As the regulatory landscape is constantly evolving, Compliance Risk Concepts (“CRC”) is issuing its monthly […]
As the regulatory landscape is constantly evolving, Compliance Risk Concepts (“CRC”) is issuing its monthly review and summary of FINRA, SEC, and NFA notices and bulletins to assist our clients in keeping abreast of notable regulatory developments and deadlines in an effort to strengthen their compliance and regulatory initiatives.
Per Regulatory Notice 23-12, FINRA has adopted amendments to its Codes of Arbitration Procedure (Codes) to modify the process relating to requests to expunge customer dispute information in the FINRA Dispute Resolution Services (DRS) arbitration forum. The amendments impose requirements on expungement requests (a) filed by an associated person during an investment-related, customer-initiated arbitration (customer arbitration), or filed by a party to the customer arbitration on behalf of an associated person (on-behalf-of request), or (b) filed by an associated person separate from a customer arbitration (straight-in request). The amendments become effective on October 16, 2023. The rule text is available in Attachment A. The Guidance is available in Attachment B. The Form Requesting Expungement on Behalf of an Unnamed Person is available in Attachment C.
Per Regulatory Notice 23-13, FINRA has adopted changes to its rules to allow for video conference hearings before the Office of Hearing Officers and the National Adjudicatory Council under specified conditions. These amendments became effective August 23, 2023.
Per Regulatory Notice 23-14, FINRA has amended the requirements relating to Covered Agency Transactions that FINRA originally adopted in 2016. Covered Agency Transactions include (1) To Be Announced transactions, inclusive of adjustable rate mortgage transactions, (2) Specified Pool Transactions and (3) transactions in Collateralized Mortgage Obligations, issued in conformity with a program of an agency or Government-Sponsored Enterprise, with forward settlement dates, as recapped more fully in this Notice.
This Notice provides an overview of the amendments. The SEC approved the amendments on July 27, 2023. FINRA stated in its rule filing, and the SEC noted in approving the rule change, that the amendments would become effective between nine and ten months following the SEC’s approval. Consistent with this timeframe, the amendments become effective on May 22, 2024. FINRA will monitor the implementation of the amendments and their impact. Prior to the May 22, 2024, effective date, FINRA will engage with market participants to make available updated guidance as appropriate.
The text of the amendments to the Covered Agency Transaction requirements is included as Attachment A. In this Notice, all references to provisions of the amended requirements are to the rule text as shown in Attachment A.
There were no Special Notices in August.
Per Release No. 34-98202, the SEC is adopting amendments to a rule under the Securities Exchange Act of 1934 (“Act” or “Exchange Act”) that exempts certain SEC-registered brokers or dealers from membership in a registered national securities association (“Association”). The amendments replace rule provisions that provide an exemption for proprietary trading with narrower exemptions from Association membership for any registered broker or dealer that is a member of a national securities exchange, carries no customer accounts, and effects transactions in securities otherwise than on a national securities exchange of which it is a member. The amendments create exemptions for such a registered broker or dealer that effects securities transactions otherwise than on an exchange of which it is a member that result solely from orders that are routed by a national securities exchange of which it is a member to comply with order protection regulatory requirements, or are solely for the purpose of executing the stock leg of a stock-option order.
Per Release No. IA-6383, the SEC is adopting new rules under the Investment Advisers Act of 1940 (“Advisers Act” or “Act”). The rules are designed to protect investors who directly or indirectly invest in private funds by increasing visibility into certain practices involving compensation schemes, sales practices, and conflicts of interest through disclosure; establishing requirements to address such practices that have the potential to lead to investor harm; and restricting practices that are contrary to the public interest and the protection of investors. These rules are likewise designed to prevent fraud, deception, or manipulation by the investment advisers to those funds. Specifically, the new rules require registered investment advisers to private funds to provide transparency to their investors regarding the fees and expenses and other terms of their relationship with private fund advisers and the performance of such private funds. The new rules also require a registered private fund adviser to obtain an annual financial statement audit of each private fund it advises and, in connection with an adviser-led secondary transaction, a fairness opinion or valuation opinion from an independent opinion provider. In addition, the new rules restrict all private fund advisers, including those that are not registered with the SEC, from engaging in certain activities unless they provide specified disclosure to and, for certain restricted activities, obtain consent from investors. All private fund advisers are also prohibited from providing certain types of preferential treatment that would have a material, negative effect on other investors, subject to certain exceptions; and other types of preferential treatment to any investor in a private fund, unless the adviser satisfies certain disclosure obligations. The SEC is adopting corresponding amendments to the Advisers Act books and records rule to facilitate compliance with these new rules and assist our examination staff. Finally, the SEC is adopting amendments to the Advisers Act compliance rule, which affect all registered investment advisers, to better enable SEC staff to conduct examinations.
Per Release No. IA-6384, the SEC is reopening the comment period for its proposal, Safeguarding Advisory Client Assets, Release No. IA-6240 (Feb. 15, 2023) (“Proposal”), which proposed a new rule under the Investment Advisers Act of 1940 (“Advisers Act” or “Act”) that would redesignate and amend the current custody rule. In light of the adoption of the private fund adviser audit rule, which generally requires a registered investment adviser to obtain an annual financial statement audit of each private fund it advises in accordance with the audit provision of the current custody rule, reopening the comment period will allow interested persons additional time to assess the proposed amendments to the current custody rule’s audit provision in light of the private fund adviser audit rule.
Interim Final Rules
There were no interim final rules in August.
There were no interpretive releases in August.
There were no policy statements in August.
Notices to Members
There were no NFA Notices to Members in August.
There were no NFA news releases in August.
In August, the SEC continued with its enforcement actions against broker-dealers for failing to preserve electronic communications. According to the SEC, this brings the total to 30 enforcement actions and $1.5 billion in penalties. In what is becoming a familiar script, the firms admitted that their employees (including supervisors and executives) often communicated through various messaging platforms on personal devices about the business of their employers, which were often not preserved in violation of federal securities laws. The SEC’s sustained enforcement activity in this area strongly suggests that firms should not delay taking the initiative to conduct meaningful reviews of their communication practices, policies and procedures.
Regulators continue to demonstrate their commitment to protecting investors by aggressively pursuing bad actors and reviewing and updating regulations to guard investors against constantly evolving threats.
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.
For more information, please contact:
p. (646) 346-2468
p. (917) 568-6470