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					Founders Financial Securities, LLC

Professional Administrators Institute Compliance Overview 2008
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Agenda:
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FINRA
– Hot Topics
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Anti-Money Laundering Variable Annuities Market Timing Senior Sales

– New Rules
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FFS – Branch Record keeping
– Branch Inspection Results – Reminders – Requirements
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FINRA Hot Topics
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Anti-Money Laundering Variable Annuities Market Timing of Mutual Funds Senior Investors

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Anti-Money Laundering
Money laundering is the process of filtering the proceeds derived from illegitimate criminal activities through one or more legitimate financial transactions. The goal is to place funds from illegitimate activities into the legitimate financial system without attracting attention to the source.
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Anti-Money Laundering
Money Laundering occurs in three phases:
1. Placement – fed fund wires, cashier’s checks, starter checks, money orders, small dollar bank deposits, travelers checks.

2. Layering – money instruments are used for a series of small dollar amount transactions that will not raise the concern of law enforcement.
3. Structuring - Criminals attempt to hide funds in legal transactions – investments, bank accounts, buying or investing in small business.
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Anti-Money Laundering
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The best protection for FFS and to help prevent money laundering is for all representatives to know their clients.
– – – – Employment Business Partners Clientele Net Worth – (“Life Style”)

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To know your customer, ask the questions necessary to understand future activities and transactions:
– What are the sources of invested funds? – Where does your income come from – employment/investments – What is the ultimate goal for the invested assets – retirement, pay for college, new house
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Anti-Money Laundering
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All employees, especially sales assistants should be mindful of the following red flags- Clients who refuse to provide personal information on CAI
- Clients who refuse to provide personal identification or the identification looks unusual - A client who is not concerned with sales charges, commissions, fees or penalties for early withdrawals - Clients who invests in an account but the funds stay in money market assets and are never invested, then suddenly withdrawn in a short time period - Clients who claim they only have starter checks or cashier’s checks - Clients who sudden come into a large amount of cash to invest with no discernible source of the new wealth
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Variable Annuities
Joint 2007 SEC/FINRA Exam Findings
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Sales that exceed a predetermined % of net worth Same product to all customers (one size fits all) High risk sub-accounts for low-risk investor Illiquid products to customers in need of funds Lack of need or desire for insurance Mortgaging a home to finance purchase
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Variable Annuities
Joint SEC/FINRA Exam Findings
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Sales that require borrowing from existing policy Ineligibility under terms of prospectus Unfounded, false or misleading justifications for switches RR misrepresented or failed to inform clients of ALL associated fees and expenses Excessive switching in client accounts every 2-3 years
9 VAs purchased in tax-qualified accounts – no added benefits

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Variable Annuities
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Perception of Rep as the Expert
– Customers rely on professionals to give the “best” possible solution to their investment needs – Reps should make an “independent” determination whether investment is suitable – Reps maintain a level of knowledge and expertise in recommended products – continue to gain knowledge in regards to new products, riders, performance, etc. – It is no defense to the charge of unsuitable that an “unsophisticated” client received a prospectus – Suitability – not compensation is the measurement
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Variable Annuities
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Suitability Rule (FINRA 2310)
– Must have reasonable basis for believing that the recommendation is suitable based on facts – Suitability Determination (NTM 96-86)
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Client’s Insurance Needs Preference for investments other than VAs Understanding of the complexity of the VA Understanding of Premiums Need for Liquidity and Short-term investment Need for retirement income

– Sophistication of Client (monitor sub-accounts)
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Variable Annuities
Best Practices (NTM 99-35) – Customer Information  Obtain all information; and discuss ALL relevant facts (fees & charges)  Recommendation made on client’s overall financial situation and objectives – Product Information  RR should know the specifics of recommended products  Keep current on product information – Investment in Tax Qualified Accounts  No additional tax deferred treatment of earnings beyond a tax-qualified acct. – Variable Annuity Replacements  Complete all necessary forms; signed by customer; keep detailed notes; may need more details than just a switch form; need to see if existing contract will meet client’s objectives without replacement
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Market Timing
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What is Market Timing?
– Entering trades at or near closing bell – Frequent trading < 90 days – Holding orders in order to time a purchase or sell with a specific event

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Market Timing
You may unknowingly cause your client to be blocked or banned from any further transactions in a fund family.
What to do? 1. Know your client 2. Know the time horizon for your client’s assets 3. Read before you invest 4. Disclose to your client 5. If necessary to liquidate, call the fund family prior to making the trade; find out how to prevent restrictions

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Mutual Fund Breakpoints
 Hot

Topic for several years

 Topic

is included in FINRA audits of all firms
www.FINRA.org http://tools1.finra.org/nbst/
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Mutual Fund Breakpoints
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Who is responsible for breakpoint discounts being applied? Read the prospectus – know what qualifies ! !
 ROA, LOI, related/household/family accounts
 Sub-accounts in VAs & VULs  B & C Shares & Money Market Accounts

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Ensure the customer actually gets the discount
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Mutual Fund Breakpoints
Breakpoints Worksheet
Account Name: _______________________ Today’s Date: ________________ Total holdings of customer at firm: Account Number __________________ __________________ Holdings in Account $_________________________________ $_________________________________ SSN/TIN/BIN: ______________________

Total $__________

 Customer declined to provide Account Number __________________ __________________

Total holdings of customer outside firm:  Customer provided (record below)
Total $__________

Holdings in Account $_________________________________ $_________________________________

 Customer declined to provide Account Number __________________ __________________ Today’s purchase amount: Total holdings:

Total holdings of related parties:  Customer provided (record below) Total $__________ $__________ $__________
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Holdings in Account $_________________________________ $_________________________________

Mutual Fund Breakpoints
Does the total qualify for a breakpoint discount?
If Yes, what breakpoint discount applies? _______%

 Yes  No

Is there a letter of intent on file that entitles the customer to a further breakpoint?  Yes  No
If customer has letter of intent, is it retroactive?  Yes  No

If yes, record the current value or historical costs of eligible prior purchases. $_________ What breakpoint discount is available based upon the letter of intent? _________%

If there is not a letter of intent, should customer sign one?  Yes  No
18 Record the highest breakpoint discount available to the customer. _______%

Mutual Fund Breakpoints
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Registered Representative was fined $30,000 and suspended from association with any FINRA member in any capacity for 20 business days. Rep consented to findings that he recommended securities transactions to public customers without having reasonable grounds for believing that the recommendations were suitable, because the customers could have purchased Class A shares in each fund at a reduced sales charge by applying break points, using letters of intent and/or using rights of accumulation.

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SEC - Seniors Summit
“Protect Older Americans from Investment Fraud” – Sept. 10, 2007
Mary Schaprio – “Our research shows that almost one in five seniors who lost money on an investment attribute that loss to being misled or defrauded.” http://www.finra.org/Industry/Issues/Seniors/ind ex.htm
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First New Sweep “Professional Designations”
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The use of Professional Designations designed to mislead or defraud investors has become widespread.
– FFS requirements:
All designations have to be reviewed and approved.  All titles must be based upon completing necessary course work and/or certification tests.  All Members must have evidence of completion of course work or tests.
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Second Sweep “Early Retirement Seminar”
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Reps are conducting seminars designed to entice older workers to liquidate retirement funds and invest.
– In the last 12 months, FINRA has fined two firms a total of $5.5 million and ordered the firms to pay $26 million in restitution related to early retirement schemes aimed at Exxon and Bell South employees.
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“Free Lunch” Seminar Examination
SEC, FINRA, and State Regulators year long exam of 110 securities firms that conducted “Free Lunch” sales seminars.
Key findings: 100% were instead sales presentations 59% reflected weak supervisory practices 50% featured exaggerated or misleading advertising claims 23% involved unsuitable recommendations 13% appeared to be fraudulent

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“Free Lunch” Seminars
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FFS Requirement – – – – All seminars require prior approval Fair and balanced, educational in nature No pressure sales tactics No handouts that have not been pre-approved

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FINRA informing HR Professionals
– Offering Seminar Scan – All seminars require prior approval – Fair and balanced

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Senior Investors
Challenges:  Diminished Capacity  Failing Memory  Erratic actions or requests  Communication  Privacy  Dealing with potential heirs
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Rule 2821 Deferred Variable Annuities
1. Principal Review – Requires registered principal review and approve the transaction prior to submitting to the issuing insurance company for processing, but no later than seven business days after the customer signs the applications. Registered principal must document and sign the determinations. 2. Supervisory Procedures Firm must develop and maintain supervisory procedures that are designed to achieve compliance with the proposed rule and to address inappropriate exchanges. 3. Training – Firm must develop training programs that are tailored to educate rep on the material features of deferred variable annuities.

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Rule 2821 Deferred Variable Annuities
Impact on FFS: 1. Reps need to understand the various products – this includes: fees, riders, penalties, surrender periods, tax deferred features; sub account investment choices 2. Conduct product comparisons – make sure you have the right product for the client’s objectives, risk tolerance and time horizon (no “cookie cutter” recommendations) 3. Submit the transactions in a timely fashion – must be reviewed within seven business days 4. Firm has develop adequate procedures for the review of new business submissions and exchanges 5. Firm’s annual training requirements – Annual Compliance Presentation and In-Firm Element both contain Variable Annuity components.

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Rule 2210 Sales Material Approval
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Provides for an exception to Rule 2210’s registered principal approval requirements for intermediary firms that use the sales material of another firm. The exception applies only to sales material that another firm has filed with FINRA, and for which FINRA has issued a review letter. Firms that are relying on the principal approval exception must keep a record of the name of the firm that filed the sales material and a copy of the related FINRA review letter.
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Rule 2210 Sales Material Approval
Impact on FFS – Reps may use sales materials from various product sponsors without obtaining approval from FFS compliance. Must obtain and maintain a copy of the FINRA review from the vendor

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Serving Your Clients
In between preparing for client meetings, you receive a call from a longtime client. He has a simple request. The client needs money wired to his bank account for a down payment on a new home purchase he will be closing on soon. You inform your client that you’ll fax over a Wire Request Form and will submit the request post-haste when the client completes and returns it. Your client then tells you that he is in his car on the way to the airport. He is flying home for the closing and needs to have the funds available as soon as possible. Since the client completed and signed a Wire Request Form a few weeks ago for another purpose, he suggests just changing the amount and date of the previously submitted form, as the new account from which the money will be drawn and the bank account information he provided are the same. Since you have the client’s consent and want to provide great service to your valuable client, you change the amount and date on the old form and submit it for processing in order to adhere to the client’s wishes.
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What went wrong?
Serving clients and acting in their best interest is the main focus of any successful practice. The problem is that not only does the above activity violate FFS’ policy, but it also can run afoul of FINRA Conduct Rule 2110 (“Standards of Commercial Honor and Principles of Trade”) and/or FINRA Conduct Rule IM2310-2 (“Fair Dealing with Customers”) and become an actionable offense. FFS requires: • client signatures and dates for all paperwork • paperwork signed by a client may not be altered • under no circumstances should clients sign blank forms
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2008 In-Firm Element
Completion Deadline – October 31, 2008 Registered Reps – VA Replacements, 1035 exchanges Advanced Concepts in AML Advanced Variable Annuities Ethics VI, Conflicts of interest Financial Planning - Products and Practices Investment Advisors – VA Replacements, 1035 exchanges Advanced Concepts in AML Ethics VI, Conflicts of interest Financial Planning - Products and Practices Investment Advisors – Advanced II

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In The End
Compliance – Part of your TEAM!
“Business Protection vs. Business Prevention”

Protect your business, your clients and your career – DOCUMENT, DOCUMENT, DOCUMENT

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Founders Financial Securities LLC Branch Record keeping
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2007 Inspection Results
Required Branch Files Operational Reminders

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2007 Branch Inspection Results
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23 branch inspections were conducted
152 deficiencies identified On average, 7 deficiencies per branch

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Types of Deficiencies
No.
I. Questionnaires II. Signage IV. Observations V. Acknowledgements 1. Advertising File 1a. Sales Literature 2 12 4 2 9 8

Percent
1% 8% 3% 1% 6% 5% 5. Speaking Engagement 7. Rep File 8. Do not Call 9. Gift Log 10. General Securities 11. Due Diligence

No.
5 16 2 9 8 2

Percent
3% 11% 1% 6% 5% 1%

2. Correspondence
3. Complaint 4. Stationary File

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1 11

21%
1% 7%

12. Customer Files
13. Checks Blotter Other

3
7 19

2%
5% 13%
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Total Deficiencies:

152

Branch Required Books and Records
Do Not Call File – name and number of all individuals that have requested not to be called Advertising File - copies of all submitted advertising pieces must be kept with evidence of compliance approval. Sales Literature File – copies of all submitted sales literature pieces must be kept with evidence of compliance approval. Correspondence Files – Outgoing Correspondence File – copies of all correspondence sent by reps to clients or potential clients, including faxes. Incoming Correspondence File – copies of all securities related correspondence, including faxes, received from customers or anyone representing them. This file should contain all original correspondence and a copy should be maintained in the customer’s file. NOTE: All correspondence must be scanned and sent to compliance for review and approval on a weekly basis. There should be a record of when each batch of 37 correspondence was sent to the home office.

Branch Required Books and Records
Customer Complaint File – contains copies of all customer complaints (written or oral) together with evidence of notifying FFS compliance and all related correspondence and documents related to the investigation and resolution. A narrative summary of verbal complaints should be drafted and retained as though the complaint had been written. Stationary File – should contain samples of all business cards and letterhead used by the office staff including DBA and other non- securities related business activities. Evidence of compliance approval should be included in the file or retained in the Advertising File. Seminar File – contains all documentation regarding each seminar program held and should include: Copies of the agenda and outline of topic Date and location of the seminar Copies of all handouts or invitations Scripts and outlines Copies of all promotional materials used with FFS Approval List of attendees Names/Company Guest Speakers 38 Copies of mailing list used

Branch Required Books and Records
Meeting File – Contains documentation regarding all meetings held with Reps. within each branch. Documentation should include date, topics discussed, names and sponsoring companies of guest speakers, copies of handouts, list of all attendees and sign in list with each RR signature. Representative File – A separate file for each RR within the branch should contain a copy of the following: Original U4 and all amendments Fingerprint card or proof of fingerprints Most recent CRD report Sales Rep Agreement All approved Outside business activity questionnaires All CE Credits and Correspondence IAR approval Annual Compliance Questionnaires Copies of Licenses Copies of Appointments 39

Branch Required Books and Records
Sales Assistant/Admin. Assistant Files – should contain a copy of the following: Job Description Fingerprint card or proof of fingerprints Resume or employment application Sales Assistant’s Questionnaire General Securities Files – Contains all trade order tickets initiated through FFS trade desk or directly via Pershing’s NetXPro. Due Diligence Files – For each security that is recommended or solicited to customers. This file should be kept current and include: Company Annual Report and Financial Statements Nationally Recognized research firm reports Other Materials and information to support the recommendation

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Branch Required Books and Records
Customer Files –

Copies of customer account information forms Copies of all investment applications and order tickets Copies of all confirmation statements Copies of all checks/stock cert. received Copies of all correspondence and letters of instruction Copies of all disclosure documents Copies of all financial plans Copies of all agreements and legal documents Copies of all insurance illustrations Any other document acquired or used to service the customer Checks and Securities Blotters – this file should contain any checks and securities blotters that have been manually completed and submitted to compliance. Gift Log File – this should contain a listing of all gifts, regardless of value, that have been given or received from a client. It should also contain evidence of compliance approval of any gift, given or received, that has been deemed over the nominal value.
NOTE: In a paperless office, these files should be kept electronically on branch’s server and a copy stored offsite.
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Client communications
Requirements:
Have incoming and outgoing correspondence files (either hardcopy or electronic) 2. Ensure that facsimiles are included in the correspondence files 3. Maintain the original piece of incoming correspondence 4. Submit all correspondence to Compliance on a weekly basis – no exception 5. Use only FFS approved email address 6. Have form letters approved prior to use
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1.

Representative File
Requirements:
1.
2. 3. 4. 5. 6. 7. 8. 9. 10.

Copy of Form U4 Proof of Fingerprints Recent Registration Report Copy of executed Sales Rep. Agreement Copy of Outside business activity request form with approval Copy of Outside brokerage account request form with approval Copy of all CE credits Copy of IAR Approval Copy of Member Partner Questionnaires Copy of prior branch inspection

**Similar file is required for Sales Assistant
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Stationary File
Requirement –
Branch File must contain:
1. 2. 3.

All business cards and stationary samples for all registered individuals Evidence of compliance approval. All historical variations of business cards and stationary

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Seminars/Public Speaking
Requirement –
Prior to each event, must submit to compliance: 1. Approval Request form 2. Copy of agenda 3. Date and location 4. Copy of all handouts 5. Scripts and outlines 6. Copies of all promotional materials 7. List of attendees or description of intend audience 8. Names/Company of any Guest Speakers

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Seminars/Public Speaking
Branch File should include: – Evidence of compliance approval – Copies of mailing list used or list of people invited to attend – Details of costs – Sponsor Company, if event is sponsored by outside vendor **These requirements are mandatory for each and every event regardless of whether the same topic is being repeated at a different time.

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Checks and Securities Blotter
Issue: 10 % of branches still fail to send in a blotter or a transmittal sheet 20 % of branches are late or need constant reminders 70 % of branches submitting in timely fashion
Reminder: Under SEC Rule 15c3-1 and 15c3-3, FFS does not carry customer funds or securities. Because FFS requires that any check for any business related transaction that enters the branch by any means should be blottered and is “promptly transmitted.” This is for your protection as well as for the client’s protection. Firm policy: Checks/Securities received by a member partner must be delivered out of the branch by NOON of the next business day. All firm records should reflect the date the check was received and the date of the next business day as being delivered from the branch. If there is a possibility of a delay, the rep must send the check back to the client, ask the client to send the check either to the branch or fund company after the application has been completed and ready for submission. 47

Branch Inspection Schedule
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Branch inspections will default to a two year schedule.
– Exceptions:
Large number of deficiencies on previous inspection  New Member Partner  Material change in business  Observations or activities that warrant an inspection
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Depositing Checks into Brokerage Accounts
• Make certain that they are made payable to either Pershing FBO the client or the client’s account registration. • NO starter/counter checks, money orders or cash.

• The written and numeric amounts MUST match
• If there is a Third-Party Deposit, you must submit a letter with the check describing the relationship between the checking account holder and the Pershing account holder.
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Outside Activities
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Member Partner must ensure that FFS is made aware of all Outside Brokerage Accounts and Outside Business Activities Reportable offenses that could get a rep fined, suspended or barred from the industry

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Third Party Marketing Support
If a Member Partner receives any type of marketing support from a third party vendor, they must ensure that their business is not concentrated with that vendor in return for increased support.
Regulators are looking for a correlation between compensation and a rep’s book of business.

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ACH / SRS / SLS
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Make certain that ALL bank account owners sign the ACH agreement The ACH agreement needs one of these three items attached: – Voided check or deposit slip with the name, ABA# and Account # pre-printed on check/slip – Letter from the bank on bank letterhead, signed by bank official, medallion guaranteed (by someone other than the person signing the letter) – Copy of a bank statement with the registration, account number and bank name listed on the statement

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ACH / SRS / SLS (cont.)
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Systematic Liquidations (SLS) forms need to be dated at least ten (10) days PRIOR TO the ACH date Systematic Reinvestments (SRS) need to be set up to happen at least 5 days AFTER the ACH date Both SRS and SLS forms need to be signed by the member partner IMPORTANT – ALL legal paperwork must be on file at Pershing. (POA, Trusts, Corporate Resolutions, etc.)

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ProCash PLUS Accounts
ProCash PLUS Accounts  All account owners must sign application  On corporate and trust accounts, additional signatories are not permitted  All legal paperwork must be on file  Mother’s maiden name or code name must be provided in Section 2  Account type (Silver, Gold or Platinum) must be indicated  Platinum includes a debit card

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ProCash PLUS Accounts (cont.)
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If there are additional signatories in Section 8, the PRIMARY account owner must sign beneath their signatures Margin privileges may not be established from ProCash If the client requests their checks be sent to an alternate address the primary account owner must sign beneath that section in the space provided Checks WILL NOT be sent to the Member Partners office Member Partners ALWAYS need to sign the “For Financial Institution Use Only” section on the second page ProCash can not be set up on IRA accounts
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IRA Resource Checking
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May only be set up for Traditional, Rollover or Spousal IRA’s

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Clients must be age 59 1/2 or older to establish
Reps ALWAYS need to sign the “For Financial Institution Use Only” section on the second page in order to witness the client’s signature
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Sending Checks / Fed Fund Wires
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All wires require LOA / Fed Fund Wire Request Forms signed by the client All Third Party check requests require LOA / Check Request Forms signed by the client All checks going to an alternate address require LOA / Check Request Forms signed by the client Please make your Member Services Representative aware that you are sending in a Time-Sensitive Request or note it in the Notes section o the transaction
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Professional Administrators Institute

Business Continuity Planning

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Business Continuity Planning
“Failure to plan is a plan for failure”
Goals of a good BCP is to:

1.
2. 3.

Protect your clients
Protect your firm Protect your future

Disruption Scenarios
Plan for different types of disruptions:
Office – computer crash; power failure; loss of internet connection; phone lines severed; building floods Local – power failure; tornado; snow storm; loss of internet by provider

Plan for different time frames of disruptions:
Less than four hours Entire business day Five business days Longer than a week
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Three Phases of BCP
People
– Staff – Clients – Vendors

Your Firm
– Facilities – Technology – Operations

Recovery – Backup site – Data Recovery 61

People
1. Staff – How to communicate regarding implementation of plan? Does all the staff need to report, or just essential personnel? Determine priorities and function for each individual, who will do what when? 2. Clients – How to communicate regarding the business disruption? How will clients communicate with you regarding their accounts? How can clients make trades or request a check or wire? 3. Vendors – How to communicate regarding the business disruption? How to reconnect or establish business lines?

Your Firm
1. Facilities – How to communicate with the owner of the building? Who are all the companies that service the building? Determine recovery standards, if disruption last more than X, move to offsite location? 2. Technology – How/When to communicate your technology support regarding the business disruption? Is there a BCP clause in your tech support contract? Do you have a “War Games” scenario built into your technology plan? How can you best protect your client’s information? How can you best archive your firm’s data for safety and recovery?

Vision for IT Protection
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Hardware Failures Natural Disasters Planned Maintenance Data Loss Failover and Recovery

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Your Firm
3. Operations – Does your firm have financial agreements in place for emergency funds in case of a business disruption? Define what bare minimum equipment it will take to get your firm operational. Determine a offsite location if primary facilities go down. Maintain offsite copy of the firms corporate records.

Maintain a current list of all vendors that you do business with.
If disruption is long term, make sure firm has access to emergency funds.

The Reality Is…….
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No plan can give a 100% guarantee
– Some things will fail – Nobody can predict what or when

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Because of this we must:
– Plan to continue our business – Have contingencies in place ready to deal with the effects of failures
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Recoverability You have a backup plan but…
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Do you have a restore plan?
– – – – – – Communicate with clients Business correspondence New Business contacts and proposals Email Financial and accounting information Personal information
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Essential Steps
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Discuss with staff the importance of having a plan Documentation -Complete your firm’s plan Plan with a IT Consultant Find out what your vendor’s BCP plans are Get with your financial institution for discussions on emergency funding
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Essential Steps
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Test the plan Evaluate the results Improve on the results Re-evaluate on an annual basis

http://www.finra.org/Industry/Issues/BusinessCo ntinuity/index.htm Handout –FINRA BCP Template
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