2015 Regulatory Priorities
Every year regulators send out their examination priorities for the year. These are typically “hot topics” that the regulators will focus on in their reviews of firms and advisors. We will highlight a few of the relevant priorities and provide some guidance to assist you in managing your practice. If you have any questions, please feel free to contact either Julie Cox or Renee Emrick with questions. Here are also links to the full reports:
1. Reverse Churning (SEC) – This is when an advisor puts a client in an advisory account and generates little to no activity to justify the receipt of an advisory fee. With that said, there are times in which clients want/need to go into cash, which is very understandable and justified. Please document the cash justification in your contemporaneous notes for the client or in ShareFile. However, when an advisory account sits for months upon months without justification of any activity and the advisor receives an advisory fee, this is reverse churning which serves no benefit to the client. In this situation, an investment advisor representative who fails to remove the account from advisory billing is in breach of his/her fiduciary duty.
Reverse churning will be an area of focus for Compliance in 2015, as it was for 2014. Our typical standard of review accounts for six months of non-activity without justification. Accounts will then be removed from billing thereafter. Consistent findings of an advisor failing to perform their own fiduciary responsibility in removing the accounts from billing, may justify disciplinary action. Please review your advisory accounts and request Operations to discontinue billing if applicable for any such accounts.
2. Sales Practice (SEC and FINRA) – As more clients start to retire, both regulators will review advisor recommendations to move retirement assets from employer-sponsored defined contribution plans into other investments. Best practice is to document your discussions with the client. The discussion should cover any risks and/or any charge of higher fees with the recommendation. Additionally, document the advantages of the recommendation to the client as well – better investment choices or any other applicable items that would benefit a client over leaving the assets in the plan.
FINRA is focused on recommendations related to IRA Rollovers and other wealth events (inheritance, life insurance payout, divorce settlement, sale of a business, etc.) to ensure that clients are provided with options and applicable fees in making such changes to their accounts. Regarding employer sponsored plans, advisors should not imply that the only choice is to move an employer plan to an IRA. A client typically has four (4) choices: (1) leave the money in the employer plan; (2) if there is a new employer – rollover the assets to the new employer’s plan, if permitted; (3) rollover to an IRA; or (4) cash out the account value. Please review Regulatory Notice 13-45, which provides discussion points on pages 2-3 to have with clients on this subject.
Regarding IRA Rollovers, remember the IRS changed the rule in 2015 on the number of IRA to IRA rollovers in which a client may take custody of the funds for up to 60 days and then rollover into another IRA to one (1) transaction per year. The IRS closed the loophole for clients to use the funds without penalty for up to 60 days (similar to a tax-free loan) for more than (1) transaction per year. Direct transfers of IRA funds from one trustee to another are not limited.
3. Cybersecurity (SEC and FINRA) – As technology continues to evolve, we will hear more and more stories on information breaches and cyberattacks through hacking and malware software. Advisors are responsible to protect client information on all of your electronic devices through strong passwords and protection of your systems. Homeland Security provides several tips on how to minimize cyber risk and how to handle an incident once identified at this link: http://www.dhs.gov/sites/default/files/publications/cybersecurity-101_4.pdf.
Please contact Compliance immediately upon any suspected breach as there are potential legal and regulatory implications that must be considered depending on the type and breadth of the breach. Additionally, you should discuss with your personal insurance broker whether you have an option of adding Cybersecurity insurance to your business policy; your clients will appreciate the additional layer of protection to their personally identifiable information and it should provide you some piece of mind.
4. Advisors Disclosable Information to the Public (SEC and FINRA) – It is an advisor’s responsibility to provide Compliance with the details related to an advisor’s disclosable events in order for IPI to complete the appropriate regulatory filings. Failure to provide this information within 30 days of the event occurring to Compliance would be considered a late filing. Late filings can be costly to advisors both hitting his/her wallet with approximately $2,000 in fees from FINRA, but also a possible enforcement action, which could include a fine and suspension.
The types of reportable disclosable events include the following: Bankruptcy, Liens, Judgments, Settling with a Creditor, Criminal Events (if you get arrested, call Compliance to discuss the charge so we can determine if a filing is needed, but do not call us for bail money thoughJ), Arbitration/Litigation with a client, Client Complaint or actions by State Insurance or Securities Departments against an advisor. Depending on the nature of the event, please keep in mind that we may need to amend your ADV2B as well to provide any applicable disclosable information to advisory clients.
To review your U4, please follow this link: https://crd.finra.org/AnonAccess/AllowReps/AccessIndvlData.aspx
You must enter your SS#, DOB, Last Name, verify a word or sound, check the affirmation box and then hit Continue to gain access to your report. If you need to make a change to your U4 or ADV2B, please contact Compliance immediately.