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How Firms Under Investigation Can Sometimes Avoid Harsher Sanctions

By Rita Raagas De RamosJuly 12, 2019

Finra has revealed how firms under investigation might sometimes be able to avoid harsher sanctions.

The self-regulator has clarified what it considers to be “extraordinary efforts” when member firms and individuals help in investigations. The clarification comes as a response to requests to clear up the ambiguity of what’s extraordinary as opposed to “required cooperation.”

Finra’s Department of Enforcement credits “extraordinary cooperation” when the efforts of an individual or firm help make the outcome of the investigation “materially different than it would have been absent the respondent's extraordinary conduct.”

Finra says it provides such credit to recognize and incentivize firms and individuals to take proactive and voluntary steps beyond those required under its rules.

In previous guidance issued in 2008, Regulatory Notice 08-70, Finra identified the following types of extraordinary cooperation by a firm or individual that could result in credit, which still stand:

  • Self-reporting before regulators are aware of the issue
  • Extraordinary steps to correct deficient procedures and systems
  • Extraordinary remediation to customers, or
  • Providing substantial assistance to the investigation.

“You know, every case is going to be different based on the facts and circumstances of that unique case,” Susan Schroeder, head of Finra’s Department of Enforcement, says in a video interview posted on Finra’s website.

“And so while sometimes we might deem that it is appropriate to forego any fine, there will be situations where we believe a fine is appropriate. But we will assess a fine that is materially different, significantly lower than the fine that we otherwise would have assessed. There are times we may choose not to bring any action at all,” she adds.

Finra says subsequent changes to its rules “may have created uncertainty around the continued impact that self-reporting may have on a potential respondent's ability to receive credit for extraordinary cooperation.”

Thus, on Thursday Finra issued Regulatory Notice 19-23, which provides additional information about the extraordinary cooperation respondents can provide to substantially assist Finra in meeting its investor protection and market integrity goals.

Finra reiterated that its rules and policies — such as Finra Rule 8210 and its Sanction Guidelines — require certain levels of cooperation in every case.

Rule 8210 gives Finra the following rights for the purpose of an investigation, complaint, examination or proceeding:

  • Require a registered representative or associates to provide information orally, in writing, or electronically and to testify under oath on any matter involved in the investigation, complaint, examination or proceeding, and
  • Inspect and copy the books, records and accounts of that registered representative or associates also in any matter involved in the investigation, complaint, examination or proceeding.

Finra reiterates that it will continue to look to the factors listed in the Sanction Guidelines and Regulatory Notice 08-70 when determining whether credit will be given for extraordinary cooperation.

Those factors include, among others, the timeliness and quality of a potential respondent's corrective measures and other cooperative steps aimed at broadly and quickly remediating harm, according to the SRO.

Finra says the credit for extraordinary cooperation may take many forms.

For example, when a problem has been fully remediated, Finra says it may conclude that no enforcement action is warranted and close an investigation with no further action or with a Cautionary Action Letter.

In other cases, Finra says it might determine that an enforcement action is appropriate to remedy or prevent harm but will provide credit by reducing the sanctions imposed. When credit is given in the form of a reduced fine, the reduction normally will be substantial; in appropriate cases, Finra says it may also consider imposing formal discipline without any fine.

Schroeder says Finra tries to “walk through a lot of examples of steps that firms and respondents have taken in the past that we deemed to be extraordinary” in its Regulatory Notice 19-23.

Here are two examples.

Finra

From 2015 through 2018, Finra ordered several firms to pay more than $75 million in restitution, including interest, to affected customers for failing to waive mutual fund sales charges for certain charitable and retirement accounts. But Finra didn’t impose fines because of the firms’ extraordinary cooperation. Firms initiated, prior to detection or intervention by a regulator, investigations to identify whether the misconduct existed; promptly established a plan of remediation for affected customers; promptly self-reported the conduct to Finra; promptly took action and remedial steps to correct the violative conduct; and employed subsequent corrective measures, prior to detection or intervention by a regulator, to revise their procedures to avoid recurrence of the misconduct.

In October 2018, Finra sanctioned a firm for failures to supervise firm functions it outsourced to a vendor. Finra didn’t impose a fine, acknowledging, among other things, the firm’s self-reporting, which extended beyond its obligation to self-report; the extraordinary steps the firm took to remediate, including weekly meetings with the vendor’s CEO and COO, hiring two full-time employees to implement controls, and assigning a dedicated manager to oversee the vendor; changing its billing structure to avoid similar issues; and conducting a comprehensive review of all its wealth management accounts to identify impacted investors, whom it voluntarily paid $4.6 million in restitution.

In the future, Finra’s letters of acceptance, waivers and consent will include a section called “Credit for Extraordinary Cooperation,” where the SRO will describe not only the nature of the credit but also describe in detail the steps the respondent took to get the credit, Schroeder says.


Judge Grants Morgan Stanley’s TRO Request for Ex-Broker Who Went to UBS

July 12, 2019

Wirehouse Morgan Stanley continues aggressively pursuing departing advisors, most recently getting a judge to quickly issue a temporary restraining order against one of its former brokers who left for UBS, according to news reports.

Morgan Stanley claims that David James Sayler pre-solicited clients for weeks prior to his resignation, using mass-mailed thank-you cards, according to a lawsuit filed in U.S. District Court in Oregon, AdvisorHub writes.

“I enjoy working with you and look forward to the years to come,” the cards read, according to the filing cited by the website.

Morgan Stanley says in the complaint that it wouldn’t have approved the cards if it had known that “those ‘years to come’ would be years spent working at another financial firm,” AdvisorHub writes.

Sayler then allegedly followed up with further solicitations after he joined UBS, Morgan Stanley says, according to the industry news website.

UBS and Sayler didn’t return AdvisorHub’s requests for comment and a Morgan Stanley spokeswoman declined comment to the website.

Sayler, who came to the financial services industry in 2006 by joining Morgan Stanley predecessor Smith Barney, was part of a five-advisor team that signed “Former Advisor Program” agreements with an advisor who retired in 2017, according to the suit cited by AdvisorHub.

Such agreements let retiring advisors still take a portion of the fees and commissions paid by their former clients from what’s earned by advisors who inherit the accounts, the website writes.

Sayler left the team in April 2019 and appears to be the focus of the first TRO action that focuses on such agreements, according to AdvisorHub.

District of Oregon Judge Ann Aiken issued a decision just a day after Morgan Stanley submitted its TRO request, ordering Sayler to return all the documents and client information he may have removed from the company and to stop soliciting clients, AdvisorHub writes.

Lawyers say the reason Aiken reached her decision so quickly has to do with the “unusual circumstances” of the case, namely, the fact that Sayler had signed the Former Advisor Program agreement, according to the website.

“The argument appears to be that these are not accounts that the advisor generated, but were given to him by the retiring broker,” Thomas Lewis, an employment lawyer at Stevens & Lee in Princeton, N.J., tells AdvisorHub. “It’s easy for judges to say they’re going to issue a TRO when brokers go after accounts that are subject to an agreement.”

(Getty)

In October 2017, Morgan Stanley announced that it was dropping out of the Protocol for Broker Recruiting, the industry accord that lets departing brokers take some client data with them without threat of lawsuits.

Since then, the wirehouse has filed 15 cases, including Sayler’s, in federal court seeking TROs against its former brokers, as reported.

Morgan Stanley was granted the TROs in eight of those cases and denied only two, while five cases were settled before a ruling could be issued.

By Alex Padalka
  • To read the AdvisorHub article cited in this story click here.
  • To read the AdvisorHub article cited in this story click here.

These New Tax Break Funds For the Rich Are Having Trouble Finding Investors

By Miriam RozenJuly 12, 2019

Multi-asset fund managers in the Opportunity Zone space are having trouble attracting investors because of the lack of clarity in the U.S. Treasury's proposed regulations, according to multiple stakeholders testifying at a July 9 IRS hearing scheduled to let the public comment on the rules before the agencies finalize them.

“Multi-asset funds are facing slower fundraising than they expected,” Steve Glickman, the founder and CEO of Develop LLC, an independent advisory firm dedicated to building and supporting Opportunity Zone Funds.

OZ funds, about which FA-IQ has written extensively, became possible after President Donald Trump signed the Tax Cuts and Jobs Act of 2017.

With that legislation, Congress identified capital gains tax relief as a carrot to lead investors to buy stakes in economically-neglected U.S. neighborhoods. The Treasury then approved some 8,700 census tracts located in all 50 states as economically disadvantaged enough to become Opportunity Zones.

Under the program, investors can defer capital gains taxes — and even avoid some entirely — if they deploy their recently-realized capital gains to buy stakes for the long haul in the designated tracts. To achieve the maximum tax benefits, investors are required to make a 10-year commitment.

“Some investors are sitting on the sidelines,” Glickman told the panel of IRS and Treasury officials this week.

“I have talked to many investors, and many fund managers who are having trouble confirming to investors that they can make individual sales,” of assets within the 10-year period to then reinvest in the Opportunity Zone.

When she testified, Regina Staudacher, a corporate tax attorney with Royal Oak, Mich.-based Howard & Howard, agreed the Treasury regulations needed to allow for the possibility of “recycling of gains within a 10-year hold period.”

She found “comfort in the spirit of the regulations,” Staudacher told the panel but added, “it’s when we get into the nuances of the rules” that she gets worried — particularly since the IRS is yet to finalize the rules.

“Another three months go by and we’ve lost another year,” she fretted. Her concerns center on “five-to-seven years from sitting in front of a different group of people and they have interpreted the rules differently,” she told the officials.

Others who testified also sought clarity on what transactions Opportunity Zone investors may do within the decade they keep their stake in the economically neglected communities to maximize their tax benefits.

Taxpayers should be allowed to exclude both ordinary and capital gains from the sale of Opportunity Zone property if those transactions represent the disposition of property used in a trade or business, said accountant John Sciarretti of Novogradac & Co., who represented a working group of his professional colleagues focused on the Opportunity Zone program at the hearing.


Kestra Adds $206 Million Practice

By Alex PadalkaJuly 12, 2019

Kestra Financial has added an Ohio-based practice to its independent advisor platform, the company says.

Founded in 1992 by Michelle Merkel, Columbus, Ohio-based Merkel Financial offers wealth management and estate planning to high net worth investors, families and entrepreneurs, with a focus on business owners and women, according to a press release from Kestra.

Before affiliating with Kestra, Merkel had been registered with Principal Securities since the start of her career in the financial services industry, according to her BrokerCheck profile.

Merkel currently manages $206 million, Kestra says.

“In selecting Kestra Financial, our objective was to find a partner that would be able to deliver the support, platform, and technology solutions that enable and enhance our ability to continue to provide top service to our clients,” Merkel says in the press release. “After learning about Kestra Financial’s offerings, we knew they were equipped with the tools to help us carry out that vision while we continue to focus on what matters most — helping our clients.”

In May, Kestra Financial CEO James Poer told FA-IQ that the company is interested in buying out books of business from advisors heading into retirement.

The same month, a UBS team overseeing $175 million went independent and affiliated with Kestra Private Wealth Services, an RIA subsidiary of Kestra Financial.

But in April, a Kestra-affiliated advice practice with $11 billion in retirement-plan assets left for a super OSJ aligned with LPL Financial.


House Lawmakers Tell SEC to Work with State Regulators

July 12, 2019

The House of Representatives wants the SEC to work more closely with state securities regulators, according to news reports.

Rep. Ayanna Pressley, D-Mass., a member of the House Financial Services Committee, introduced the bipartisan resolution in June to honor the 100th anniversary of the North American Securities Administrators Association, WealthManagement.com writes.

In particularly, the resolution “urges the Securities and Exchange Commission to maintain and expand voluntary collaboration with State securities regulators in the interest of the investing public.”

The House passed the resolution earlier this week, according to the web publication.

The same month Pressley introduced the resolution, the SEC approved its overhaul of investment advisor and broker conduct rules, known as Regulation Best Interest. Critics of the SEC’s rules package — including prominent state securities regulators such as Massachusetts Secretary of the Commonwealth William Galvin — say it doesn’t go far enough to protect investors. And several states, including Massachusetts, New York, Nevada, New Jersey and Connecticut, are working on their own versions of state-level fiduciary rules.

“Over the last 100 years, state securities regulators in Massachusetts have played a crucial role in protecting and educating American investors,” Pressley says in a statement accompanying the resolution, according to WealthManagement.com. “NASAA and the regulators they represent have been leaders in ensuring stability and equity. I’m proud to honor 100 years of the NASAA’s important investor-protection work and I look forward to 100 more.”

By Alex Padalka
  • To read the Wealth Management article cited in this story click here.

Regulation Doesn't Trump Fiduciary Standard, Reg BI Author Insists

July 12, 2019

One of the authors of the SEC’s overhaul of its investment advisor and broker conduct regulation says that broker requirements in the package aren’t more stringent than the requirements put on investment advisors, according to news reports.

"It is not true to say that the broker-dealer standard is higher than the fiduciary standard,” Dalia Blass, director of the SEC Division of Investment Management, said at a Sifma seminar in Washington this week, according to InvestmentNews.

One SEC commissioner, Hester Peirce, and others have suggested Regulation Best Interest, as the package is known, is a tougher regulation than the fiduciary duty since it forces brokers to mitigate conflicts of interest, the publication writes. But Blass said at the Sifma conference that investment advisors must still eliminate or mitigate conflicts in how the advisor standard in the rule package is interpreted, according to InvestmentNews.

"To say that mitigation is not there in the advisory world is not correct and to say one standard is higher than the other is also not correct," Blass said, according to the publication.

(Getty)

Later the same day, meanwhile, Peirce took a “more nuanced” stance on the issue, saying that both Reg BI and the fiduciary standard are strong, InvestmentNews writes.

Reg BI applies to recommendations and is more prescriptive, while the fiduciary duty applies to a relationship and is thus ongoing, she said, according to the publication.

“It depends on which perspective you're taking," she tells InvestmentNews.

By Alex Padalka
  • To read the InvestmentNews article cited in this story click here.

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