FINRA Announces Escalation of High-Risk Broker Program
Thursday, November 28, 2013 12:28

Tags: compliance | FINRA

Facing government pressure to crack down on the industry's most problematic registered representatives, FINRA announced a program in February 2013 to focus on what it deems "high-risk brokers."  Now FINRA is expanding the program.

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As a result of this initiative, FINRA has conducted expedited investigations of 42 advisors, and barred 16 individuals, according to a letter recently published by FINRA's CEO, Richard Ketchum.
Mr. Ketchum's letter indicated that FINRA will be expanding the high-risk broker enforcement program in 2014, including the creation of a dedicated team to investigate misconduct.
Ketchum did not describe the exact methods that FINRA's Office of Fraud Detection and Market Intelligence uses in order to identify advisors engaging in suspicious conduct. However, in addition to the high-risk broker enforcement program, FINRA utilizes a computerized risk-analysis "broker migration model" to track representatives who previously worked at FINRA Member Firms that have been expelled, as well as a separate "problem broker model" tool that scrutiinzes representatives who have had multiple customer complaints or other serious problems disclosed on their CRD records. 
Overall, FINRA barred 1,342 registered representatives from the industry from January 2011 through September 2013.

An Open Letter To SEC Chair Mary Jo White: Please Modernize The RIA Testimonial Rule So That Consumers Could Rely On The Web To Connect Them With The Best Advisors
Saturday, November 09, 2013 16:18

Tags: client communications | client feedback | content marketing | investment advisors | registered investment advisors | regulation | sec | Social Media

Dear Mary Jo:

The Securities and Exchange Commission needs to modernize – or at the very least provide greater clarity -- about its rule prohibiting RIAs and IA reps from using anything approaching a testimonial in their advertising. I know you're pretty busy but please read through what I am saying because I have a good point.
The current rules on social media use by RIAs are stifling competition and preventing the best advisors from helping more consumers. I’m not a libertarian and I’m not invested in any political party’s agenda. But I do know about social media, financial advisors, and RIA compliance and I’m telling you that what you’re doing is bad for consumers and advisors.
Social media can connect consumers with the best investment advisors at a lower cost if the testimonial rule were updated to allow advisors to use “Likes,” star ratings, Google reviews, and LinkedIn endorsements and recommendations in their marketing materials and Form ADV.

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Admittedly, there is a risk that, given the freedom to use crowd-sourced data in advertisiing, some RIAs might try to rig the system by engaging in deceptive Internet marketing practices to increase their Likes, star ratings and Linked recommendations and endorsements. But an advisor can use a phone to commit fraud and the SEC does not ban the use of the telephone by advisors. In fact, it doesn’t even require you to keep a record—much less a recording—of all client phone calls!
Regs supporting the Investment Advisers Act of 1940 have historically changed to accomodate new media and communication systems over the past seven decades, enabling advisors to communicate and advertise using fax machines, email, and websites. Social media is just another medium for communication. If advisor is hellbent on defrauding people, the mode of communication is not the cause.  
And if you’re really worried about an advisor gaming the system by generating fake reviews, recommendations or star ratings from non-existent people or tricking people into liking them, simply impose stiff penalties—like a lifetime ban from the investment advice business.
The SEC has been incredibly opaque about RIA use of social media and it's hurting consumers as well as the good, honest, hard-working professionals who would benefit most from increased transparency.
Fixing all this is pretty easy. Start by getting the agency to answer some very basic questions:
1.       Can RIAs and IA reps make a “Facebook” fan page for an RIA or IA rep?
2.       Can an RIA and IA Rep advertise how many fans or likes are accumulated?
3.       Can an RIA and IA rep make a fan page on Facebook for an idea or solution (i.e., an RIA or IA rep might post a fan page for Miami Beach Index Fund Investors, a charity event, or for Retirement Income Portfolio Solutions)?
4.       Can RIAs and IA reps show endorsements and recommendations on their LinkedIn profile page?
5.       Can RIAs advertise their Google Reviews and ratings on their websites and elsewhere? (Why not? Since they do not control what other people say about them, why no allow them to use crowd-sourced data in ads and Form ADV?)
6.       Are there some boilerplate disclosures you would like RIAs and IA reps to use when signing people up as connections or on their social media pages?
With great respect for your work and reputation, I ask you to consider helping the SEC get out of the way and allowing the transparency of the Web to connect the best advisors with consumers at better prices. 



SEC Bars Four CPAs For Audit Failure; Rare Prosecution Of CPA Auditors For Failing To Fulfill Their Professional Obligations Raises A Question For Financial Advice Professionals
Thursday, November 07, 2013 17:28

Three New York CPAs today were prohibited from practicing before the Securities and Exchange Commission for at least five years, and another was barred for at least three years. Should it have been a lifetime bar?


It's rare that the SEC bars a CPA from a small audit firm because it is usually too difficult to establish that the accountant should have known a fraud was amiss. If someone is intent on fraud, it can be hard to detect. However, in this case the most basic financial facts about the company appear not to have been verified by the auditors.

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The SEC says the CPAs, from Sherb & Co. LLP, engaged in improper professional conduct in auditing two China-based companies, China Sky One Medical (and another called--you can't make this stuff up--Wowjoint). On September 4, the SEC charged China Sky and and its chief executive with fraud for recording fake sales of a weight loss product to inflate revenues in the company’s financial statements to the tune of $1 million a month.


If, like me, you are fascinated by fraud stories, check out this one. China Sky traded as high as $23 a share in January 2010. It now trades for 12 cents.


"China Sky One Medical Inc. (CSKI) falsely stated in 2007 annual and quarterly reports that it had entered into a strategic distribution agreement with a Malaysian company that would become the 'exclusive' distributor of CSKI’s 'slim patch' in Malaysia and generate $1 million per month in sales," according to the SEC's September release in the China Sky case. "However, the company never actually entered into any such agreement.  CSKI instead created approximately $19.8 million in phony export sales to Malaysia that were recorded as revenue in its financial results for 2007 and 2008."



Point is, if revenue can be fabricated so easily and the existence and fulfillment of major contracts by pubicly-held companies are not verified by the auditor, that's a major  failure by the professionals involved and getting barred three or five years just isn't enough.


Let these guys keep their professional designations, so they can earn a living preparing taxes for the rest of their lives. That's a fate worse than jail.


But if a CPA is guilty of failing to fulfill his or her professional obligations as an auditor, as the SEC charged, the SEC should not let them ever practice again as an auditor of publicly held companies.  


Nowe here's an exercise for those of you who want the delivery of financial planners and investment advisors to be a profession. If a financial advisor is guilty of gross incompetence, would he or she get the same treatment as the CPAs--accepted professionals.  The answer: No.


The SEC does not prosecute IA reps for failing to fulfill their professional obligations. If you want to have a profession, shouldn't the SEC be able to do that? 


SEC Rewards Whistleblower With $150,000 Payout; This Is One Part Of Dodd Frank That Is Working
Monday, November 04, 2013 10:50

Tags: compliance | fraud | sec

The Securities and Exchange Commission today announced an award of more than $150,000 to a whistleblower whose tips helped the agency stop a scheme that was defrauding investors. 

While the July 2010 enactment of Dodd-Frank legislation has been a slow and messy process, this was the sixth whistleblower to be awarded through the SEC’s whistleblower program since it began two years ago. This will help increase trust in the U.S. investment system.

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Board of Governors Authorizes FINRA To File Recruitment Compensation Proposal With SEC
Thursday, October 10, 2013 09:50

Tags: breakaway brokers | compensation | FINRA | registered reps

The Financial Industry Regulatory Authority (FINRA) today announced that its Board of Governors approved a proposal requiring brokers to disclose recruitment compensation paid to them as an incentive to move to a new firm. The proposal needs to be submitted to the Securities and Exchange Commission (SEC) for review and approval. If approved, brokers would need to disclose their recruitment compensation to any customers that choose to follow them to their new firm for a full year.

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The proposal contains two components, according to a FINRA press release: a disclosure obligation and reporting to FINRA. The disclosure requirement would apply to recruitment compensation – including signing bonuses, up-front or back-end bonuses, loans, accelerated payouts, and transition assistance – of $100,000 or more, and to future payments (trade-based or asset-based) contingent on performance criteria. Firms would be required to disclose to their customers the compensation paid to the transferring representative in ranges. The first range would be $100,000 to $500,000; the next would be $500,000 to $1 million; followed by increasingly larger bands.




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