THE AMERICAN LAW INSTITUTE Continuing Legal Education. The Independent Broker-Dealer Legal and Compliance Forum September 14, 2012 New York, New York

Transcription

1 1 THE AMERICAN LAW INSTITUTE Continuing Legal Education The Independent Broker-Dealer Legal and Compliance Forum September 14, 2012 New York, New York Broker-Dealer Supervision By Clifford E. Kirsch Issa J.Hanna New York, New York 2012 Sutherland Asbill and Brennan LLP. All Rights Reserved.

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3 3 I. Introduction...3 II. Supervision Basics...3 A. The Securities Exchange Act of 1934 ( 1934 Act )...3 B. FINRA Rules...3 III. The Establishment and Maintenance of a Supervisory Structure...4 A. Rule B. Designation of Principals...4 C. Designation of FINRA Offices Offices of Supervisory Jurisdiction Branch Offices and Non-Branch Locations...6 D. Assignment of Registered Persons to Registered Principals...7 Sutherland Asbill and Brennan LLP E. Reflection of a Firm s Supervisory Structure in Its Written Procedures...8 Broker-Dealer Supervision of Representative Outside Activities...8 A. Background...8 B. The Current Regulatory Framework FINRA Rule 3270 Outside Business Activities NASD Rule 3040 Private Securities Transactions Form U-4 Question 13 Other Business Form ADV Part 2B Preparing a Brochure Supplement Item 4 Outside Business Activities...11 C. SEC/FINRA Guidance NASD Notice to Members (Sept. 12, 1986) Compliance with the NASD Rules of Fair Practice in the Employment and Supervision of Off-Site Personnel Notice to Members (May 1998) NASD Reminds Members of Supervisory and Inspection Obligations Notice to Members (June 1999) NASD Provides Guidance on Supervisory Responsibilities Notice to Members (December 10, 2001) Selling Away and Outside Business Activity SEC Staff Legal Bulletin No. 17, (March 22, 2004) Remote Office Supervision SEC/FINRA Joint Risk Alert (November 30, 2011) Brand Office Audits...13 D. FINRA Exam and Enforcement Focus...14 E. Practical Compliance Considerations...17 V. The Supervision of Non-Securities Activities...19 A. The Supervision of Equity-Indexed Annuity Products Methods for Supervising EIA Sales FINRA Regulatory Focus Exchanges of Securities to Purchase EIAs...20 B. Supervision of Investment Advisory Activity FINRA Position on Brokerage Firm Duty to Supervise Representative Advisory Activity...20 a. Supervision of Representatives Independent Advisory Activity...20

4 4 VI. 2. Due Diligence of Third-Party Advisers Solicitor v. Adviser Activity Advisory Fees on Top of Securities Commissions Broker-Dealer Supervision of Financial Planning Activity...22 Special Supervisory Structure Issues Concerning Geographically Dispersed and Remote Sales Offices...23 A SEC Enforcement Action...24 B. FINRA Notice to Members C. SEC Staff March 2004 Guidance

5 5 I. Introduction In this outline, we examine the obligation of a broker-dealer firm to supervise and control its activities, including those of its personnel. We first look at the basic requirement to supervise and then look at the requirements to establish and maintain a supervisory structure. We then turn to broker-dealer supervision of outside activities conducted by representatives; the supervision of non-securities activities; and the supervision of remote offices. II. Supervision Basics A. The Securities Exchange Act of 1934 ( 1934 Act ) Section 15(b)(4)(E) of the 1934 Act directs the SEC to take administrative action against a broker-dealer or its associated person for supervisory failures. More specifically, that section provides that sanctions may be imposed if a firm (or individuals at the firm) has failed reasononbly to supervise, with a view to preventing violations of the provisions of [the federal securities laws, including the Commodity Exchange Act or the Municipal Securities Rulemaking Board], another person who commits such a violation, if such other person is subject to his supervision. (Emphasis added) The Section further provides that no person shall be deemed to have failed reasonably to supervise any other person if-- B. FINRA Rules [T]here have been established procedures, and a system for applying such procedures, which would reaonably be expected to prevent and detect, insofar as practicable, any such violations by such other person, and [S]uch person has reasonably discharged the duties and obligations incumbent upon him by reason of such procedures and system without reasonable cause to believe that such procedures and systems were not being complied with. Current NASD Rules and FINRA Rule 3130 which was formerly NASD Rule establish the required framework of broker-dealer supervisory programs. We discuss these rules extensively below. NASD Rules would be overhauled by certain pending FINRA rule proposals which are being advanced as part of its Rule Consolidation Initiative. 2 1 See FINRA Regulatory Notice (Oct. 16, 2008); Exchange Act Rel. No (Sept. 26, 2008), 73 Fed. Reg (Oct. 2, 2008). 2 See FINRA Regulatory Notice (May 14, 2008). This proposal would replace NASD Rules 3010, 3012 and 3040 with FINRA Rules 3110 and Proposed Rule 3110 would set forth requirements relating to a firm s supervisory system, written procedures, and internal inspections. The rule would be 3