Sutro at SIFMA-CL (Day 3)

SOME ARE CALLING PRIVACY AND THE SOON TO BE AMENDED REG S-P “THE NEW AML” FOR BROKER-DEALERS


In March 2008, in response to increasing identity theft and concern for protection of customer privacy, the SEC announced significant proposed changes to Reg S-P. (SEC Notice). Comments on the proposed rules are due to the Commission by May 12, 2008. Many senior legal and compliance professionals attending the SIFMA CL Conference in Orlando, Florida compared the requirements of proposed Regulation S-P to the rigors of AML compliance. If adopted as proposed, the new privacy rules will present significant financial and administrative burdens to broker-dealers.

The proposed rules broaden the definition of non-public customer information and set forth stricter standards for handling, protecting, disposing and sharing customer information. The rules require regular privacy risk assessments and stricter identification and management of potential threats and vulnerabilities. They also set forth a road map for notifying customers of any actual or potential privacy breaches.

The Reg S-P amendments also include a new exception that will allow registered representatives or advisors moving from one financial services firm to a new firm to take certain limited customer information. This exemption appears to mirror the terms of the Broker Protocol which has been in place between and among numerous financial services firms for some time.

Sutro at SIFMA-CL (Day 2)

SALES TO SENIORS IS EMPHASIZED AT ANNUAL SIFMA CL CONFERENCE

Sales to Seniors is unquestionably the hot topic at the 40th Annual SIFMA CL Conference in Orlando. FINRA, the SEC, compliance professionals, in-house and outside counsel are highlighting and stressing the need for firms to focus on the propriety of their sales practices and adequacy of their supervisory procedures related to marketing, selling and communicating with senior clients.

The regulators remind the industry that there are no special rules for seniors. Rather, suitability standards, the firm’s sales and marketing policies and the firm’s written supervisory procedures should encompass all issues related to sales to seniors (FINRA Notice).

Some considerations when serving senior clients include:

· age
· life stage
· liquidity needs
· retirement plans
· diminished capacity
· heirs, fiduciaries and estate planning issues
· client sophistication and suitability of product
· commission versus fee-based arrangements

Firms should be surveying, testing and validating their supervisory policies and procedures to assure protection of senior clients. Firms should be training their sales forces and adopting best practices related to sales to seniors.

Sutro at SIFMA-CL (Day 2)

SEC ANNOUNCES 11 AREAS OF SCRUTINY FOR THEIR 2008 BROKER DEALER EXAMS


At the SIFMA CL General Session, the SEC announced eleven areas of scrutiny for their 2008 Broker/Dealer examinations:

1. Valuations.
2. Adequacy of firm internal controls over material non-public information, including written supervisory policies and procedures and testing.
3. Retail sales practices. Particular focus on sales to seniors (SEC Report), suitability of sales of CMO’s, structured products, limited partnerships, REITS and other alternative investments.
4. Supervision. Particular focus on any unsupervised firm activities, any failure to implement and test written supervisory procedures and on the adequacy of supervision of “independent brokers”.
5. Given current market conditions, the SEC will be looking at net capital and the firm’s internal controls around the calculation of net capital.
6. Trading issues. Particular focus on best execution and Reg SHO compliance.
7. Fixed Income. Particular focus on pricing, mark-ups, suitability, CMOs, asset-backs, and G-37 “Pay to Play” compliance.
8. Rating agency scrutiny.
9. Conflicts of Interest. Particular focus on whether Advisors are paying to be on a preferred B/D recommended list and whether firms are recommending securities in which the firm has a financial or ownership interest.
10. AML. Particular focus on adequacy of independent testing.
11. Information and account security. Particular focus on Reg S-P controls to protect customer information. Particular focus on outside vendor outsourcing and the vendor’s protection of non-public customer information.