Series 6

Exam Alert: Investment tax to take effect next year

Effective January 1, 2013, investment income of people with gross adjusted income over a certain threshold will be subject to a 3.8% tax. The threshold is $200,000 for single filers and $250,000 for joint filers. Income from certain investments will not be subject to the tax. The tax applies to investment income that causes the gross adjusted income of the individual or couple to be in excess of the $200,000 or $250,000 threshold. Continue reading

The income unaffected by the tax, according to the Wall Street Journal, includes:

-payouts from a regular or Roth IRA, 401(k) plan or pension

-Social Security income

-annuities that are part of a retirement plan

-life-insurance proceeds

-municipal-bond interest

-veterans’ benefits

-Schedule C income from businesses

-income from a business on which you are paying self-employment tax, such as a Subchapter S firm or a partnership

Income that is expected to be subject to the tax, according to the Wall Street Journal, includes:

-dividends

-rents

-royalties

-interest, except municipal-bond interest

-short- and long-term capital gains

-the taxable portion of annuity payments

-income from the sale of a principal home above the $250,000/$500,000 exclusion

-a net gain from the sale of a second home

-passive income from real estate and investments in which a taxpayer doesn’t materially participate, such as a partnership

For examples of how to calculate the tax, see the linked articles below.

Sources:

“Get Ready for the New Investment Tax” (Wall Street Journal)

“Medicare tax hikes: What the rich will pay” (CNN)

“About That Investment Tax…” (Wall Street Journal)

This alert applies to the Series 6, Series 7, Series 62, Series 82, Series 65, and Series 66.

Exam Alert: FINRA to raise limit for simplified arbitration

The SEC has approved amendments to FINRA’s arbitration rules. These amendments, effective July 23, 2012, raise the limit for claims under simplified arbitration from $25,000 to $50,000. These changes apply to both arbitration claims involving customers and claims involving other members of the securities industry.

Simplified arbitration is a streamlined arbitration process where both parties submit written statements to a single arbitrator, who then evaluates the claim. Note that if a counterclaim raises the amount in dispute to over the $50,000 limit, then the dispute will not be resolved through simplified arbitration.

Source: FINRA Regulatory Notice 12-30

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

Exam Alert: FINRA to implement new communications rules

The SEC has approved new FINRA rules governing communication with the public. The rules will take effect February 4, 2013. While the rules are generally based on current communications rules, several significant changes will be made. Continue reading

Communication Categories

-The six current types of communications will be replaced with three types: institutional communication, retail communication, and correspondence.

-Institutional communication is communication that is only distributed to institutional investors. In order for a communication to count as institutional communication, the firm must not have “reason to believe” that the communication will be forwarded to non-institutional investors (“retail investors”).

-Retail communication consists of communications to more than 25 non-institutional investors within a 30 calendar day period.

-Correspondence includes communications to 25 or fewer non-institutional investors.

-Replacements for current rules may apply to different categories of communication than the present rules do. For full details on which rules will change, see the FINRA Notice.

Approval, Review, and Recordkeeping Requirements

-There are modified standards for pre-approval of communication by principals.

-Series 16 supervisory analysts may approve research that is not a “research report” if they have technical expertise in the product area and the product does not require licenses they do not have.

-The following are exempted from pre-approval: research/analysis on certain broad, limited topics; forum posts; and communications that do not make recommendations or promote a product or service of the firm.

-FINRA may grant an exemption from pre-approval requirements for good cause.

-Any communication filed with the Advertising Regulation Department must be pre-approved.

-Records must include information on the sources of tables, graphs, and charts.

-If a communication wasn’t pre-approved, records must include the name of the person who prepared and distributed the communication.

Filing Requirements and Review Procedures

-The one-year pre-filing period for new firms will start on the date the firm’s FINRA membership becomes effective. Under the current rule, the period starts when a firm first files an advertisement with FINRA.

-The Advertising Regulation Department may require a firm to file any type or types of communications prior to use.

-The pre-use filing requirement is revised to include retail communications regarding investment companies that include self-created rankings, retail communications concerning securities futures, and retail communications that include bond mutual fund volatility ratings.

-All retail communications concerning closed-end registered investment companies, registered CMOs, and derivatives must be filed with FINRA within 10 business days of first use.

-A present requirement to file advertisements concerning government securities within 10 business days of first use has been eliminated.

-An exclusion from filing exists for:

–Retail communication based on a template that has been filed with FINRA, if the only changes are updating statistical or other “non-narrative” information;

–Retail communications that do not make recommendations or promote a product or service of the firm;

–Online forum posts; and

–Press releases issued by closed-end investment companies listed on the NYSE that are subject to the “immediate release policy.”

-Free writing prospectuses that are prepared by broker-dealers and that will be widely disseminated must be filed with FINRA.

-FINRA may grant an exemption from the concurrent-with-use filing requirement (requirement that states a communication must be filed within 10 business days of first use) for good cause.

Content Standards

-FINRA has added new specifications for illustrations that compare tax-deferred investments with taxable compounding investments. These requirements include using actual federal income tax rates, making a fair comparison, and making appropriate disclosures – the full list of requirements may be found on pages 17-18 of the FINRA Notice.

-A firm must disclose that a testimonial is a paid testimonial if more than $100 is paid for a testimonial (the current rule requires disclosure if more than a “nominal sum” is paid).

-A retail communication that contains a recommendation of securities must disclose if the firm or any associated person involving in preparing the communication has a non-nominal financial interest in the issuer of the security. This is in place of a prior requirement that required disclosure if any of the firm’s officers or partners had a non-nominal financial interest in the issuer.

-Firms are now subject to similar requirements as investment advisers in regards to retail communications about past recommendations – generally specific past recommendations are not allowed. Lists of past recommendations that cover at least one year are acceptable if they include all recommendations for a given type, kind, or classification of security.

Public Appearances

-Public appearances will no longer require pre-approval or filing with FINRA. They still require a reasonable basis for recommendations, proper disclosure, and written supervisory procedures.

Guildlines for Communications With the Public Regarding Security Futures

-Communications about securities futures must be accompanied or preceded by a risk disclosure document if it contains the names of specific securities.

Source: FINRA Regulatory Notice 12-29

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

Exam Alert: FINRA prohibits collective action claims from being arbitrated under its Code

Effective July 9, 2012, FINRA will modify its arbitration rules to explicitly state that collective action claims brought under the Fair Labor Standards Act (FLSA), the Age Discrimination in Employment Act (ADEA), or the Equal Pay Act of 1963 (EPA) may not be arbitrated under FINRA’s Code of Arbitration for Industry Disputes. The rule had already prohibited arbitration of class action claims under the Code – this change makes it clear that this prohibition extends to the specified collective action claims as well.

Other rules of procedure were added that govern the determination of whether a specific dispute is a collective claim, and thus not subject to arbitration. These rules are similar to the existing rules for determining whether a dispute is a class action claim. These rules include:

-Someone who opts in to a collective action claim cannot settle the same dispute using arbitration.

-If there is a disagreement over whether a claim is part of a collective action, a panel will review the issue.

-Members and associated persons may not enforce arbitration agreements against members of certified or putative collective actions in relation to any of the claims covered by the collective actions.

Source: FINRA Regulatory Notice 12-28

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

Exam Alert: FINRA provides guidance on its new suitability rule

FINRA’s new suitability rule, FINRA Rule 2111, will take effect on July 9, 2012. On May 18, 2012, FINRA provided guidance on the new rule by responding to broker-dealer questions, in Regulatory Notice 12-25. This guidance is in addition to the guidance provided in two prior notices, Regulatory Notice 11-02 and Regulatory Notice 11-25.

Some key takeaways:

Acting in a Customer’s Best Interest

-When a broker-dealer makes a recommendation, they must not place their own interests ahead of the customer’s.

Recommendation

-Marketing and offering materials do not count as “recommendations” subject to the suitability rule. See prior notices for further info on what does count as a “recommendation.”

-Implicit recommendations to trade, such as trading on the customer’s behalf without informing them, require a suitability determination. Explicit recommendations to trade or to hold securities also require a suitability determination. Implicit recommendations to hold (i.e. when the broker-dealer remains silent about the customer’s holdings) do not trigger the suitability requirement.

-A call center informing a customer that they can keep their account with a firm does not constitute a recommendation.

-Broker-dealers still have suitability obligations when recommending private placements – this was not changed by the JOBS Act.

Customer

-The suitability rule applies to anyone the broker-dealer makes a recommendation to besides another broker-dealer. This includes potential investors that do not currently have accounts with the firm.

Investment Strategy

-Communications are not subject to the suitability rule if they 1) do not recommend a particular security or group of securities, and 2) are based on an acceptable asset allocation model. For example, suggestions to invest certain percentages of assets in equities or in fixed-income securities would not generally be subject to the rule, but more specific recommendations would be subject to the rule.

Risk-Based Approach to Documenting Compliance With Suitability Obligations

-The extent to which the firm needs to document suitability compliance depends on the risk and complexity of the recommended security/strategy. Recommendations of riskier, more complex securities/strategies are more likely to require documentation.

-Explicit hold recommendations should be documented for certain securities where holding them would be particularly unusual or risky.

-Firms can choose how they want to document hold recommendations.

Information-Gathering Requirements

-The customer info described in the rule only needs to be acquired if/when the broker-dealer makes recommendations.

-Asking a customer for their info is usually good enough, though the broke-dealer may not rely on the customer’s response if there are “red flags” indicating the info may be inaccurate.

-Broker-dealers must use reasonable diligence when trying to get customer info. If they do not get all the info, firms must carefully consider whether they understand the customer well enough to analyze the suitability of an investment before making a recommendation.

-Broker-dealers must consider all information disclosed by a customer in connection with a recommendation when making a suitability analysis.

-If a customer has multiple goals that appear inconsistent, the firm should clarify/reconcile the customer’s goals.

-A broker-dealer may consider the experience of an account manager when making recommendations.

-A broker may make recommendations based on a customer’s overall portfolio, including investments held at other institutions, if the customer give their approval and the broker knows the details of the customer’s overall portfolio.

Reasonable-Basis Suitability

-The reasonable-basis suitability determination has two components.

1) The broker must understand the recommended security or strategy and the risks involved.

2) The broker must determine whether the recommendation is suitable for at least some investors.

Quantitative Suitability

-The quantitative suitability obligation prohibits churning.

Institutional-Customer Exemption

-FINRA has not endorsed or approved any “Institutional Suitability Certificates.”

-The new suitability rule does not use the old rule’s definition of an “institutional customers” – it instead uses the more common definition of an “institutional account.”

-The new institutional customer exemption requires an affirmation from the institutional customer that they are exercising independent judgment. The broker-dealer must also have reasonable basis to believe that the institutional customer is capable of independently evaluating investment risks.

-If the institutional customer does not meet both conditions (capable of evaluating risk and affirming that they will exercise independent judgment) for all of the broker-dealer’s recommendations, the broker-dealer may narrow the scope of the types of securities/strategies it recommends so as to meet the institutional customer exemption.

-The firm may use a risk-based approach to documenting an affirmation from an institutional customer. The affirmation does not need to be in writing.

Source: FINRA Regulatory Notice 12-25

This alert applies to the Series 6, Series 7, Series 24, Series 26, Series 55, Series 62, Series 79, and Series 82.

Exam Alert: SEC releases risk alert on unauthorized trading

On February 27, 2012, the SEC released a risk alert providing suggestions for techniques and controls a firm may use to help avoid conducting unauthorized trades. The alert has a large focus on supervisory procedures, but also addresses other ways in which firms can make it harder for employees to engage in unauthorized trading. The alert identifies alternative methods to more readily detect unusual trading activity and stresses the importance of a culture of openness and compliance. Continue reading

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.

Exam Alert: SEC approves revised FINRA telemarketing rule

The SEC has approved a new consolidated FINRA telemarketing rule. The rule will become effective July 29, 2012. The new rule contains provisions that are similar to FTC standards. Continue reading

The SEC has approved a new consolidated FINRA telemarketing rule. The rule will become effective July 29, 2012. The new rule contains provisions that are similar to FTC standards. Changes to the prior rule include:

-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.

Exam Alert: FINRA raises exam fees

Effective April 2, 2012, FINRA will increase the fees associated with several of its qualification examinations. The fee increases range from $5 to $25. In addition, FINRA will impose a $15 service charge for examinations taken outside of the territorial limits of the United States. Continue reading

Source: FINRA Regulatory Notice 12-16

This alert applies to the Series 6, Series 7, Series 24, Series 26, Series 55, Series 62, Series 79, and Series 82.

Exam Alert: SEC requests that broker-dealers provide FINRA with SAR information

Member firms must make suspicious activity reports (SARs) and supporting documentation available to FINRA, as well as any information that would reveal the existence of an SAR or any decision not to file an SAR. Continue reading

On January 26, 2012, the SEC issued a letter that authorized FINRA to request suspicious activity reports (SARs) and supporting documentation from member firms when FINRA conducts examinations, investigations, or risk assessment for its examination program. Member firms must make these documents available to FINRA, as well as any information that would reveal the existence of an SAR or any decision not to file an SAR.

Source: FINRA Regulatory Notice 12-08

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

Exam Alert: US Labor Dept requires disclosures from plan service providers

The US Labor Department has finalized a rule under ERISA that will require service providers for pension plans to disclose information about their fees to the employers sponsoring the plans. The rule will be effective July 1, 2012. Continue reading

The rule will require disclosure of the service provider’s compensation structure (including both “direct” compensation from the plan sponsor and “indirect” compensation from other sources), as well as potential conflicts of interest. The rule is limited in scope to ERISA-covered defined benefit and defined contribution pension plans. The rule applies to service providers who expect to receive at least $1,000 in compensation for specified plan-related services, including fiduciary, advisory, brokerage, and recordkeeping services, or other financial services for which they receive indirect compensation.

Sources:

U.S. Treasury, Labor Departments Act to Enhance Retirement Security for an America Built to Last

Fact Sheet – Final Regulation Relating to Service Provider Disclosures Under Section 408(b)(2)

This alert applies to the Series 62, Series 6, Series 26, Series 24, Series 7, Series 65, Series 66, and Series 82 – these exams address ERISA considerations.