Archive for March, 2013

FINRA Seeks More Transparency in Disciplinary Information

Monday, March 25th, 2013

According to an article in InvestmentNews, a recent FINRA rule change will permit the SRO to make pending regulatory complaints more consistently available across all of FINRA’s publicity channels. The new rule brings FINRA’s practice of disclosing disciplinary events closer in line with the SEC’s, which today posts most of its complaints on the agency’s website.  Currently, most pending FINRA complaints are disclosed only in summary form on the separate BrokerCheck system, based on disclosures made on the U4 form.  Unlike the SEC, FINRA itself will not usually release the complaint.  The new rule will now make FINRA actions, including most complaints, much more publicly visible.

Opponents of the rule change claim that a full release of official complaints will be prejudicial to the FINRA arbitration process. In addition, FINRA tends to cast a much broader net in its investigations in comparison to the SEC, and hauls in far more actions including those for misconduct that some in the industry would consider relatively minor.  The proposal is currently up for comment for a 21 day period.

MA’s Supreme Court Rules Zip Codes Are Considered “Personal Identification Information”

Monday, March 25th, 2013

This month, Massachusetts’ highest court weighed in on the boundaries for what types of consumer information qualify as “personal identification information”, and thus, afforded special protections under the State’s Privacy Statute.  Recently, the Supreme Court of MA held that personal identification information includes a person’s zip code.  While the case, Tyler v. Michaels Stores, Inc., was primarily about a merchant’s collection of information on a credit card transaction, the ruling has implications on MA privacy regulations in general, especially when determining information that a departing representative can take with them.

Brian Hamburger Quoted in Saturday’s Wall Street Journal Defending Independence

Saturday, March 16th, 2013

In Saturday’s Wall Street Journal, Brian Hamburger was asked about the latest SEC Risk Alert on Custody and used the platform to caution investors about traditional brokerage custody arrangements.  He advised investors to ask 3 questions of their financial advisor to ensure their money is safe:

You want maximum independence between your investment adviser and the custodial firm he uses. Remember, convicted Ponzi schemer Bernard L. Madoff used a custodian affiliated with his own company, making it easier for him to play tricks with his clients’ money.

Brian Hamburger, managing director at MarketCounsel, a consulting firm in Englewood, N.J., that helps investment advisers comply with financial regulations, suggests asking your adviser three questions: Where will my assets be held? Is there any affiliation between your firm and that custodian? And what is your business relationship with that firm?

You can’t keep your money absolutely safe. But you can at least make sure it is in the right kind of safe.

The full article can be accessed using firm credentials at

@WSJ: Brian Hamburger advises investors to ask 3 questions of their financial advisor to ensure their money is safe.

Saturday, March 16th, 2013

@RIABiz: Dan Bernstein among the “’Who’s Who’ of the most sought-after industry experts” that presented at FPA’s BSC.

Tuesday, March 12th, 2013

@newsfromIN: Dan Bernstein advises “don’t panic” about SEC Risk Alert on Custody Rule but “get your ducks in a row.”

Tuesday, March 12th, 2013

MarketCounsel Comments on Proposed FINRA Compensation Rule

Tuesday, March 12th, 2013

MarketCounsel commented on a proposed FINRA rule, proposed through Regulatory Notice 13-02, that would require registered reps to disclose any “enhanced compensation” that they received for transitioning employment to another firm.  Enhanced compensation would include most traditional incentives such as signing bonuses and forgivable loans.  MarketCounsel told FINRA that we believe that their proposed requirements are narrowly construed and overly burdensome.  The full text of the comment, which was submitted by email, follows.

“MarketCounsel appreciates the opportunity to comment on the proposed rule discussed in Regulatory Notice 13-02, Disclosure of Recruitment Compensation Practices.  MarketCounsel and its affiliated law firm, the Hamburger Law Firm, have worked with hundreds of transitioning brokers who have been offered and/or received “enhanced compensation” for transitioning employment to another firm and others that have received additional compensation by their current firm to stay put and not move to another firm.  MarketCounsel believes that customers are entitled to disclosure of any material conflict of interest and compensation arrangements between brokers and their firms that incent any behavior over another are material to the customer.  Because we believe that compensation intended to encourage an action should be disclosed, MarketCounsel feels that retention compensation should be disclosed as well.

“As discussed in FINRA’s Regulatory Notice, enhanced compensation on transition has long been a concern amongst regulators and broker-dealers alike. MarketCounsel believes that it is in the best interest of clients and brokers to require disclosures about enhanced compensation.  We further believe, however, that the specificity of the disclosure that FINRA is seeking is too narrow yet overly burdensome in its specificity.

“MarketCounsel feels that disclosure of the conflict of interest, including a description of the type of, and reason for, enhanced compensation along with the potential outcome that the conflict may   bring about is sufficient notification to clients.  Requiring full and specific disclosure of the amount of the enhanced compensation does not permit brokers to explain the justification, allocation, and duration of service in what may otherwise be a customary and reasonable arrangement.  Clients can always ask more questions about the enhanced compensation arrangements to which brokers are obliged to respond consistent with their duty of good faith and fair dealing.

“We once again appreciate the opportunity to comment on this proposed rule.

Brian S. Hamburger, Managing Director
Daniel A. Bernstein, Director of Research + Development MarketCounsel, LLC”

Former SEC Chairman Pitt puts his weight behind instituting SRO investment adviser exams

Tuesday, March 12th, 2013

Speaking at the Investment Adviser Association conference in Arlington, VA this past Thursday, former Chairman Pitt, reported AdvisorOne, while acknowledging that the SEC has a focused and sophisticated exam program, suggested that the agency lacks the necessary personnel and funding to effectively institute this program and examine advisers and postulated that a self-regulatory organization like FINRA, along with outside compliance audits would be key in resolving the issues faced by the beleaguered SEC.

Echoing these sentiments was Carlo di Florio, director of the SEC’s Office of Compliance Inspections and Examinations, who, as recounted by AdvisorOne, after the conference told reporters that the agency was “indifferent” as to whether fees assessed by the Commission or an SRO should be used to help the Commission improve adviser exams but that he welcomes congressional action authorizing an SRO. “The problem to solve is to increase the number of adviser exams we conduct.”

Currently, it is not known in which direction incoming SEC Chairwoman Mary Jo White is leaning.

SIFMA gives FINRA approval on a proposed rule requiring disclosure of recruitment compensation packages

Tuesday, March 12th, 2013

As reported by AdvisorOne, it is widely believed that the Securities Industry and Financial Markets Association’s support of a rule requiring registered representatives of a broker-dealer disclose recruitment compensation packages to clients will lend sufficient support to the proposed rule to ensure its passage.

FINRA’s proposed rule states that “customers would benefit from being told the material conflicts arising from a registered person being paid recruiting incentives to change firms.”  SIFMA told FINRA in its March 5 comment letter that “enhanced compensation paid to a registered representative as a recruitment incentive, when a conflict of interest, should be the centerpiece of the proposed rule.”  Though there are details to solidify, the rule appears to be a “done deal.”

Strangely, the comment period closed on Tuesday without any comment from the major wirehouses.

SEC to Review 12(b)-1 and Other Mutual Fund Fees

Tuesday, March 12th, 2013

As reported by InvestmentNews, the Securities and Exchange Commission plans, in the coming week, to initiate a nationwide review of mutual fund distribution fees. Distribution fees typically include marketing and selling costs involved with running a mutual fund. To cover these costs, the companies that run mutual funds are permitted to charge fees known as 12(b)-1 fees. In the coming year, the SEC is looking to examine mutual fund fees that include not only 12b-1 fees but also sub transfer agent, revenue sharing and conference fees. Regulators appear to be concerned that the payment of these fees may give certain mutual funds preferential treatment and actually increase costs for investors. Andrew Bowden, deputy director of the SEC’s Office of Compliance Examinations and Inspections, was quoted by InvestmentNews last week as saying that the SEC plans to determine “whether such payments are made in compliance with regulations,  including Investment Company Act Rule 12b-1, or whether they are instead payments for distribution and preferential treatment.” Bowden went on to say that the SEC also plans to launch examinations focused on the use of alternative investments in mutual funds. “These reviews will be designed to determine whether the strategies and products comply with regulations that require the funds to have daily valuations and liquidity, and limit the use of leverage.”

The Commission is trying to ascertain exactly what services are being provided by payment of these fees and whether there is any degree of oversight over such payments.  Many believe the results of these examinations will be used to revise a proposal on 12(b)-1 fees released in 2010.  The SEC’s 2010 proposal sought to: (1) protect investors by limiting fund sales charges; (2) improve transparency of fees for investors; (3) encourage retail price competition; and (4) revise fund director oversight duties.