Annual Compliance Meeting - faconference.com€¦ · LPL Financial Member FINRA/SIPC 2 Agenda • Culture of Compliance • Working with Seniors • Suitability and Know Your Customer

LPL Financial Member FINRA/SIPC

1 Member FINRA/SIPC

Annual Compliance Meeting


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Agenda •  Culture of Compliance •  Working with Seniors •  Suitability and Know Your Customer •  Conflicts of Interest •  Consolidated Reporting •  Communications with the Public •  Variable Annuities •  Mutual Funds •  Alternative Investments •  Exchange Traded Products •  Fixed Income •  Letters of Non-Solicitation •  Advisory Update •  Retirement Update •  Cybersecurity •  Outside Business Activity and Private Securities •  Customer Disputes •  Form U-4 Updates


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Culture of Compliance

•  Risk Management is your business and your responsibility

•  You are the first line of defense in managing risk •  You are responsible for:

•  Understanding and following policies and procedures •  Escalating concerns and non-compliance – If you see

something, say something!

Compliance is a culture, not just a set of policies and procedures The culture of compliance is about: •  Understanding that you each

have individual responsibility for compliance

•  Understanding what is expected


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Working with Seniors

•  If senior client experiences dementia, the concern is whether he or she is capable of making decisions about investing

•  Role as advisor: •  Assist clients in planning and preparing for this change •  Be able to identify potential signs and symptoms of diminished

capacity •  Be vigilant for signs of elder financial abuse and fraud

As a person ages, his or her capacity to make decisions and execute transactions may begin to diminish – this holds true for both investors and advisors


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Working with Seniors and Issues of Diminished Capacity


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Working with Seniors/Diminished Capacity

  If general signs and symptoms of dementia are identified, document your concerns and report them to your OSJ Manager or Supervisory Principal   Short term memory loss   Communication problems or confusion   Comprehension problems   Lack of mental flexibility   Calculation problems   New interest in get-rich-quick schemes   Personal hygiene changes

  Look for signs that older client may be a victim of elder financial abuse   Atypical withdrawals   Changes in investment style   Unable to contact client   Signs of intimidation in presence of family or caregiver


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Working with Seniors and Issues of Diminished Capacity

  LPL has resources to help you when you are faced with the tough situation of a client exhibiting signs of diminished capacity

  SIAC Resources   [email protected]

  or   (800) 877-7210 Ext. 6228

  BranchNet Resource Center   >Your Business   >Governance, Risk & Compliance   >Compliance Essentials

•  >Senior Investors


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Suitability and Know Your Customer

•  Suitability is a fundamental tenant of securities rules •  When recommending a security, an advisor must have

up-to-date investment profile information •  Advisor must also know the products being

recommended •  Recommending a strategy or a hold is also subject to

suitability

Suitability: an advisor must have a “reasonable basis” for believing that a recommended transaction or investment strategy involving a security is suitable for the client


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Know Your Customer & Suitability

  Know Your Customer - Information obtained through reasonable diligence:   Age   Investment experience   Investment time horizon   Liquidity needs   Risk tolerance   Other investments   Financial situation   Tax status   Investment objectives   Other information disclosed by client

  Key Point: •  Must have reasonable basis to believe recommended transaction or strategy is suitable based on

knowledge of customer and knowledge of product •  An explicit hold recommendation must be suitable


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New FINRA Suitability Sanction Guidelines

•  Suitability is a key focus of regulators

•  Range of suspension for violations of suitability guidelines has increased from one year to two years and FINRA adjudicators are urged to consider barring individuals for violations

FINRA has announced changes to its Sanction Guidelines to call for tougher sanctions against those who commit fraud or make unsuitable recommendations to customers


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Conflicts of Interest - Supervision

•  Each supervisory conflict is evaluated to determine its risk in reducing the standards of supervision

•  Potential remediation includes: •  Additional oversight •  Office restructure

•  Form F687 created to assist OSJs in documenting and submitting potential supervisory conflicts of interest for review by Supervision

FINRA Supervision rules prohibit supervisors from supervising their own activities or having their compensation or continued employment determined by a person they are supervising


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Communications with the Public •  Content standards apply to all communications, both

written and verbal •  Communications may not omit any material fact if it

causes the communication to be misleading •  Cannot make promissory or unwarranted statements or

predict or project performance based on past performance

•  If communication is distributed to 25 or fewer brokerage clients or a single advisory client, no need for prior approval of content by MRR

•  If communication is distributed to 26 or more brokerage recipients or 2 or more advisory recipients, or if audience is unknown, advisor must get prior approval of content from MRR

•  Advisor must obtain prior approval of content before speaking at a conference or holding a seminar

•  For ongoing radio or TV shows, there are additional requirements, so contact MRR

Guiding Principles: •  Adhere to principles of fair

dealing, good faith •  Clear, fair, balanced •  Have sound basis for

evaluation of facts •  Disclose all material

differences when making comparisons

•  Must be truthful


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Communications with the Public - Websites

•  Submit content to MRR via ComplianceMax •  Ensure that approval is received prior to posting new

content or making changes to a website •  Don’t forget to regularly review website content and

remove outdated content

Advisors must obtain prior approval for all content posted to their websites


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Communications with the Public - Websites

  Websites must contain:   www.FINRA.org   www.SIPC.org

  For state disclosure, must either have:   “The LPL Financial representative associated with this website may discuss and/or transact

securities business only with residents of the following states: {insert list of states in which the advisor is registered}”, or

  State filter


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Communications with the Public - Professional Designations and Titles

•  Use of Professional Designations and Titles are under

regulatory scrutiny

•  Industry is especially sensitive to professional designations and titles that imply an expertise in servicing senior citizens

•  LPL reached settlement with Massachusetts about process to review senior-specific designations and titles of representatives in the state and we have enhanced our designation and title review procedures

•  Beginning May 1,2016, all instances of an Advisor’s Bio must include a link to FINRA Broker Check website.

If you hold a any professional designation and reference the designations in your communications, it is imperative that you stay in good standing with the issuing organization: •  Pay fees/dues •  Complete continuing

education requirements •  Complete any other

requirements of the issuing body


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Communications With the Public – Social Media

•  Permitted to use these sites for business purposes if: •  Complete social media training before creating an account or

profile •  Register with Erado before posting any content so that all social

media activity is captured

•  The content that remains the same unless changed by the user, called “static content” must be submitted to MRR for approval prior to posting

•  Biographical information •  Contact information included in a profile

•  Interactive communications are allowed through those sites and Erado will capture that and LPL will retain and supervise them those communications

•  Don’t forget that the standards for communications with the public applies to social media

Approved interactive social media sites: •  Facebook •  LinkedIn •  Twitter

Use of all other social media sites not allowed Chat tools on any social media site not allowed


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Variable Annuities •  Typically sold as a method of meeting retirement and

other long-range goals •  Product can offer valuable benefits, but they do have

certain risks that can make them unsuitable for some investors:   Long holding periods or significant surrender fees   Unsuitable for investors with liquidity needs   High fees and expenses may result in reduced performance in

underlying holdings   High commissions make the product a target for switching

•  Advisor must inform the client of: •  Surrender period and surrender charge •  Tax penalty if sell or redeem VA before age 59 ½ •  Mortality and Expense fees •  Investment advisory fees •  Fees for riders •  Market risk •  Insurance and investment components of the VA

Variable Annuities are complex financial vehicles that must be suitable based on a client’s age, objectives, finances and time horizon Generally designed to be long-term investments Variable Annuities are often the focus of regulatory concerns regarding suitability, fees and share class selection


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Variable Annuities

Suitability considerations: •  Share class recommendation should be commensurate

with client’s time horizon •  Regulatory focus on L shares

•  Living Benefit Riders and Death Benefit selections should be taken into consideration when selecting a share class

•  When recommending exchange or replacement, advisors must be able to demonstrate an economic benefit to the client of the new contract when compared to the surrendered contract

•  Anticipate follow up questions from the Central Supervision Group in GRC

When recommending a Variable Annuity, suitability is extremely important


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Variable Annuities

•  All fields in AOE must be completed prior to submitting an AOE order

•  Any proposed transaction subject to CDSC that are within 3 months of contract anniversary must contain detailed advisor rationale for timing of the transaction

•  Transactions for investors age 75 or above must contain detailed advisor rationale with the client’s specific financial situation and needs information supporting the justification for incurring long-term fees

FINRA requires supervisory pre approval for all VA transactions Annuity Order Entry system must be used to place VA orders


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Variable Annuities

•  Surrenders and exchanges are subject to scrutiny •  Surrender charge incurred •  Commencement of new surrender period •  Loss of existing benefits •  Fees or charges •  Product enhancements •  Any other exchanges or surrenders in the preceding

36 months

When recommending an exchange or replacement of a VA, it has to suitable and advisors should be able to demonstrate an economic benefit to the client


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Mutual Funds

•  Switching is a focus of regulatory scrutiny and any recommendation to switch is evaluated with regard to the net investment advantage to the client

•  An exchange (sale of one fund and the purchase of

another) must be suitable

•  Beginning 2/22/16, switch letters are now sent on a negative consent basis and the advisor needs to add rationale to the trade blotter

First consideration in making a mutual fund recommendation is suitability The different choices of share classes available must be discussed with the client Must disclose breakpoint opportunities available to the client


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Mutual Fund Sales Charge Waivers for Retirement Plans and Charitable Organizations •  Some mutual fund providers may offer sales charge

waivers, allowing qualified retirement accounts and accounts for charitable organizations to purchase class A shares at net asset value without the imposition of an upfront sales charge

•  If a fund family does not offer this type of waiver, this policy does not apply

•  When a waiver is available, we’ll modify any transaction executed through the LPL trading platform to the appropriate share class with a waiver and advisors will be notified of the modification

•  LPL is working closely with sponsors to attempt to harmonize fund waiver policies


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Alternative Investments

•  Alternative Investments continue to be under intense regulatory scrutiny at the federal and state level

•  Suitability analysis is important when recommending AI’s •  Product knowledge is necessary and completion of

product training is required for the advisor and their OSJ before selling AI’s

•  Documentation of rationale is key and must explain why the product purchase or exchange is suitable for the individual client

AI’s include: •  Non-traded REITs •  Business Development

Companies •  Non-Traded Closed End/

Interval Funds •  Hedge Funds •  Managed Futures •  Other illiquid investments


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Questions to determine suitability:   Does the client have sufficient liquidity outside the alternative space to cover all expenses?

  Does the client understand the distributions are not guaranteed?

  Does the client have the ability to hold the product for the long term?

  For IRA purchases, are funds available to cover required minimum distributions, if applicable?

  Have state requirements been confirmed via the most current prospectus?

  Does the purchase conform to firm guidelines?

  If funded via switch, does the rationale cover both the buy and sell recommendation?

  Has the proper AI form and subscription agreement been submitted?


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Issues with suitability rationales:

  Lack of information when the distribution rate is not being properly balanced against the risks

  Stating “reduced volatility” as a potential benefit for the client’s purchase without providing a basis for the reduced volatility

  Stating “increased stability” as a benefit without explaining that underlying properties or leases may be fluctuating without the client’s awareness because valuations are conducted less often and therefore volatility may not be seen by the client, resulting in a misperception about the stability of the product


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Exchange Traded Products

•  Non-traditional ETF’s are under intense regulatory scrutiny

•  Suitability and documentation are critical •  Important to understand the unique feature of the specific

product being recommended •  LPL policy: no leveraged or inverse leveraged or inverse

ETFs in brokerage accounts •  If held in advisory accounts, it is important to document

the investment strategy •  Enhanced due diligence may result in a move to

traditional ETFs and fewer “exotic” product offerings

•  The longer the ETF is held, the riskier it is

The goal of traditional ETF’s is to track a specific market index, but if held for longer than one day tracking error may occur– differences from the intended result from the benchmark Non-traditional, often leveraged ETF’s can magnify tracking error ETFs have a daily reset feature under which the fund rebalances its holdings to achieve its goals on a daily basis


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Fixed Income

•  Investments in any interest-rate sensitive fixed income security can no longer be assumed to be comparatively “safe”

•  Make sure your clients with existing interest-rate sensitive fixed income positions understand what could happen when interest rates rise

•  Advisors and supervisors must carefully consider a client’s investment objective, time horizon, risk tolerance and investment experience when recommending investments in fixed income

•  Advisors must review material events at the time of sale and attest through the order entry process that all material events were disclosed to client

•  Material events can be found on EMMA

Fixed Income products in regulatory spotlight due to concerns over the potential of rising interest rates


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Fixed Income

Considerations:   Interest rate risk – effect of changes in interest rates on bond yields

  Duration- measure of the sensitivity of a bond’s price to changes in interest rates

  Credit Rating – indicator of the overall stability of the issuer

  Call provisions – ability to call a bond can have a direct effect on the bond holder’s yield

  Material Events – prior to recommending municipal securities, advisors must disclose all material events that could have a direct effect on the issuer’s ability to meet debt obligations

  Source of revenue - it is important to understand the underlying entity and the activity funding the issue

  Risks of Bond funds – Bond funds are also sensitive to interest rate changes and lack the principal guarantees that may be available when individual bonds are held to maturity


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Letters of Non-Solicitation

What’s New? •  By automating the letter of non-solicitation process, LPL has implemented changes which will simplify the process

for you and your clients while also mitigating this item as a common branch exam finding. •  Effective December 1, 2015 Advisors are no longer required to obtain client signatures on a Letter of Non-Solicitation

(F59) Form. This procedural change impacts the unsolicited purchases of low-priced/unlisted securities, non-rated bonds, proprietary bank stock and LPLA stock.

•  Instead for unsolicited transactions involving these securities, a negative consent letter – meaning your client doesn’t have to acknowledge the communication with a signature – will automatically be generated by LPL and mailed to the investor. This letter will provide important disclosures on LPL’s solicitation policy and the potential risk(s) of purchasing these securities.

•  This automation will save time for you, your staff and your clients.

•  Additionally, we will not ask the investor to sign or return anything to us.


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Letters of Non-Solicitation

Why is it required? Low priced securities (i.e. penny stocks) can be subject to market fluctuations and are also instruments that regulators have identified for potential fraudulent activity. LPL policy prohibits the solicitation of these securities. LPL policy also prohibits affiliated employees from soliciting LPL stock or publicly traded bank stock due to potential insider trading concerns. With regard to below investment grade bonds, sensitivity to factors such as interest rate changes, economic conditions, and the overall strength of the issuer make what has traditionally been considered a safe investment, much less so. LPL policy prohibits the recommendation of below investment grade or “junk “bonds. By automating the letter of non-solicitation process, LPL can ensure investors have relevant disclosure information regarding their investment choices and help our advisors focus their time on meeting clients and supporting their practice.

•  Effective December 1, 2015 Advisors are no longer required to obtain client signatures on a Letter of Non-Solicitation (F59) Form. This procedural change impacts the unsolicited purchases of low-priced/unlisted securities, non-rated bonds, proprietary bank stock and LPLA stock.


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Advisory Updates

•  Advisory v. Brokerage Analysis •  Ongoing analysis required to fulfill fiduciary obligation •  Review client circumstances to determine that advisory continues to be the most appropriate account

type for your client

•  Policy Reminders •  High Cash Balance •  Inactivity Policy •  Annual Client Meeting Policy

•  New Advisory Compliance Technology


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Hybrid Advisor Updates

•  New focus on hybrids:

•  Compensation arrangements and conflicts of interest

•  State registered RIAs

•  SEC Retirement Initiative


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Rollovers of Retirement Plans

Advisors must share these options with a plan participant who is leaving an employer and contemplating a rollover:

1. Leave the money in the former employer’s plan, if permitted 2. Roll over the assets to the new employer’s plan, if one is available and rollovers are permitted 3. Roll over the assets to an IRA, or 4. Cash out the account

Advisors are responsible for ensuring the client understands their options when considering a rollover


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Retirement – Qualified and IRA Accounts for Linear Family Members

•  Linear family member means: parent, grandparent, children and their spouses, grandchildren and their spouses

•  Includes self and spouse •  Not included: siblings, cousins, aunts and uncles •  For assets held at LPL:

•  If advisory, the advisory fee will be brought to zero, but you can invoice a non-retirement/IRA advisory account

•  If brokerage, commissions will be credited back to the account, but you could reassign account to another advisor

•  For assets held at recordkeeping provider: •  Advisory assets for IRA’s – fee needs to be brought to zero •  Advisory assets (RPCP) – you cannot have a fee that is paid

out of plan assets - fees must be paid by the plan sponsor •  Broker of Record for Qualified Plans or IRA Assets– you cannot

receive commissions/trails/12b-1’s and you should take action to have compensation turned off

When an advisor receives any form of compensation on their own IRA/401(k) or retirement plan, or for any linear family member account, it could be considered a prohibited transaction and could lose it’s tax exempt status Ensure that you are not paid on your own or a linear family member’s retirement or IRA account


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Cybersecurity

•  Control access to your computer •  Set strong passwords •  Train your staff on privacy and security •  Perform due diligence of vendors you use •  Encrypt your devices that contain PII •  Perform regular updates to your computer’s privacy and

security tools •  Dispose of PII correctly

•  Don’t be fooled by fraudsters impersonating your clients

Branch Office Security Policy states that Branch office staff must: •  Safeguard the security and

confidentiality of PII from unauthorized access, alteration or destruction

•  Protect again unauthorized access to or use of information that could result in substantial harm or inconvenience to a customer or LPL

•  Ensure the proper disposal of information


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Policy Reminder – Outside Business Activities Commonly overlooked OBA’s: •  Doing Business As Name (DBA) for LPL services •  Non-profit board positions •  Legal entities where advisor is listed as an owner •  Insurance agencies where advisor is listed as an owner •  Television or radio appearances for which compensation

is received •  Real estate rental or investment properties Prohibited OBA’s: •  Custody and bill pay services •  Participation in offering EIA’s/ FIA’s away from LPL •  Non-family fiduciary capacities •  Arranging loans through a pledge of stock or otherwise •  Acting as a finder for a fee •  Soliciting others to invest in an OBA •  Borrowing money from or loaning money to clients

Policy: Registered and associated persons cannot be employees, independent contractors, sole proprietors, officers, directors, or partners, or be compensated or possibly be compensated by a business activity outside the relationship with LPL without prior written notice to and approval from LPL. Don’t forget to let LPL know if your OBA changes


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Policy Reminder – Selling Away

•  Selling Away is often linked to an Outside Business Activity

•  Example: •  OBA for luxury car limo service is approved with understanding

that the advisor is a passive investor and with advisor confirming he will not solicit investments from others

•  Over time, the advisor’s role changes from passive investor to active management, serving as President of the OBA

•  The advisor seeks investors without our knowledge, including investments from his LPL clients – this is the selling away

•  The business declines rapidly because of the 2008-09 financial downturn (no one is renting luxury limos)

•  The advisor starts to solicit new investors to pay out commitments to earlier investors – selling away and Ponzi

•  The advisor supports a lavish lifestyle by taking assets from limo company

•  The firm folds. Investors lose money. Former advisor goes to prison. Investors look to us to make them whole. Though we were unaware of advisor activity, we are liable.

“Selling Away” is the inappropriate practice of an advisor selling or recommending the sale of a security or investment to a client or non-client without processing the order through LPL and without LPL’s permission or knowledge This is a violation of FINRA rules and is considered serious


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Policy Reminder – Private Securities

•  Private Securities Transactions may not be solicited •  Before participating in any private securities transaction,

registered persons must provide LPL with written notice about the proposed transaction and proposed involvement

•  Approval from LPL must be received prior to transaction •  Submit Rule 3040 Disclosure Form

A “Private Securities Transaction” is a securities transaction that is outside the regular course or scope of an advisor’s association with LPL, including, but not limited to, new offerings of securities which are not registered


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Policy Reminder: Customer Disputes - Complaints

•  For verbal complaints, advisors must make notes of the conversation, forward a copy of the notes to their OSJ branch manager or LPL Supervisor and to the LPL Legal Department, and place the notes in the branch office complaint file

•  Advisors may not respond to any complaint without first consulting the LPL Legal Department

•  If the client wants to discuss the complaint, the advisor should advise the client that the complaint has been referred to Legal

•  Advisors and OSJ branch managers are not permitted to respond to complaints or settle errors without the express written approval of LPL Legal

•  Copy of the complaint and the final response must be maintained in the branch office complaint file and in the client file

All customer complaints, whether written or verbal, must immediately be brought to the attention of the appropriate OSJ branch manager or LPL Supervisor and the LPL Legal Department


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Policy Reminder – Updating Form U-4

•  Update within 30 days for change of home or business address, change of name, or change in outside business activities

•  Update within 10 days of a “Disclosure Event” pertaining to criminal actions, regulatory disciplinary actions, civil judicial actions, customer complaints, arbitrations and civil litigations, financial matters such as bankruptcy, tax liens or compromises with creditors

•  FINRA charges a late disclosure fee up to a maximum of $1,575 when updates aren’t made in a timely manner and that fee is passed on to the advisor

Registered individuals have a continuing obligation to promptly update Form U-4 information This is accomplished by sharing updated information with LPL so that we can file an updated Form U-4 New registration technology, RegXchange launching in September – demo here at Focus


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Thank You For more information or if you have questions: Call the Compliance Service Center at 800-877-7210 extension x6835

Thank you for attending this Annual Compliance Meeting.

Documents

Annual Compliance Meeting - faconference.com€¦ · LPL Financial Member FINRA/SIPC 2 Agenda • Culture of Compliance • Working with Seniors • Suitability and Know Your Customer