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February 2014 Archives

Rule Approved by FINRA to Restrict Language in Conditioning Settlements Allowing CRD Expungement

A further turn in the arena of regulations toward client disclosures and agreements has taken place at the Financial Industry Regulatory Authority (“FINRA”), where a newly-approved rule on conditioning settlement agreements was detailed in a February 13, 2014 press release. According to the release – which will be brought to the Securities and Exchange Commission (“SEC”) for public comment and review/approval – FINRA’s Board of Governors approved a rule proposal that will restrict firms and “associated persons” from using client agreements to condition settlements of customer disputes that prevent a customer from opposing an expungement request for information in an associated person’s Central Registration Depository (“CRD”) record.

In the Spotlight: OCIE Director Drew Bowden

In a recent interview with Drew Bowden, the Director of the Securities and Exchange Commission's (SEC's) Office of Compliance Inspections and Examinations (OCIE), he spoke to the mission, role and complications associated with operating the examination branch of the SEC - and more specifically, outlooks for the future of OCIE. Bowden first discussed the varied reasons why OCIE may conduct an examination on a firm. While "the majority of examinations that we do are based upon our own risk analysis [measures]"[1], particularly within the operations of OCIE's Risk Analysis and Surveillance group, other circumstances - from violations that are reported by "tips, complaints, referrals and whistleblowers" and other internal personnel, to new business models or hybrid firms operations that the SEC is curious in learning more about - may also prompt an examination. He also addressed such questions as how Chief Compliance Officers can best handle an SEC examination: "be organized, be responsive, and be helpful" to examination staff, and educate the examiner on the nature of the firm and its operations from the start. On the subject of outside compliance consultants, Bowden suggests firms be open and patient to third-party reviews, and in matters of examination preparation, he warns against "coaching" of staff prior to an examination that may lead to falsified information being perpetuated. Finally, Bowden confirmed OCIE's internal review of its Exam Manual,  which is still pending and awaiting public release. For further information on this and other related subjects, please contact us at [email protected]  or (619) 298-2880.

The Importance of AML: Banorte-Ixe Fined by FINRA for Registration and AML Failures

The importance of adequate and effective Anti-Money Laundering ("AML") programs should never be underestimated in the current US regulatory environment, as the Financial Industry Regulatory Agency's ("FINRA's") January 28, 2014 announcement of penalties against the firm Banorte-Ixe clearly illustrates. The FINRA news release details the penalties and oversights that led it to fine Banorte-Ixe Securities International, Ltd. $475,000 for AML and registration failures. Subsequently, the firm's AML Officer and Chief Compliance Officer ("CCO") Brian Anthony Simmons, was suspended for 30 days in a principal capacity. While Banorte-Ixe - a New York firm working with Mexican clients who invest in US and other foreign securities - was found to have failed to register "approximately 200 to 400 foreign finders" (to learn more about "finders" please see JLG's previous blog post here) who worked with the firm's Mexican clients, their more egregious failure was within the realm of AML. According to the FINRA announcement, Banorte-Ixe's AML policies were so flawed that the firm did not "detect, investigate or report" the funneling of $28 million in and out of an account opened for a corporate client with ties to a Mexican drug cartel. The AML system in place at Banorte-Ixe could not track "suspicious transactions that involve at least $5,000 in funds or other assets" that should be reported to Financial Crimes Enforcement Network, under the Bank Secrecy Act. Additionally, Banorte-Ixe and Simmons failed to tailor AML policies to consider the "unique risks posed by opening accounts, transferring funds and effecting securities transactions for customers located in Mexico," a country known for its "high risk money laundering" environment. This case, exemplifies not only the repercussions of a lack of proper AML measures, but also the importance of AML policies that are adequately tailored to the particular needs and services of an investment firm. For further information on this and other related subjects, please contact us at [email protected]  or (619) 298-2880.

2014 SEC Priorities in Focus: Disclosure Reforms

RoundIcons-Free-Set-54In his January 24, 2014 speech Securities and Exchange Commission ("SEC") Commissioner Daniel M. Gallagher stated that "two issues that...should be at the very top of the SEC's agenda",  a "revamping" of the SEC's corporate disclosure system and a series of "much needed reforms" for the proxy advising industries. In this blog post, we will summarize the primary points that Gallagher addressed in his speech about the first of these two issues: the topic of disclosure. In his speech, Commissioner Gallagher identified disclosure as the "bedrock premise" and "foundation" of federal securities law. That said, accurate disclosure of financial information by firms to their clients and to the public should be "core responsibilities" of all issuers, Gallagher conceded that an abundance of disclosure - provided in lengthy documents that primarily aim to avoid shareholder lawsuits, and do not communicate relevant information clearly - can also cause unintended consequences: "more disclosure...may not always yield better disclosure." To this effect, Gallagher outlined a few "examples" of focus that the SEC may seek to pursue towards disclosure reform:

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