Reason? It's the scariest thing I can think of.
Remember when NASD Reg. merged with NYSE reg.? And they said they'd be consolidating the rulebooks? Well, the first set of Rule Conversions was released by FINRA on October 16. For 34 pages of fright, see Notice 08-47 at: http://www.finra.org/web/groups/industry/@ip/@reg/@notice/documents/notices/p117255.pdf
This shows the changes that are effective in 60 days. Many changes are simply adopting current NASD Rules and incorporating old NYSE Rules into brand new FINRA Rules—with no substantive changes. But the quantity of information is scary: 564 items in the handy “Conversion Chart.”
http://www.finra.org/Industry/Regulation/FINRARules/p085560 . This chart shows the old NASD Rule number and the new, corresponding FINRA Rule number (I'm not addressing NYSE Rule changes here, since that's not my area of expertise). That’s helpful, but not as great as it could be. I mean, each of these conversion listings has links to the old and new Rules, the Federal Register with the Rule Filings and approval orders, and any amendments to Rule Filings. The chart doesn’t comment on the nature of the changes represented: minor, technical or substantive. You have to cross reference the Notice (above) for any mention of that. Or open up the Rule Filing and start reading… a lengthy process, for sure.
I've added two columns to the chart: "Summary of Changes" and "In WSP? Changes Necessary?" This way, I'll record the results of my painstaking investigation into each and every cited change. Process: open up 'filing number' link on chart; read summary; open up 'text of proposed rule change' and any amendment links, read 'til I'm cross-eyed, then summarize changes on the table. Next, go to WSP, look for old Rule citations, change them, and add any text necessary to incorporate substantive Rule changes. That's it! I only have 547 items to go. I'm on a roll.
Seriously though, many of these changes relate to things like arbitration claims procedures and other administrative Rules that are generally not included in a firm's WSP. So, maybe in the end only a handful of these announced conversions will result in real written procedural changes. (Wait, this reminds me of the difference between the 'real America' and the, well, not-so-real America and that silly Congresswoman's call for Congressional hearings to route out the fakers... oops, wrong scary blog site...) Anyway, I'm not one to make assumptions and will therefore poke through every item on this chart. I'm praying to the Great Pumpkin and Santa Claus that the next released Conversion Chart will be waaaaaay less lengthy/frightening.
I encourage you to take the time to look at the recent Notice and to open up subsequent bi-monthly Notices. Scroll down through the list of Rule changes for those that are relevant to your business. It certainly won't pay to put off attention to this. Face these demons now: 'tis the season.
Have a sweet Halloween.
Thursday, October 30, 2008
Wednesday, October 15, 2008
FACT Act for BD's? Maybe.
A very helpful member of FINRA's Office of General Counsel looked into the whole FACT Act/ID Theft/Red Flags Rules subject. A big shout out to that person--thanks again!
I had asked him about 2 weeks ago about how these new rules might apply to registered B-D’s. He let me know that it is, specifically, FTC Rule 681, implemented under the FACT Act, that may apply. This rule goes into effect November 1. I guess FINRA is considering publishing either a reminder or guidance on the topic. Since it’s not an SEC Rule, SEC won’t be enforcing this; whether or not FINRA adds it to their examination protocols, we won’t know yet. A parallel example of FINRA enforcing an FTC rule is in the area of telemarketing restrictions. As you know, FINRA/NASD ‘adopted’ them and enforces cold calling rules.
Here is the link to the Federal Register announcing the FTC’s (and other agencies’) implementation of the FACT Act: http://frwebgate1.access.gpo.gov/cgi-bin/PDFgate.cgi?WAISdocID=080421251418+19+1+0&WAISaction=retrieve.
The operative terms within the rule are “financial institution,” “creditor” and “covered account.” I have a sense that M&A/private placement firms and straight up check & app firms (no brokerage accounts) will be able to exempt themselves; OGC seems to think introducing firms whose clients have brokerage accounts will not be exempt. But let’s wait and see…my opinion is, it’s only fair that FINRA provide some help on this complicated subject. Because let's face it: your compliance staff is working hard these days on many other issues. They're not pro-actively reading the Federal Register on weekends in an attempt to find new, unannounced rules to follow. (If they are, give them a raise or ask them to call me for a job.)
So be on the lookout for something from FINRA. In the mean time, think about clicking that link above and searching "681." You'll be way ahead of the game. (Unlike the Sox.) (Go Sox.)
I had asked him about 2 weeks ago about how these new rules might apply to registered B-D’s. He let me know that it is, specifically, FTC Rule 681, implemented under the FACT Act, that may apply. This rule goes into effect November 1. I guess FINRA is considering publishing either a reminder or guidance on the topic. Since it’s not an SEC Rule, SEC won’t be enforcing this; whether or not FINRA adds it to their examination protocols, we won’t know yet. A parallel example of FINRA enforcing an FTC rule is in the area of telemarketing restrictions. As you know, FINRA/NASD ‘adopted’ them and enforces cold calling rules.
Here is the link to the Federal Register announcing the FTC’s (and other agencies’) implementation of the FACT Act: http://frwebgate1.access.gpo.gov/cgi-bin/PDFgate.cgi?WAISdocID=080421251418+19+1+0&WAISaction=retrieve.
The operative terms within the rule are “financial institution,” “creditor” and “covered account.” I have a sense that M&A/private placement firms and straight up check & app firms (no brokerage accounts) will be able to exempt themselves; OGC seems to think introducing firms whose clients have brokerage accounts will not be exempt. But let’s wait and see…my opinion is, it’s only fair that FINRA provide some help on this complicated subject. Because let's face it: your compliance staff is working hard these days on many other issues. They're not pro-actively reading the Federal Register on weekends in an attempt to find new, unannounced rules to follow. (If they are, give them a raise or ask them to call me for a job.)
So be on the lookout for something from FINRA. In the mean time, think about clicking that link above and searching "681." You'll be way ahead of the game. (Unlike the Sox.) (Go Sox.)
Friday, October 3, 2008
Fact-ish: The FACT Act and Reg. S-P Amendments
I'm writing this to let you know I'm looking into something--that is, this is preliminary and I'll follow up later. So, put this information in the category of 'truthiness.'
I saw on FINRA's weekly e-mail the announcement of its online workshop on the subject of customer data protection issues (see: http://www.finra.org/Industry/Education/OnlineLearning/OnlineWorkshops/P117068 ). Within the workshop description the “new FACT Act” is mentioned.
This mention made me look into the FACT Act; I'd certainly seen references to new 'ID theft' compliance in other documents and online sources, but I was not familiar with the Act, nor its applicability to broker-dealers. Sometimes I'm lazy (no, not lazy: overworked!), and I rely on FINRA's Notices to announce important new requirements that will effect my clients.
Note that the FACT Act was referenced in NtM 05-49, but only in the footnotes and in reference to preventing identity theft by destruction of consumer reports.
The FACT Act is a banking regulation: the Fair and Accurate Credit Transactions Act of 2003. Financial institutions, under the Act, have a mandatory deadline of November 1, 2008, to comply with three new parts, called the Red Flag Rules (in sections 114 and 315 of the Act). New requirements include:
But, within the Act, “account” and "transaction" as defined may include certain types of brokerage accounts that allow for check writing, debit transactions,etc., that would then throw the requirements into a BD's realm. Since you, the small BD offering mutual fund investments on an application way basis, doing private placements or hedge funds offerings, or running an institutional trade desk, do not allow check writing on customer accounts, this stuff seems inapplicable and worthy of ignoring.
But.... why the mention in the online workshop announcement? The mention, itself, is a red flag for me: ooh-oh, is this something I missed? Maybe the workshop will confirm just what I surmise: the FACT Act doesn't apply to you; no worries. I would have liked it better had FINRA released guidance first, though, so that the message was way more broadly-distributed (most firms don't listen to the online workshops). I've asked FINRA if guidance is forthcoming. I'll keep you posted.
We're not done yet.
Reg. S-P is subject to pending amendments that cross reference the FACT Act. So, this may be a good thing for you or a bad thing. That is, if S-P will definitively require all BD’s to comply with the red flag rules under the Fact Act, then you'll have to waste time building procedures or justifications for not having procedures to comply. Perhaps the amendments--and FINRA's expectations of compliance—will be nuanced, such that you won't have to waste time on this. We will see.
Now remember, my knowledge base is minimal on this subject. No facts expressed here, only factish information. My goal is let you know that you don't have to react with alarm if you hear about firms complying with the Fact Act. Most likely it does not concern you. But stay tuned, because the Reg. S-P changes might.
If only politics were this straightforward. ... oh wait, they are.
I saw on FINRA's weekly e-mail the announcement of its online workshop on the subject of customer data protection issues (see: http://www.finra.org/Industry/Education/OnlineLearning/OnlineWorkshops/P117068 ). Within the workshop description the “new FACT Act” is mentioned.
This mention made me look into the FACT Act; I'd certainly seen references to new 'ID theft' compliance in other documents and online sources, but I was not familiar with the Act, nor its applicability to broker-dealers. Sometimes I'm lazy (no, not lazy: overworked!), and I rely on FINRA's Notices to announce important new requirements that will effect my clients.
Note that the FACT Act was referenced in NtM 05-49, but only in the footnotes and in reference to preventing identity theft by destruction of consumer reports.
The FACT Act is a banking regulation: the Fair and Accurate Credit Transactions Act of 2003. Financial institutions, under the Act, have a mandatory deadline of November 1, 2008, to comply with three new parts, called the Red Flag Rules (in sections 114 and 315 of the Act). New requirements include:
- Creating an identity theft prevention program
- Implementing change of address safeguards when issuing credit/debit cards
- Verifying identity upon notice of address discrepancy from a consumer reporting agency
334.90 Duties regarding the detection, prevention, and mitigation of
identity theft.
(a) Purpose and scope. This section implements section 114 of the Fair and Accurate Credit Transactions Act, 15 U.S.C. 1681m, which amends section 615 of the Fair Credit Reporting Act (FCRA). It applies to financial institutions and creditors that are insured state nonmember banks, insured state licensed branches of foreign banks, or subsidiaries of such entities (except brokers, dealers, persons providing insurance, investment companies, and investment advisers).
But, within the Act, “account” and "transaction" as defined may include certain types of brokerage accounts that allow for check writing, debit transactions,etc., that would then throw the requirements into a BD's realm. Since you, the small BD offering mutual fund investments on an application way basis, doing private placements or hedge funds offerings, or running an institutional trade desk, do not allow check writing on customer accounts, this stuff seems inapplicable and worthy of ignoring.
But.... why the mention in the online workshop announcement? The mention, itself, is a red flag for me: ooh-oh, is this something I missed? Maybe the workshop will confirm just what I surmise: the FACT Act doesn't apply to you; no worries. I would have liked it better had FINRA released guidance first, though, so that the message was way more broadly-distributed (most firms don't listen to the online workshops). I've asked FINRA if guidance is forthcoming. I'll keep you posted.
We're not done yet.
Reg. S-P is subject to pending amendments that cross reference the FACT Act. So, this may be a good thing for you or a bad thing. That is, if S-P will definitively require all BD’s to comply with the red flag rules under the Fact Act, then you'll have to waste time building procedures or justifications for not having procedures to comply. Perhaps the amendments--and FINRA's expectations of compliance—will be nuanced, such that you won't have to waste time on this. We will see.
Now remember, my knowledge base is minimal on this subject. No facts expressed here, only factish information. My goal is let you know that you don't have to react with alarm if you hear about firms complying with the Fact Act. Most likely it does not concern you. But stay tuned, because the Reg. S-P changes might.
If only politics were this straightforward. ... oh wait, they are.
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