ARMARM 2014 Annual 2014 Annual Educational Educational Conference Conference

NASAA Regulator PanelAmelia Island, Florida

March 4, 2014

Panelists & Moderator

Pam Epting – Florida

Andrea Seidt - Ohio

Melanie Lubin - Maryland

Moderator: Janet L. Edwards

UPDATE ON STATE RULES & LEGISLATION

Update on State LegislationUpdate on State LegislationFlorida –

3 bills currently filed impacting the securities industry:(1) proposal to authorize Intrastate Crowdfunding;(2) proposal to prohibit employers from obtaining user id and passwords for employee’s social media accounts;(3) proposal to prohibit employers from conducting credit checks on

employees or potential employees; an amendment has been incorporated to exclude the securities industry

Louisiana –

Proposing legislation to require an examination or certification for an RA affiliated with a federal adviser in order to qualify to do business in Louisiana. There is currently an exam/cert. requirement for an RA affiliated with a state registered IA, but not an SEC IA.

Nevada –

2014 off year for legislature; however made revision to make it a dishonest practice to use a certification or professional designation that is non-existent.

Update on State LegislationUpdate on State Legislation

Ohio –

Considering legislative changes as a result of the enactment of Dodd-Frank and JOBS Acts.

Utah –

Considering an exemption for Merger & Acquisition dealers; may be handled by rule but will await outcome of federal legislation. Will follow the standards set forth in recent SEC no-action letter.

Update on State RulesUpdate on State Rules

Florida –During 2014 will be proposing rules regarding the following:

(1) updates to incorporations by reference;(2) updates to IA rules to include issues relating to

custody and supervision;(3) deletion of obsolete rules; (4) overhaul of rules to make more user friendly.

Nevada – Currently updating regulations and considering adoption of the following:

– NASAA Unethical Business Practices of Investment Advisers, Investment Adviser Representatives and Federal Covered Advisers; and

– NASAA Custody Requirements for Investment Advisers

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Update on State RulesUpdate on State RulesWashington –

Have proposed amendments to investment adviser regulations that provide for two limited exemptions from IA registration:

(1)certain venture capital fund managers, and (2)certain 3(c) (7) fund managers.

Texas – In 2014, Texas adopted a notice filing requirement for advisers to private funds and made corresponding changes to the rule exempting advisers to institutional investors from registration.

Maryland –Updating IA rules to modify:

(1)Brochure Rule(2)Performance-Based Compensation Provisions(3)Custody Requirements

Other Guidance or Significant Other Guidance or Significant Regulatory ChangesRegulatory Changes

Florida –

Have implemented a 5 year cycle examination program for state registered IA firms

New York –

May improve timeliness of BD agent registration in NY by timely submitting FP; per NY law the prints must "clear" prior to a decision being made.

Ohio –

Recommend (1) resolution of old disclosure items prior to submitting an application, and (2) submission of a timely response to requests for disclosure details.

Tennessee –

Will implement a field examination program to review the sales practices of branches of broker-dealer firms beginning in late April 2014.

STATE ENFORCEMENT

TRENDS

Actions on License, Industry Actions on License, Industry ParticipantsParticipants

• 3564 licenses withdrawn due to state action (27% increase from 2011 reporting period)

• 736 licenses revoked, suspended, or conditioned

• Industry Participant Breakdown:

– 414 actions against Broker‐Dealer Firms & Agents

• 225 actions against BD Firms, 189 against Agents

– 338 actions against Investment Adviser Firms & Reps.

• 181 actions against IA Firms, 158 against IARs

– 46 actions against Insurance Firm or Agent

ENFORCEMENT CONCERNSENFORCEMENT CONCERNS

• REG D- 506 PRIVATE PLACEMENTS

• ‘JOBS’ ACT ISSUES/CROWDFUNDING

• REG A+

• SUITABILITY

• NON-EXCHANGE TRADED REITS

• ILLIQUID SECURITIES

• PONZI/PYRAMID/BIZ OP

HOT TOPICS AND BEST PRACTICES HOT TOPICS AND BEST PRACTICES FOR BROKER DEALERSFOR BROKER DEALERS

1) Suitability

Broker Dealers (“BDs”) must develop effective standards and criteria for determining suitability. State regulations and FINRA Rules 2090 and 2111 require registered persons to “know your customer” and receive training sufficient to demonstrate knowledge of products prior to sale.

2) Develop, Update, and Enforce Written Supervisory Procedures

BDs should also ensure that staffing and expertise are commensurate with the size of the BD, type(s) of business engaged in by the firm, and the individual responsible for specific procedures. With recent announcements of BD staff reductions, state securities regulators have become concerned that proper internal controls and the ability to respond to customer service and regulatory inquiries are maintained.

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HOT TOPICS AND BEST PRACTICES (cont.)HOT TOPICS AND BEST PRACTICES (cont.)

3) Exception Reports

Introducing dealers should obtain the necessary exception reports from the clearing dealer to ensure proper compliance. Upon the generation of exception reports, all BDs must document and resolve “red flags” in a timely manner. BDs that rely solely upon conversations with salespersons to address exception reports without contacting investors may subject themselves and supervisory staff to regulatory and/or legal action.

4) Branch Office Audits

Develop a branch audit program which includes a meaningful audit document/plan, unannounced visits, a means to convey audit results, and a follow-up plan requiring that the branch take corrective action.

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HOT TOPICS AND BEST PRACTICES HOT TOPICS AND BEST PRACTICES (cont.)(cont.)

5) Selling Away

BDs must ensure that adequate procedures are in place to address private securities transactions (selling away). If this activity is permitted, the firm’s written supervisory procedures should be adequate to monitor this activity on an ongoing basis. The BD’s procedures must have a mechanism to conduct a meaningful review of the request and in the instance where the request is denied, a process to determine the salesperson is/has not engaged in the activity. Additional violations which may be charged in selling away cases include, but are not limited to, fraud, sale of unregistered securities, and supervision.

6) Outside Business Activity

Written outside business activity requests from salespersons must be received, reviewed and approved by the firm prior to the activity. The BD and salesperson are obligated to report the outside business activity on the salesperson’s Form U-4. The firm should have a supervisory procedure in place to address its approval/denial process and a requirement that should the approved outside activity change the salesperson is required to promptly report the changes to the firm.

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HOT TOPICS AND BEST PRACTICES (cont.)HOT TOPICS AND BEST PRACTICES (cont.)

7) Advertisements

Advertisements and sales literature MUST be fair and balance and MUST be approved by the BD and/or FINRA. Seminar notices/advertisements, programs, seminar materials utilized, and guest speakers must be approved by the BD. In instances where the salespersons routinely conduct seminars, a supervisory representative of the firm should randomly attend the seminar for compliance purposes. Remember, your advertisements are published into the public domain and regulators, the public, and your competitors are watching.

8) Correspondence

Correspondence, both electronic and hard copy, must be effectively monitored by the BD. This includes a system of capturing and maintaining electronic business-related correspondence sent by salespersons from websites and social network service providers outside the firm. For additional guidance, refer to FINRA Notice 11-39.

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HOT TOPICS AND BEST PRACTICES (cont.)HOT TOPICS AND BEST PRACTICES (cont.)

9) Customer Complaints

Upon receipt of a complaint, firms must acknowledge receipt, conduct and document a thorough review of the customer’s allegations, and, if necessary, update the salesperson’s Form U-4. In situations where the firm discovers wrongdoing, the firm should redress customer harm. Timely reporting and remediating customer harm are some of the factors under NASAA guidelines to determine if the firm is entitled to credit for cooperation.

10) Dealing with Senior Citizens

Baby Boomers are now moving into retirement. As we age into our “golden years” our cognitive abilities begin to wane. BDs and, for that matter, financial professionals should develop procedures/best practices for handling accounts of “senior” investors. A number of the recommendations relating to these best practices are contained in joint reports issued in 2008 and 2010 by NASAA, SEC, and FINRA found below.

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STATE EXPUNGEMENT PROCESS AND TRENDS

NASAA Expungement Review NASAA Expungement Review ProcessProcess

• Expungement requests are communicated from FINRA to NASAA Steering Committee as part of Rule 2080 waiver process

• Steering facilitates state review of requests, including weekly calls with state expungement points of contacts

• States report whether they are or are not opposed to expungement and whether they are or are not likely to intervene in the litigation

• Not uncommon for states to request additional information where expungement recommendation is scant on details

Combined Rule 2080 Waiver Combined Rule 2080 Waiver Requests & LitigationRequests & Litigation

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Rule 2080 Waiver Requests Rule 2080 Waiver Requests

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Rule 2080-Related Litigation Rule 2080-Related Litigation (No Prior Waiver Request)(No Prior Waiver Request)

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Expungements: Looking Expungements: Looking AheadAhead

• States will continue to request additional information when reviewing 2080 waiver requests, if additional information is warranted.

• States likely to take additional action if there’s an issue with a particular waiver request.

• States will continue to be involved with litigations, e.g., Lickiss, John Doe

• Ongoing dialogue with FINRA and FINRA Dispute Resolution.

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ARM 2014ARM 2014ANNUAL EDUCATIONAL CONFERENCEANNUAL EDUCATIONAL CONFERENCE

NASAA Regulator PanelAmelia Island, Florida

March 4, 2014