate can help ensure that a firm is prepared for a regulatory exam. Rather than scrambling to rectify issues or meet deadlines, a thorough, active compliance program that considers and incorporates regulatory developments is in a better position to satisfy regulators and preserve operations so they can best serve their clients.

In light of the recent Risk Alert related to Reg BI, as well as the ongoing trend of increased findings and enforcements in this area since its implementation, firms should take this opportunity to assess their existing Reg BI compliance procedures, training materials, and operational processes to ensure that no gaps exist. Firms should pay careful attention to technological solutions deployed to meet the obligations of Reg BI and confirm that such solutions do not implicate the regulatory pitfalls outlined in this most recent Risk Alert.

For more information, please contact:

Mitch Avnet

p. (646) 346-2468 

mavnet@compliance-risk.com

David Amster

p. (917) 568-6470

damster@compliance-risk.com

The post The Message from the SEC’s Reg BI Risk Alert: “Come on, be reasonable." appeared first on Compliance Risk Concepts.

In November 2022, FINRA published a podcast that discussed available guidance concerning several paths through which broker-dealers can be approved by FINRA for digital asset securities activity: 1) as a placement agent in private placement digital asset securities offerings, 2) as an ATS facilitating secondary transaction of digital asset securities, and 3) as a special purpose broker-dealer (SPBD) with custody of digital asset securities.

1) Placement agent in private placement digital asset securities offerings

Overview

The broker-dealer sends the trade-matching details (e.g., identity of the parties, price, and quantity) to the buyer and issuer of a digital asset security—like a traditional private placement—and the issuer settles the transaction bilaterally between the buyer and issuer, away from the broker-dealer. In this case, the broker-dealer instructs the customer to pay the issuer directly and instructs the issuer to issue the digital asset security to the customer directly (e.g., the customer’s “digital wallet”).

Everything happens away from the broker-dealer so it does not custody the digital asset. The broker-dealer does not handle, control, or receive customer funds or securities. Issuers and investors directly transact with each other through an escrow account established by issuer.

Key Considerations in a Placement Agent Application

1. Demonstrate an understanding of the risks of the digital asset security.
2. Communicate how the risks will be disclosed and how the offering documents will be reviewed.
3. Evidence an understanding of the obligations under FINRA’s advertising rules (including if first-year firm conditions apply).
4. Detail the role and function of the broker-dealer with specificity.
5. Be able to show that that there are procedures that are specific to digital asset securities and the distributed ledger.

2) ATS facilitating secondary transaction of digital asset securities (two types)

ATS #1: Bilateral settlement without ATS involvement

Overview

The ATS matches the orders of buyers and sellers of digital asset securities, and the trades are either settled directly between the buyer and seller or the buyer and seller give instructions to their respective custodians to settle the transactions. In either case, a broker-dealer operator does not guarantee or otherwise have responsibility for settling the trades and does not at any time exercise any level of control over the digital asset securities being sold or the cash being used to make the purchase (e.g., the ATS does not place a temporary hold on the seller’s wallet or on the buyer’s cash to ensure the transaction is completed).

• Step 1 - the buyer and seller send their respective orders to the ATS;
• Step 2 - the ATS matches the orders;
• Step 3 - the ATS notifies the buyer and seller of the matched trade; and
• Step 4 - the buyer and seller settle the transaction bilaterally, either directly with each other or by instructing their respective custodians to settle the transaction on their behalf.

ATS #2: Custodians carry out conditional instructions using information from ATS

Overview

In this case, there is a higher degree of control exercised by the broker-dealer operator because it tells the buyer’s custodian where to send the funds and the seller’s custodian where to deliver the securities. As with the four-step process, the broker-dealer operator does not guarantee or otherwise have responsibility for settling the trades and does not at any time exercise any level of control over the digital asset securities being sold or the cash being used to make the purchase (e.g., the ATS does not place a temporary hold on the seller’s wallet or on the buyer’s cash to ensure the transaction is completed) but it notifies the custodians for the buyer and seller, and the buyer and seller, of the match.

• Step 1 - the buyer and seller send their respective orders to the ATS, notify their respective custodians of their respective orders submitted to the ATS, and instruct their respective custodians to settle transactions in accordance with the terms of their orders when the ATS notifies the custodians of a match on the ATS;
  • Step 2 - the ATS matches the orders; and
  • Step 3 - the ATS notifies the buyer and seller and their respective custodians of the matched trade and the custodians carry out the conditional instructions.

Key Considerations in ATS Applications

1. Explain in detail how the transaction flows and business model involving digital asset securities and the ATS comply with either the three-step or the four-step process.
2. Ensure other documents are consistent with that process, such as:
   1. User disclosure
   1. Draft Form ATS
   1. Contracts
   1. Custodian disclosure
   1. Disclosures with other third-parties

3) Special Purpose Broker-Dealer (SPBD) with Custody of Digital Asset Securities

Overview

The business activities of a special purpose broker-dealer are limited to digital assets that are also securities (this can include operation of an ATS that trades only in digital assets securities or otherwise engages in other business involving digital assets securities). It cannot engage in business activities involving non-security digital assets or securities that are not digital assets (e.g., traditional securities).

Key Considerations in SPBD Applications

1. Demonstrate an understanding how the business model is impacted by the nine conditions detailed in the SEC Statement (dated April 27, 2021).
2. Explain how each of the nine conditions are met.
3. Make it clear where staff can find information responsive to each of the nine conditions.

Lastly, the FINRA podcast also identified several common issues with membership applications involving digital asset securities.

• Show that the applicant is capable of complying with FINRA rules and the U.S. federal securities laws and regulations.
• Missing details. For example:
  • What is the business plan?
  • What is the relationship between different parts of the broker-dealer’s business?
  • How does the transaction flow and business model involving digital asset securities fit with the available guidance?
  • How will the broker-dealer ensure that it functions in a way comporting with the applicable guidance?
  • How do the transaction flows address compliance and legal requirements?
  • Is there documentation to support that each step in the transaction flow meets those requirements?
• Being inconsistent in describing the proposed business activities involving digital assets, cryptocurrencies, distributed ledger or related products.

CRC has extensive experience with helping firms successfully navigate the New Member and Continuing Member Application process with FINRA. We are specifically familiar with the fintech space and offer clients the ability to quickly scale and support their application with experienced C-Suite level personnel. Contact us today to discuss how we can provide right-sized support as you consider forming a broker-dealer.

For more information, please contact:

Mitch Avnet

p. (646) 346-2468  

mavnet@compliance-risk.com

David Amster

p. (917) 568-6470

damster@compliance-risk.com

The post <strong>Considerations for FINRA Membership involving Digital Asset Securities</strong> appeared first on Compliance Risk Concepts.

On September 27, 2022, the SEC announced charges against 15 broker-dealers and one investment adviser for pervasive and longstanding failures to maintain and preserve electronic communications. Monetary penalties ranged from $50 million to $125 million for the charged firms. The settlements also required the firms to retain a compliance consultant to review and assess the firm’s remedial steps relating to recordkeeping practices, policies and procedures, related supervisory practices, and employment actions. The SEC’s investigation found that the firm’s employees, including supervisors and executives, routinely used text-messaging applications on personal devices to communicate about business matters. The SEC determined that the substantial majority of these communications were not maintained or preserved by the firms, which violated federal securities laws.

Regarding a focus on managers in the settlements, Bloomberg News in its reporting on the SEC’s action said: “The SEC’s decision to call out executives -- based on a sampling of messages that banks were asked to gather for the investigation -- may ramp up the pressure on firms to ensure certain managers are held accountable.”

Yesterday’s SEC press release comes less than a year after a similar action by the SEC involving J.P. Morgan Securities LLC (JPMS) was announced in December 2021. In that instance, JPMS’ settlement with the SEC included a $125 million penalty.

CRC believes that the best approach to regulatory compliance is a proactive one. Staying ahead of the curve by taking note of this enforcement activity and using it as a barometer to assess the current regulatory climate can help ensure that a firm is prepared for a regulatory exam. Rather than scrambling to rectify issues or meet deadlines, a thorough, active compliance program that considers and incorporates regulatory developments is in a better position to satisfy regulators and preserve operations so they can best serve their clients.

For more information, please contact:

Mitch Avnet

p. (646) 346-2468 

mavnet@compliance-risk.com

David Amster

p. (917) 568-6470

damster@compliance-risk.com

The post SEC Charges 16 Wall Street Firms with Widespread Recordkeeping Failures appeared first on Compliance Risk Concepts.

In an order[1] dated July 30, 2021, the SEC approved the adoption of new FINRA Rule 4111 and Rule 9561 and the amendment of Rule 9559. FINRA has extended the effective date for the proposed rule change to no later than 180 days after publication of a Regulatory Notice announcing this Commission approval. At time of this update, FINRA has not yet published such a Regulatory Notice.

From the SEC’s approval order:

The proposal to establish a process in new Rule 4111 to identify members firms that present a high degree of risk to the investing public, based on numeric thresholds of firm-level and individual-level disclosure events, and then impose a Restricted Deposit Requirement, conditions, or restrictions on the member firm’s operations, or both, will help protect investors and encourage such member firms to change their behavior. FINRA has designed the proposed rule change to establish an annual, multi-step process to determine whether a member firm raises investor protection concerns substantial enough to require the imposition of additional obligations, while allowing identified firms several means of challenging FINRA’s decisions and affecting the ultimate outcome.

The Department would begin each member firms’ annual Rule 4111 review process by calculating specified “Preliminary Identification Metrics” for each firm for each of six categories of events or conditions, collectively defined as the “Disclosure Event and Expelled Firm Association Categories.”

The six categories are: (1) Registered Person Adjudicated Events; (2) Registered Person Pending Events; (3) Registered Person Termination and Internal Review Events; (4) Member Firm Adjudicated Events; (5) Member Firm Pending Events; and (6) Registered Persons Associated with Previously Expelled Firms (also referred to as the Expelled Firm Association category).

There are numeric thresholds for seven different firm sizes, to provide that each member firm would be compared only to its similarly sized peers.

If the Department determines that a member firm warrants further review under Rule 4111, and such member firm would be meeting the Preliminary Criteria for Identification for the first time, the member firm would have a one-time opportunity to reduce its staffing level to avoid meeting the Preliminary Criteria for Identification, within 30 business days after being informed by the Department that it met the Preliminary Criteria for Identification. However, if the Department determines that the member firm still meets the Preliminary Criteria for Identification (or if the member firm did not opted to reduce staffing levels) the Department would determine the firm’s maximum Restricted Deposit Requirement, and the member firm would proceed to a “Consultation” with the Department.

During the Consultation, the Department would give the member firm an opportunity to demonstrate why it does not meet the Preliminary Criteria for Identification, why it should not be designated as a Restricted Firm, and why it should not be subject to the maximum Restricted Deposit Requirement. (42930) Pursuant to Proposed Rule 4111(e)(2), the Department would provide the member firm with written notice of its decision no later than 30 days from the date of FINRA’s letter scheduling the Consultation, stating any conditions or restrictions to be imposed, and the ability of the member firm to request a hearing with the Office of Hearing Officers in an expedited proceeding.

Under new Rule 9561(a)(1), the Department would serve to the member firm a notice of the Department’s decision following the Rule 4111 process. The proposed rule change would also provide that if a member firm does not request a hearing, the decision would constitute final FINRA action. In general, a request for a hearing would not stay any of the Rule 4111 Requirements imposed in the Department’s decision, which would be immediately effective with one exception being when member requests review of imposition of Restricted Deposit Requirement. In that case, the firm would be required to deposit the lesser of 25% of its Restricted Deposit Requirement or 25% of its average excess net capital over the prior year, while the proceeding is pending.

If a member firm fails to comply with any of the requirements imposed on it under Rule 4111, the Department would be authorized to serve a notice pursuant to proposed Rule 9561 stating that the member firm’s continued failure to comply within seven days of service of the notice would result in a suspension or cancellation of membership.

If a member firm requests a hearing under proposed Rule 9561, the hearing would be subject to Rule 9559 (Hearing Procedures for Expedited Proceedings Under the Rule 9550 Series).

Opportunities for CRC to Assist Your Firm:

• CRC can proactively conduct a review of your current compliance program to identify opportunities to potentially implement enhancements before the annual Rule 4111 reviews begin.
• Between now and the effective date of this rule, CRC can help your firm to quickly scale up its compliance program with CRC resources to address concern areas.
• CRC can develop and implement enhanced diligence processes relative to hiring or acquisition processes designed to avoid scrutiny under Rule 4111.

Please contact Mitch Avnet for more information:

mavnet@compliance-risk.com

p. (646)346-2468

[1] SR-FINRA-2020-041 Approval Order, https://www.finra.org/sites/default/files/2021-08/sr-finra-2020-041-approval-order.pdf

The post News Update: SEC Approves FINRA Rules Change appeared first on Compliance Risk Concepts.

March 2022

Overview & Summary

President Biden signed an executive order on Wednesday, March 9 that will direct the federal government to produce a plan to regulate cryptocurrencies. This Executive Order will outline the first approach to addressing the risks and potential benefits of digital assets and their underlying technology. The order lays out a national policy for digital assets across six key priorities: consumer and investor protection; financial stability; illicit finance; U.S. leadership in the global financial system and economic competitiveness; financial inclusion; and responsible innovation.

Notably, the order directs the Federal Reserve to research and potentially develop its own digital dollar, which would be similar to cryptocurrencies. The order also directs the Treasury Department to develop guidelines for Americans trading and using cryptocurrency to facilitate the mitigation and reduction of fraud or market volatility. The Treasury will conduct further research on the potential role of digital assets and blockchain in future payment systems. In addition, other agencies will examine cryptocurrency's role as a speculative asset and its role in illicit finance.

The current administration has been under pressure to play more of a coordinating role in Washington’s approach regarding this asset class, as industry executives continue to lament what they believe is a lack of clarity on rules; this executive order takes a step in that direction.

Our Take

The cryptocurrency market is now worth more than $3 trillion. Surveys suggest that around 16 percent of adult Americans – approximately 40 million people – have invested in, traded, or used cryptocurrencies.

Whether you are an adviser looking to expand your investment strategy to include digital assets, or you are looking to participate in ICOs or build out a platform for trading cryptocurrency as a broker-dealer, it is wise to consider partnering with an established compliance team who can help you navigate this imminent regulation and provide assistance from initial registration to regulatory examination.

CRC recommends that firms prepare to ensure that appropriate controls and procedures are developed to allow sufficient oversight into this area.

As with any compliance initiative or change to regulation, CRC recommends that all personnel are well trained, and that such training is both highly specific to firm policies and procedures and appropriately documented.

Opportunities for CRC to Assist Your Firm

• CRC is available for outsourced support with respect to cryptocurrency.
• CRC can proactively conduct a review of your existing compliance program to identify opportunities to potentially implement enhancements in preparation for regulatory examinations.
• CRC is available to assist with examination responses.
• CRC can prepare written electronic communications and record retention policies and procedures designed to comply with relevant industry rules, regulations, and laws.
• CRC offers best practices guidance to firms that seek to improve current protocols or to further strengthen existing program compliance.

Please contact Mitch Avnet for more information.

Mitch Avnet at mavnet@compliance-risk.com  or (646) 346.2468

The post News Update: Biden Takes Step to Regulate Cryptocurrencies appeared first on Compliance Risk Concepts.

Overview

As firms prepare their annual ADV updates or review their compliance programs, one area where advisers and brokers who provide services to retail clients should highlight is Form CRS. 

On December 17, 2021, the staff of the U.S. Securities and Exchange Commission issued observations and guidance regarding Form CRS disclosures required of SEC-registered broker-dealers and investment advisers who offer services to retail investors. The statement provides insight into CRS findings for recently examined firms. While SEC staff notes that they did observe appropriately drafted Form CRS samples from various firms, there were consistent issues found across a broad sampling within the industry. Areas where CRS improvements were most frequently noted are described below and represent areas where firms should pay close attention when reviewing the CRS to see if updates are necessary, whether or not material changes have occurred this year.

Areas of Focus

Plain English

The purpose of Regulation Best Interest and the Form CRS is to create transparency within the financial service industry. As such, the Form CRS should not contain legal jargon or esoteric industry terms that may inhibit comprehension amongst retail investors.  

Live Hyperlinks

Firms were cited for including the text of links in their Form CRS which did not navigate to the correct destination or were not actually live hyperlinks. All hyperlinks to regulatory resources or additional disclosure must be live. 

Delivery

Perhaps the most common deficiency cited amongst broker-dealers and investment advisers was their failure to properly deliver or evidence such delivery of Form CRS. Ensure that the Form CRS is delivered at the appropriate point in a retail client’s relationship with the firm. Policies, procedures, training, and recordkeeping should all support this distribution process. 

Proper Format

Many firms were cited for failure to comply with the formatting requirements imposed by the Form CRS instructions. Firms should take care to confirm that all required headings, conversation starters, emphasized text, etc. are included throughout the document. 

Website

Form CRS should be prominently linked, along with other documents such as the firm’s Form ADV Part 2 and privacy policy, on a firm’s publicly available website. This should always be updated whenever the Form CRS is updated to ensure that the most current version is available on the website. 

Conflicts of Interest

Conflicts of interest are not static and can evolve over time as industry relationships, products, client-base, fee structures, etc. change and develop. As such, firms should be aware that all new conflicts (whether real, potential, or perceived) must be reported to compliance for possible inclusion in Form CRS, Form ADV Part 2, or other relevant disclosure documents. 

Monitoring For Updates

CRC recommends that firms adopt a process whereby trigger events for Form CRS updates are recognized, tracked, and implemented within Form CRS by compliance. Such process should also include identifying material updates and tracking and confirmation of related re-distributions of the Form to current retail investors, clients, and customers. Such trigger events could include updates and changes to offerings, fees, compensation structure, or any other content within Form CRS. 

Conclusion

The Commission is not likely to give firms a break regarding Form CRS in 2022; in fact, CRC anticipates quite the opposite. We consider that 2021 was the honeymoon period for Regulation Best Interest, and even so, it brought 27+ enforcement actions related to Form CRS alone. Those actions, in conjunction with the most recent guidance and findings from the SEC should serve as both a warning and a road map as firms review and update their Form CRS. 

Next Steps for Advisers and Broker-Dealers

As always, CRC believes that the most effective compliance program is a proactive one. Accordingly, CRC recommends that advisers take this opportunity to review existing Form CRS content, format, and any related practices, policies, and procedures to ensure they adhere to current rules, and evaluate and implement any process re-engineering that might be necessary to comply fully with both Regulation Best Interest and the Form CRS instructions.

Contact Us

To discuss the Form CRS, contact a regulatory specialist at CRC. Our team is available to assist with outsourced policy and procedure management, gap analysis, policy implementation, and training. 

The post SEC Offers Guidance on Form CRS appeared first on Compliance Risk Concepts.

Overview

In an order^[1] dated July 30, 2021, the SEC approved the adoption of new FINRA Rule 4111 and Rule 9561 and the amendment of Rule 9559. FINRA has extended the effective date for the proposed rule change to no later than 180 days after publication of a Regulatory Notice announcing this Commission approval. At time of this update, FINRA has not yet published such a Regulatory Notice.

From the SEC’s approval order:

The proposal to establish a process in new Rule 4111 to identify members firms that present a high degree of risk to the investing public, based on numeric thresholds of firm-level and individual-level disclosure events, and then impose a Restricted Deposit Requirement, conditions or restrictions on the member firm’s operations, or both, will help protect investors and encourage such member firms to change their behavior. FINRA has designed the proposed rule change to establish an annual, multi-step process to determine whether a member firm raises investor protection concerns substantial enough to require the imposition of additional obligations, while allowing identified firms several means of challenging FINRA’s decisions and affecting the ultimate outcome.

The Department would begin each member firms’ annual Rule 4111 review process by calculating specified “Preliminary Identification Metrics” for each firm for each of six categories of events or conditions, collectively defined as the “Disclosure Event and Expelled Firm Association Categories.”

The six categories are: (1) Registered Person Adjudicated Events; (2) Registered Person Pending Events; (3) Registered Person Termination and Internal Review Events; (4) Member Firm Adjudicated Events; (5) Member Firm Pending Events; and (6) Registered Persons Associated with Previously Expelled Firms (also referred to as the Expelled Firm Association category).

There are numeric thresholds for seven different firm sizes, to provide that each member firm would be compared only to its similarly sized peers.

If the Department determines that a member firm warrants further review under Rule 4111, and such member firm would be meeting the Preliminary Criteria for Identification for the first time, the member firm would have a one-time opportunity to reduce its staffing level to avoid meeting the Preliminary Criteria for Identification, within 30 business days after being informed by the Department that it met the Preliminary Criteria for Identification. However, if the Department determines that the member firm still meets the Preliminary Criteria for Identification (or if the member firm did not opted to reduce staffing levels) the Department would determine the firm’s maximum Restricted Deposit Requirement, and the member firm would proceed to a “Consultation” with the Department.

During the Consultation, the Department would give the member firm an opportunity to demonstrate why it does not meet the Preliminary Criteria for Identification, why it should not be designated as a Restricted Firm, and why it should not be subject to the maximum Restricted Deposit Requirement. (42930) Pursuant to Proposed Rule 4111(e)(2), the Department would provide the member firm with written notice of its decision no later than 30 days from the date of FINRA’s letter scheduling the Consultation, stating any conditions or restrictions to be imposed, and the ability of the member firm to request a hearing with the Office of Hearing Officers in an expedited proceeding.

Under new Rule 9561(a)(1), the Department would serve to the member firm a notice of the Department’s decision following the Rule 4111 process. The proposed rule change would also provide that if a member firm does not request a hearing, the decision would constitute final FINRA action. In general, a request for a hearing would not stay any of the Rule 4111 Requirements imposed in the Department’s decision, which would be immediately effective with one exception being when member requests review of imposition of Restricted Deposit Requirement. In that case, the firm would be required to deposit the lesser of 25% of its Restricted Deposit Requirement or 25% of its average excess net capital over the prior year, while the proceeding is pending.

If a member firm fails to comply with any of the requirements imposed on it under Rule 4111, the Department would be authorized to serve a notice pursuant to proposed Rule 9561 stating that the member firm’s continued failure to comply within seven days of service of the notice would result in a suspension or cancellation of membership.

If a member firm requests a hearing under proposed Rule 9561, the hearing would be subject to Rule 9559 (Hearing Procedures for Expedited Proceedings Under the Rule 9550 Series).

Opportunities for CRC to Assist Your Firm

• CRC can proactively conduct a review of your current compliance program to identify opportunities to potentially implement enhancements before the annual Rule 4111 reviews begin.
• Between now and the effective date of this rule, CRC can help your firm to quickly scale up its compliance program with CRC resources to address concern areas.

Please contact Mitch Avnet or for more information.

Mitch Avnet at mavnet@compliance-risk.com  or (646) 346.2468 

^[1] SR-FINRA-2020-041 Approval Order, https://www.finra.org/sites/default/files/2021-08/sr-finra-2020-041-approval-order.pdf

The post News Reminder: SEC Approves FINRA Rules Change appeared first on Compliance Risk Concepts.

December 2021

Overview & Summary

JP Morgan has agreed to pay the SEC and CFTC a combined $200 million in response to regulatory findings which include “widespread and longstanding failures” surrounding the retention of employee electronic communications. The settlement order alleges that JP Morgan employees regularly communicated using personal email accounts, text messages, and WhatsApp as a means of conducting business. Such communication also took place on personal devices rather than firm-issued and controlled devices despite JP Morgan’s written policies and procedures and industry recordkeeping regulations. 

According to the settlement order, the failures stemmed from communications-related misconduct between January 2018 and November 2020. The settlement order also states that supervisory personnel participated in the misconduct it should have been supervising and preventing; this makes the offense particularly egregious. The settlement order enumerates various specific issues relative to the failures in recordkeeping as well as JP Morgan’s responsiveness and level of cooperation with the SEC during the examination process with respect to the producing of requested communications documents. 

Our Take

Electronic communications and related recordkeeping practices have been a hot topic amongst regulators in recent years. This landmark settlement is a clear indication that regulatory interest in this area is not waning and, as such, should be on the forefront of all compliance teams’ focus areas in 2022. 

As always, CRC reminds firms that the best compliance program is a proactive one. Accordingly, we suggest that firms (whether registered with FINRA as a BD or with the SEC as an RIA) who permit the use of text messages, chat features, and use of personal devices for the purpose of conducting firm-related business have sufficient oversight over such processes and have appropriate record-keeping practices in place for such communication methods.  Further, where firm policies and procedures have clear prohibitions or limitations on use of personal email, personal devices, chat features of social media platforms and other chat applications, text messages, etc., CRC recommends that firms ensure that controls and procedures in place allow sufficient oversight into this area. 

As with any compliance initiative, CRC recommends that all personnel are well trained, and that such training is highly specific to firm policies and procedures and is appropriately documented. 

Opportunities for CRC to Assist Your Firm

• CRC is available for outsourced support with respect to email review and electronic communications archiving solutions. We are versed with industry-leading email review and retention platforms (e.g., Global Relay, Smarsh) and can advise on appropriate compliance-driven configuration that meets regulatory standards. 
• CRC can proactively conduct a review of your current compliance program and electronic communications to identify opportunities to potentially implement enhancements in preparation for regulatory examinations.
• CRC is available to assist with examination responses.
• CRC can prepare written electronic communications and record retention policies and procedures designed to comply with relevant industry rules, regulations and laws. 
• CRC offers best practices guidance to firms that seek to improve current protocols or to further strengthen current program compliance. 

Please contact Mitch Avnet for more information.

Mitch Avnet at mavnet@compliance-risk.com or (646) 346.2468 

The post News Update: JP Morgan to pay $200M for Electronic Recordkeeping Lapses appeared first on Compliance Risk Concepts.

September 2021

Overview & Summary

FINRA announced that it is conducting a review of firm practices related to the acquisition of customers through social media channels and how firms manage their obligations related to information collected from those customers and other individuals that may provide data to firms. Sweep effort review periods will begin (unless otherwise noted) starting January 1, 2020 and will likely carry through the date of examination (or most recent quarter end). Note that this sweep effort was announced following a request for comment by the SEC regarding “digital engagement practices” of advisers and broker dealers. View this request in full, here.

Our Take

As always, CRC reminds firms that the best compliance program is a proactive one. As such, we suggest that firms (whether registered with FINRA as a BD or with the SEC as an RIA) who are utilizing social media, as well as social media influencers, often known as finfluencers, review their current policies and procedures to ensure that recordkeeping, data tracking and protection, and disclosure requirements relative to investments, investment advice, and solicitation agreements are all addressed properly. In addition, CRC recommends that key personnel involved in such processes are well trained, and that such training is specific and documented. 

Some Key Takeaways:

• FINRA is instituting this initial sweep effort, but investment advisory firms should prepare themselves as well for a similar initiative from the SEC. 
• FINRA appears to be focused on determining whether firms have adequate written policies and procedures in place to ensure that obligations are met where finfluencers and social media are used to refer clients, as well as whether procedures are followed.
• The SEC’s request for comment also notes “gamification” as an area of interest with respect to the collection of and engagement with client and prospect data. 
• The full FINRA sweep exam scope is available here.

Opportunities for CRC to Assist Your Firm (list not exhaustive):

• CRC can proactively conduct a review of your current compliance program and digital engagement activities to identify opportunities to potentially implement enhancements in preparation for sweep examinations.
• CRC is available to assist with sweep exam responses.
• CRC is available for outsourced support with respect to social media marketing in general, as well as where the use of finfluencers is applicable. 
• CRC can produce written social media marketing/ influencer referral policies and procedures designed to comply with relevant regulatory implications. 
• CRC can provide best practices to firms looking to expand into this area or to ensure current program compliance. 
• CRC can perform a program analysis to ensure compliance with Reg SP relative to social media referral programs. 

Please contact Mitch Avnet for more information.

Mitch Avnet at mavnet@compliance-risk.com  or (646) 346-2468 

The post News Update: FINRA to Sweep BDs on Use of Social Media Influencers to Refer Clients appeared first on Compliance Risk Concepts.

News Update: SEC Approves FINRA Rules Change

August 18, 2021

Overview & Summary

In an order[1] dated July 30, 2021, the SEC approved the adoption of new FINRA Rule 4111 and Rule 9561 and the amendment of Rule 9559. FINRA has extended the effective date for the proposed rule change to no later than 180 days after publication of a Regulatory Notice announcing this Commission approval. At time of this update, FINRA has not yet published such a Regulatory Notice.

From the SEC’s approval order:

The proposal to establish a process in new Rule 4111 to identify members firms that present a high degree of risk to the investing public, based on numeric thresholds of firm-level and individual-level disclosure events, and then impose a Restricted Deposit Requirement, conditions, or restrictions on the member firm’s operations, or both, will help protect investors and encourage such member firms to change their behavior. FINRA has designed the proposed rule change to establish an annual, multi-step process to determine whether a member firm raises investor protection concerns substantial enough to require the imposition of additional obligations, while allowing identified firms several means of challenging FINRA’s decisions and affecting the ultimate outcome.

The Department would begin each member firms’ annual Rule 4111 review process by calculating specified “Preliminary Identification Metrics” for each firm for each of six categories of events or conditions, collectively defined as the “Disclosure Event and Expelled Firm Association Categories.”

The six categories are: (1) Registered Person Adjudicated Events; (2) Registered Person Pending Events; (3) Registered Person Termination and Internal Review Events; (4) Member Firm Adjudicated Events; (5) Member Firm Pending Events; and (6) Registered Persons Associated with Previously Expelled Firms (also referred to as the Expelled Firm Association category).

There are numeric thresholds for seven different firm sizes, to provide that each member firm would be compared only to its similarly sized peers.

If the Department determines that a member firm warrants further review under Rule 4111, and such member firm would be meeting the Preliminary Criteria for Identification for the first time, the member firm would have a one-time opportunity to reduce its staffing level to avoid meeting the Preliminary Criteria for Identification, within 30 business days after being informed by the Department that it met the Preliminary Criteria for Identification. However, if the Department determines that the member firm still meets the Preliminary Criteria for Identification (or if the member firm did not opted to reduce staffing levels) the Department would determine the firm’s maximum Restricted Deposit Requirement, and the member firm would proceed to a “Consultation” with the Department.

During the Consultation, the Department would give the member firm an opportunity to demonstrate why it does not meet the Preliminary Criteria for Identification, why it should not be designated as a Restricted Firm, and why it should not be subject to the maximum Restricted Deposit Requirement. (42930) Pursuant to Proposed Rule 4111(e)(2), the Department would provide the member firm with written notice of its decision no later than 30 days from the date of FINRA’s letter scheduling the Consultation, stating any conditions or restrictions to be imposed, and the ability of the member firm to request a hearing with the Office of Hearing Officers in an expedited proceeding.

Under new Rule 9561(a)(1), the Department would serve to the member firm a notice of the Department’s decision following the Rule 4111 process. The proposed rule change would also provide that if a member firm does not request a hearing, the decision would constitute final FINRA action. In general, a request for a hearing would not stay any of the Rule 4111 Requirements imposed in the Department’s decision, which would be immediately effective with one exception being when member requests review of imposition of Restricted Deposit Requirement. In that case, the firm would be required to deposit the lesser of 25% of its Restricted Deposit Requirement or 25% of its average excess net capital over the prior year, while the proceeding is pending.

If a member firm fails to comply with any of the requirements imposed on it under Rule 4111, the Department would be authorized to serve a notice pursuant to proposed Rule 9561 stating that the member firm’s continued failure to comply within seven days of service of the notice would result in a suspension or cancellation of membership.

If a member firm requests a hearing under proposed Rule 9561, the hearing would be subject to Rule 9559 (Hearing Procedures for Expedited Proceedings Under the Rule 9550 Series).

Our Take

As always, CRC reminds firms that the best compliance program is a proactive one. As such, we suggest that firms review their programs to identify areas where updates relative to Rule 4111 are necessary, and implement such updates prior to the effective date, which will formally be determined as 180 days following the publication of a Regulatory Notice noting approval of this Rule. 

Some Key Takeaways:

• This appears to be intended to be a fast-moving process once it starts (e.g., FINRA must issue a written decision within 30 days of the date of the letter scheduling the “Consultation,” and in the case of alleged non-compliance with obligations under Rule 4111, there is a seven-day window from service of notice under Rule 9561 that can result in a suspension or cancellation of membership).
• FINRA may still determine that a firm has met its preliminary criteria for identification even after the firm engages in a “staffing reduction” as a part of the Rule 4111 process.
• It is designed to provide an opportunity for the firm to affect the outcome through the “Consultation” process – e.g., by demonstrating to FINRA why the firm should not be a Restricted Firm or why it should not be subject to the maximum Restricted Deposit Requirement.

Opportunities for CRC to Assist Your Firm:

• CRC can proactively conduct a review of your current compliance program to identify opportunities to potentially implement enhancements before the annual Rule 4111 reviews begin.
• Between now and the effective date of this rule, CRC can help your firm to quickly scale up its compliance program with our resources to address concern areas.

Please contact Mitch Avnet for more information.

Mitch Avnet at mavnet@compliance-risk.com  or (646) 346.2468 

^[1] SR-FINRA-2020-041 Approval Order, https://www.finra.org/sites/default/files/2021-08/sr-finra-2020-041-approval-order.pdf

The post Breaking News Update SR-FINRA-2020-041 Approval appeared first on Compliance Risk Concepts.

The Securities and Exchange Commission announced on July 26^th that 21 investment advisers and 6 broker-dealers have agreed to settle charges that they failed to timely file and deliver their client or customer relationship summaries to their retail investors. In the release the SEC’s Director of Enforcement, Gurbir Grewal, notes:

“Today’s cases reinforce the importance of meeting those obligations and providing retail investors with information that is intended to help them understand their relationships with their securities industry professionals.”

The penalties ranged from $10,000 to $97,523. 

The Cost of Non-Compliance

Appropriate implementation, maintenance, and distribution of a two-page document could have saved these firms the hassle and embarrassment of fines and reputational damage. At CRC, we firmly believe that the best compliance program is a proactive one; the fines above demonstrate that regulators agree. 

Our Take

Regulators have continued to display heightened focus on transparent communication and disclosure when interacting with retail investors. Recent examinations of both SEC-registered investment advisers and broker-dealers have shown a sharp emphasis on Regulation Best Interest (Reg BI) related policies and procedures, particularly regarding the content and distribution (and subsequent evidence of delivery) of Form CRS. As such, firms should ensure that the Form CRS includes all mandated language and meets formatting requirements as specified by Reg BI. A firm’s compliance policies and procedures should also accurately reflect the processes implicated by Reg BI, including the delivery of Form CRS; firms should consider testing such procedures to ensure efficacy. If you have concerns regarding your firm’s Reg BI policies and procedures, please contact your Compliance Professional at CRC, or contact CRC using the method’s listed below so that we can connect you with a member of our team. 

For more information:

 Mitch Avnet at mavnet@compliance-risk.com  or (646) 346.2468 

Kate Gibbs at kgibbs@compliance-risk.com or (781) 742.4688 

The post News Update: SEC Fines 27 Firms for Form CRS Failures appeared first on Compliance Risk Concepts.

Background & Summary

On July 8, 2019, the US Securities and Exchange Commission (SEC) issued a joint statement in conjunction with FINRA’s general counsel addressing various elements of digital currency amid request for clarity on whether broker-dealers can hold digital assets under federal securities laws. The regulator reiterated its growing concerns relative to investor protection and clarified the fact that entities seeking to participate in digital currency markets must comply with relevant securities laws. The release placed specific emphasis on compliance with the customer protection rule. While recounting the success and importance of the customer protection rule, the SEC added, "[t]his record of protecting customer assets held in custody by broker-dealers stands in contrast to recent reports of cyber theft, and underscores the need to ensure broker-dealers robust protection of customer assets, including digital asset securities."

With respect to custody and digital securities, the SEC’s statement would seem to indicate that the regulator seeks to regulate such assets as uncertificated securities (i.e. ownership is confirmed via electronic certificate rather than a physical one). As such, broker-dealers would likely need to establish custody through the use of an SEC registered transfer agent, who would also maintain applicable records relating to security ownership. The statement also seems to allude to the fact that custodying digital assets through the use of digital wallets and maintaining private keys that would be controlled by the broker dealer are unlikely to be looked upon favorably, or ultimately approved by regulators. While the tone of the statement seems to be geared towards preparing digital securities for more mainstream access (i.e., gearing it towards retail investors), the bottom line for regulators, as evidenced by this release, is customer protection. As the industry navigates the nuances of digital securities markets, it should do so through the lens of protecting against fraud, theft, or misappropriation of client funds and/or information. 

Our Take

As always, it is our position at CRC that cooperation with regulators is key for the successful operation of financial services organizations. Regulators have continued to display heightened focus on the protection of retail and senior investors. As such, digital currency in particular is a developing area where cooperative, responsible players will hold the ace. Prompt, efficient, and honest communication and responses will satisfy regulators and clients alike, while also and bringing a sense of legitimacy and scrupulousness to digital currency operations. If you would like to speak with one of our Compliance Specialists about custody implications or have any other questions regarding digital currency, please do not hesitate to contact us. 

Contact Mitch Avnet at mavnet@compliance-risk.com or (646)346-2468 for more information. 

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(The Economist | May 2019) Excerpt from the article Rise of the No Men The past decade has brought a compliance boom in banking. A recent episode of “Billions”, a television drama about Wall Street, captured the rainmakers’ frustration: so fed up is “Dollar” Bill Stern with having his wings clipped by Ari Spyros that the veteran trader rams the side of the compliance chief’s Porsche when he pulls out of the car park of their hedge fund, Axe Capital.

“Some financial firms, particularly small ones, are outsourcing compliance functions or specific projects. Compliance Risk Concepts, an American firm that takes on such work, has seen demand for its services grow by over 30% a year, says Mitch Avnet, its managing partner.”

But pity not finance’s in-house policemen, for they have had a golden decade since the crisis. While swathes of banking have labored under cutbacks and stiff capital requirements, their headcount and clout have grown. Banks fined for aiding corruption, money-laundering and sanctions-busting have beefed up their compliance, risk, legal and internal-audit teams. Compliance officers will never be the rock stars of finance, but they have moved from drums to rhythm guitar. And though some banks hint at having reached “Peak Compliance”, staffing and investment are likely to remain well above pre-crisis levels.

Click here to read the full article>>>(subscription required)

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Mitch Avnet shared his thoughts on pharmaceutical compliance and the opioid crisis in the following Law360 article titled With Opioid Charges, DOJ Signals Compliance Fixation by Alison Noon. Mitch reasoned,

“If a company has reservations about a dual-function compliance officer, it can help to follow the money and decide whether their other compensation could undermine their objectivity. Is this individual being incentivized to turn the other way?”

Law360 (April 30, 2019, 7:38 PM EDT) ­­A logistics specialist who stumbled into pharmaceutical compliance is facing at least 10 years in prison for keeping quiet while his company doled out millions of doses of opioids to alleged pill mills, a stern warning from the U.S. Department of Justice to compliance officers in the crosshairs of the opioid epidemic.

Charging documents indicate that the compliance role was handed to businessman William Pietruszewski at Rochester Drug Co­operative Inc. with little direction and no training. For years, he wore both the logistics and compliance hats.

Compliance professionals should take note, said Mitch Avnet, founder and managing partner of Compliance Risk Concepts. Taking the role lightly can land you in a world of hurt. “It’s incumbent upon the individual to understand what they’re getting into,” Avnet said. “Like any career choice, you need to understand the risks.” Attorneys told Law360 the case held several other lessons for compliance professionals.

Click here to read the full article >> (Law360 subscription required)

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President and Chief Executive Officer of the Investment Adviser Association, Paul Cellupica, has posted a letter to President & Chief Executive Officer of the Investment Adviser Association, Karen Barr, on behalf of the division’s staff, asking investment advisers for public comments and input on the Custody Rule as it applies to the emerging landscape of digital assets.

Issues have been raised about the regulatory status of the trading practices involving digital assets. Cellupica inquired about the Custody Rule as it applies to the Investment Advisers Act of 1940, and the role it serves with the growth of digital assets. The SEC is asking for input amid the possibility they could be reconsidering existing custody rules in specific cases of digital asset trading and settlement.

The current Custody Rule (Rule 206(4)-2) protects investors who delegate custody of their funds or securities to investment advisers or firms under the Advisers Act. The custodial authority given to professional investment advisers provides an ”increased risk of misappropriation or misuse of [investors’] assets” when it comes to going digital, as Cellupica wrote in the letter.

One of the specific points the SEC wants to clear up is how the Custody Rule applies to digital assets - specifically the issue of “non-DVP arrangements,” or delivery versus payment. The types of digital assets that trade on a non-DVP basis and what role investment advisers will play in non-DVP digital asset trading are a few examples of questions raised in the letter. The SEC’s goal in reaching out for public input is to reinforce compliance for investment advisers in trading digital assets, which is relatively new to the investment adviser industry.

All in all, the SEC wants to lay groundwork for how characteristics particular to digital assets will impact compliance with the Custody Rule going forward.

Call us today to schedule a complimentary CryptoConsult to speak with a qualified member of our team who can help determine your unique risk areas and assess where we can provide necessary support to your digital currency program. Whether you are an adviser looking to expand your investment strategy to include digital assets, or you are looking to participate in ICOs or build out a platform for trading cryptocurrency as a broker-dealer, it is wise to consider partnering with an established compliance team who can help you navigate imminent regulation and provide assistance from initial registration to regulatory examination.

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NEW YORK, NY /PRESS RELEASE/ - Building on its leadership position in the compliance professional services sector, Compliance Risk Concepts LLC (CRC) today announced the hire of James (Jim) K. Ryan as Director of Business Development. At CRC, Jim will continue to drive growth and expansion in CRC's core business verticals, which include broker-dealer, investment banking, investment adviser, futures and commodities, financial and operational, research supervisory analyst, digital asset/crypto and technology compliance related services. Additionally, with Jim's leadership, CRC expects to make a big push into the insurance compliance arena in 2019.

"I have known Jim for more than a decade. From the time of our first interaction, I was impressed with Jim's industry knowledge and overall approach toward his business development efforts", said Mitch Avnet, CRC's Managing Partner, and CEO. "Jim builds long term, meaningful strategic relationships. He is truly invested in the right outcomes for his clients, embodying CRC's core values and strategic goals and objectives. We are fortunate to have Jim join our team and looking forward to his long term success at CRC."

During Jim's 15 year tenure at RegEd, he handled sales of the organization's vast portfolio of technology solutions for compliance, training, and licensing management to broker-dealers, investment advisers, and insurance companies. Through his direct contribution, Jim was responsible for approximately $17 million worth of growth for RegEd, establishing lifelong clients in the process. Looking back on his accomplishments, Jim credits his achievements in advocating for the client, building sincere relationships with those he serves, and creating a culture of shared success with his colleagues.

When asked about his decision to join CRC, Jim said "I've known Mitch for many years. We have not only developed and maintained a strong business relationship – but also formed a long-term friendship. I am thrilled to join the leadership team and look forward to my role and contribution in building upon the growth and success of CRC has celebrated since 2013. I cannot wait to work alongside Mitch and the rest of the hard-working compliance professionals in the organization."

James K. Ryan can be reached at jryan@compliance-risk.com or direct dial: (646) 813 7874.

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Coinbase, who recently acquired broker-dealer Keystone Capital Corp in June 2018, announced the addition of Jeff Horowitz as the Cryptocurrency exchange’s new Chief Compliance Officer. Prior to joining Coinbase, Horowitz served as the Global Head of Compliance at Pershing, and previously held positions managing AML and compliance programs at Citigroup and Goldman Sachs.

"As Coinbase — along with the cryptocurrency space as a whole — grows and matures, continued regulatory compliance across all the varying jurisdictions globally will be critical," Coinbase President and Chief Operating Officer Asiff Hirji wrote in a blog post Tuesday. "Adding Jeff to our team is one more important step along this journey."

Following the acquisition of Keystone, which included Venovate Marketplace, LLC, Coinbase is registered as an Alternative Trading System (ATS) with the SEC, which allows them to trade securities in a regulatory compliant manner. This is a path that US-based crypto exchanges and offering platforms will need to take if they plan to sell or trade blockchain-based securities in the future.

Coinbase’s strategy and recent actions towards building out a program to comply with anticipated regulation support CRC’s steadfast position that the key to operating successfully in the digital currency market is continually moving towards legitimizing the asset class, not only from the prospective of regulators, but institutional and wary retail investors as well.  Scrupulous attention to regulatory developments and visible effort to serve the best interest of clients and safeguard assets and personal information will distinguish a crypto exchange from it’s regulation-shirking counterparts in the industry. CRC continues to maintain that this approach will satisfy regulators and investors alike, and will allow the digital currency market to flourish within the bounds of regulation and client service.

CRC boasts a team of experts equipped to support your firm throughout the entire New Member Application (NMA) and ATS registration processes, from coordinating the initial steps to submitting the finalized application. For more information, or to speak with a Compliance Specialist about your digital currency needs, please contact Mitch Avnet at (646)346-2468 or mavnet@compliance-risk.com.  

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Compliance Risk Concepts, LLC, a business-focused team of seasoned compliance professionals providing top tier compliance risk management services, has launched its new website in honor of its 5-year anniversary.

Mitch Avnet, Managing Partner and Founder of CRC, says, "The launch of our new website has been a significant undertaking to further ensure our clients and followers have a user-centric experience, enabling easy access to our talented team, quality services and timely regulatory and compliance information. We are thrilled with the look and feel of the new site and view this as another significant step in the evolution of our organization."

The improved website builds upon the foundation of CRC's previous website, furnishing a modern layout that improves and optimizes the overall user experience. The website includes aerial video footage of the New York City skyline and team photos in CRC's new state-of-the-art office space at 40 Exchange Place, Suite 402 New York.

Dave Amster, the Principal and Head of Fund and Dealer Advisory, says, "Our new website is the culmination of many hours of hard work to ensure that clients and prospective clients enjoy a user experience that presents meaningful information and content without unnecessary noise. This is just one more step in our steady focus on continually improving our client service." The launch of the new website in conjunction with the recent company move is a tremendous step forward in terms of brand cohesion and CRC's commitment to provide best-in-class professional services to the financial services industry.

Read the full press release

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Background and Summary
On July 6, 2018, FINRA published Notice 18-20 regarding member firm involvement in digital currency. This notice addressed the fact that the market for digital assets, including cryptocurrencies and virtual coins, has grown significantly in recent months, particularly amongst retail investors. The regulator reiterated its growing concerns specific to investor protection, including incidences of fraud and other securities law violations involving digital assets and the platforms on which they trade.

As such, FINRA has indicated an interest in remaining well-informed of the extent to which member firms are involved in this space. Firms that engage or begin to engage in such activities are reminded to consider all applicable federal and state laws, rules and regulations, including FINRA and SEC rules and regulations.

To better understand the scope of such activities, FINRA Regulatory Coordinators recently conducted a survey regarding firms’ involvement in activities related to digital assets. In addition, the 2018 RCA Survey contained questions regarding digital assets. FINRA announced in this Notice that it is supplementing these efforts by requesting that each firm promptly provide notification to its Regulatory Coordinator if it or its associated persons (including activities under Rules 3270 and 3280) or affiliates, currently engages (or intends to engage) in activities related to digital assets, including digital assets that are non-securities. The types of activities of interest to FINRA if undertaken (or planned) by a member, its associated persons or affiliates, include, but are not limited to:

• purchases, sales or executions of transactions in digital assets;
• purchases, sales or executions of transactions in a pooled fund investing in digital assets;
• creation of, management of, or provision of advisory services for, a pooled fund related to digital assets;
• purchases, sales or executions of transactions in derivatives (e.g., futures, options) tied to digital assets;
• participation in an initial or secondary offering of digital assets (e.g., ICO, pre-ICO);
• creation or management of a platform for the secondary trading of digital assets;
• custody or similar arrangement of digital assets;
• acceptance of cryptocurrencies (e.g., bitcoin) from customers;
• mining of cryptocurrencies;
• recommend, solicit or accept orders in cryptocurrencies and other virtual coins and tokens;
• display indications of interest or quotations in cryptocurrencies and other virtual coins and tokens;
• provide or facilitate clearance and settlement services for cryptocurrencies and other virtual coins and tokens; or
• recording cryptocurrencies and other virtual coins and tokens using distributed ledger technology or any other use of blockchain technology.

Our Take
As always, it is our position at CRC that cooperation with regulators is key for the successful operation of financial services organizations. Regulators have continued to display heightened focus on the protection of retail and senior investors. As such, digital currency in particular is a developing area where cooperative, responsible players will hold the ace. Prompt, efficient, and honest communication and responses will satisfy regulators and clients alike, while also bringing a sense of legitimacy and scrupulousness to digital currency operations.

If you need assistance drafting a response to this request, or have any other questions regarding digital currency, please do not hesitate to contact Mitch Avnet at mavnet@compliance-risk.com.

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On October 1, 2017, regulatory changes go into effect for investment advisers. The amended Form ADV will require investment advisers to expand the information they report on Form ADV about separately managed accounts and other important aspects of their advisory business. The SEC also adopted a number of other amendments to the Form ADV and certain rules under the Investment Advisers Act of 1940 that include permitting consolidated investment adviser registrations for certain private fund advisers that operate a single advisory business through multiple entities, amending the Advisers Act books and records rule to require investment advisers to maintain additional information supporting performance claims, and making certain other clarifying and technical amendments to the Form ADV and Advisers Act rules.

Investment advisers are not required to revise and file their Form ADV on that date solely to reflect the changes. Instead, an investment adviser will be required to use the new Form, and provide all of the newly requested information, in any initial filing or amendment of its Form on or after October 1, 2017. As a practical matter, investment advisers will generally not use the new Form until filing their next annual updating amendments (January 1, 2018 and April 2, 2018 (March 31, 2018 is a Saturday) or until they are filing an other-than-annual amendment due to material changes.

Compliance Risk Concepts suggest that investment advisers review the new requirements in detail to ensure that if an earlier amendment must be made, the required information can be gathered in a timely manner.

Highlights of the Form changes and material changes that would require filing an other-than-annual amendment are outlined below. In addition, a PDF version of the new Form ADV can be downloaded by clicking here. This highlights in yellow, section by section and question by question the changes that were made to the ADV. Those changes are indicated in the color red.

CLICK TO VIEW & DOWNLOAD

As always, Compliance Risk Concepts is available to answer any questions regarding these changes or assist your firm with the completion of the amended Form.

Highlights of the amendments to Form ADV include the following: 

• Umbrella Registration for Private Fund Managers: The revised Form includes instructions and a new schedule (Schedule R) for the reporting of relying advisers.
• Separately Managed Accounts: The revised Form requires disclosure regarding separately managed accounts.  Separately managed accounts are those advisory accounts over which an investment adviser has continuous and regular supervisory authority (and therefore that count towards “regulatory assets under management”) that are not pooled investment vehicles.
• Other: The revised Form also now requires new or additional information regarding (among others):
  • the breakdown of “regulatory assets under management” among categories of clients;
  • accounts on social media platforms (including, but not limited to, Twitter, Facebook and LinkedIn);
  • branch offices;
  • parallel managed accounts; and
  • outsourced chief compliance officers.

Books and Records Rule Amendments (Look out for an additional memo regarding this rule change)

The amendments to the books and records rule will now require registered investment advisers to maintain the following:

• the records listed in SEC Rule 204-2(a)(16) supporting performance claims in communications that the investment adviser circulates or distributes, directly or indirectly, to any person (as opposed to the current rule, which only applies to communications which are distributed to ten or more persons); and
• originals of all written communications received and copies of written communications sent by an investment adviser relating to the performance or rate of return of any or all managed accounts or securities recommendations.

The amendments to the books and records rule will apply to any communication circulated or distributed on or after October 1, 2017.

Material Changes:

If you are registered with the SEC or a state securities authority, you must amend your Form ADV, including corresponding sections of Schedules A, B, C, and D, by filing additional amendments (other-than-annual amendments) promptly if:

• information you provided in response to Items 1, 3, 9 (except 9.A.(2), 9.B.(2), 9.E., and 9.F.), or 11 of Part 1A or Items 1, 2.A. through 2.F., or 2.I. of Part 1B becomes inaccurate in any way;
• information you provided in response to Items 4, 8, or 10 of Part 1A or Item 2.G. of Part 1B becomes materially inaccurate; or
• information you provided in your brochure becomes materially inaccurate (see note below for exceptions)

Notes:

Part 1: If you are submitting an other-than-annual amendment, you are not required to update your responses to Items 2, 5, 6, 7, 9.A.(2), 9.B.(2), 9.E., 9.F., or 12 of Part 1A or Items 2.H. or 2.J. of Part 1B even if your responses to those items have become inaccurate.

Part 2: You must amend your brochure supplements (see Form ADV, Part 2B) promptly if any information in them becomes materially inaccurate. If you are submitting an other-than-annual amendment to your brochure, you are not required to update your summary of material changes as required by Item 2. You are not required to update your brochure between annual amendments solely because the amount of client assets you manage has changed or because your fee schedule has changed. However, if you are updating your brochure for a separate reason in between annual amendments, and the amount of client assets you manage listed in response to Item 4.E or your fee schedule listed in response to Item 5.A has become materially inaccurate, you should update that item(s) as part of the interim amendment.

• If you are an SEC-registered adviser, you are required to file your brochure amendments electronically through IARD. You are not required to file amendments to your brochure supplements with the SEC, but you must maintain a copy of them in your files.

• If you are a state-registered adviser, you are required to file your brochure amendments and brochure supplement amendments with the appropriate state securities authorities through IARD.

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NEW YORK (NEW YORK) | CHICAGO (ILLINOIS) Compliance Risk Concepts ("CRC"), a top-tier compliance consulting services firm, and NexTier Consulting Solutions (“NexTier”), a leading risk management consulting services firm are pleased to announce that they have formalized a strategic partnership to serve the investment management community.

Compliance Risk Concepts and NexTier Consulting Solutions

The partnership benefits CRC’s investment management clients by expanding its support model to include a broad suite of strategic and tactical support services to bolster the growth of these firms while reducing business risk. As part of this relationship CRC, will have access to a broad group of seasoned investment management practitioners with a wide array of direct and practical investment management industry experience. For NexTier, the partnership replaces its current compliance offering with a robust and complete compliance solution to address the needs of its investment management clients.

In acknowledging the new joint venture, CRC’s Chief Executive Officer and Managing Partner, Mitch Avnet, stated, “We are extremely enthusiastic about our relationship with NexTier. The NexTier leadership has done a fantastic job building out a platform to serve the strategic and tactical needs of the investment management community. We believe that our alliance with NexTier will enable both organizations to disrupt our target market verticals while providing the asset management community with cost-effective, best-in-class support options and alternatives.”

In addition, NexTier’s Chief Executive Officer, Lawrence C. Manson, Jr., stated that “Our partnership with CRC significantly elevates our profile in compliance vertical which will allow our firm to expand our mission-critical, end-to-end solution offering for investment management organizations. Our mission is to elevate the operating practices of investment management organizations by providing best-in-class services.”

CRC and NexTier look forward to discussing the details of their partnership on a webcast that will be scheduled on Tuesday, October 24, 2017. More details will follow.

About NexTier Consulting Solutions

NexTier Consulting Solutions is a consulting firm focused on helping investment firms compete more effectively in the institutional investment marketplace by providing strategic and tactical support services designed to create and support growth strategies. The company was founded in 2012 and is headquartered in Chicago with an office in New York and senior consultants located in Atlanta, Denver, Philadelphia, Los Angeles and San Francisco.

Contact (Headquarters):
NexTier Consulting Solutions | 515 North State Street, Suite 2640 | Chicago, Illinois | 60654 T. 312-948-9178 | www.nextiercompanies.com

About Compliance Risk Concepts

Compliance Risk Concepts is a business-focused, team of senior compliance consultants and executives providing top tier compliance consulting services to clients on an as-needed, project or part-time basis. We provide our clients with the critical skills and expertise required to establish, maintain and enhance a balanced and effective compliance operational risk management program. We help organizations demonstrate a commitment to a strong risk management culture.

Contact (Headquarters):
Compliance Risk Concepts | 40 Exchange Place, Suite 402 New York, New York 10005 | www.compliance-risk.com

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NEW YORK (NEW YORK) | MONTREAL (CANADA) Compliance Risk Concepts ("CRC"), a top tier compliance consulting services firm, and Phocion Investment Services ("Phocion"), a leading service provider in performance, due diligence and compliance, are pleased to announce that they have formalized a strategic partnership.

The partnership benefits CRC's clients by expanding their offering to include a broad suite of performance measurement services. The agreement also gives CRC its initial foray into the Canadian marketplace positioning it to better serve its clients' cross-border needs. For Phocion, the partnership expands its United States prospect list, particularly for the fast-growing performance measurement offerings.

In acknowledging the new joint venture CRC's CEO and Managing Director Mitch Avnet stated, "We are extremely proud and excited about our relationship with Phocion. The Phocion leadership team has done a tremendous job as it relates to their performance measurement and due diligence capabilities. We believe our alliance with Phocion will further enable both organizations to continue to disrupt our target market verticals, providing the asset management community with cost effective, best-in-class support options and alternatives".

Phocion's Founder and Managing Director Ioannis Segounis went on to say that "today marks an important day in Phocion's seven-year history. Our partnership with CRC significantly elevates our profile in the United States - by far the largest market for our services. Phocion's mission is to elevate the operating practices of all investment industry participants by providing best-of-breed services in the areas of performance measurement, due diligence, and compliance. The agreement with CRC enables our firm to take a giant leap towards realizing this goal."

CRC and Phocion look forward to discussing the details of their partnership on a webcast that will be scheduled on Tuesday. September 12th, 2017. More details will follow.

About Phocion Investment Services

Phocion Investment Services provides the expertise, independence, and sophisticated tools that enable our clients to meet their performance, compliance and due diligence objectives. Our objective is to bring clarity to the complexities of the investment industry and to assist stakeholders in their investment decision processes. With our team's proven track record and the firm's core pillars of honesty, accountability, and excellence in service, we are the industry's trusted partner in the investment process.

Contact (Headquarters):
Phocion Investment Services | 1010 Sherbrooke Street West, Suite 1800 | Montreal, Quebec | H3A 2R7 Canada T. 514-564-9955 | www.phocioninvestments.com

About Compliance Risk Concepts

Compliance Risk Concepts is a business-focused, team of senior compliance consultants and executives providing top tier compliance consulting services to clients on an as-needed, project or part-time basis. We provide our clients with the critical skills and expertise required to establish, maintain and enhance a balanced and effective compliance operational risk management program. We help organizations demonstrate a commitment to a strong risk management culture.

Contact (Headquarters):
Compliance Risk Concepts | 40 Exchange Place, Suite 402 New York, New York 10005 | www.compliance-risk.com

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It is with great enthusiasm that Compliance Risk Concepts (CRC) is proud to announce that we are moving our NYC headquarters. The continued loyalty from our clients has fueled our remarkable growth, making a new location the next exciting step.

On November 15th, CRC will occupy the 11th Floor of 441 Lexington Avenue. Our state-of-the-art space will provide us the infrastructure to continue to scale our operations, including top of line video conferencing capabilities and world-class client meeting / conference rooms.

We’ve been lucky enough to work with the best clients a business could hope for. Many thanks for your loyal support through the years, and cheers to continuing these valued relationships in the future.

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NEW YORK, Oct. 25, 2016 /PRNewswire/ -- Expanding its scope of compliance specialties to Anti-Corruption and Foreign Corrupt Practices Act resolution, Compliance Risk Concepts LLC (CRC) today announced the hire of Daniel Dorsky as Principal of its Anti-Corruption and Ethics Practice. "CRC is excited to expand its services to advise clients on best practices and solutions for the Anti-Corruption and Foreign Corrupt Practices Act, with the notable addition of Dan Dorsky," said Mitch Avnet, CEO and Managing Partner of Compliance Risk Concepts. Mr. Avnet continues, "His broad experience combines corporate compliance dealing with complex issues and service as a prosecutor. With an in-the-trenches perspective from both sides, Dan will prove invaluable in guiding clients during all stages -- before the emergence of compliance violations, during a regulatory agency audit, and throughout the resolution of any issues." Mr. Dorsky served as Senior Compliance Counsel at Tyco where, as part of the post-Dennis Kozlowski clean-up effort over a five-year period, he developed and implemented global compliance with the Foreign Corrupt Practices Act (FCPA). The company's highly successful resolution with the Department of Justice and the Securities and Exchange Commission resulted in a Non-Prosecution agreement and no monitor. After the merger of Tyco's Flow Control Division with Pentair, Mr. Dorsky most recently served as Pentair's Vice President and Chief Compliance Officer, where he brought its Flow Control division to a successful resolution of its three-year period of self-reporting to the DOJ under Tyco's FCPA settlement. Prior to serving at Tyco and then Pentair, Mr. Dorsky was Compliance Counsel at HBO. Before that, he served as an Assistant United States Attorney at the Department of Justice, for both the Southern District of New York and the Eastern District of New York. At DOJ, he focused on complex criminal investigations and prosecutions of white collar crime and tax fraud, among other areas. Mr. Dorsky made material contributions to the effort to dismantle organized crime in New York, including twice prosecuting the legendary boss of the Genovese Crime Family, Vincent "the Chin" Gigante. He was recognized with two US Department of Justice Director's Awards for Superior Performance. Mr. Dorsky began his legal career as an associate in private practice, later served in a federal clerkship with the Honorable Carol Bagley Amon of the Eastern District of New York, and worked with the American Civil Liberties Union. According to Daniel Dorsky, "CRC offers a unique opportunity to launch a new practice and build Anti-Corruption compliance solutions that tap my corporate and prosecutorial experiences. The complex issues of fraud and compliance affect companies in all industries, from manufacturing to financial services. I look forward to addressing this challenge with my CRC colleagues." In addition, Mr. Dorsky will be an advisor to CRC affiliate, JW Michaels, a leading national executive search firm. Jason Wachtel, Managing Partner of JW Michaels, said, "We are pleased to provide our clients and candidates with direct access to Dan as well as having his valued expertise shared at select client round tables and within white papers. Dan's insights into the exploding world of corruption within compliance are preeminent." According to Wachtel, Mr. Dorsky's involvement with many complicated investigations as a prosecutor will be invaluable background for JW Michaels' vast network of CCOs and clients. Mr. Dorsky graduated from Haverford College in 1985 and received his law degree from New York University School of Law in 1988. He can be reached at ddorsky@compliance-risk.com.

Download Dan Dorsky's Bulletin

Click below to receive a complimentary copy of Dan Dorsky's Bulletin: Hedge Fund Rocked By Bribery Investigation:

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Building on its team of compliance advisory professionals, Compliance Risk Concepts, LLC (CRC) has hired of David J. Amster as Principal and Head of its Fund and Dealer Advisory practice.

“David’s professionalism and breadth of buy-side and sell-side product knowledge gives him 360-degree awareness of the issues financial services firms confront daily in the marketplace, and will permit him to immediately establish rapport and trust with clients,” said Mitch Avnet, CRC’s CEO and Managing Partner. “He solidifies CRC’s competitive edge in delivering high-quality, cost-effective regulatory advice and solutions to its Investment Advisor and Broker-Dealer clients.”

As leader of CRC’s Fund and Dealer Advisory practice, Mr. Amster will develop new client relationships and also advise on operational matters.

For more than 15 years, Mr. Amster served as a Managing Director and the Chief Compliance Officer of CRT Capital Group LLC’s US broker-dealer unit, CRT’s FCA-registered UK-based dealer affiliate, CRT Capital (UK) Ltd., and CRT’s domestic registered investment advisory affiliate, Harbor Drive Asset Management. During his tenure, CRT Capital Group expanded from a convertible arbitrage and research business to ultimately trade high yield debt, distressed debt, equities, securitized products, treasuries, foreign exchange products and to offer investment banking services.

Earlier in his career, Mr. Amster served as an Associate Director with UBS Investment Bank, LLC’s Fixed Income Capital Markets Compliance Group, where he had senior support responsibilities for the firm’s Primary Dealership, Rates and Repo Desks and as a Securities Examiner in FINRA’s New York District Office. While at FINRA, Mr. Amster led comprehensive on-site examinations of the books, records and operational policies and procedures of bulge bracket New York Stock Exchange member dealers. Mr. Amster began his Wall Street career with Salomon Brothers, Inc. as a Syndicate Coordinator for its Private Investment Department.

Mr. Amster said, “Drawing upon my experience in the capital markets as a participant, supervisor and regulator, I’m eager to identify potential and existing regulatory challenges and to develop corresponding client solutions. My approach comfortably balances sensible regulatory risk mitigation with the practicality demands of front office personnel. CRC is an organization whose compliance professionals offer approaches that are both commercially focused and will stand the test of regulatory scrutiny.”

Mr. Amster graduated from Binghamton University with a BA in Economics and received his MBA in Finance from Fordham University’s Gabelli School of Business.

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The post David J. Amster hired as Principal and Head of its Fund and Dealer Advisory practice appeared first on Compliance Risk Concepts.

Several times over the past decade FINRA has indicated they may be considering making it a requirement for broker-dealers to maintain errors and omission insurance (E&O) to cover the payment of arbitration awards to investors. A 2013 article in the Wall Street Journal indicated that FINRA was “frustrated” over nonpayment of arbitration awards to investors whose retirement savings were eviscerated by financial advisor malpractice. FINRA has reported that $51 million of arbitration awards granted in 2011 were not paid – this was 11% of all awards against broker-dealers, which was up from 4% in 2010.FINRA has not yet enacted that requirement. However, it is a very good idea for all participants in the financial services industry to maintain some sort of insurance coverage to protect from arbitration awards and court litigation related to the professional services.

At CRC, we have seen instances of investor awards against broker-dealers and registered representatives that ruined both. A simple mistake could spell disaster for even the most careful practitioner and his/her employer. There are numerous reasons to purchase E&O insurance. But, to put it bluntly, the primary reason is that everyone makes mistakes. Even the most experienced representatives, and the best supervision and operations departments, mistakes will be made. No one is perfect.

In one recent case, a representative made a mistake in calculating the taxes associated with a 1031 real estate exchange for a 30-unit apartment complex. His former client has initiated litigation against him alleging over $1 million in damages. Just the attorneys’ fees alone will cost him several hundreds of thousands of dollars. The representative had been with his broker-dealer for over 20 years, did not have a single mark on his U4/U5, had never had a grievance lodged against him. Nonetheless, it appears he made a mistake in calculating the tax liability for his client. However, the bigger mistake he made, which he shares with his broker-dealer, is that they did not have E&O insurance coverage.

With all that said, understanding E&O insurance is difficult. How much overage do you need? What exclusions and endorsements are appropriate? What does the “Covering Clause” of the insurance policy actually mean? Does my E&O policy cover all of the products available on the Broker-Dealer’s platform? Will you policy cover losses other than damage awards, such as attorneys’ fees, litigation/arbitration expenses, subpoena costs, regulatory investigation expenses? Just asking these questions is the right start in finding and purchasing E&O insurance.

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Whether you are a small-town doctor or a powerful hedge fund manager - the SEC doesn’t discriminate! If you are abusing your fiduciary duty and use material, non-public information to trade securities - you will be caught and you will be charged with insider trading.

Combat insider trading within your firm by learning the right questions to ask and developing the right internal controls and processes to mitigate this risk.

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Compliance Risk Concepts is honored to be recognized by Enterprise Services Outlook (ES Outlook) as one of the top 25 Most Recommended Compliance Services Providers of 2016.

"Given that the market is swarming with compliance service providers, picking a particular agency is often a daunting exercise. ...the editorial team at ES Outlook has critically evaluated a slew of service providers based on their domain expertise," ES Outlook explains in 25 Most Recommended Compliance Services Providers 2016.

"CRC is one of these organizations, that have been able to deliver phenomenal results year-after-year and have already positioned themselves as the leading market players."

About ES Outlook

ES Outlook is a print magazine which provides a platform to thinkers, practitioners, strategists and visionaries in the Enterprise Services landscape.

The ES Outlook platform is uniquely positioned to let upcoming and promising enterprise services vendors showcase their innovative services. Sourcing professionals working for US corporations are in search for a one-stop resource that will help them keep track of new innovative offerings from service providers. Enterprise Services Outlook provides deeper information about outsourcing companies, makes available practical experiences and advice from their peers working in other reputed companies in the U.S. who have similar problems and keeps them abreast with important news, analysis and thought leadership in the services arena. Enterprise Services Outlook is that source which provides value to senior sourcing executives that shelf life of the magazine is forever.

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NEW YORK, NY– Compliance Risk Concepts ("CRC") launches new mobile app for financial service organizations. The CRC Hotline app offers on-the-go answers from industry experts regarding ongoing and onerous regulatory compliance issues.

It connects Compliance Officers, CEOs of independent broker-dealers, Managing Partners of independent investment advisers, Chief Financial Officers ("CFOs"), Chief Operating Officers ("COOs"), Chief Risk Officers ("CROs"), insurance underwriters and private equity firms with the real-time compliance resources they need, when they need it most.

"The intersection of compliance and technology has been core to our strategic vision since our inception," explained CRC's Founder and Managing Partner, Mitch Avnet. "The launch of the CRC App is one of many strategic investments our organization has made over the past several years geared toward making the life of the compliance officer easier. This App represents yet another access point to our extremely talented team."

Available for iPhone and Android, the CRC Hotline app saves FINRA registered broker-dealers, SEC and State-registered investment advisers, hedge funds, State chartered and nationally regulated banks, insurance underwriters and private equity firms from having to pay hundreds of dollars per hour to outside counsel and while providing mobile access to intellectual capital of former industry Chief Compliance Officers ("CCOs").

"The CRC Hotline app takes compliance mobile," said Roland Reyes, Director of Professional Services at CRC. "Which is essential nowadays for executives navigating this increasingly challenging regulatory environment."

The user-friendly design of the CRC Hotline app makes the intellectual capital of former industry Chief Compliance Officers ("CCOs") available by simply submitting a question or calling the CRC "Hotline" directly.

Download The New CRC Hotline App

To find the new CRC Hotline app, search Compliance Risk Concepts in Google Play or the Apple store.

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The SEC alleges that an employee, who worked as an associate in Goldman’s compliance department, traded on confidential information contained in e-mails sent and received by Goldman investment bankers. The employee gained access to investment banker e-mails as part of his work developing surveillance software designed to monitor other employees for potential misconduct such as insider trading.

Washington D.C., Nov. 25, 2015 —The Securities and Exchange Commission today announced insider trading charges against a former Goldman Sachs employee accused of stealing nonpublic information in the firm’s e-mail system so he could trade illegally in advance of client mergers and make more than $450,000 in illicit profits. The SEC has obtained an emergency court order to freeze the assets of the trader and accounts he used to place the illicit trades. READ THE FULL SEC RELEASE >

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The OCIE staff of the SEC released a Risk Alert relating to the Outsourcing of Chief Compliance Officers and Compliance Activities. Truly, the findings and risks shouldn’t be a surprise to anyone. My colleagues and I have all recently left “in-house” Compliance positions to become “outsourced compliance advisors.” As Consultants that have recently had the opportunity to observe multiple Financial Firms that have utilize outsourced compliance we have spotted many of the issues that the SEC reported. A few things my colleagues and I have noted since leaving our “in-house” positions: Many Financial Institutions may have a false sense of security with respect to their Outsourced Compliance Office as they deem "no news" to be "good news". Prior to hiring a Compliance Consultant, Financial Firms should ask the following questions:

• What is the experience of the individual(s) who will be supporting the Financial Institutions?
• How many other Financial Firms is the Compliance Consultant Supporting?
• Do the individuals have sales and consulting experience or Compliance Experience?
• For individuals with Compliance Experience what type of Firms did they provide Compliance advice to and what were their Compliance responsibilities.
• How many years of Experience do they have?
• Who will be the backup for the Firm’s Compliance support and what is the turn-over rate of the Compliance Consultants?
• How often will the Compliance Consultant be on-site?
• How often will the Firm meet with the Compliance Consultant?

Within moments of looking at a Firm’s policies and procedures, we can determine which Compliance Consulting Firm wrote the policies and procedures. Most Compliance Consulting Firms have "template" policies and procedures that they implement in each Financial Institution. And indeed it seems as if most Compliance Consulting Firms implement the entire policies and procedures without tailoring them to the particular Financial Institution. Not being privy to the agreements between the Consultant and Financial Firm, our belief, based on what we have observed, is that the Financial Firm is told they will be tailored. We have not been able to identify the exact cause of why the policies were not tailored, but it seems as if it is a combination of lack of experience, quality or business knowledge of the Consultant implementing the procedures. Often times a Compliance Consultant will complete a review by interviewing the Firm’s personal and then document the conversation as a report with few to no findings. If the Compliance Consultant hasn’t requested specific samples and has left it up to the Firm to determine the Compliance Consultant reviews, the Firm will be at risk. This is especially true when it comes to AML reviews. Compliance Consultants may not actually understand the business of the Financial Institution. If a Compliance Consultant does not have the requisite experience in the same type of Financial Firm as the Financial Firm they will be supporting the Firm is at risk to a lack of business knowledge. This is a key point that smaller Financial Firms overlook; it is easy to underestimate the specialization of Compliance Officers and to find that you have hired a Consultant that does not have experience with your particular business. What the SEC is asking: Has your Firm hired Compliance in Box and how effective is your appointed Outsourced CCO? As the demand for Outsourced Compliance Officers has increased, the field of Qualified Compliance Consultants has shrunk. One Compliance Consulting Firm has offered “Free 15 Minute Consultations.” That suggests that a Firm has 15 minutes to share information and receive recommendations from the Consulting Firm. This hardly seems to be a Consultant looking to for a long-term relationship, or a Consultant that would address the SEC concerns. In addition, some Compliance Consulting Firms have a link to the SEC Risk Alert and a statement that their programs address the SEC concerns and however, they offer little to no information on how their programs support the SEC concerns. If your firm is seeking to retain an industry savvy and seasoned Compliance Professional, see how CRC's programs support the SEC's concerns. Please contact us to get started.

The post Assessing Outsourced CCO Risk Before the SEC Completes the Assessment for You appeared first on Compliance Risk Concepts.

Date: Nov 16-17, 2015 
Sponsored by: Compliance Science

This year’s conference is shaping up to be another great one. The list of speakers include Mitch Avnet and Compliance Science partners from leading security, consulting, and law firms as well as other seasoned compliance professionals who will discuss best practices for compliance automation and SEC exam preparation.

The post Compliance Summit 2015 appeared first on Compliance Risk Concepts.

Goldman Sachs Group, Inc. will report earnings on 10/15/2015 before the market opens. Last week Goldman publicized that it would announce its earnings via Twitter (@Twitter). The talk since the publication has been about the use of social media and Twitter becoming a viable and safe competitor in the field of company news distributors. That talk and the Twitter announcement by Goldman (@GoldmanSachs) maybe helping to drive Twitter stock price upwards. The timeline below suggests that Goldman, Twitter & Square (@Square) are tightly entwined. It
isn’t clear that there is any customer harm from the relationships or other type of wrongdoing. However the timeline is an interesting window into actions that appear isolated and how they may be related:

5/18/12 – Goldman Sachs is third banker on the Facebook IPO loosing out to Morgan Stanley and JP Morgan 11/7/13 – Goldman Sachs leads Twitter IPO with Investment Banker Anthony Noto as the lead banker 5/13/14- Anthony Noto resigns from Goldman Sachs 7/1/14 - Anthony Noto announced as the CFO for Twitter and according to executive compensation filings the highest paid executive at Twitter 7/1/15 – Jack Dorsey becomes interim CEO of Twitter – Anthony Noto is widely speculated to become CEO. 7/24/15 - Square with Jack Dorsey at the helm filed for an IPO at the same time Twitter states that Jack Dorsey who is interim Chair of Twitter will not be permanent as long as he is at Square. 8/5/15 – 8/7/15 – 3 Executive Insiders at Twitter purchase shares of Twitter: Jack Dorsey, Interim CEO; Anthony Noto, CFO; and Peter Fenton, Independent Director (Is a director truly independent when they own shares of a company?) 9/30/15 – Jack Dorsey named permanent CEO of Twitter 10/7/15 – Goldman Sachs announces that it will release its earnings on Twitter – speculation arises that Twitter has found a mechanism for income via earnings releases.

Is Goldman’s support of Twitter related to the decision for Square to choose Goldman for its Lead Banker? Is the use of Twitter the best for shareholders and the investing public or was it a strategic relationship decision? Would Goldman have won the Square IPO without supporting Twitter?

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The State of New York recently passed legislation requiring those transacting in virtual currency to become licensed. The new rules mirror much of what is already in place for many broker-dealers, banks, and other financial institutions. However, there are some important parts of the legislation that may change written policies or require new policies be written and implemented.

While the new rules do not go into effect immediately – there is a 45-day comment period starting on July 23 – we summarize the legislation in anticipation of it being put into place without major changes.

Most poignantly, the New York Virtual Currency Regulation (VCR) requires, with few exceptions, all companies that store, control, buy, sell, transfer, or exchange Bitcoins (or other cryptocurrency) to become licensed with the New York State Department of Financial Services (NYDFS). In order to obtain a license, an application must be completed providing: (1) identifying information about the applicant and its individual and entity affiliates, (2) a background report prepared by an independent investigatory agency, (3) fingerprints, (4) photographs, (5) organization charts, (6) current financial statements, (7) business plans, (8) details of banking arrangements, (10) copies of written VCR policies and procedures, (11) copies of insurance policies, (12) an explanation of the methodology used to calculate the value of the virtual currency into traditional currency and(13) verification from the New York State Department of Taxation and Finance.

Since the DFS has 90 days to approve or deny your application, presumably, the NYDFS will be supplying forms to assist in the application process; if for no other reason, to provide itself the consistency necessary to process the applications it will receive.
Importantly, the non-refundable license fee required under the VCR is $5,000. You may also have to submit other fees to process additional paperwork related to the license, if the NYDFS requires. In other words, if you apply and are rejected for a license, the Department of Financial Services keeps your $5,000. Thus, it will be important that you follow the steps necessary to properly provide all required information with your application. CRC can assist in this regard.

There are capital requirements that must be maintained at all times and each licensee must maintain a surety bond. The capital requirements and the amount of the surety bond have not yet been set by the NYDFS. In addition, if a licensee undergoes a change of control or engages in a merger, the NYDFS must be given prior notice and a written application must be completed providing the detailed information about the new control group identified above. The NYDFS has authority to stop any change in control or merger if the new control group does not pass licensing requirements.

Some important items each licensee must be aware of and implement with its Virtual Currency License are:

1) Designation of a Digital Currency Compliance Officer
2) Maintenance of a Digital Currency compliance policy covering items relating to anti-money laundering, cyber security, privacy, and information security.
3) Books Records policies similar to current securities and banking books and records requirements.

The AML requirements are very similar to current AML requirements from FINRA and the Bank Secrecy Act. However, the VCR’s AML requirements require each licensee’s AML program to maintain a customer identification program. This requirement is antithetical to the nature and spirit of the origins relating to the anonymity of digital currency. However, a robust AML program combined with an even more robust privacy and information program may be a point of differentiation for you with your competitors and could be a way to encourage customers to use your services who desire to maintain their anonymity.

The VCR’s cyber security mandates mirror current regulations such as the Gramm-Leach Bliley Act and the Federal Information Security Act. Every licensee must create and enforce a cyber security written policy and designate a Chief Information Security Officer (CISO). The cyber security program requirements under the VCR include identifying risks, protecting electronic systems, detecting intrusions, recovering and restoring operations and systems. There are also annual reporting and auditing requirements that may necessitate substantial administrative work by the CISO.

The VCR requires each licensee to provide quarterly and annual financial disclosures and reports to the NYDFS. These disclosure and reports are standard types of information, but will add another regulatory requirement to the already heavy regulatory requirements of many broker-dealers, banks, and other financial institutions.

Lastly, there are disclosure requirements and advertising/marketing limitations under the new laws. The disclosure requirements are specific to virtual currency transactions and involve adding language to account applications “in clear, conspicuous and legible writing in the English language and in any other predominant language spoken by the customers of the licensee.” The list of disclosures in the legislation is extensive and will likely lengthen already long account applications. However, it may be a good idea to review your current account applications with a representative from CRC to determine the best was to combine the VCR disclosure requirements with your current regulatory disclosures. The advertising/marketing disclosures merely require each licensee’s advertising to contain the following phrase “Licensed to engage in Virtual Currency Business Activity by the New York State Department of Financial Services.”

There are other parts of the VCR with which entities and individuals who obtain licensure will have to comply. Ultimately, living within the requirements of the law will require careful consideration of the VCR’s provision for new written policies and internal procedures.
Please contact Compliance Risk Concepts if you would like more information about digital currency regulations or are interested in learning more about compliance issues relating to digital currency issues.

The post Spotlight On Talent: Kevin Wheeler On NY's Virtual Currency Regulation appeared first on Compliance Risk Concepts.

This article originally published by The Global Association of Risk Professionals (GARP)

Massachusetts Mutual Life Insurance Co. has assigned executive vice president and chief enterprise risk officer Elizabeth (Betsy) Ward the additional role of chief actuary. The move is seen as part of a trend to streamline and clarify risk governance amid growing marketplace complexity.

“Managing risk is critical to our success, and by bringing together our actuarial and risk functions, we are strengthening our ability to help more people secure their future and protect the ones they love,” Roger Crandall, chairman, president and CEO of MassMutual, said in a May 18 announcement.

Ward has been chief enterprise risk officer since 2007. When she stepped into that role, she was also chief risk officer of Babson Capital Management, a MassMutual subsidiary that she had joined in 2001 and where she was managing director.

Effective May 29, Ward succeeded Isadore Jermyn as chief actuary. He retired after more than a decade in that position and 34 years overall with MassMutual.

Concurrent with Ward’s change in status, Brad Hoffman was promoted to senior vice president in the enterprise risk and actuarial organization. A 24-year veteran of the company, Hoffman has been a member of the enterprise risk management team since 2009, helping to standardize the risk identification and management process across the firm. He also serves as chief risk officer for broker-dealer MML Distributors.

Hoffman has degrees in mathematical economics (B.A., Colgate University) and law (Marshall Wythe School of Law at the College of William and Mary).

“Expect to see more risk functions combined and evolve in this way to create true, comprehensive and consistent risk management programs throughout organizations, enabling risk to be defined, ranked and mitigated in a manner in which the measuring scales are equal whether you are looking at quantitative or qualitative risk,” said Mitch Avnet, founder and managing partner of Compliance Risk Concepts in New York.

Consolidating titles, such as chief risk officer with chief actuary or with chief compliance officer, is typically part of an effort to coordinate oversight and break down silos.

“Roles are being combined especially in operational risk areas to create continuity and consistency in the overall risk management program, because it can be very siloed,” Avnet explained.

Ward, who has actuarial experience, said, “Given how much life insurance involves financial risk management, it’s natural to have the combined roles be part of strategic planning in forecasting risk, supplementing it with necessary operational consideration and balancing it with strategic risk taking and risk protection.”

Read the article in it's entirety here: http://goo.gl/ptekYK

About The Global Association of Risk Professionals

The Global Association of Risk Professionals is a not-for-profit organization and the only globally recognized membership association for risk managers. GARP's goal is to help create a culture of risk awareness within organizations, from entry level to board level.  Follow: @GARP_Risk

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In a non-exclusive co-branding agreement, Compliance Risk Concepts and FinWebTech have teamed up to provide broker-dealers, registered investment advisors, banks and other financial institutions, an automated cost effective solution to improving operations, reducing risk and maintaining a strong culture of compliance.

Cost Effective Compliance Solution For The Financial Industry

Developed with input from ex-regulators from FINRA and the Securities Exchange Commission (SEC), Catalyst features algorithms and compliance processes like: Supervisory Task Manager, Trade Surveillance, AML Surveillance, Document Library and Risk Monitoring and Scoring. Learn more about this new Automated Compliance Solution and how it is changing how compliance officers and firms are viewing and managing their compliance programs.

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RegEd 2015 Compliance Alliance Client Conference

Date: May 4-6, 2015
Location: Raleigh Marriott City Center | Raleigh, NC

Join financial services CCOs, Compliance Professionals, senior representatives, regulators and former regulators and gain a new understanding of expanding and new compliance obligations. Learn how other firms are working through their challenges and learn best practices from regulators, leading consultants, RegEd and industry peers.

How Firms have Implemented New Supervision Rules
Mitch Avnet On Panel Discussion
Date: Tuesday May 5, 2015
Time: 3:15-3:45 pm

Regulatory Change Management Best Practices
Mitch Avnet On Panel Discussion
Date: Wednesday May 6, 2015
Time: 10:30-11:25 am

Click to view preliminary 2015 RegEd Compliance Alliance agenda

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Washington D.C., April 20,
2015 — The Securities and Exchange Commission today charged BlackRock Advisors LLC with breaching its fiduciary duty by failing to disclose a conflict of interest created by the outside business activity of a top-performing portfolio manager.

BlackRock agreed to settle the charges and pay a $12 million penalty. The firm also must engage an independent compliance consultant to conduct an internal review.

According to the SEC’s order instituting a settled administrative proceeding, Daniel J. Rice III was managing energy-focused funds and separately managed accounts at BlackRock when he founded Rice Energy, a family-owned and operated oil-and-natural gas company. Rice was the general partner of Rice Energy and personally invested approximately $50 million in the company. Rice Energy later formed a joint venture with a publicly-traded coal company that eventually became the largest holding (almost 10 percent) in the $1.7 billion BlackRock Energy & Resources Portfolio, the largest Rice-managed fund. The SEC’s order finds that BlackRock knew and approved of Rice’s investment and involvement with Rice Energy as well as the joint venture, but failed to disclose this conflict of interest to either the boards of the BlackRock registered funds or its advisory clients.
Click here to read the SEC Press Release in its entirety

The post BlackRock Charged By SEC With Failing to Disclose Conflict of Interest appeared first on Compliance Risk Concepts.

Citigroup, for example, now boasts nearly 30,000 employees dedicated to regulatory and compliance issues. As 2014 drew to a close, HSBC was well on its way toward a goal of 7,000. Since 2013, JPMorgan Chase has increased compliance- and risk-related spending by $4 billion and added 5,000 new employees. Last year, Deutsche Bank added 500 U.S. compliance officers to its ranks.

“It is one thing to have a big head count, but it can be caveman compliance: They are just hunting and gathering. How much of their time is really being used to conduct high-quality analytical work and provide good advice to your stakeholders?”

-Mitch Avnet, CEO, Compliance Risk Concepts

"While few would argue that these investments are a bad thing, ramping up does require a carefully developed strategy that matches adequate talent with a coordinated game plan", says Mitch Avnet, CEO of Compliance Risk Concepts, a consulting firm.

“While companies have taken huge steps to increase the size of their compliance functions, I can’t tell you that those functions are any better today than they were historically,” he says.

“There can be a lot of confusion among a lot of the added compliance folks in terms of where they fit in, who owns what, and who is stepping on whose toes.”

Read the full Compliance Week article, which included additional M. Avnet commentary, by Joe Mont titled Putting All That Talent to Work Smartly (subscription required)

The post Mitch Avnet Featured In Compliance Week appeared first on Compliance Risk Concepts.

The Securities and Exchange Commission (“SEC”) recently announced an enforcement action against two broker-dealers that apparently failed in their “gatekeeper roles” and improperly engaged in unregistered sales of microcap stocks on behalf of their customers.

This action, along with issuance of the SEC’s Office of Compliance Inspections and Examinations (“OCIE”) National Exam Program Risk Alert (“Risk Alert”) and the Division of Trading and Markets’ “Responses to Frequently Asked Questions about a Broker-Dealer's Duties When Relying on the Securities Act Section 4(a)(4) Exemption to Execute Customer Orders” (“FAQ”) will certainly have impact to broker-dealers policies and procedures, as well as other controls related to suspicious activity reports and related areas.

Red Flags Ignored
The SEC investigation found that the firms sold billions of shares in microcap companies for customers during a four-year period while ignoring “red flags” that the offerings were being conducted without an applicable exemption from the registration provisions of the federal securities laws. Red Flags ignored included:

• a customer opens a new account and delivers physical certificates representing a large block of thinly traded or low-priced securities;
• a customer has a pattern of depositing physical share certificates, immediately selling the shares and then wiring out the proceeds of the resale;
• a customer deposits share certificates that are recently issued or represent a large percentage of the float for the security;
• share certificates reference a company or customer name that has been changed or that does not match the name on the account;
• the lack of a restrictive legend on deposited shares seems inconsistent with the date the customer acquired the securities or the nature of the transaction in which the securities were acquired;
• there is a sudden spike in investor demand for, coupled with a rising prince in, a thinly traded or low-priced security;
• the company was a shell company when it issued the shares;
• a customer with limited or no other assets under management at the firm receives an electronic transfer or journal transactions of large amounts of low-priced, unlisted securities;
• the issuer has been thought several recent name changes business combinations or recapitalizations, or the company’s officers are also officers of numerous similar companies; and
• the issuer’s SEC filings are not current, are incomplete, or non-existent.

Section 4(a)(4) of the Securities Act of 1933 provides a registration exemption for broker-dealers when executing customers’ unregistered sales of securities if, after reasonable inquiry, the broker-dealer is not aware of circumstances indicating that the customer would be violating the registration requirements of Section 5 of the Securities Act.

In addition to a combined penalty of $1 million, the two firms agreed to settle the SEC’s charges by paying back more than $1.5 million in disgorgement and prejudgment interest from commissions they earned on the improper sales. See SEC Press Release 2014-225.

The Risk Alert and the FAQ
OCIE staff, during their targeted sweep of 22 broker-dealers, identified the following concerns in the Risk Alert:

• Insufficient policies and procedures to monitor for and identify potential red flags in customer-initiated sales.
• Inadequate controls to evaluate how customers acquired the securities and whether they could be lawfully resold without registration.
• Failure to file suspicious activity reports, as required by the Bank Secrecy Act, when encountering unusual or suspicious activity in connection with customers’ sales of microcap securities.

As per the Risk Alert, of the 22 firms examined, 80% were issued letters of deficiency for material control weaknesses and/or potential violations of law, with the majority of the firms examined were also referred to the Division of Enforcement or another regulatory agency for further consideration of whether violations of law occurred.

OCIE concluded “most of the examined broker-dealers have policies and procedures requiring the firm to conduct a reasonable inquiry into the facts surrounding a proposed unregistered sale to determine if the customer is an underwriter.” However, the OCIE examinations “illuminated control weaknesses in the design or implementation of those policies and procedures.” The Risk Alert presented examples of certain situations where these control weaknesses have resulted in the broker-dealers failing to conduct a reasonable inquiry and/or failing to file SARs regarding suspicious sales activity. Control weaknesses identified included:

• Some firms’ policies and procedures did not contain sufficient detail to assist the firms’ employees in their efforts to effectively monitor and identify situations where facts and circumstances suggest the customer may not have had a claimed exemption. For example, some firms’ policies and procedures merely stated that a reasonable inquiry should be conducted, without providing any additional discussion of potential red flags that could indicate a possible Section 5 violation, protocols that the staff should follow when encountering red flags, or supervisory reviews that should be conducted to determine whether the securities were resold in compliance with an available exemption;
• Some firms relied, without further inquiry, on the absence of restrictive legends on stock certificates to conclude that the securities could be resold in unregistered transactions.
• Some firms relied, without further inquiry, on the delivery of the shares into a customer’s account in electronic form through a transfer from the Depository Trust and Clearing Corporation (“DTCC”) or the issuer’s transfer agent as a basis for believing either that the shares were not restricted securities or that no further inquiry regarding the customer was necessary; and
• Some firms did not collect information from the customer about how large blocks of shares, deposited into the customer’s account that the customer requested the broker-dealer to sell, had been acquired, despite the fact that the firms did not know how the customer had acquired the shares.

In addition, OCIE discussed in the Risk Alert their observations that certain types of accounts as being frequently associated with “dumping” of microcap securities.

The Division of Trading and Markets issued an FAQ in effort to remind broker-dealers of their obligation to conduct a reasonable inquiry when selling securities in an unregistered transaction in reliance on Section 4(a)(4) of the Securities Act of 1933.

The post Faulty Broker Dealer Gatekeeping Leads To SEC Enforcement Action appeared first on Compliance Risk Concepts.

Join SmartBrief Risk and Compliance Editor Sean McMahon and a panel of industry experts as they discuss trade reconstruction challenges in a webinar sponsored by Bloomberg Vault.

TITLE Tackling the Challenges of Trade Reconstruction
SPONSORED BY Bloomberg Vault
WHEN Tuesday September 16 1:00pm-2:00pm EDT
PANEL
Harald Collet, Global Head of Bloomberg Vault
Stephen Marsh, Founder and CEO of Smarsh
Mitch Avnet, Managing Partner, Compliance Risk Concepts

The post Tackling the Challenges of Trade Reconstruction appeared first on Compliance Risk Concepts.

Compliance Chiefs' Top Worry: Culture written by Peter Ortiz.  Visit Ignites/Financial Times (paid subscription) to read the entire article.. 

Compliance training has moved from instruction on regulatory requirements and how not to flout them to a more intense focus on fostering an ethics-friendly culture, compliance chiefs say. Recently released results of a survey of 763 professionals who deal with compliance or legal responsibilities show that 90% cite creating a culture of ethics and respect as the top training objective.

Complying with laws and regulations (89%) and preventing future misconduct (82%) came in second and third, according to the Navex Global 2014 Ethics and Compliance Training Benchmark report. The Navex survey spanned 39 industries, including banking and financial services. Survey co-author Ingrid Fredeen notes that strong oversight by the Securities and Exchange Commission and other regulators helped fund firms stand out.

“The key takeaway I have for CCOs is if you are in a position where you are looking at effectiveness, then budget for measurements of effectiveness,” Fredeen says. “Don’t just assume completion equals effectiveness, otherwise it won’t happen.”

Jim Volk, CCO for SEI Investment Manager Services says that the best training program will do little good unless the organization’s top executives lead by example.

“If people are following the rules but doing it kicking and screaming, then you are not really changing the culture,” he says. “If the culture is good, then the nuts and bolts will take care of themselves.”

Volk stresses that firms should invest in high-quality training that includes presentations with powerful graphics that sink in, rather than issuing lengthy documents for employees to pore over. SEI also uses video where employees and hired actors demonstrate good and bad compliance action. In one scenario, an employee’s personal views expressed on social media get improperly tied to SEI.

“The point is when you invest the time to make it more vibrant and to catch their attention, it makes it more memorable and lets them know if we in invest in [the presentations] that much it must be important,” Volk says.

To prepare his compliance staff, Todd Spillane, CCO of Invesco, encourages them to sharpen their presentation skills by participating in a weekly public speaking group in Invesco’s Houston headquarters. He has joined in on those meetings along with more junior staff.

The survey also found that 45% of respondents say their organizations plan to implement more training for middle managers.

Mitch Avnet, managing partner at Compliance Risk Concepts, notes that firms lacking “consistent and cohesive training and messaging to mid-level managers” place their organizations at great risk.

“Employees who don’t think they can take an issue to their direct manager ... are in turn likely to go externally with their issues,” Avnet writes in an e-mail response to questions. “An organization must create an awareness and culture encouraging employees to raise their hands — bring issues to their direct mangers with no fear of repercussions.”

The post M. Avnet Commentary | Ignites Financial Times Article appeared first on Compliance Risk Concepts.

Bloomberg Vault Webinar: Trade Reconstruction for Compliance Officers WHEN: Thursday August 21 1:00pm-2:00pm EDT Presented By: Harald Collet Global Head of Bloomberg Vault Moderated By: Mitch Avnet Managing Partner, Compliance Risk Concepts OVERVIEW: It’s only a matter of time before regulators begin requesting trade reconstruction in conjunction with regulatory exams. Are your systems ready? Join Bloomberg Vault for a webinar, Trade Reconstruction for Compliance Officers, and learn what you need to do to ensure your process is CFTC-compliant.

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Not since the Great Depression has such a comprehensive financial regulatory reform measure been taken as the Dodd-Frank Wall Street Reform and Consumer Protection Act, or “Dodd-Frank Act”. Under these new rules, one of the most significant challenges for Compliance Officers is the work set surrounding the CFTC’s trade reconstruction requirement. Trade reconstruction imposes a new standard on swap entities, requiring impacted firms to produce a time-sequenced complete reconstruction of a swap trade within 72 hours of the request by the CFTC. In response, CRC had the honor of collaborating with the talented team at Bloomberg Vault in hosting a DFA Think Tank at Bloomberg Headquarters in NYC. Senior compliance executives and financial services firms representing nearly 10 percent of institutional investment firms impacted by these regulatory requirements met to discuss challenges and practical solutions around the Dodd Frank Trade Reconstruction Regulation. CRC is extremely appreciative of the opportunity to be part of the thought leadership that contributed to resulting industry white paper titled "Practical Guide For Compliance Officers | Swap Trade Reconstruction in 4 Phases". This white paper offers Compliance Officers practical guidance on meeting the trade reconstruction challenge based on emerging industry best practices. The paper initially analyzes the challenges, and then offers a phased project plan to help firms structure the process in a straightforward manner.

Download a copy of the Bloomberg Vault DFA Swap Trade Reconstruction white paper by filling out the form below.

NOTE: We are in the process of planning our next DFA Think Tank session, if you are interested in receiving more information regarding the upcoming session scheduled for October 22nd, 2014 please be sure to select YES when filling out the form.

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NEW YORK, NY, July 7, 2014 - Compliance Risk-Concepts ("CRC") announced today that John Anderson has been named as Vice President of Business Development.

Former VP of Corporate Bond Trading/Sales at Wells Fargo, John’s diversity of experience has enabled him to gain deep transactional knowledge of various equity, fixed income and derivative products, as well as the compliance challenges unique to each sector.

Recognized for ethics and collaboration, John's skill for intuitive and quick assessment of situational needs and management of complex transactions will be a great asset to CRC. John has a proven track record of consistently exceeding expectations, while gaining a high level of trust liaising with executive decision makers, support personnel and prospects.

Along with 15 years experience on Wall Street as a Front Office Sales and Trading Specialist, John has held positions at UBS, William Blair, Knight-Libertas, Wachovia Securities and Forum Capital Partners. John currently maintains FINRA Series 7, 55 and 63 securities license designations. He graduated with a Bachelor of Arts Degree from Marist College.

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NEW YORK, NY, June 18, 2014 /24-7PressRelease/ -- Four Points Capital Partners LLC ("Four Points"), a New York based independent brokerage has found a way to rise above, in their strategic partnership with Compliance Risk Concepts ("CRC"). The strategic partnership between Four Points and Compliance Risk Concepts serves as a success model for Independent Broker-Dealers and Investment Advisers challenged by the current regulatory and economic environment.

"As our partnership continues with CRC, we are finally able to leverage the strength of our platform. CRC's expertise to assess opportunities in the marketplace has helped to expand our reach and provide greater long term value for our clients," said Michael C. Martino, Chief Executive Officer of Four Points Capital Partners LLC. "This includes the launch of our the third Four Points Branch office - and the formation of a separate and distinct Investment Advisory firm that is currently becoming a registered entity."

Empowered by CRC's expertise and commitment to maintaining a strong risk management culture, Four Points is optimistic about future strategic growth opportunities in the market and their positioning for long term, sustainable and scalable success.

"The foundational work with Four Points over the last several months, has enabled CRC to evidence itself as a strategic partner that looks holistically at client relationships. We have utilized the principles of strong compliance and risk management as necessary components, in the identification of revenue generation and growth opportunities for Four Points," said Mitch Avnet, Founding and Managing Partner of Compliance Risk Concepts ("CRC"). "We could not be more pleased to work with such an excellent management team at Four Points and look forward to continuing the strong trajectory and building of a future leader in the Independent Broker-Dealer and Investment Adviser sectors."

About Four Points Capital Partners LLC Four Points Capital Partners LLC, is an Independent Broker Dealer with headquarters in New York and members of the Financial Industry Regulatory Authority (FINRA) and the Securities Investor Protection Corporation (SIPC).

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2014 Compliance Alliance Conference Hosted by RegEd
Mitch Avnet had the honor of moderating this year's RCA panel on recent FINRA and SEC exam trends. This is RegEd's 3rd year of hosting the spectacular event, that brings over 100 compliance professionals, industry experts, regulators and industry consultants together under one roof.

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FINRA is conducting an assessment of firms' approaches to managing cyber-security threats. FINRA is conducting this assessment in light of the critical role information technology (IT) plays in the securities industry, the increasing threat to firms' IT systems from a variety of sources, and the potential harm to investors, firms, and the financial system as a whole that these threats pose.

FINRA has four broad goals in performing this assessment:

• To understand better the types of threats that firms face
• To increase its understanding of firms' risk appetite, exposure and major areas of vulnerabilities in their IT systems
• To understand better firms' approaches to managing these threats, including through risk assessment processes, IT protocols, application management practices and supervision
• As appropriate, to share observations and findings with firms

Note: The assessment addresses a number of areas related to cyber-security, including firms':

• Approaches to information technology risk assessment
• Business continuity plans in case of a cyber-attack;
• Organizational structures and reporting lines
• Processes for sharing and obtaining information about cyber-security threats;
• Understanding of concerns and threats faced by the industry
• Assessment of the impact of cyber-attacks on the firm over the past twelve months
• Approaches to handling distributed denial of service attacks
• Training programs
• Insurance coverage for cyber-security related events; and
• Contractual arrangements with third-party service provider

Click Here to download the FINRA Cyber-Security Sweep Alert.
For questions regarding this Alert or any other regulatory matter can be directed to:

Mitch Avnet, Managing Partner –Email or T:(646) 346-2468

Bill Schloth, National Director of Client Development –Email or T: (203) 247-3687

The post ALERT: FINRA Cyber-Security Sweep appeared first on Compliance Risk Concepts.

On January 9th, the SEC published it's National Examination Priorities for 2014. On the top of their list - Fraud Detection and Prevention, Corporate Governance, Conflicts of Interest, Enterprise Risk Management, Technology and issues specific to Dual Registrants.

Now is a good time to review these priorities vs. your organization's current control environment, policies and procedures and discrete risk management activities. Read more: http://ow.ly/sLwgd 

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Three Investment Advisers Sanctioned for Repeatedly Ignoring Problems with their Compliance Programs. Read the press release here: http://ow.ly/qf0PP The recent action taken by the SEC against three Investment Advisers should serve as a “wake up call” for the IA sector. IAs must ensure they have regular and rigorous compliance programs in place to keep pace with industry requirements and expectations. IAs should utilize the recent sanctions as a “road map” / “checklist” for their own internal controls.

“The Compliance Program Initiative is designed to address repeated compliance failures that may lead to bigger problems,” said Andrew J. Ceresney, co-director of the SEC’s Division of Enforcement. “That risk materialized with these firms, whose compliance programs were not adequate to prevent misleading statements in marketing materials or inadvertent overbilling of clients. Firms must not only have policies and procedures in place, but also need to properly implement those policies and procedures.” The firms charged today – Modern Portfolio Management Inc., Equitas Capital Advisers LLC, and Equitas Partners LLC – have agreed to settlements in which they will pay financial penalties and hire compliance consultants.

As part of your ongoing IA Compliance responsibilities, CRC can assist with the following discrete activities:

• Mock SEC Exams
• Gap Analysis
• Advertising and Marketing Reviews
• Access Person / Personal Account Trading Reviews
• Form ADV Part 1, 2A and 2B
• Annual Compliance Reviews –Rule 206(4)-7 of the Investment Advisers Act
• Code of Ethics
• Drafting / Revision of Policies and Procedures

For further assistance or an introductory conversation, please contact Mitch at Compliance Risk Concepts.

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New York, NY— Sept. 10, 2013 —Four Points Capital Partners LLC (“Four Points”), a New York based independent brokerage firm announced a partnership today with Compliance Risk Concepts ("CRC") in an ongoing effort to develop and maintain a strategic approach toward its compliance program.

“We continue to operate in a difficult environment and have sought the expert support and guidance of CRC to help us navigate the regulatory landscape.” said Michael Martino, Chief Executive Officer of Four Points Capital Partners LLC . “We are excited about this partnership and the opportunity CRC brings to Four Points to continue a successful trajectory while maintaining compliance as a cornerstone of our foundation.”

“Four Points has an incredible opportunity to create and shape its Compliance Culture in the early stages of its evolution – positioning itself for long term, sustainable and scalable success,”, said Mitch Avnet, Founding and Managing Partner of CRC. “CRC’s mission is to help firms like Four Points who strive for excellence, not just in client service, but also in regulatory standards of excellence.”

Four Points Capital Partners LLC., members of the Financial Industry Regulatory Authority (FINRA) and the Securities Investor Protection Corporation (SIPC), are focused on delivering the highest level of customer service, the finest range of financial products and an array of customized solutions to meet the needs of today’s discerning investors.

The post Four Points Strives For Regulatory Standard Of Excellence By Partnering With Compliance Risk Concepts appeared first on Compliance Risk Concepts.

CRC Service Spotlight: 3012 / 3130 Testing and Certification Annually, FINRA member broker-dealers are required to test and verify the adequacy of their supervisory program, and the CEO is required to certify their awareness of the program’s state.

But can your firm’s principal sign with confidence?

Regulators require a report for testing and verifying supervisory controls. With that said, here are two important questions every Broker-Dealer should be thinking about:

1. Is your firm prepared to perform a critical review of key compliance and operational functions to the satisfaction of its CEO?
2. Can your firm’s resources step far enough away from their duties long enough to assess them thoroughly and objectively?

An independent review by longstanding industry professionals is the most effective way to ascertain a program’s status. At CRC, we strive to do more than perform a review- we strive to partner. Our industry veterans not only provide key insights into what is required of your firm, but assist your firm in building a stronger program- one that your management and regulators can have confidence in. Let CRC help you turn your risk into reward.  

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Understanding the volatile regulatory environment we will continue to face for the next several years, the need for automated solutions is more important than ever. Additionally, given the weak economic environment, this is simply not a problem that organizations can (or are willing to) to throw bodies at to handle in a “manual” manner. We are all being asked to do more with less. Therefore, forward looking approaches that incorporate sustainable and scalable technology solutions will continue to rule the day.

The post Regulatory Change Management appeared first on Compliance Risk Concepts.