Dept of Labor Stepping Up to Fiduciary Responsibility for Retirement Advisers

February 2016 update -
Proposed rule:  Labor Department proposes to hold retirement investment advisers to a fiduciary standard, forcing them to avoid conflicts of interest that include sales based on commission and sales performance compensation.  

Assuming the rule is added to the law books, variable annuity issuers will likely find themselves shifting from paying out upfront commissions (around 8%) to returns on investor paid on-going fees. The rule would affect large insurance companies such as MetLife, Prudential, and Lincoln National; smaller brokerages and advisers are similarly impacted. Industry wide concerns are the entire variable annuity retirement savings sector will be thrown into flux for the first year. Sales of variable based annuities have been close to $140 billion per year recently. More than half of these sales are attributed to retirement savings accounts.

Experts indicate variable annuities with guaranteed lifetime benefits are extremely complicated products and should be sold with caution. In recent years, high commissions on variable annuity investments have pushed advisers and insurance agents to sell the products even where the annuity may not be best suited for the investor. The result - regulators are issuing consumer advisories and taking increased regulation under their wing.  

Members of the financial industry threaten legal challenge once the final rule is in place. The change is huge for the annuity industry and some sellers may avoid the products going forward because of lower upfront compensation. Many advisers believe upfront commissions should remain the standard for variable annuities because most of the adviser work is done in the beginning when establishing the account. Others cite, the restrictions create an imbalance and disservice to consumers who benefit from annuities; and that the industry is already highly regulated.

The proposed rule by the Department of Labor is designed to reduce conflicts of interest by requiring brokers working with retirement funds to act in the client’s best interest. Retirement vehicles with annual fees of 3-4% and a surrender charge of 7% (or more) is too often recommended as the best retirement vehicle; and often results is retirees who own high-fee products that erode retirement savings.  

With the proposed rule back on the table and likely to pass, brokers and insurance agents will be pressed to update conflict of interest policies and procedures.  FINRA focus on senior and vulnerable investors has increased over the past years. In 2016 FINRA plans to make treatment of senior investors a priority and urges firms to monitor investor accounts for red flags like; overly aggressive investments, unusual asset movements, and an unusual number of high cost products driving unsuitable recommendations.

April 2015 FINRA launched a Securities Helpline for Seniors (HELPS) and a toll-free number where senior investors can call and get assistance about their brokerage accounts or raise concerns. Armed with information from over 2500 calls, FINRA released an end of year report on effective practices brokers  and investors can take to establish a healthy working relationship that provides for the best interests of the investor as well as a suitable role for the broker.

Read the FINRA Securities Helpline for Seniors Report 2016

What do you think? Are these updates way overdue or right on time?

RND Resources Inc is a compliance and audit consulting firm serving broker-dealers, investment advisory firms, and fund managers.  We provide on-going compliance maintenance for firms as well as; #forensicanalysis, #mockaudits, #expertwitnesstestimony, suitability analysis, and custody compliance for securities regulated firms. Call #RNDResourcesInc for support (818) 657-0288 or visit our website at www.finracompliance.com

Taking #CyberSecurity to the Executive Level

Financial industry executives have a unique responsibility to protect investors and proprietary firm information from compromise. 

For FINRA (Financial Industry Regulatory Authority), cybersecurity protection measures include a broad swipe approach that covers compromise through use of any electronic digital media (e.g. computers, mobile devices, Internet based systems, ipads, software solution providers). And, no matter how much of the cyber security task is outsourced to IT professionals, the ultimate responsibility lands on the shoulders of each firms executive leadership.  For this reason cyber-security practices have taken a front and center seat in board room discussions that reach past IT to operations, sales, vendors, and anyone else with access to electronic company data.

RND Resources has created an action plan for compliance officers and executives leading  #cybersecurity initiatives for their firm. A comprehensive plan includes components such as; Cybersecurity Governance and #RiskManagement, Cybersecurity #RiskAssessment, Technical Controls, Incident Response Planning, Vendor Management, Staff Training, Cyber Intelligence &  Information Sharing, Cyber Insurance.  These topics are discussed more completely on our website at www.finracompliance.com . 

Tips for taking action:  Guideline for Cyber-Security Board Room Meeting

• Form a cyber-security committee to design, implement, and oversee day-to-day cybersecurity compliance efforts. Calendar regular reports and reviews to assess the activities and effectiveness of the team.
• Educate yourself on Information Security: Research and understand various types of cyber-security threats. Speak with industry colleagues about what firms are doing to protect themselves. Make assessing cyber threats and solutions a regular part of the business cycle.
• Know the plan. Read and keep a copy of information security policies handy. Make sure you thoroughly understand what to do in the event of an attack. Prepare as if an attack will happen one day, because chances are it will.
• Review the plan regularly to make sure it remains relevant and up to date with current threats and trends.
• Test the plan. Ask IT and other professionals or staff to try and break through the systems to see where the weaknesses are.  Run surprise or mock tests on your staff to see how they measure up on policy and procedures.
• Work with professionals to identify security issues and industry trends. Audit procedures and conduct forensic investigations following a breach or at regular intervals.
• Supplier Due Diligence. Vendors and suppliers have their own management weaknesses that present a threat. A motivated hacker may find their way in to your company records through an unsecure supplier system or other means. Test supplier and vendor portals for weaknesses and make sure the staff alerts appropriate parties of anything unusual.
• Prioritize the security to do list  Some risks are naturally greater than others.  Get an understanding of which efforts require the most resources and match them up with level of threat. Handle items that pose the greatest risks first. Set aside some time for simple fixes and plan for long term solutions.
• Create a cyber-secure culture   Make certain all staff has a clear understanding that cyber-security is needs are taken seriously. Ask them to consider cyber risks when hiring staff, adding new customer accounts, and establishing business partnerships.

RND Resources provides regulatory compliance services and consulting for broker-dealers, investment advisory firms, and fund managers. For assistance developing a cyber-security plan tuned to regulatory requirements, feel free to call us at 818.657.0288

SEC 2016 - Release of OCIE Regulatory Examination Priorities

Standing by its commitment to provide transparency and share information with industry registrants; the SEC has released 2016 examination priorities from OCIE, Office of Compliance Inspections and Examinations.  

According to Marc Wyatt, OCIE Director, “We hope that registrants will use this information to [evaluate] their own compliance programs.”

New areas of focus this year:    

Liquidity Controls |

September 22 2015 SEC voted to propose rule 22e-4, in order to improve liquidity risk management of open-end funds such as exchange-traded funds (EFTs) and mutual funds. The key feature of open-end funds is that they allow investors to redeem their shares daily. Thus, the funds must maintain liquid assets in order to meet shareholder redemptions. 2016 examination priorities will include a look at potentially illiquid securities and various controls in place to manage risk, valuation, liquidity, trading, and capital.

Public Pension Advisors |

Pay-to-play rule 206(4)-5 was adopted June 2010 to address the inherent issues related to the power public officials have in appointing an investment advisory firm to manage public pensions. The rule limits political contributions by investment advisors and other collusive activities like entertainment and travel. 2016 examinations will continue to focus on identification of undisclosed gifts.

Product Promotion & Disclosure | 

Existing and emerging investment products can be complex and high risk. For 2016, the OCIE asserts its commitment to protecting investors from sales practices that result in a breach of fiduciary responsibility or unsuitable investments.

Read more about the new areas of focus and additional risk management priorities to protect investors such as Cyber-Security governance.

On a broader scope, OCIE indicates sweeps to unravel risk across various types of industry business models such as; investment companies, broker-dealers, transfer agents, clearing agencies, and exchanges, areas of focus include:

• Protecting Retail Investors and Investors Saving for Retirement
  • Growing numbers of investors face a greater dependence on their own savings for retirement. The initiative to protect investors includes focus on basis for recommended investments, conflicts of interest, and marketing disclosure.
• Assessing Market-Wide Risks
  • Maintaining orderly and efficient markets is at the core of the SEC’s mission. Examinations will include a look into structural risks and trends, over multiple firms or entire industries.
• Using Data Analytics to Identify Signals of Potential Illegal Activity
  • Always striving to detect risk, the OCIE mines data intelligence from examinations and regulatory filings. Algorithms, data analysis, and review are leveraged to identify registrants and areas with elevated risk profiles.

RND Resources Inc is a leading compliance consulting firm helping broker-dealers, investment advisors, and fund managers meet regulatory compliance obligations. Visit our website for more details:  www.finracompliance.com

Are you a new broker-dealer or registered investment advisory firm needing help with cyber-security compliance.  We can help.  Call us for a quote (818) 657-0288 or visit our website for details.

a look in to FINRA's CyberSecurity Report - February 2015

Regulatory entities require registered broker-dealers, investment advisers, and investment companies to establish written procedures and policies designed to:

• Ensure security and confidentiality of customer records and information
• Protect against anticipated threats or hazards to security and integrity of customer records
• Protect against un-authorized use or access to customer records & information that could result in substantial harm or inconvenience.

Are your red-flag rules in place?  

Failure to govern cyber-security policies and procedures can result in fines and suspension to firms and individuals. Governance failures include: 

• Inadequate written policies and procedures
• Failing to enforce policies and procedures
• Failing to conduct periodic Assessments of Procedures and Measures
• Failing to respond to deficiencies identified through periodic assessments

This presentation takes a look in to CyberSecurity issues and recommendations identified by FINRA in their February 2015 report - CyberSecurity Practices Report

CyberSecurity Standards for Investment and Brokerage Firms from Amie Akridge