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  • FINRA Releases New Guidance on Rules Concerning Digital Communications

    Privacy, Cyber Risk & Data Security

    On April 25, FINRA issued new guidance on the application of its rules governing communications with the public concerning social media networking sites and online business communications. In 2010 and 2011, FINRA released Regulatory Notices 10-06 and 11-39 to provide initial guidance on these specific rules, and in 2013, “adopted amendments to Rule 2010 that codif[ied] guidance provided in the Notices with respect to the supervision of interactive social media posts by member firms.” In December 2014, FINRA issued its Respective Rule Review Report, which was designed to “assess whether the communications rules are meeting their intended investor protection objectives . . . and to take steps to maintain or improve the effectiveness of the rules.” FINRA Regulatory Notice 17-18 is the response to the report’s request for additional guidance and provides examples of how FINRA applies its rules to the following topics: text messaging, personal communications, hyperlinks and content sharing, native advertising, online testimonials and endorsements, correction of third-party content, and BrokerCheck. FINRA further notes that Regulatory Notice 17-18 is intended to deliver further guidance and does not alter principles previously provided in prior notices.

    Privacy/Cyber Risk & Data Security FINRA Agency Rulemaking & Guidance Securities

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  • FINRA Releases Revisions to Its Sanction Guidelines

    Financial Crimes

    On April 10, FINRA issued a notice revising its Sanction Guidelines to reflect recent developments in its disciplinary process, revisions to certain rules, and amendments to the levels of sanctions imposed during proceedings. FINRA Regulatory Notice 17-13 states that the revisions: (i) establish a new factor that requires “the exercise of undue influence over a customer be considered for all violations”; (ii) introduces new guidelines concerning systemic supervisory failures, short interest reporting, and borrowing and lending arrangements with customers; (iii) provides guidance on a new factor related to the mitigating effect of sanctions imposed by other regulators or firms; (iv) describes amendments made to twelve sections that revise sanctions for more serious rule violations; and (v) harmonizes “the Sanction Guidelines to the relevant precedent, prior amendments to the Sanction Guidelines and FINRA’s rulebook consolidation process.” FINRA further states that the purpose of the Sanction Guidelines is not to “prescribe fixed sanctions for particular violations . . . [but to] provide direction for Adjudicators in imposing sanctions consistently and fairly. The guidelines recommend ranges for sanctions and suggest factors that Adjudicators may consider in determining, for each case, where within the range the sanctions should fall or whether sanctions should be above or below the recommended range.” The revised guidelines are effective immediately.

    Financial Crimes FINRA Sanctions

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  • FINRA Bars Broker Charged in NY Pension Fund Scandal

    Securities

    On March 28, FINRA filed a disciplinary action in the form of a Letter of Acceptance, Waiver and Consent (Letter of Acceptance) against one of the brokers charged in December of last year for participating in a "pay-for-play" bribery scheme involving the $184 billion New York State Common Retirement Fund (NYSCRF). The Letter of Acceptance bars the broker from the industry and prohibits association with “any FINRA member in any capacity.” From 2014 through 2016, the broker, along with two other individuals, engaged in a scheme to defraud the pension fund, its members and beneficiaries, by paying bribes to a portfolio manager totaling more than $100,000 in the form of entertainment, travel expenses, narcotics, luxury gifts, and other items in “exchange for fixed-income business from the NYSCRF.” The broker was charged with allegedly conspiring to commit securities fraud, conspiring to obstruct justice in a Securities and Exchange Commission investigation, as well as wire fraud charges. Currently the SDNY criminal case and SEC civil action are pending against the broker.

    Securities FINRA Bribery

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  • Proposed FINRA Rule Would Streamline Securities Competency Exams for Industry Professionals

    Securities

    On March 8, the Financial Industry Regulatory Authority (“FINRA”) filed a proposed rule with the SEC to streamline its competency exams for professionals entering or re-entering the securities industry. Currently, only individuals associated with FINRA-regulated firms are eligible to take the qualification exam. The proposed rule would allow individuals with no prior securities industry experience to take FINRA’s Securities Industry Essentials exam, an “important first step to entering the industry,” which would serve to “provide enhanced flexibility and efficiency in [the] qualifications programs, while maintaining important standards and investor protections.” While these individuals would also be required to pass a more specialized knowledge exam—and must be associated with, and sponsored by, a firm—the proposed change would potentially expand the pool of qualified candidates for positions. Further, under this proposal, individuals who transfer to a financial services affiliate of a FINRA-regulated firm may qualify for a waiver that allows their credentials to be reinstated without re-taking their qualification exams, should they return to the industry within a seven-year period and meet the requirements of the waiver program. Currently, a registered individual who transfers for two or more years must re-take an exam to be re-qualified. The proposed rule is under review with the SEC.

    Securities FINRA SEC

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  • FINRA Fines Brokerage Firm $5.75M for Lax Anti-Money Laundering Program

    Courts

    On December 28, FINRA entered into an acceptance, waiver, and consent (AWC) agreement with a Puerto-Rican-based brokerage firm based upon allegations that the firm’s anti-money laundering (AML) program “was not reasonably designed to achieve and monitor compliance with the requirements of the Bank Secrecy Act.” In deciding to levy a $5.75 million fine, FINRA noted, among other things, that the firm improperly “relied on manual supervisory review of securities transactions” that was “not sufficiently focused on AML risks.” The firm neither admitted nor denied the findings set forth in the AWC agreement, but agreed to address deficiencies in their AML program within 180 days. According to a firm spokeswoman, the firm is “pleased to have this matter from 2013 resolved and we continue to improve, manage and monitor our AML efforts.”

    Courts FINRA International Anti-Money Laundering Bank Secrecy Act

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  • N.Y. Attorney General’s Office, SEC and FINRA Assess Penalties, Fines Against Securities Firm Over Dark Pool Access Disclosures

    State Issues

    On December 16, N.Y. Attorney General Eric Schneiderman announced a $37 million settlement against a major securities firm following its joint investigation with the Securities and Exchange Commission (SEC) into allegedly false statements and omissions made by the firm in connection with the marketing of its electronic order routing services, known as its “Dark Pool Ranking Model.” As explained by Attorney General Schneiderman, “Electronic order routing systems that route investor orders to various markets, including dark pools, are a part of modern equities trading, and companies that promote their routing capabilities must do so truthfully.” As part of the agreement, the firm admitted that it misled investors and violated New York State and federal securities laws; its conduct was also censured by both regulators.

    That same day, FINRA announced its decision to fine the same firm $3.25 million for failing to disclose accurate information to all clients about services and features of its alternative trading system (ATS). In Form ATS filings with the SEC, the firm represented that all ATS users would have “identical access” to the system’s services and features. However, FINRA found that some ATS users, including high-frequency traders, were provided with more information than others and received services not available to others. The firm settled without admitting or denying the charges.

    State Issues Securities FINRA SEC State AG

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  • FINRA Fines Credit Suisse over Anti-Money Laundering Policies

    Courts

    In a December 5 press release, FINRA announced that it has fined Credit Suisse Securities (USA) LLC $16.5 million for anti-money laundering (AML), supervision and other violations. FINRA’s determination and penalty were based primarily on two deficiencies in the investment bank’s suspicious activity monitoring program. First, Credit Suisse relied too heavily on its registered representatives “to identify and escalate potentially suspicious trading, when, in practice, such high-risk activity was not always escalated and investigated, as required.” And, second, FINRA found that the firm failed to properly implement its automated surveillance system to monitor for potentially suspicious money movements.

    Courts Banking FINRA Anti-Money Laundering

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  • FINRA Elects New Chairman of Board of Governors

    Securities

    On July 15, the FINRA Board of Governors elected John J. Brennan as its new Chairman. Effective August 15, Brennan will succeed Richard G. Ketchum, who previously announced his retirement.

    FINRA

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  • FINRA Releases 2016 Regulatory and Examination Priorities Letter

    Securities

    On January 5, FINRA released a letter regarding its regulatory and examination priorities for 2016. The letter focuses on the following three broad issues within the securities industry: (i) culture, conflicts of interest and ethics; (ii) supervision, risk management and controls; and (iii) liquidity. Regarding FINRA’s assessment of firm culture, the letter notes that FINRA “will focus on the frameworks that firms use to develop, communicate, and evaluate conformance to their culture,” assessing five specific indicators of a firm’s culture, including (among others) whether policy or control breaches are tolerated. In connection with supervision and risk management, FINRA will focus its examination efforts on the following four areas that continue to affect firms’ business conduct and market integrity: (i) management of conflicts of interest; (ii) technology; (iii) outsourcing; and (iv) anti-money laundering. Finally, in connection with liquidity, FINRA plans to review firms’ contingency funding plans as they relate to their business models, noting that the framework for FINRA’s reviews will be driven by the effective practices contained in Regulatory Notice 15-33. Additional areas of regulatory and examination focus for FINRA in 2016 will include but are not limited to: (i) protecting seniors and vulnerable investors from fraud, sales practice abuse, and financial exploitation; (ii) private placements and Regulation A+ public offerings; (iii) financial and operational controls concerning exchange-traded funds and fixed-income prime brokerage; and (iv) market integrity.

    Examination FINRA Investment Adviser Broker-Dealer Risk Management

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  • FINRA Announces $1.5 Million Sanction Against Broker-Dealer and Bars President for Fraud

    Securities

    On March 12, FINRA announced an order requiring a New York-based broker-dealer to pay over $1 million in restitution and $500,000 in fines for alleged fraud in sales of a private placement offering. According to the Order, from January 2011 to October 2011, the firm defrauded its customers by claiming – without performing sufficient due diligence – they would benefit from investing in the pre-initial public offering shares of a California-based automaker, but failed to disclose the criminal and adverse regulatory background of a key individual connected to the automaker. In addition to the $500,000 fine against the broker-dealer, its president has been barred from the securities industry. Under the settlement agreement, the broker-dealer and its president neither admitted nor denied the allegations.

    FINRA Enforcement

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