FIRMA National Risk Management Training Conference New Orleans, LA April 29, 2009 Overview of Key Rules and Regulator

Presentation Transcript

FIRMA National Risk Management Training Conference New Orleans, LA April 29, 2009 Overview of Key Rules and Regulatory Developments influencing Broker Dealers, Investment Advisers and so on. Sean Gray Senior Vice President Director of Wealth Management Compliance PNC Bank All announcements and assessments contained in this are the sole sentiment of the speaker – not PNC – and subject to change without notice.

Agenda Refresher/Overview of NASD Rules 3012, 3013, NYSE Rule 342 and so forth (i.e., new FINRA Rule 3130) FINRA 2009 Exam Priorities and Enforcement Guidelines Other FINRA and B-D Regulatory Developments Annual Review Tips for RIA's SEC Compliance "Problem areas" 4 Key Areas to Focus – Lori Richards Custody Sweeps and so on. New SEC Exam Letters and Approaches Other RIA "Hotly debated issues"

Regulatory Scheme Ensures handle "possessed" by CEO, senior administration Assures hearty announcing between senior initiative and consistence pioneer Mandates yearly surveys that drive persistent process change, conformity for administrative, business changes Trend spotting, early cautioning ability clear focal points Annual Compliance and Supervision Certification NYSE 342.30 & NASD 3013 NEW CEO Certification NEW Processes for Testing, Verification, Enforcement and Reporting Supervisory Control System NYSE 342.23 & NASD 3012 Key Requirements : Establish, keep up, authorize an arrangement of supervisory control Procedures set up to survey and administer client movement and Branch/Sales/Regional/District Managers Independent everyday supervision of delivering administrators Processes for Monitoring Supervisory Procedures (Surveillance, Corporate Audit Reviews, Branch Inspections, Internal Reviews) Supervisory Procedures NYSE 342 & NASD 3010 Key Requirements : Written supervisory P&Ps Internal examinations Supervision of RRs Written Supervisory Policies and Procedures Various affected business territories Note: FINRA Rule 3130 (Annual Certification of Compliance and Supervisory Processes) replaces NASD Rule 3013 and the comparing arrangements in Incorporated NYSE Rule 342.30 and related NYSE Rule Interpretations (powerful December 15, 2008)

Rule 3013 requires: Designation of a CCO on Schedule An of Form BD CEO confirmation that the Member firm has set up procedures to: (a) build up, keep up and survey strategies and methodology sensibly intended to accomplish consistence with NASD and MSRB rules and pertinent government securities laws and direction (b) alter these strategies and techniques as business, administrative and authoritative changes and occasions manage (c) test the viability of such arrangements and methodology on an intermittent premise, the planning and degree of which is sensibly intended to guarantee proceeding with consistence with material guidelines, laws and controls At minimum one yearly meeting amongst CEO and CCO to talk about recommended consistence matters Member's procedures must be prove by a report assessed by the CEO, and Chief Compliance Officer (and such others as the Member esteems vital) and submitted to the Member's Board of Directors and Audit Committee The CEO affirmation is a procedure accreditation and does not require execution or finish of any consistence testing or check NASD Rule 3013: Annual Certification of Compliance and Supervisory Processes

NASD Rule 3012: Supervisory Control System " Supervisory control approaches and techniques " incorporate methods sensibly intended to survey and oversee client account action, branch office administrators, deals supervisors, provincial and locale deals supervisors and some other individual playing out a comparative supervisory capacity Rule 3012(a) requires assignment of at least one Principals entrusted to set up, keep up and uphold an arrangement of supervisory control strategies and techniques and consistently enhance such techniques as required after surveys or testing or in light of business or administrative changes Rule 3012 likewise requires systems for senior or something else "free" everyday supervision of "Creating Managers" account action and "increased supervision" of delivering chiefs with at least 20% incomes created from units managed by the creating chief's boss Requires yearly testing and check of WSP's by January 31 st of every year to show that they are sensibly composed as for the part's exercises (and those of its RR's and Assoc Persons) to accomplish consistence with NASD rules and relevant securities laws and controls, and the making of extra approaches and techniques where the need is distinguished by such testing and check

NASD Rule 3012: Supervisory Control System COMMON EXAM FINDINGS – Rule 3012 Failure to perceive that Supervisory Control Procedures (SCP's) vary from WSP's Need WSP's in addition to control prepare for protecting such systems are satisfactory and current, i.e., basic motivation behind 3012 A firm that does not have SCP's, much of the time neglects to : Designate the Principal(s) in charge of setting up, keeping up and upholding the association's arrangement of supv control pol & proc; Annually test and confirm supv strategies and correct them, when required; Adequately oversee client account action of "delivering supervisors"; Adequately direct "delivering administrators" subject to HS; and Review, screen and affirm transmittal of assets/securities from clients to 3 rd parties, changes of address and changes of inv obj's

NASD Rule 3012: Supervisory Control System COMMON EXAM FINDINGS – Rule 3012 Testing and Verification FINRA has noticed that a few firms neglected to test and check on yearly premise that supv methods are adequate and sensibly outlined as for exercises of the part firm and its RR's and Assoc Persons Each firm more likely than not composed testing and confirmation techniques that detail ventures to be taken by firm to lead testing and check to recognize any holes in supv handle Procedures should likewise detail ventures to be taken by firm to draft and favoring new techniques, including ID of dependable Principal and usage handle. Inability to get ready and convenient present the Rule 3012 yearly answer to association's senior administration. Restricted Size and Resource Exception One of most normal 3012 finds is off base comprehension and utilization of this special case. It just gives elective technique to who may play out a creating administrator's audit Failure to regulate Producing Managers Must accurately recognize all "delivering directors"

NASD Rule 3012: Supervisory Control System COMMON EXAM FINDINGS – Rule 3012 Failure to affirm, confirm or catch up with clients in case of a: change of address; transmittal of assets; or transmittal of client assets or securities.

Responsibility Matrix

Rule Comparison Chart

FINRA 2009 Exam Priorities 3 General Categories – Sales Practice Issues, Enterprise Control Functions, and Financial/Operational Controls Sales Practice Issues: Cash Alternatives Focus is consequence of ARS Issues, i.e., speaking to specific securities as money alt's or equiv's. 1 - Need to have sensible reason for describing inv as money option 2 – Need to have Proc's set up to screen improvements to guarantee inv holds portrayal as money option 3 – Need to perform "appropriateness" investigation before prescribing same to client Bank Sweeps Increase in late utilization of bank store programs as breadth vehicles with the expectation of complimentary credit parities Focus on divulgences re: terms and conditions Differentiation of SIPC versus FDIC scope Methodology for figuring enthusiasm on compass equalizations Disclosure of comp earned by B-D's and banks working range programs and additionally RR's who offer these projects Add'l exam concentrate on compromise issues identifying with the bank where record is held.

FINRA 2009 Exam Priorities Enterprise Control Functions: AML E-Trade requirement activity Focus extensively on suspicious exercises identified with securities exchanges versus exclusively on cash developments One size does not fit all with respect to AML Program! Each firm needs to tailor program to claim plan of action, hazard profile, volume of exchanges and so on. FCPA Recent & noteworthy ($$) SEC settlements Add'l late concentration by NYSBD Reminder to individuals from commitment to go along, keep up precise books and records, execute inside controls and so forth. Insurance of Customer Info and IT Security Several current SEC implementation activities emerging from online record interruptions e.g., LPL Financial – charged inability to execute shields regardless of mindfulness that it had inadequate controls to ensure client data Members offering on the web client get to need to survey inside observation and actualize measures for managing account "interruptions"

FINRA 2009 Exam Priorities Protection of Customer Info and IT Security (Cont'd) Need to consistently screen account movement to screen for any note of suspicious action FINRA reminding firms to create and actualize composed ID Theft Program in accordance with FTC's Red Flag Rules which the FTC will start to authorize May 1 st – See FINRA Reg Notice 08-69 Outsourcing NTM 05-48 states that BD's may outsource certain capacities, however may not outsource supervision and oversight. FINRA gives recommendations on how individuals can fulfill supervision/due perseverance on merchants by: Requiring sellers to meet quantifiable execution measures Meeting as often as possible with merchant work force; and Assigning qualified staff to screen survey and direct the specialist organization's exercises Need to evaluate danger of merchants working in outside purviews and business coherence issues related therewith FINRA will search for Written Proc's in all of thi