News and Articles

SEC unanimously passes revised Form ADV, Part 2

By Barry Hollander
Senior Consultant, SCA- July, 2010

On July 22, the SEC voted unanimously to change the format of Form ADV, Part 2. SEC Chairman Mary Schapiro touted the move as on one that will “transform” the brochure from its current “check the box’ format to a plain English narrative. In addition to the changes to the format, and the current requirement that the brochure be delivered to the client prior to the commencement of the advisory relationship, the brochure will now be publicly available on the SEC website. Delivery of the brochure to existing clients will be required within 120 days of the end of the adviser’s fiscal year as opposed to the current requirement of making offer annually. Also, it appears that, consistent with the informal position taken by the SEC, delivery of the ADV Part 2 to investors in pooled investment vehicles will not be required.

The investment adviser will be required to provide the following information on Part 2:

• A description of the advisory business, including the types of service offered, whether a certain specialization is offered by the adviser and assets under management;
• How the investment adviser is compensated for its advisory services. A fee schedule must be provided and a disclosure as to whether the fees are negotiable
• Disclosure as to any other fees or expenses that advisory clients must pay;
• Disclosure of performance based fees and side-by-side management arrangements. The investment adviser will be required to disclose any conflicts that arise from side by side management and how it manages those conflicts;
• Description of methods of analysis, investment strategies, and general risk of loss and, if recommending a particular method of analysis, strategy, or securities, an explanation of material risks involved and detailed discussion of unusual risks;
• Any material disciplinary and legal events and any information on new disclosures or material changes to existing disclosures must be delivered to clients promptly;
• A description of the adviser's code of ethics and a statement that copies are available upon request;
• Disclosure of securities the adviser or an affiliate may recommend and have a material, financial interest in, the conflicts of interest associated with those recommendations and how the adviser addresses those conflicts;and
• Disclosure of:
• Soft dollar practices;
• Client referrals;
• Trade aggregation; and
• Directed brokerage.

Along with the disclosure of the above, addition disclosure of conflicts arising from these arrangements and how the investment adviser addresses these conflicts:

• Disclosure of how and with what frequency the adviser reviews client accounts;
• Disclosure of proxy voting policy;
• Wrap fee disclosure (as an appendix)similar to the current Schedule H;
• Resume information (as a Brochure Supplement) to new and prospective clients on specific individuals providing services to clients (provided to investors as supplements), including educational background, business experience, other business activities, the individuals' disciplinary history, and the person's supervisor's contact information. Note that delivery of the Brochure Supplement will not be required for the following types of clients:
• Clients for which brochure delivery is not required;
• Clients who receive only impersonal advice;
• Clients who are “qualified purchasers” as defined under section 2(a)(51) of the Investment Company Act of 1940; and
• Certain “qualified clients” such as officers, directors and other employees of the adviser.

Also note that the Brochure Supplement will not be required to be filed with the SEC.

The SEC has delayed the publication of revised Form ADV, Part 2 for five business days to create a uniform SEC-state form that will incorporate technical, state-specific changes to the Form's items and instructions. The amended rules and Form will be effective 60 days after publication in the Federal Register, and, according to the SEC, most advisers will begin distributing and publicly posting new brochures in the first quarter of 2011.

For further information contact Barry Hollander at 212-537-6555

Status of Financial Reform for the Hedge Fund Industry

By Barry Hollander
Senior Consultant, SCA- June, 2010

During the past year all financial regulatory reform proposals have included a component which expands the registration requirement to advisers to hedge funds. Currently, there are bills both in the Senate and the House which will require further regulation of hedge funds. Many expect that that the final bill passed will more closely resemble that of the Senate.

Hedge Fund Registration

Many advisers to hedge funds currently exempt would be required to register under proposed legislation. Both the Senate and the House bills would provide for a one year phase in of the registration requirement.

Exceptions under Consideration::

1. Smaller Funds: Both the Senate and House bills provide for a threshold amount under which advisers to hedge funds would not be required to register with the SEC. The Senate bill provides for a $100 million AUM threshold for all investment advisers. Those below the threshold would be subject to state registration. Senator Reed of Rhode Island had proposed an amendment which would allow, but not require, advisers to hedge funds with AUM of under $100 million to register with the SEC, but that amendment did not become part of the current version of the Senate bill.


2. Advisers to Venture Capital Funds: Both the Senate and the House bills exempt advisers to venture capital funds from registration, but the House bill would require such funds to maintain certain reports and records. The Reed Amendment would require venture funds to register.


3. Advisers to Private Equity Funds: The Senate bill would exempt advisers to private equity funds, but require certain reporting. The Reed Amendment and the House bill would require advisers to private equity funds to register.


4. Family Offices: The Senate bill exempts family offices


5. Foreign Hedge Fund Advisers: The Senate bill would exempt foreign advisers from registration if they advise less than 15 US clients and have less than $25 million AUM attributable to US clients or investors.

Reporting Requirements

Under the Senate bill, registered investment advisers, along with the current Adviser Act disclosure requirements, would be required to report the following with respect to each hedge fund they advise:

• The fund’s assets under management; ;
• Use of leverage;
• Counterparty credit risk exposure:
• Trading and investment positions;
• Trading practices;
• Other information the SEC determines necessary;
• The fund’s valuation policies and practices;
• The types of assets held; and
• Side letter arrangements.

Accredited Investor Standard

The Senate bill changes the net worth threshold for “accredited investor” status with respect to natural persons under the Securities Exchange Act and most notably eliminates the annual income alternative to the net worth standard.

Upon enactment of the bill, and for 4 years thereafter, the net worth threshold will be $1 million, excluding the value of the investor’s primary residence.

The Senate bill also authorizes the SEC to conduct an initial review the definition of “accredited investor,” as applied to natural persons, and to promulgate rules adjusting the provisions of the definition that do not relate to the net worth threshold.

Every four years, the Senate bill requires the SEC to review the definition of “accredited investor,” as applied to natural persons, and authorizes the SEC to modify the definition as appropriate for the protection of investors, in the public interest, and in light of the economy. In connection with such review, the SEC may change the net worth threshold, subject to a minimum of $1 million.

Although this new standard significantly reduces the potential investor base for hedge funds, the Senate bill does not require existing investors to withdraw from hedge funds if such investors do not meet the new standard.

The Volcker Rule - Prohibition on Banks Sponsoring or Investing in Funds

The Volcker Rule would, among other things, prohibit all U.S. banks and their affiliates (as well as foreign banks operating in the U.S. and their affiliates) from “sponsoring” or “investing in” private equity funds or hedge funds. The Senate chose not to vote on the Volcker Rule and its status is still unclear.

Derivatives – Proposed legislative changes will impact on hedge funds who trade derivatives

Key Elements in the Senate bill:

• Dual Regulators (SEC and CFTC) Would Regulate Derivatives.
• Mandatory Clearing and Exchange Trading Requirements.
• Margin Requirements.
• Segregation of Assets Held as Collateral in Derivative Transactions.
• Mandatory Reporting Requirements.
• Reporting Requirements of Prior Transactions.
• Public Availability of Swap Transaction Data.
• Major Swap Participants Would Be Regulated
• Prohibition Against Federal Government Bailouts of Swap Entities.
• Recommendations for Changes to Portfolio Margining Laws.

For further information contact Barry Hollander at 212-537-6555

Guidance on the recently passed SEC amendment to the Custody Rule

By Andrew Goldstein
Senior Consultant, SCA Securities Compliance Advisors- June, 2010

On December 30, 2009, the SEC adopted its long awaited amendments to Rule 206(4)-2 under the Investment Advisers Act of 1940, as amended (the “Custody Rule”), which become effective on March 12, 2010. As previously, an adviser with custody of client assets must maintain those assets with a qualified custodian and inform the client in writing of the name and address of such custodian. The Custody Rule has been amended, inter alia, to require SEC-registered investment advisers to undergo an annual surprise examination by an independent public accountant registered with the Public Accounting Oversight Board (the “PCAOB”) to verify assets under such investment adviser’s custody. The annual surprise examination requirement does not apply to (i) advisers who have custody of client assets solely because they are authorized to deduct fees from client accounts; (ii) advisers to pooled investment vehicles who deliver audited financial statements to pool participants; and (iii) advisers who have custody because they maintain client assets with a related person that is “operationally independent” of such adviser.

Click here to read the full article in .pdf format

Summary of FINRA Notice to Memebers 10-22 - Private Placement Due Diligence

Summarized by SCA Staff - May, 2010

In April 2010, the Financial Industry Regulatory Authority ("FINRA") released Notice to Members 10-22, reminding broker-dealer firms of their obligation to conduct reasonable investigations of the issuer and the securities that they recommend in connection with Regulation D offerings, also known as private placements. Although Regulation D offerings are exempt from the registration requirements of Section 5 of the Securities Act of 1933, they are still subject to the antifraud provisions of federal securities laws. Therefore, it is the responsibility of broker-dealers under both federal securities laws and FINRA rules to conduct a reasonable investigation of securities that they recommend to investors. Such responsibilities also include compliance with the suitability, advertising and supervision rules of the NASD, FINRA and the SEC.

In making recommendations to customers, broker-dealers are representing that they have made a reasonable investigation of the recommended security. Violation of this requirement may result in violations of federal securities laws with serious regulatory repercussions for the firm. The nature of such investigations, however, may vary based on a number of factors, including, but not limited to, the nature of the recommendation, the size and stability of the issuer, the relationship of the broker-dealer to the issuer, the role of the broker-dealer in the transaction and the presence of any "red flags." The specifics and breadth of the investigation must be determined by broker-dealers on a case-by-case basis. Broker-dealers are also restricted from relying solely on information provided by issuers with regard to subject companies. Regardless of the information provided by issuers, broker-dealers are still required to conduct their own independent investigations of the issuers and the subject companies.

At a minimum, broker-dealers' Regulation D offering investigations should consider the following:

• the suitability of recommendations under NASD Rule 2310;
• the issuer and its management;
• the business prospects of the issuer;
• the assets held by or to be acquired by the issuer;
• the claims being made;
• the intended use of proceeds of the offering;
• whether offerees are retail or institutional customers;
• whether the broker-dealer is an affiliate of the issuer;
• whether the broker-dealer is preparing the offering memorandum; and
• whether "red flags" are present (e.g., inaccurate issuer financial statements).

Furthermore, broker-dealers engaging in Regulation D offerings must also have supervisory procedures in place under NASD Rule 3010 in order to properly supervise such transactions and document their reasonable investigations. Reasonable investigations in connection with Regulation D offerings should include investigations of:

• the issuer and management concerning the issuer's history and management's background and qualifications to conduct the business;
• the issuer's business prospects and the relationship of those prospects to the proposed price of the securities being offered; and
• the quality of the assets and facilities of the issuer.

For more detailed information on broker-dealer responsibilities in connection with Regulation D securities offerings, please refer to FINRA Notice to Members 10-22.

Summary of FINRA Social Networking Guidance

Summary by SCA Staff- June, 2010

In the past year, the Financial Industry Regulatory Authority ("FINRA") has issued several releases to serve as guidance on the use of social networking media, such as blogs and social networking websites, emphasizing the importance of protecting investors from false or misleading claims and representations, as well as the applicability of FINRA rules related to communications with the public, supervision, recommendations and suitability and recordkeeping that apply to social networking media. Although FINRA does not want to prevent its members from utilizing emerging technology to better facilitate communications with investors, it has also made it clear that it is crucial that member firms understand the applicability of various FINRA, NASD and SEC rules to social networking media and that they develop policies and procedures to supervise, monitor, approve and maintain records of such communications. Failure to apply the requirements of applicable rules to firms' or their registered representatives' social media activities could have serious regulatory repercussions for both firms and their representatives.

Firms should first consider the extent to which they or their registered representatives utilize social networking media to communicate with the public about the firms' business and the audience for those communications and then determine the specific applicability of the rules. Use of social networking websites such as LinkedIn, Twitter, Facebook and Plaxo may require a number of supervisory and recordkeeping requirements for the firm. In fact, merely mentioning the firm's name in a LinkedIn account would subject the account to FINRA's communications with the public rules.

Firms may need to approve employees' participation in social networking websites, monitor their activities and capture and maintain communications from such websites if they pertain in any way to the firms' business. Participation in such websites may constitute advertising, sales literature or public appearances, depending on the method of communication and the form of interaction with the public. Among many other considerations, there may also be further implications for representatives making recommendations on social networking websites, the potential for communications between research and non-research employees and the receipt of customer complaints.

It is therefore crucial that member firms develop appropriate procedures to monitor use of social networking media and ensure compliance with all applicable regulatory requirements. Although review and approval of social networking activities are both critical components of effective compliance programs, firms should also establish robust monitoring and recordkeeping systems for social networking media. Firms may also take into consideration such factors as the format of the communications (static or interactive), the audience for such communications, prior compliance issues related to employees' social networking activities and the technology available for monitoring and capturing social networking related communications. Regardless of the extent of firms' and their representatives' use of social networking communications, firms should establish comprehensive compliance programs specific to their businesses.

For further, in-depth guidance provided by FINRA for social networking media, please refer to FINRA Notice to Members 10-06 and the webinars and podcasts on social networking that FINRA is currently hosting on its website.

FINRA to Modify Rule 3011 Eliminating the AML “Independent Testing Exemption”

By SCA Staff - October, 2009

On September 10, 2009, the Securities and Exchange Commission (“SEC”) approved the Financial Industry Regulatory Authority’s (“FINRA”) proposal to adopt National Association of Securities Dealers (“NASD”) Rule 3011 and NASD IM-3011-1 and 3011-2 as FINRA Rule 3310 and associated supplementary material. Although new FINRA Rule 3310 and associated supplementary material will adopt the provisions of NASD Rule 3011 and NASD IM-3011-1 and IM-3011-2 without substantive change for the most part, FINRA Rule 3310 will eliminate the “independent testing exception” of NASD IM-3011-1.

Currently, NASD IM-3011-1 prohibits persons at member firms from conducting independent testing of the firms’ AML compliance programs if they are: (1) a person who performs the functions being tested; (2) the designated anti-money laundering compliance person; or (3) a person who reports to a person described in either (1) or (2) above. However, NASD IM-3011-1 does allow for an exception to the above prohibitions if the person conducting the test meets all of the following four (4) requirements: (1) the firm has no other qualified internal personnel to conduct the test; (2) the firm establishes written policies and procedures to address conflicts that may arise from allowing the test to be conducted by a person who reports to the person(s) whose activities he or she is testing (e.g., anti-retaliation procedures); (3) to the extent possible, the person conducting the test reports the results of the test to someone who is senior to the AML compliance person or persons performing the functions being tested; and (4) the firm documents its rationale, which must be reasonable, for determining there is no other alternative than to comply in this manner. In addition, if the person does not report the results consistent with (3) above, the member must document a reasonable explanation for not doing so. FINRA Rule 3310 will eliminate this “independent testing exception” provision of NASD IM-3011-1.

Therefore, given the above, member firms will no longer be allowed to rely on an exception from the independent testing requirement when testing their AML compliance programs once new FINRA Rule 3310 and its associated supplementary materials have become effective. FINRA will announce the implementation date of the proposed rule change in a Regulatory Notice within ninety (90) days of the SEC’s approval of the new rule on September 10, 2009.

New FINRA Series 79 Investment Banking Exam Requirements

By SCA Staff - October, 2009

The SEC recently approved amendments to NASD Rules 1022 and 1032 that will require individuals whose activities are limited to investment banking (and the principals who supervise such activities) to pass the new Limited Representative – Investment Banking Qualification Examination – Series 79 Exam), effective November 2, 2009.

NASD Rule 1032(i) provides specific activities that would require an associated person to hold the S79 license, including, but not limited to, advising on or facilitating mergers and acquisitions, tender offers, financial restructurings, asset sales, divestitures or other corporate reorganizations or business combination transactions. Other activities specified in NASD Rules 1022(e)(2) and 1032(h)(1) are exempted from the S79 requirement. Firms should review both Rules 1022 and 1032 to determine whether the specific activities of their representatives will require the S79 license.

Representatives currently holding the S7 or a “Series 7-quivalent exam” who are also currently engaged in investment banking activities will have six (6) months from the date of the implementation of the new rule to “opt in” to the new exam (i.e., between November 2, 2009 and May 3, 2010). If representatives choose to “opt in” to the S79 exam, they will be able to maintain their Series 7 or Series 7-equivalent exam, as well as the new S79 designation. This requirement will also apply to principals supervising investment banking representatives. Such principals will be required to hold the Series 24 license and the Series 79 license, although they will also be eligible to opt out of the Series 79 exam during the initial six (6) month transition period.

New hire candidates for the new Limited Representative – Investment Banking designation during the initial six (6) month transition period for the new exam may take either the Series 7 exam, a Series 7-equivalent exam or the Series 79 exam. Representatives choosing to take (and pass) the Series 7 or a Series 7-equivalent exam during this period may also opt-in to the Series 79 license

Rule 1032 also provides for an exception to the six (6) month S79 requirement for member firms that conduct training programs for new employees that expose them to the firms’ various business lines by rotating them among departments, including investment banking. Such employees may be eligible to delay the Series 79 requirement for a period specified in Rule 1032(i). Firms should refer to Rule 1032 to determine whether their representatives will be eligible for this exception.

In order to opt in to the new Series 79 license, representatives will need to file a Form U-4 amendment, checking the Series 79 category in the SRO Registrations section of the Form U-4. Representatives choosing to opt in should not select the Series 79 designation in the Exam Requests section of the Form U-4 as this will open an exam window and incur a $265 examination fee.

Any representatives or principals conducting or intending to conduct (or supervise, respectively) investment banking activities who do not choose to opt in to the Series 79 license prior to May 3, 2010 will be required to take and pass the Series 79 exam.

The Status of Investment Adviser Legislation

By Barry Hollander
Senior Consultant, SCA - September, 2009

As a result of the numerous scandals involving investment advisers, there are currently six legislative proposals dealing with augmenting the regulatory control over investment advisers. It should be noted that private equity firms will be part of the new regulatory scheme. Hedge fund advisers and private equity firms who may be impacted by the proposed legislation should review the various elements of each of the proposals.

Hedge Fund Transparency Act - Senate Bill

• Removes the current exclusions from the definition of “investment company” under the Investment Company Act for funds with fewer than 100 investors or all of whose beneficial owners are “Qualified Purchasers” by deleting Sections 3(c)(1) and 3(c)(7) of the Investment Company Act.
• Replaces Sections 3(c)(1) and 3(c)(7) with new Sections 6(a)(6) and 6(a)(7). Under new Sections 6(a)(6) and 6(a)(7), a fund with $50 million or more in assets or assets under management would be exempt from full regulation as an investment company only if (a) either (i) the fund had less than 100 investors or (ii) all of the fund’s beneficial owners were “Qualified Purchasers” and (b) if the fund complies with new Section 6(g).
• New Section 6(g) requires SEC registration, maintenance of books and records as required by the SEC, cooperation with any request for information or examination by the SEC, and filing of an annual information form with the SEC that would be publically available in electronic, searchable format. Conflicts exist between the text of the proposal and subsequent public statements made by the proposal’s sponsors. Accordingly, it is not possible to say with certainty what, if any information would be required in the annual information form concerning the beneficial owners of fund interests. However, the proposal contemplates that the annual information form would include the following:
  
  
  • The primary accountants and primary brokers used by the fund.
  • An explanation of the structure of ownership interests in the fund.
  • Information on any affiliation that the fund has with another financial institution.
  • A statement of any minimum investment commitment required of a limited partner, member, or other investor in the fund.
  • The total number of any limited partners, members, or other investors in the fund.
  • The current value of (i) the assets of the fund and (ii) any assets under management by the fund.
• Anti-Money Laundering compliance similar to that of other financial institutions

Private Fund Transparency Act of 2009 – Senate Bill

• Removes the current exemption from registration under the Advisers Act for investment advisers with fewer than 15 clients.
• Provides a new definition of “Foreign Private Adviser”:
  • No place of business in the United States;
  • Fewer than 15 clients in the United States; and
  • Assets under management attributable to US clients of less than $25 million
• Requires all domestic “private advisers” with assets under management greater than $30 million and all non-domestic “private advisers” who do not meet the definition of “foreign private adviser” to register as an investment adviser under the Advisers Act.
• Subjects such registered advisers to SEC oversight
• Requires registered private fund advisers to comply with SEC rules related to recordkeeping, compliance programs, advertising and marketing and disclosure requirements
• Strikes Section 210(c) of the Advisers Act that presently prohibits the SEC from requiring disclosure of an investment adviser’s clients. It is possible that the intention may be to require disclosure of client and investor lists

Investor Protection Act of 2009 – Treasury Department

This proposed rule elucidates the position of the Treasury that investors do not distinguish between recommendations made by investment advisers and those made by broker dealers and therefore grants broad rulemaking authority to the SEC regarding the following:

• A uniform fiduciary standard for both investment advisers and broker dealers when either provides investment advice
• Delivery of “simple and clear” disclosures regarding the terms of the relationship between the investor and the financial institution
• Prohibition of sales practices, conflicts of interest and compensation schemes for financial institutions that in the view of the SEC are deemed “contrary to the public interest and the interest of investors”
• Requirement of a concise summary prospectus including the disclosure of fees prior to the completion of a purchase of interest in a private fund

Private Fund Investment Advisers Registration Act of 2009 – Obama Administration

• Removes the current exemption from registration under the Advisers Act for investment advisers with fewer than 15 clients.
• Provides a new definition of “Foreign Private Adviser”:
  • No place of business in the United States
  • Fewer than 15 clients in the United States
  • Assets under management attributable to US clients of less than $25 million
• Requires all domestic “private advisers” with assets under management greater than $30 million and all non-domestic “private advisers” who do not meet the definition of “foreign private adviser” to register as an investment adviser under the Advisers Act.
• Subjects such registered advisers to SEC oversight
• Requires registered private fund advisers to comply with SEC rules related to recordkeeping, compliance programs, advertising and marketing and disclosure requirements
• Strikes Section 210(c) of the Advisers Act that presently prohibits the SEC from requiring disclosure of an investment adviser’s clients. It is possible that the intention may be to require disclosure of client and investor lists
• Grants the SEC authority to require fund advisers to maintain certain records and to require reporting to the SEC of certain information about the fund adviser and the funds it manages
• Grants the SEC authority to require certain disclosures to investors, counterparties and creditors, where such disclosures would be intended to protect investors’ ability to assess systemic risk.
• Allows the SEC to keep reported information confidential except pursuant to request by Congress or other federal agencies

Corporate and Financial Institution Compensation Fairness Act of 2009 – House Bill

While this bill focuses primarily on public companies, it does include a requirement for reporting of compensation structure for investment advisers and broker dealers.

Summary

While there is much overlap in the various pieces of proposed legislation, it would be premature to predict which proposal will be enacted or whether it will be a combination of several of the proposals or a modified version of any one of them. But it would appear to be safe to say that hedge fund adviser registration, in one form or another, is on the immediate horizon.

For further information, contact Barry Hollander at 212-537-6555.

Privacy-Comments and Perspective on Privacy Programs

By Barry Hollander
Senior Consultant, SCA - September, 2009

Hedge Fund Transparency Act - Senate Bill

With the proliferation of identity theft, the imposition of new regulations regarding the protection of nonpublic consumer personal information, and the increased focus by regulators on privacy matters during examinations, financial institutions are beginning to reevaluate the privacy policies and procedures they have in force which are intended to protect such information.

Firms must assess every aspect of their policy beginning with identifying what information needs to be protected and culminating with the eventual disposal of that information.

This artilcle will discuss guidelines for developing and implementing a privacy program, including the process for conducting a risk assessment of a firm’s privacy program as well as new regulatory developments in the area of privacy safeguards.

Click here to read the full article in .pdf format

FINRA Form U4 and U5 Amendments to Affect all Registered Representatives

By SCA Staff - September, 2009

Recently, the Securities and Exchange Commission (“SEC”) approved amendments to Forms U4 and U5 as well as Financial Industry Regulatory Authority (“FINRA”) Rule 8312. FINRA amended Form U4 to:

• add three (3) new questions, (6), (7) and (8), regarding willful violations, to section 14C (which inquires about SEC and Commodity Futures Trading Commission (“CFTC”) regulatory actions);
• add three (3) identical questions in the context of findings by any self‐regulatory organization (“SRO”) to section 14E; and
• add section 14I to require the reporting of allegations of sales practices violations made against registered persons in a civil lawsuit or arbitration in which the registered person is not a named party.

Any “yes” answers to the new U4 questions will, of course, require appropriate detailed explanations in the DRP section of the U4.

In addition, FINRA amended Form U5 to:

• add question 7E to require the reporting of alleged sales practice violations made by a customer against persons identified in the body of a civil litigation complaint or an arbitration claim, even when those persons are not named as parties;
• add Question 12C to the Regulatory Action DRP;
• clarify that, in the case of full terminations, the “Date of Termination” provided by the firm will continue to be used by FINRA and other SROs and jurisdictions to determine whether an individual is required to requalify by examination or obtain an appropriate waiver upon reassociating with a firm; and
• clarify that the relevant SRO or jurisdiction determines the effective date of termination of registration.

These new U5 questions apply only to arbitration claims or civil litigation filed on or after May 18, 2009.

Furthermore, FINRA amended Rule 8312 to:

• raise the monetary threshold for reporting of settlements of customer complaints, arbitrations or civil litigation on the Forms U4 and U5 from $10,000 to $15,000, and
• make a conforming change to reflect this revised monetary threshold in the description of “Historic Complaints.”

These amendments became effective on May 18, 2009, except for section 14I of Form U4, which will become effective on November 14, 2009. Firms are required to respond to the new disclosure questions the next time they file Form U4 amendments for registered persons. FINRA will allow firms, at their discretion, to file provisional “no” answers to the six (6) new regulatory action questions (U4 section 14I) during the one hundred eighty (180) day period between the release date and the effective date of the regulatory action disclosure questions; however, any “no” answers to section 14I during such period that are not amended before November 14, 2009, will become final.

Firms should ensure that they make corresponding U4 and U5 filings, as required, within the stated time period. Further information on these amendments is available in FINRA Regulatory Notice 09‐23

FINRA Consolidated Rules to Impact all Member Firms Supervisory and
Compliance Programs

By SCA Staff - September, 2009

Recently, the Financial Regulatory Authority (“FINRA”) has been proposing new consolidated rules in phases for approval by the Securities and Exchange Commission (“SEC”) as part of the process of combining the rules of the National Association of Securities Dealers (“NASD”) and the New York Stock Exchange (“NYSE”) into one consolidated rulebook.

The new FINRA rules will apply to all member firms (whether firms were formerly NASD or NYSE members), unless the rules specifically state otherwise. The first of these new consolidated rules became effective on December 15, 2008. FINRA Notices to Members will continue to announce the dates of new approved consolidated rules to become effective from that date every sixty (60) days thereafter, unless noted otherwise. In some cases, the rule consolidation process may simply renumber existing NASD and FINRA rules in the consolidated rulebook, whereas, in other cases, FINRA may make substantial material changes to such rules.

FINRA member firms should keep in mind that they will be required to comply with the requirements of the new consolidated rules, as well as existing NASD and NYSE rules (“Transitional Rulebook”), until such rules have been fully consolidated by FINRA. As the new FINRA rules become effective, the rules in the Transitional Rulebook that address the same regulatory matters will be eliminated. Eventually, when the Consolidated FINRA Rulebook is complete, the Transitional Rulebook will have been entirely eliminated. In the meanwhile, member firms may notice that some rules are still referred to as NASD rules, others as NYSE rules and the consolidated rules as FINRA rules. Member firms should be aware that their conduct and the conduct of their representatives will be subject to the rules that were in effect at the time of such conduct with regard to regulatory examinations and disciplinary/enforcement proceedings.

It is extremely important that member firms review recent FINRA Notices to Members for information on the consolidation process and ensure that they implement the new rule requirements, as applicable, into their supervisory and compliance programs.

For more information on the FINRA rule consolidation process, please refer to the FINRA website at: http://www.finra.org/Industry/Regulation/FINRARules/P038095 Member firms will also find a FINRA Rule Conversion Chart at this location, which may be helpful in determining what rules are currently effective and how they are currently designated (i.e., FINRA, NASD or NYSE rules).

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