-Clear explanation of regulatory requirements and firms' expectations: detailed written policies and procedures that make clear how to conduct due diligence and include relevant rules and guidance

-Commitment committees: firm-wide, senior level committees that provide an additional step of review for various underwritings

-Diligence checklists: checklists to record which due diligence steps have been taken

-Due diligence memoranda: memos prepared by public finance bankers that describe any due diligence concerns and provide a review of the final official statement

-Outlines for due diligence calls: outlines prepared by underwriters' counsel or issuer's counsel that address disclosure concerns identified during due diligence calls

-On-site examination activities: on-site examinations to check the issuer's fiscal prospects

-Recordkeeping checklists: checklists to make sure records of due diligence activities are made and properly stored

Source: SEC Release 2012-48

This alert applies to the Series 7, Series 79, Series 24, and Series 62.

-Details regarding the underwriter's role, including that the underwriter has different financial interests than the issuer and that the underwriter does not have a fiduciary duty to the issuer

-The conditions of the underwriter's compensation

-Any actual or potential material conflicts of interest - the interpretive notice specifically identifies the following potential conflicts of interest: third-party payments, profit-sharing with investors, and credit default swaps

-If recommending complex municipal securities transactions/products, all associated material financial risks, characteristics, incentives, and conflicts of interest

Additional requirements are as follows:

-All representations to the issuer must be accurate, truthful, and complete, with no omission or misrepresentation of material information.

-When drafting any issuer disclosure documents, the underwriter must have a reasonable basis for any representations it makes.

-The underwriter must pay a fair and reasonable price to the issuer.

-The underwriter may not recommend that the issuer not retain a municipal advisor.

This Exam Alert applies to the Series 7 Exam.

Sources:

MSRB Notice 2012-25

MSRB Establishes New Protections for State and Local Governments that Issue Bonds

Regulation M was put in place to prevent market manipulation by those involved in the distribution of a security.  Covered, non-excepted securities are subject to a restricted period, during which time the distribution participants may not purchase the security, with certain exceptions (such as passive market making and stabilizing activities).

FINRA requires firms acting as manager in a distribution subject to Regulation M to file written notice that includes a determination as to the length/applicability of the restricted period and details on the pricing of the distribution, including the security name and symbol, the type of security, the number of shares offered, the offering price, the last sale before the distribution, the pricing basis, the SEC effective date and time, the trade date, and identification of the distribution participants and affiliated purchasers.  FINRA also requires written notice of penalty bids and syndicate covering transactions in OTC equity securities.

ADF Market Makers must submit written notice of withdrawals of quotations during the restricted period.  Under FINRA trade reporting rules for OTC equity transactions, firms must provide notice and information to FINRA when they use an exception to the trade reporting requirements for transactions that are part of an "unregistered secondary distribution."

Sources:

FINRA Regulatory Notice 12-19

Regulation M Filing

FINRA Rules 5190 and 6275

This alert applies to the Series 24, Series 79, and Series 7.

FINRA will generally not be migrating data from the old system to the new one.  However, FINRA will transfer over base prospectuses submitted for shelf offerings.

The new system includes new features.  FINRA will be releasing further information on the new system on its website.

Emerging growth companies that choose to file their IPOs confidentially with the SEC must still file information with FINRA (all filings with FINRA under the Corporate Financing Rules are nonpublic).

Firms remain responsible for the accuracy of their filings even if the filing is made by a third party.

Source: FINRA Regulatory Notice 12-22

This exam alert applies to the Series 62, Series 79, Series 24, Series 7, and Series 82.

The rules provide two categories of persons subject to SEC registration: "security-based swap dealers" and "major security-based swap participants."  In essence, a security-based dealer is a person that regularly trades security-based swaps for their own account.  A de minimis exemption exists for dealers who traded up to $3 billion worth of credit default swaps over the past year and up to $150 million worth of other security-based swaps.  Note that there is a different de minimis threshold of $25 million for security-based swaps involving "special entities," including certain government agencies.

A major security-based swap participant is a person who maintains a "substantial position" in any of the major security-based swap categories, or whose outstanding security-based swaps create "substantial counterparty exposure."  Note that hedging positions are not counted towards the "substantial position" threshold if the person is not a "highly leveraged financial entity," meaning a financial entity with a ratio of liabilities to equity in excess of 12-to-1.  Two tests are provided for determining "substantial position," and two thresholds are provided for "substantial counterparty exposure."  The specifics of these tests and thresholds may be found in the SEC release, along with background information, a plan to phase-in the de minimis rule, a safe harbor to avoid being considered a major participant, and other details.

The rule will become effective 60 days after publication in the Federal Register, though the deadline for registration will be given in SEC's final rules for registration of dealers and major participants.

Source: SEC Release 2012-67

This exam alert applies to the Series 62, Series 79, Series 99, Series 65, and Series 66.

FINRA's amended rules will state that disputes that arise under whistleblower statutes that prohibit predispute arbitration agreements are not required to be arbitrated.  These disputes may only be arbitrated if both parties agree to do so after the dispute arises.

Source: FINRA Regulatory Notice 12-21

This exam alert applies to the Series 62, Series 79, Series 24, Series 7, and Series 82.

Here is a breakdown of the changes:

-IPOs for "emerging growth companies" are subject to fewer restrictions limiting communication between research analysts and investment bankers (Chinese Walls).  An emerging growth company is defined as a company with less than $1 billion in annual revenue that had its first IPO no more than five years ago.  This has been estimated to cover as much as 90% of companies looking to go public (Source: Reuters).

-Banks are allowed to publish research reports on emerging growth companies immediately after they take them public.  The old rule required a 40 calendar day quiet period for IPOs.

-There are fewer restrictions on advertising emerging growth companies to accredited investors.

-Emerging growth companies are exempt from certain disclosure requirements.

-Startup companies can sell small amounts of shares to several investors to raise up to $1 million without being required to register the security (crowdfunding).  An investor can contribute up to at most $10,000, though the individual maximum may be lower based on the investor's annual income or net worth.

-The Act increases the number of shareholders a non-bank company may have before it is required to go public, from 500 persons to 2000 persons or 500 non-accredited investors.

-The Act increases the amount of funds that can be raised before a company is forced to register with the SEC, from $5 million (under Regulation A) to $50 million.

-Up to 2,000 shareholders may invest in a bank holding company before registration is required (up from 500).

-Various other issuer registration requirements have been modified (see the SEC's JOBS Act FAQ).

The Act itself may be found here.

Sources, further reading:

http://dealbook.nytimes.com/2012/04/04/wall-st-examines-fine-print-in-a-new-jobs-bill/

http://dealbook.nytimes.com/2012/04/11/regulator-seeks-feedback-on-jobs-act/

http://www.sec.gov/divisions/corpfin/cfjobsact.shtml

http://www.gpo.gov/fdsys/pkg/BILLS-112hr3606enr/pdf/BILLS-112hr3606enr.pdf

http://www.reuters.com/article/2012/04/11/us-jobsact-ipos-idUSBRE83A0Z820120411

http://www.reversemergerblog.com/2012/03/17/summary-of-jobs-bill-and-update/

http://www.csmonitor.com/USA/Politics/2012/0308/What-does-the-JOBS-Act-actually-do-Six-questions-answered/What-s-in-the-JOBS-Act

http://www.pcmag.com/article2/0,2817,2402657,00.asp

http://www.forbes.com/sites/jjcolao/2012/03/21/jobs-act/

This alert applies to the Series 79, Series 62, Series 24, Series 7, and Series 82.

Suggestions for supervisory procedures include:

-Have more than one chain of control be responsible for monitoring the integrity of the business, i.e. don't have all your compliance personnel report to the same person.

-Managers and supervisors should understand any complex products and strategies being employed by traders.

-Supervisors should engage in discussions with traders and portfolio managers and address positions that are unusual (given the strategies and/or client objectives involved).

-Make sure the payment structure for traders and supervisors encourages responsible risk-taking.

-Try to avoid having one person or desk fulfill multiple roles.

-Have an "open-door" policy that encourages traders to report unexpected losses promptly.

-Limit trader access to their appropriate portfolios - don't let them keep access to ones that they are no longer authorized to trade in.

-Consider additional controls (several are listed in the alert).

Other suggestions include:

-When an employee transfers into the trading department, remove any prior system access he or she had.

-Have controls in place to confirm extended settlement trades and rollovers.

-Review delays and discrepancies in the customer trade confirmation process to check for unauthorized trading.

-Require mandatory vacations for traders with no remote access to accounts, then assign their portfolio(s) to a supervisor or experienced trader for the duration.  Use this time to check for unusual activity.

-Have the audit and compliance departments review trading strategies, business performance, and risk profile.

-If the firm has multiple recordkeeping systems, try to integrate them.

-Test the controls put in place to discourage unauthorized trading.

-Maintain a corporate culture of honesty, integrity, accountability, and responsible risk-taking.

Source: SEC Release 2012-33

This exam alert applies to the Series 24, Series 26, Series 6, Series 7, Series 62, Series 79, Series 82, and Series 99.

-Do-not-call lists: Under the old rule, do-not-call requests were required to be honored for five years.  Under the new rule, do-not-call requests must be honored indefinitely.

-Unencrypted consumer account numbers: Firms may not buy or sell unencrypted consumer account numbers for telemarketing purposes.

-Submission of billing information: Firms must obtain the informed consent of a customer in order to charge them for a telemarketing transaction.  The firm must also identify the account to be charged.  If the transaction involves "pre-acquired account information and a free-to-pay conversion feature," then the firm must make an audio recording of the telemarketing transaction.

-Abandoned calls: Firms may not abandon outbound calls, unless they meet the following safe harbor provisions:

1. The firm employs technology that drops no more than 3% of answered calls over a 30-day period (or the duration of a single calling campaign that lasts less than 30 days).

2. The firm lets the phone ring for 15 seconds or 4 rings before disconnecting the unanswered call.

3. If there is no associated person available to speak with the person answering the call within 2 seconds of the person's completed greeting, the firm plays a recording giving the name and number of the firm.

4. The firm retains records of compliance with the safe harbor.

-Prerecorded messages: Except as noted above (under "abandoned calls"), firms may not make outbound calls that deliver prerecorded messages unless they have the written consent of the person receiving the call.  The call must include an opt-out mechanism, as well.

-Credit card laundering: Credit card laundering is prohibited.  Credit card laundering is "the practice of depositing into the credit card system a sales draft that is not the result of a credit card transaction between the cardholder and the firm."  Soliciting someone else to engage in credit card laundering is prohibited as well.  Obtaining unauthorized access to the credit card system is also prohibited

These rules also apply to associated persons of a firm.

Source: FINRA Regulatory Notice 12-17

This exam alert applies to the Series 62, Series 6, Series 26, Series 24, Series 7, and Series 82.