Broker-Dealer

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The Commodity Futures Trading Commission (CFTC) recently brought its first enforcement action arising from the Dodd-Frank requirement that swap transactions be reported to a registered swap data repository (SDR). The CFTC has emphasized that the accuracy and completeness of swap reporting is essential to enhance market transparency, promote standardization and reduce systemic risk.

Reflecting increased regulatory willingness to discipline principals and supervisors, FINRA recently announced that it had imposed an industry bar on the former president of a defunct broker-dealer, along with five registered representatives who likewise were barred in all capacities. FINRA also barred two former principals from continuing to act in a principal capacity and imposed additional sanctions on other former employees.

As we wrote about here, in April the Department of Labor issued its highly anticipated, re-proposed regulation addressing the standard of care for broker-dealers and other financial professionals who provide retirement investment advice. Since its release, the proposed rule has come under fire from critics who maintain that the DOL proposal, while well intentioned, will ultimately limit access to affordable retirement services and result in investor confusion. Last week, the chorus of opposition grew louder as the proposed rule’s 90-day notice-and-comment period came to an end.

Sensing the growing opposition, earlier this month Timothy Hauser, the Deputy Assistant Secretary for Program Operations in the DOL’s Employee Benefits Security Administration (“EBSA”), signaled that the DOL is open to reworking its controversial fiduciary proposal. Speaking at a meeting of the Securities and Exchange Commission’s Investor Advisory Committee, Mr. Hauser said that, while the DOL is committed to addressing the issue of conflicted investment advice, the agency is not “wedded to any particular choice of words or regulatory text.”

Earlier this month, the Securities Industry and Financial Markets Association (“SIFMA”) released its “Proposed Best Interests of the Customer Standard for Broker-Dealers” – an alternative to the U.S. Department of Labor’s (“DOL”) proposed regulation addressing the standard of care for broker-dealers and other financial professionals who provide retirement investment advice.  Unlike the DOL’s proposed rule, which we wrote about here, SIFMA’s across-the-board proposal emphasizes disclosure and investor consent as mechanisms to promote a uniform “best interest” standard.

In remarks accompanying SIFMA’s announcement, Kenneth E. Bentsen, the organization’s President and CEO, reiterated SIFMA’s support for a uniform standard to govern broker-dealers and investment advisers providing investment advice to retail customers.  Mr. Bentsen highlighted a number of issues with the current DOL proposal, expressing specific concern that it would limit access to affordable retirement services and result in investor confusion.  Mr. Bentsen explained that, given the increased liability risk and compliance costs associated with the current DOL proposal, firms have indicated that, if enacted, they plan to shift their commission-based brokerage accounts to (more expensive) fee-based accounts.  Because, according to Mr. Bentsen, most firms are willing to provide fee-based services only for higher-balanced accounts, this could potentially leave millions of consumers with “no option for advice or guidance.”  In addition, Mr. Bentsen said that “it is hard to see how investors won’t be confused” by the DOL’s proposed rule, which will apply different standards to broker-dealers when they provide retirement-related investment advice than when they provide investment advice that is not retirement related.

Last week, Richard Ketchum, Chairman and CEO of the Financial Industry Regulatory Authority (“FINRA”), doubled-down on his recent criticism of the U.S. Department of Labor’s (“DOL”) proposed regulation addressing the standard of care for broker-dealers providing retirement investment advice. Speaking at FINRA’s annual conference, Chairman Ketchum said that, while he supports a “best interests of the customer” standard, the DOL’s proposal – which we wrote about here – is “not the appropriate way to meet that goal.”

Chairman Ketchum expressed particular concern over language in the DOL proposal that would require an advisor to make recommendations in the best interest of the customer “without regard to the financial or other interests” of the advisor. He worried that this language could lead to class action lawsuits and arbitration where the standard would be misapplied, stating, “I’m not sure, but I suspect, a judicial arbiter might draw a sharp line prohibiting most products with higher financial incentives no matter how sound the recommendation might be.”

FINRA recently released updated and revised Sanction Guidelines and an accompanying Regulatory Notice that, among other things, call for stricter penalties against broker-dealers who commit fraud or violate suitability rules. The revisions are effective as of May 12, 2015.

The Sanction Guidelines, first published in 1993, are intended to assist FINRA’s adjudicators in determining the appropriate disciplinary penalties for violations of the FINRA rules. Rather than provide predetermined or fixed sanctions for particular violations, the Sanction Guidelines provide a suggested range of penalties for such violations and allow adjudicators to consider various factors in determining the appropriate penalty. The Sanction Guidelines provide members and associated persons with an understanding of the sanctions associated with particular violations, thereby facilitating settlements.