Editor column

Citation

Davis, H.A. (2012), "Editor column", Journal of Investment Compliance, Vol. 13 No. 3. https://doi.org/10.1108/joic.2012.31313caa.001

Editor column

Article Type: Editor column From: Journal of Investment Compliance, Volume 13, Issue 3

We begin this issue with an article by Deborah Heilizer, Brian Rubin and Andrew McCormick that summarizes and analyzes Sutherland Asbill & Brennan’s annual FINRA Sanctions Survey, a review of the disciplinary actions reported by the Financial Industry Regulatory Authority (FINRA) in 2011. Sutherland conducts its annual survey of Enforcement actions so that broker-dealers, registered representatives and law firms can better understand where FINRA has been and where it may be going in the future. FINRA’s enforcement history can be an effective predictor of future trends, the authors point out. By analyzing FINRA’s recent enforcement statistics, priorities, and trends, one may be able to anticipate the issues that will capture the regulator’s attention. Topics such as advertising, short selling, and suitability were priorities for FINRA in 2011 and therefore it seems likely that those issues will be the subject of heightened scrutiny in the near future.

Next Samuel Francis analyzes whether and how employee benefits plans established in foreign jurisdictions may participate in initial equity public offerings in the US in compliance with the FINRA’s rules restricting the sale and allocation of such offerings by registered broker-dealers. His article aims to shed light on the treatment of foreign benefits plans under FINRA’s new issue rules, an unsettled topic that is often encountered in practice but has persisted for many years with limited authoritative guidance and professional commentary.

The article by the Sanctions Compliance & Evaluation Division of the US Treasury’s Office of Foreign Assets Control (OFAC) highlights some of the most significant US sanctions risks faced by persons that operate in the securities and investment marketplace in order to encourage firms to maintain comprehensive, risk-based compliance controls that will strengthen their ability to comply with US sanctions regulations. OFAC sanctions generally either target countries or regimes whose actions or policies are determined to constitute an unusual and extraordinary threat to the national security, foreign policy, or economy of the US, or they target specific individuals or entities involved in or contributing to activity determined to constitute such a threat (such as narcotics trafficking, weapons proliferation, and terrorism) regardless of geographic location. The nature of the securities and investment sector can make identifying the often indirect sanctions implications of engaging in certain activity a challenging task; however, a well thought out, responsibly implemented OFAC compliance program can help mitigate sanctions risks in an effective manner.

Richard Parrino and Peter Romeo review the principal provisions of the Jumpstart Our Business Startups (JOBS) Act, which was enacted in April 2012 and represents significant legislative reform of securities regulation in the US. This article examines the key reforms enacted in the JOBS Act, one of the most significant pieces of legislation in a decade affecting US federal regulation of securities offerings and the disclosure obligations of public companies. Unlike other landmark regulatory reforms, such as the Sarbanes-Oxley Act of 2002 and the Dodd-Frank Act enacted in 2010, the JOBS Act liberalizes the regulatory regime rather than imposing more stringent controls to address breakdowns in the system. The Congress was motivated to enact the reforms to address concerns that the US regulatory system inhibits capital formation (and therefore job creation) by smaller companies and makes the US increasingly uncompetitive with European and Asian capital markets, the authors explain. In addressing these concerns, the Congress significantly eased regulatory burdens on companies of the size that has accounted for the vast majority of US initial public offerings in recent years, and scaled back long-standing regulatory restrictions on the conduct of both public and private securities offerings. One aspect of the legislation that has attracted feverish interest from business interests and capital market professionals alike is the Congress’s establishment of a regime for smaller businesses to raise money through the internet in “crowdfunding” transactions. The JOBS Act has not won universal acclaim, however. The Chairman of the US Securities and Exchange Commission (SEC), various investor groups, and some experienced securities practitioners have warned that the reforms could result in an increase in fraudulent offering activity and weaker disclosure by public companies.

Paul Architzel and Petal Walker explain the rules the Commodity Futures and Trading Commission (CFTC) has adopted for the segregation of cleared swaps customers’ collateral as mandated by the Dodd-Frank Act. The authors point out that segregation of customer funds is critically important to market participants. Although the CFTC’s new segregation model for segregating customer collateral for cleared swaps (Legally Segregated Operationally Commingled – LSOC) addresses a number of significant customer concerns, additional concerns are still being actively debated. The outcome of this debate may lead to additional changes to the protection of customer funds in connection with cleared swaps and to fundamental changes in the protections afforded to customer funds in connection with futures trading.

Rita Molesworth, Deborah Tuchman, Dianne O’Donnell, Jonathan Burwick, and James Lippert analyze amendments proposed by the CFTC to its disclosure, recordkeeping and reporting rules that are designed to resolve or minimize certain conflicts between CFTC and SEC rules applicable to registered investment companies whose futures and swaps trading will subject their advisers to regulation as commodity pool operators as a result of the amendments to CFTC Rule 4.5. For the benefit of legal and compliance personnel of registered investment companies whose futures and swaps trading will subject their advisers to registration as commodity pool operators as a result of amended CFTC Rule 4.5, the authors highlight the significant differences between CFTC and SEC regulation and how the CFTC proposes to minimize or resolve those conflicts.

Allison Lurton, Bruce Bennett, William Massey, Robert Fleishman, Mark Herman, Michael Sorrell, and Ronald Hewitt explain the joint final SEC and CFTC rules released this spring defining the major categories of swap and security-based swap market participants. They note that a key element of the new Federal oversight regime for the swaps market includes identifying those parties who are the most frequent users of swaps. These swap dealers and major swap participants, and their security-based swap counterparts, will be subject to registration and various other requirements. While these entities are defined in the Dodd-Frank Act, the joint SEC and CFTC rules provide extensive guidance on how a party can determine its status under the rules. The analysis required to determine status could be time-consuming and parties should begin the process of determining status as soon as possible to complete registration and other requirements within the compliance deadlines.

Martin Saunders and Chris Stott explain the meaning of a May 2012 UK High Court decision and Financial Services Authority fine and their importance for Money Laundering Reporting Officers and those who oversee anti-money laundering controls. Both decisions provide useful reminders of the range of criminal, civil and regulatory liabilities that financial institutions and their employees can face if they do not follow proper AML procedures. Although specific AML regulations differ among the UK, US, and other major jurisdictions, the underlying principles are the same.

Joseph Kelly and Elliott Curzon explain the new FINRA rules governing communications with the public approved by the SEC in March. They explain that FINRA is overhauling these rules by employing new communications categories and requiring the filing of certain types of communications that currently are not required to be filed. It is important that firms are aware of the new rules and that they educate their compliance and marketing professionals regarding the changes to ensure compliant sales communications.

Hardy Callcott, Elizabeth Baird, Timothy Foley, and Paul Tyrrell explain a new Municipal Securities Rulemaking Board Interpretive Notice defining certain disclosure and other obligations of municipal securities dealers when they act as underwriters to municipal securities issuers. Although most underwriters have always viewed themselves as having a duty of fair dealing to municipal issuers, the MSRB’s Notice will require underwriters to formalize their procedures. Underwriters will have to develop mandatory disclosures, checklists of potential conflict disclosures, and procedures for receiving written acknowledgments. They will also need to rethink how they approach complex financings for municipal issuers.

Mark Shipman explains regulatory issues and considerations as to future regulatory changes that Chinese regulators may implement with regard to the Qualified Foreign Institutional Investor (QFII) Regime. That regime has been a key component of China’s staged opening up of its financial markets, in particular its public securities market, permitting foreign investors to gain access to the previously restricted RMB denominated A share market under relatively strict regulatory oversight.

The issue concludes with two FINRA regulatory notices on telemarketing and suitability. FINRA Rule 3230 (Telemarketing) updates exiting NASD and NYSE rules that require member firms to maintain and consult do-not-call lists, limit the hours of telephone solicitations and prohibit members from using deceptive and abusive acts and practices in connection with telemarketing, and adopts provisions that are substantially similar to Federal Trade Commission (FTC) rules that prohibit deceptive and other abusive telemarketing acts or practices. The new FINRA Rule 2111 (Suitability) requires, in part, that a broker-dealer or associated person “have a reasonable basis to believe that a recommended transaction or investment strategy involving a security or securities is suitable for the customer, based on the information obtained through the reasonable diligence of the [firm] or associated person to ascertain the customer’s investment profile.” In general, the new rule retains the core features of the previous NASD suitability rule, codifies several important interpretations of the predecessor rule and imposes a few new or modified obligations.

Henry A. Davis