Welcome back to the Compliance in Context Podcast!  In this episode, we discuss the recent private fund rule proposals and explore how their adoption would affect the industry.  For an in depth review of the proposals, we are joined by Jeff Blumberg—Partner at Faegre Drinker and Chair Elect of the NSCP.  Our conversation spans Form PF, rule amendments for private funds under the Advisors Act, and what Jeff deems to be problem points for private funds in the future.  In the Headlines section, we cover President Biden’s recent Executive Order on Digital Assets, as well as the recent leadership changes underway at the SEC.   Finally, we wrap up the show with another installment of Outtakes, where a recent disciplinary action can provide the perfect punch list to make sure your broker-dealer firm is meeting its requirements to obtain best execution.   

Headlines

Outtakes

Quotes:

10:30 “A lot of these rule proposals they are coming up with, these are solutions looking for a problem, because a lot of these suggestions are already being pushed by the institutional investing population.” ~ Jeff Blumberg

16:37 “If the SEC could justify the time and expense these managers are going through to put this information together and say here is what we learned by looking at last quarter’s Form PF filings, that would absolutely be something the industry would appreciate.” ~ Jeff Blumberg

23:41 “I’ve never seen the SEC come in and say you didn’t get best execution.  What I’ve seen is them say you don’t have a process for pursuing best execution.  I think you have the same kind of situation here, which is, it’s not so much they’re going to say this was material so you’re going to get in trouble; they’re  going to say we think it’s material, you didn’t, but because you took a reasonable process and put it in place, the next time the same thing comes up you should treat it as material.” ~ Jeff Blumberg

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Compliance in Context 

Welcome back to the Compliance In Context Podcast! Today’s episode features the fifth in a series of shows we refer to as the Lessons From The Front Lines series. These shows focus on real-life, tough-to-tackle subjects that other industry professionals and regulators have faced on the front lines of our industry. Today we have the pleasure of speaking with Enforcement and Investigations Chief Richard Szuch of the New Jersey Bureau of Securities to discuss one of the most critical issues affecting the investment management industry—namely—how firms can address issues and challenges with senior investors and investors with diminished capacity.

Interview

Quotes:

“I would say, from the very beginning I was keeping an eye on victims, their profiles, and how they could be exploited. We definitely had cases, when I was a prosecutor, that were ‘white collar type crimes.’ And obviously bad actors are looking to exploit people that are vulnerable, whether it’s their age or if they have some other vulnerability.” - Richard Szuch

“Every state had a law that applies to exploitation to older people but it’s usually about their personal safety, whether their home is secure, whether they’re physically okay. Some states have exploitation regarding finances in their laws. But then there’s been a new group of laws that have developed with the advent of NASAA’s Model Act.” - Richard Szuch

“40 or 50 percent of the investment advisory firms surveyed had not really changed their way of doing business in the past five years. So if I were to say that there was one thing that really needs to get out there, it’s education for the investors and for the firms, about the importance of this structure to be put around their business.” - Richard Szuch

“NASAA just put out (with the SCC and FINRA) a training module that, in essence, mimics what I used to do when I was in private practice, to train firms about what they needed to know.” - Richard Szuch

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Compliance in Context  

Welcome back to the Compliance In Context Podcast! This episode, we welcome in Carlo di Florio, Chief Services Officer at ACA Group and Brian Rubin, a partner and leader of the Eversheds Sutherland securities enforcement practice to discuss the issue of CCO liability and the newly proposed NSCP Firm and CCO Liability Framework. In our Headlines section, we look the recent attention and rulemaking onslaught in the private funds space and discuss cryptocurrency enforcement trends. And finally, we’ll wrap up today’s show with another installment of History Has Your Back series where we honor the legendary Chinese workman and builder Yi Kaizhan to teach us a compliance lesson about precision.

Headlines

Interview

History Has Your Back

Quotes:

 “The two key principles of the framework (that you noted on the outset), impact the overall exam process. Right? So one is, I think the NSC framework does a really good job of emphasizing, taking a holistic approach to looking at the compliance program, and the culture within the firm, overall. And then two, doing so earlier in the regulatory exam or the enforcement of the investigative process.” – Carlo di Florio 

“We hope that FINRA and the SEC (and other regulators) might be able to use this Framework as a solid foundation by which to conduct parts of their investigation processes. But then again, another benefit would be for a persons (like yourself and others) that might be thinking about how to defend against an enforcement action, just to be able to show that there were other mitigating circumstances involved.” – Patrick Hayes

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Compliance in Context  

Welcome back to the Compliance In Context Podcast! On today’s show, we welcome the return of former NSCP Board Chair and all-around compliance expert, Craig Watanabe, to analyze some recent comments from SEC Chair Gensler around cybersecurity, and reveal some practical tips firms can use to enhance the cybersecurity measures inside their own firms. In our Headlines section, we look at the new NSCP Firm and CCO Liability Framework and its broader application to the industry. And finally, we wrap up today’s show with another installment of What’s On My Mind where we examine what an 80s classic song from Mike and the Mechanics and the life of John Madden can teach us about being the best compliance officer and CCO for your respective firms.

Headlines

Interview

What’s On My Mind?

Quotes:

 “Cybersecurity is almost always at the top or near the top of the list in terms of risks and I think that’s going to be the case for some time for this foreseeable future so it’s going to be a big risk for everyone, a big risk for the industry.” – Craig Watanabe  

10:12 - “I think Regulation SP is somewhat of a misnomer because the S stands for safeguarding and the P stands for privacy. But if you ask most people, ‘Reg SP?’ ‘Oh, yeah! Privacy.’ We kinda forget Section 30, which is the safeguarding part of the rule. And that’s where all cybersecurity regulation basically resides.” – Craig Watanabe

“In the Fortress Model, the idea is you create this fortress. Everything on the inside of the fortress, all the interior is safe and you try to keep all the unknowns (all the bad stuff) out. That model works really well when you have a centralized work environment and you have a centralized IP. It’s a perfectly reasonable, very usable, and a very functional model. That model, however, doesn’t work as well in a remote or hybrid work environment.” – Craig Watanabe 

“I think there has been a paradigm shift at Microsoft and other big vendors, with an emphasis on security. That’s clear to me. I don’t think Microsoft would have done these things prior.” – Craig Watanabe  

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Compliance in Context  

Welcome back to the Compliance In Context Podcast! On today’s show, we welcome the Marcia Wagner, founder of The Wagner Law Group and an expert in all things ERISA to discuss the impact of the new DOL Fiduciary Rule on the investment management industry and the upcoming compliance and enforcement deadlines. In our Headlines section, we look at recently proposed amendments from the SEC to its electronic recordkeeping requirements and the new SEC enforcement report. And finally, we’ll wrap up today’s show with another installment of the Outtakes series where we once again learn the importance of being honest and transparent with investors when it comes to disclosures.

Headlines

Interview

Outtakes

Quotes:

“The DOL treated five different types of transactions as rollovers, even though only some of them would constitute a rollover under the Internal Revenue Code.  These were plan-to-plan; plan to IRA; IRA to plan; IRA to IRA; and commission based account to fee based account.” – Marcia Wagner 

To satisfy PTCE 2020-02, financial institutions and investment professionals must acknowledge their fiduciary status in writing; disclose their services and material conflicts of interest; adhere to impartial conduct standards; adopt policies and procedures prudently designed to ensure compliance with the impartial conduct standards; document and disclose specific reasons why any rollover recommendations are in the participant’s best interest; and conduct an annual retrospective compliance review” – Marcia Wagner

“[I]in determining whether a retirement investor should rollover assets from a tax-qualified plan to an IRA, the financial institution or investment professional should take into account the retirement investor’s investment objectives, risk tolerance, financial circumstances and needs.  In addition, they should document the services available under the new arrangement; consider the long-term impact of any increased costs, determine why the rollover is appropriate notwithstanding any additional costs, and the impact of any economically significant investment features such as surrender schedules; index annuity caps, and participant rates.” – Marcia Wagner  

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Compliance in Context  

Welcome back to the Compliance In Context Podcast! Today’s podcast features the fourth in our Lessons From The Front Lines series which focus on real-life, tough-to-tackle subjects that other industry professionals and regulators have faced on the front lines of our industry. To help guide us through today’s conversation, we welcome in Neil Maitra and Haime Workie.  Whether it’s issues in AI, the cloud, custody, DEPs, crypto, gamification, and everything in between, the SEC’s FinHub and FINRA’s Office of Financial Innovation sit at the forefront of what’s happening in our industry.  So sit back, relax, and enjoy the crypto conversation!

Interview

Quotes:

“Our Office of Financial Innovation was actually only opened up about two and a half years ago. And its overarching mandate is really to facilitate innovation in a way that supports investor protection and market integrity, which is the overall mandate of FINRA.” – Haime Workie  

“So this idea of being excited about something new that you’re doing, that carries a bit of risk. But also having the ability to step back a little bit and say, ‘Look, you know, here are things we need to think about before we take on this new adventure.’ In a similar vein, as technology gets introduced to the marketplace, there’s a lot of excitement to be had about the potential ways it can benefit the investor, the firm, the marketplace. But it’s also important to step back and think about what are the risks that are being introduced into the system? And what are the implications of those?” – Haime Workie 

“[I]t's [SEC’s FinHub is] really kind of an all-arms group within the Commission itself...it really coordinates the SEC oversight and response regarding emerging technologies and financial regulatory and supervisory systems. Including specifically I think in the areas of distributed ledger technology. blockchain which forms are large part of our work, but also automated investment advice or what what's popularly called robo-advice digital marketplace financing and artificial intelligence machine learning. Those are also areas where we where we often get involved.” – Neel Maitra

“But what's been really introduced I would say, and it's fairly recent introduction in the past four or five years and kind of ramping up in the in the past one or two years, is this process where you have these app-based systems that provide nudges or provide influences that potentially steer investors a certain way. Many of these nudges or influences maybe things that are short of recommendations. But at least in my view, they are definitely designed to elicit certain types of behaviors and what we've heard is frequently firms will do A-B type of testing to see what type of behaviors are being elicited and which things, which ways of kind of having the APP interface is more effective in terms of eliciting those types of behaviors.” – Neel Maitra

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Compliance in Context  

Welcome back to the Compliance In Context Podcast! On today’s episode, we welcome in the President of the North American Securities Administrators Association, Melanie Lubin, for an insider’s look into what’s happening at NASAA including new areas of focus like continuing education, Reg BI, senior investors, and much more. 

In our Headlines section, the first-ever bitcoin-linked exchange-traded fund will began trading recently and the SEC provided comments on the regulatory issues involving GameStop trading from January of earlier this year.

Finally, we’ll wrap up today’s show with another installment of History Has Your Back, as we review a posthumous quote from one of the world’s most well-traveled chefs to better understand how we can maximize our knowledge in compliance.

Topics:

Headlines

Interview

History Has Your Back

Quotes:

“And really the ultimate goal is for us to make a determination about whether the rule as it stands is really moving has raised the bar for how brokers act in relationship to their clients and is it really driving the behavior towards the customers best interest.” - Melanie Lubin

“This is important—here's the explanation: customers, particularly elderly customers, tend to be worried that somebody's going to get their hands on their money and all the things that we've taught them to be worried about—But [we] want them to understand that a trusted contact is not a power of attorney, but it's someone that if you’re the person you have a professional relationship with starts to get a little bit worried about what's going on, they could pick up the phone and call that other person.” - Melanie Lubin

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Compliance in Context  

Welcome back to the Compliance In Context Podcast! On today’s episode, we welcome in Jennifer Selliers, Director of Internal Compliance for the State of Tennessee Department of Treasury and current NSCP board member, for an authentic look at how to find your own career path in compliance (and everywhere). 

In our Headlines section, the SEC seeks comment on Broker-Dealer and Investment Adviser Digital Engagement practices, we look to we look at a recent SEC Investor Advisory Committee meeting to demonstrate contrasting views on market regulation, and close with a quick update on the SEC’s telework timeline.

Finally, we’ll wrap up today’s show with another installment of Outtakes, as we look to showcase how even an exempt reporting adviser can find itself in hot water with the SEC and its LP investors, particularly where an auditor isn’t involved

Headlines

Interview

Outtakes

Quotes:

“I think one of the things that helps me stay motivated is remembering that I’m responsible for driving my own career, whether that’s in compliance or if that’s a whole career shift (and I know there’s a lot of people who are contemplating that and taking that big leap). But I own that. That’s mine.” - Jennifer Selliers

“There’s people in my life that are my cheering squad, right? When I need that pick-me-up, I know I can call them and they’re going to be like, ‘You know, buck up camper! You got this! You just take that bull by the horns! Run with it! You’re making the right decision!’ right? And then there’s some other days when I feel like, ‘I’m feeling like I need to do this. I need to talk this out with somebody. And I’ve got another group of people that’ll be like, ‘I don’t know what you’re thinking but you’ve got to take that back to the table.’ [laughs] Right? You can see those types of people, along with other types of people that just help you build and round out your professional and your career goals.” - Jennifer Selliers 

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Compliance in Context  

Welcome back to the Compliance In Context Podcast! On today’s episode, we we welcome in Melissa Loner, the Executive Vice President of Advisor Services at Premiere Wealth Management and current NSCP board member.  With a background in compliance but with a focus now on running the business, Melissa is the perfect person to share with us all the best practices when it comes to fees, expenses, and firm compensation, and the types of questions should be asking themselves when setting up a billing system.

In our Headlines section, we examine yet another FINRA warning about a new Phishing Email Campaign targeting BD and RIA firms and discuss some changes in leadership at the CFTC. And finally, we’ll wrap up today’s show with another installment of What’s On My Mind, where we explore how a key element of acoustic design could be a critical component of your defense during an SEC examination.

Headlines

Interview

What’s on My Mind

Quotes:

“The best thing I can tell people is processes and disclosures. As you were asking the question we talked a little bit about, ‘Is there a monthly fee or a quarterly fee? Is it charged in advance or is it charged arrear? Is it charged on a 360 day or a 365 day? Is it refunded at what period of time?’ So there’s a lot of what ifs that come into place and I think that’s what gets people hung up.” - Melissa Loner “The more flexibility you have, which you want to have for advisors and advisors want to have that for clients, but it puts in a larger risk to not have everything that’s needed to be done. I know you’re going to ask about this later but it goes to disclosure, it goes back to processes, it goes back to consistency.” - Melissa Loner 

“Disclosures is a big one because that’s the first place that the regulators are going to go. They’re going to go to your disclosure and then they’re going to match that up to the billing that you’ve been doing. And, in addition to that, they’re also going to match that up to your supervisory procedures or your clients’ manual or your operations procedural to ensure that you’re following that consistently.” - Melissa Loner  

 “So one of the best practices that I largely suggest is to have an annual process where you look at how your billing is actually happening and then review all of those documents to ensure that they’re actually reflective.” - Melissa Loner  

 “You’ve got to make sure that the trifecta of your disclosures, and your brochures, and your advisory agreements match what you have for your internal compliancies and procedures and your internal controls. And if you can marry those three things in a way that is consistent, it’s at least going to, hopefully, give you a foundation for success.” - Patrick Hayes 

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Compliance in Context  

Welcome back to the Compliance In Context Podcast! On today’s episode, we have the distinct pleasure of chatting with Jim Downing, the current Chair-Elect of the NSCP Board of Directors and current Chief Compliance Officer for Morningstar, who shares with us his Five Fundamentals of Compliance, and provides some fantastic insight into how best to run a compliance program that has multiple business lines and a global customer base.

In our Headlines section, we do another dive into some recent buzz and regulatory activity surrounding cryptoassets, we’ll cover a defense of family offices from a couple key regulators, and finally, we’ll wrap up today’s show with another installment of What’s On My Mind, where in the spirit of this year’s Olympic games, we look back at a quote from the greatest sprinter of our generation to help provide peace of mind to compliance officers everywhere, no matter the stage in their career. 

Headlines

Interview

What’s on My Mind

Quotes:

“One of the first things to do is to check your ego at the door. So when it comes to a global compliance program, I have to realize what I don’t know. And so when we look at, let’s say, Aon or my current position at MorningStar, there were several jurisdictions where I could--in no way--consider myself an expert. So what’s really important there is you make sure you have the right talent onboard.”

“It’s so important to, number one, when you first get there and you first start meeting these executives or heads of sales or product, or operations, or finance, or all the various compartments, is to really take some time and to sit down and to listen to them.”

“Because that’s the advice that we're giving the business on kind of a day-to-day basis you know. When they come to us “Hey what should I do about this?” or “I'm thinking about doing this, what do you think?” And that advice should be drawing from all of these five different fundamentals, you know it should be drawing from where's our where's what's our most risky behavior? It should be drawing from what do our policies and procedures say? It should be drawing from, well, you know, we tested that process and they’re talking about they want to increase the capacity of that and that wasn't very good or hey we had a recent exam or there’s an outstanding issue or whatever it is.”

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Compliance in Context