SEC Extends For Two Years Principal Trading Rule For Non-Discretionary Accounts
Thursday, January 03, 2013 09:01

Tags: fiduciaries | fiduciary standard | sec

A controversial rule that allows brokers to trade as principals in non-discretionary advisory accounts has been extended by the SEC for another two years.
The rule was adopted in 2007 and was designed to allow principal trading in accounts that had been converted to fee-based compensation.

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This happened after the so-called Merrill Lynch was thrown out by a federal court. The Merrill Lynch rule exempted brokers from the Investment Act of 1940.
The rule has been extended twice before and a five-year extension was pushed for in comment letters from SIFMA (Securities Industry and Financial Markets Association) and FSI (Financial
Services Institute) the SEC received last month.
fi360, the fiduciary firm, said the extension should only be for six months. It said the SEC has no idea how many firms use the exemption, how many problems arise from principal trading, and the possible costs those problems are incurring for investors.
The SEC said that ADV data showed that 10 firms engage in principal trading and that those firms have a total of 3.5 million non-discretionary accounts in which principal trading may be involved.

FINRA Makes Arbitration Forum Available To Registered Investment Advisers
Friday, December 21, 2012 12:42

For many years, the vast majority of disputes between retail investors and their securities brokers have been resolved in arbitrations administered by the Financial Industry Regulatory Authority (FINRA). But, FINRA-administered arbitrations were not available to investors, or their financial advisors, where the client’s relationship was with a Registered Investment Adviser (RIA) not affiliated with a securities broker/dealer firm, as FINRA does not have authority over RIA firms.  

This is changing.  

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FINRA has recently adopted a new policy permitting RIA firms and their clients to utilize the SRO’s arbitration forum to resolve their disputes, even where the RIA is not affiliated with a FINRA Member Firm.  Where parties meet the required conditions, FINRA will now accept jurisdiction over such cases that are filed.  Specifically, under the guidance posted on FINRA’s website, in order for Investor-RIA disputes to be resolved through the organization’s arbitration arm, the following conditions must be satisfied:

  • The RIA must agree to pay all FINRA arbitration fees and surcharges;


  • The RIA, the investment advisor representatives involved, and the investor must each sign a special form of FINRA’s standard Submission Agreement that was executed after the dispute arises (pre-dispute arbitration clauses are not valid);


  • The parties must all affirmatively acknowledge and agree on the RIA dispute Submission Agreement form that:


    • FINRA cannot enforce awards entered against non-member RIA firms and/or their employees that are not associated with a FINRA Broker/Dealer member firm;


    • Investors who prevail at arbitration may only enforce awards entered against non-member RIAs and their personnel through a court action in the event of non-payment of the Award;


    • FINRA may bar the RIA from using FINRA Dispute Resolution in future cases if the firm fails to pay any award, settlement agreement, or FINRA fees;


    • FINRA and its arbitrators will be held harmless from liability arising in connection with the resolution of the parties’ dispute;


    • Disputes involving RIA firms will be administered in accordance with the FINRA Codes of Arbitration Procedure.


  • The parties must also affirmatively acknowledge that the final arbitration Award will be made publicly available.


Strategic Considerations for RIAs and Investment Adviser Representatives

While the RIA industry has generally expressed opposition to FINRA’s attempts to exert regulatory authority over it, there are substantial benefits for individual RIA firms and their personnel to avail themselves of FINRA’s arbitration system.  Some of the advantages include:

·         Faster resolution

·         More limited and predictable fact discovery (such as the lack of depositions);

·         Greater certainty in budgeting litigation costs;

·         Having disputes decided by arbitrators with securities industry experience;

However, RIA firms are not without risk if they opt to have their dispute decided through a FINRA arbitration.  In particular, if the facts of the case are very problematic for the firm, it may not want to have seasoned securities professionals deciding their case, and applying the higher “fiduciary” standard of care applicable to RIAs and Investment Adviser Representatives. Additionally, if RIA firms choose to arbitrate through FINRA, the decisions will be publically available on the FINRA website.  By contrast, an arbitration conducted by AAA will be private because the decisions in such cases are not posted publicly. 


FINRA’s decision to make its arbitration arm available to RIA firms for resolving disputes with their customers (as well as their departing personnel) offers an intriguing new option for these firms and their professionals.  But RIA firms should retain qualified legal counsel as soon as any customer dispute arises--and before any litigation actually ensues--in order to assess whether it makes sense to propose using FINRA’s arbitration forum given the facts and circumstances of the particular dispute.

How Investment Advisors Can Hide Endorsements In Their LinkedIn Profiles To Be Compliant: The Movie
Wednesday, December 19, 2012 10:21

RIAs know that they're not supposed to have any form of testimonials in their advertising materials. On LinkedIn, that has always meant not posting any "recommendations" to your profile. About two month ago, LinkedIn added "endorsements" to everyone's profiles, and investment adviser reps must now turn those off.


Bill Winterberg, CFP, a technology consultant who writes regularly about advisor technology, has made a very helpful two-minute video that shows you how to remove LinkedIn endorsements from your profile.  It's not a Hollywood blockbuster, but it is very helpful. 

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Twitter Has Started Rolling Out The Option To Download All Your Tweets
Monday, December 17, 2012 10:52

Tags: compliance | RIA compliance | Social Media

In a move that could put an end to the growing number Twitter archive apps, Twitter is reportedly beginning to roll out its own app for downloading a history of all your tweets in a compressed file.

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The first report of the new option that in the wild was reported by a Twitter user to The Next Web, which says  the archive download supposedly can be found - for those who have it enabled – at the bottom of your Settings page.


Whethet the new feature will allow RIAs to satisfy regulatory requirements remains to be seen, but it sounds promising.




AdvisorOne Conducts Advisor Poll Weighs In On Who Should Be Schapiro's Successor And What Should Be The SEC's Top Priorities
Thursday, December 13, 2012 21:24

Tags: registered investment advisors | regulation | sec

Today, December 14, is SEC Chief Mary Schapiro’s last at the commission. Elisse Walter will serve as interim chairperson but there is still open speculation on who will ultimately head the commission.

Advisor One conducted a poll to let advisors weigh in on who they think should be the next chairperson.

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Sallie Krawcheck was the top pick of 27% of respondents. Seventeen percent said an actual advisor should take over. Third pick was Robert Khuzami, Schapiro’s director of the enforcement division, at 16%.
When asked what should be the SEC’s top priority, 43% cited a need for better training and knowledge of SEC examiners.
Broadening the fiduciary standard to apply to brokers as well as investment advisors was the choice of 24%. Thirteen percent said the SEC should have better funding.
Respondents gave poor grades to the current effectiveness of the regulatory system, saying it failed to protect the integrity of the markets and also failed to offer a level playing field for all advisors.
David Tittsworth, executive director of the Investment Advisor Association, thinks the new chief should be someone who has experience in the investment advisory industry, not just in the securities industry as a whole.
He says Schapiro has faced significant challenges and a good amount of criticism during her tenure. But many say she stabilized the agency during a time when people were talking about doing away with the SEC altogether.


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