effective practices for managing conflicts of interest and ...alistair e. johnson, surveillance...

© 2017 Financial Industry Regulatory Authority, Inc. All rights reserved. 1

Effective Practices for Managing Conflicts of Interest and Considerations Related to Dual Registration Wednesday, December 6 11:15 a.m. – 12:15 p.m.

This session explores major types of conflicts of interest facing firms and examines the typical supervisory systems used to address those conflicts. In addition, the session provides practical insight regarding how firms can manage dual registration issues. Moderator: Alistair Johnson Surveillance Director, Sales Practice FINRA New Orleans District Office Panelists: Ronald Klimas Executive Vice President, Director of Compliance Securities Services Network, Inc. Joelle Morris Examination Manager, Sales Practice FINRA Dallas District Office Mary Simonson Executive Vice President and Chief Risk Officer Advisor Group, Inc.

© 2017 Financial Industry Regulatory Authority, Inc. All rights reserved. 2

Effective Practices for Managing Conflicts of Interest and Considerations Related to Dual Registration Panelist Bios: Moderator: Alistair E. Johnson, Surveillance Director in FINRA’s New Orleans District Office, manages Regulatory Coordinator staff responsible for the ongoing financial monitoring, sales practice surveillance and examination planning for member firms assigned to the New Orleans District. Prior to becoming Surveillance Director, she was a Senior Regulatory Specialist in FINRA’s Regulatory Programs Group working on the development and support of FINRA’s National Examination Program. This included authoring and approving examination policies and procedures on a variety of topics. She also serves as an Anti-Money Laundering Regulatory Specialist and has been involved in most aspects of interpretation and enforcement of FINRA and federal AML rules. She has delivered AML training to both FINRA staff and the financial services industry and has been a frequent speaker on AML. Prior to joining Regulatory Programs in 2006, she was a Special Investigator in the New Orleans District Office since 1999, conducting cycle, sweep and cause examinations. Ms. Johnson received her B.A. degree from Tulane University in New Orleans. She is also a designated Certified Regulatory and Compliance Professional™ (CRCP™) and Certified Anti-Money Laundering Specialist (CAMS). Panelists: Ronald T. Klimas is Executive Vice President, Director of Compliance with Securities Service Network, Inc. a Knoxville TN based independent contractor broker dealer with approximately 400 producing registered representatives. He has been the head of compliance at SSN since 1998. Mr. Klimas graduated from Widener University School of Law in 1992 and is a member of the Florida Bar Association. Mr. Klimas initially started in the industry as a retail broker but quickly moved onto compliance. In the early part of his career he worked as compliance examiner with INVEST Financial Corporation, and also served as in-house counsel for InterSecurities, Inc. and Western Reserve Life Insurance. Mr. Klimas’ registrations include Series 4, 7, 24, 63, and 65. Joelle Morris has been with FINRA for over seven years. She began her career at FINRA as a cycle examiner, became a cause examiner in 2012, and was promoted to Examination Manager in the Dallas District Office in 2016. Prior to joining FINRA, Ms. Morris worked for the Securities and Exchange Commission as an Examiner in the Division of Investment Management in New York. Ms. Morris graduated from Hofstra University with a Bachelor in Business Administration, and is currently enrolled in the dual degree program at the University of Texas at Dallas for her MBA/MS Management. Mary Simonson is Executive Vice President and Chief Risk Officer at Advisor Group, Inc., a member of Advisory Group, one of the nation’s largest networks of independent financial advisors, overseeing more than $160 billion in client assets, she assumed her current role in June 2016. As Chief Risk Officer, Ms. Simonson is responsible for developing and maintaining Advisor Group’s risk management program to identify, reduce and measure the risk exposure of the firm and its broker dealers. She ensured continuity of core practices during the 2016 separation of Advisor Group for AIG, and the subsequent creation of the firm’s independent status. Ms. Simonson joined Phoenix-based SagePoint Financial, a member firm of Advisor Group, as a Vice President and Chief Compliance Office in 2010. She later assumed the additional role of CCO for two other member firms, Atlanta-based FSC Securities Corporation and New Jersey-based Royal Alliance Associates, Inc. Immediately prior to taking on her current role, Ms. Simonson served as Senior Vice President and Chief Compliance Officer of Advisor Group, continuing development, implementation and maintenance of all compliance procedures within the firm’s broker-dealers. Ms. Simonson has more than 30 years of experience in the financial services industry, including leadership roles at WaMu Investments, formerly WM Financial Services, as chief compliance officer, at CFM Partners, Inc., a governance and risk compliance firm, where she served as Director of Business Development. Earlier, she held compliance roles at the former Shearson Lehman (now Smith Barney), and the former Chemical Investments (which became Chase). Ms. Simonson earned a Bachelor’s degree in Business Administration from Pace University. She is registered with FINRA as a General Securities Representative (Series 7), a General Securities Principal (Series 24), and holds Series 53 and Series 63 licenses.

2017 South Region Compliance Seminar

December 6 – 7 | Ft. Lauderdale, FL

Effective Practices for Managing Conflicts

of Interest and Considerations Related to

Dual Registration

FINRA South Region Compliance Seminar | © 2017 FINRA. All rights reserved.

Moderator

Alistair Johnson, Surveillance Director, Sales Practice, FINRA New Orleans District Office

Panelists

Ronald Klimas, Executive Vice President, Director of Compliance, Securities Services Network, Inc.

Joelle Morris, Examination Manager, Sales Practice, FINRA Dallas District Office

Mary Simonson, Executive Vice President and Chief Risk Officer, Advisor Group, Inc.

Panelists

1


Identifying Conflicts

Examples of Conflicts

How to Address Conflicts

Agenda

2


Dual Registrant Conflicts

Revenue Sharing Arrangements

Compensation Structures

Sales of proprietary products

Hiring Practices (e.g., recruitment bonuses, higher

payouts)

Employee/Affiliate Trading Contrary to Customers

Examples of Conflicts

3


Acting as a beneficiary on a customer’s account/policy unless approved in advance

Acting as a Chairman and/or Board Member for a publicly traded company

Acting as a 1031 Exchange Qualified Intermediary for any firm client

Payment of finder/referral fees to a third party (except IAR may pay solicitor fees if disclosed)

Acting as a Trustee, Custodian, Executor, Power of Attorney, CPA or other capacity where the RR accepts investment authority or discretionary control over assets or property of others (IAR activity, immediate family members and discretionary contracts excluded)

Examples of Firm Prohibited Activities

4


Product due diligence committee members cannot be

the same people that review/approve what sponsors

can present at firm’s annual meeting

IA Fee-based billing on application-way products

Sales contests

Check-writing authority as a Board member (except if

there are dual signatories and the other signatory is

unrelated)

Examples of Firm Prohibited Activities

5


Independent IARs can only sell BD-approved products

Independent IAR contracts requiring an IA CCO,

certain policies (e.g., inactive account policy), Section

206 testing

When accounts convert from BD to IA, look-back at

account activity for recent problematic purchases

(some firms waive fees for a period of time)

Best Practice Controls – Dual BD and RR/IARs

6


Product agnostic compensation grids

Flat payout (per RR contract)

Whistleblower Policy

RR contract allows for review of personal taxes on a

red flags basis

Best Practice Controls

7


Branch audits Interviews of non-registered employees

Are there other people in the office not associated with the firm?

Who sits in each desk/office? Why is that desk/office empty?

Obtain a phone list to compare against associated persons in that location

Testing whether IA billing is accurate

Financial Records Review: DBA/business checking accounts or, if none, personal checking account where commissions are deposited

– Comparing the bank records reviewed in subsequent year’s branch audits to see if checking accounts have changed

– Obtaining proof of accounts that are closed

Hiring – onsite office visit prior to hiring

Mitigating Techniques

8


Email reviews

Can be used to identify reps that are engaged in unapproved OBA/PST activities

Supervision of Account Activity

Look at an account activity over the review period to identify unsuitable conversions of accounts from BD to IA

Identify instances where the share class purchased could have been replaced with a lower fee or fee-waived share class in advisory accounts.

Supervision of Trading Activity

Review trading activity by reps that appears to significantly increase at the end of a quarter or other period over which performance is measured for receiving a back-end bonus.

Revenue Sharing Relationships

Look for trends in sales of products where a revenue sharing relationship exists


9


Lexis/Google/Sec of State website

Search RRs, OBAs, DBAs during hiring phase and periodically

Annual Compliance Questionnaires

Oftentimes RRs will disclose unreported OBAs, PSTs, etc.

Accounts transferred over by a newly onboarded RR

Review activity for evidence that RR recommended assets be

liquidated in order to purchase products issued by new firm


10


Commonwealth of Massachusetts vs. Investment

Professionals, Inc. Consent Order (E-2016-0060)

(March 22, 2017)

Revenue Sharing Business Model

Sales Contests

Unsuitable Sales of VAs, MLCDs, non-traded REITs and BDCs

Recent Actions

11


Supervisory failures resulted in an action against the

firm that included:

A $100,000 fine

Rescission and restitution to investors

An undertaking that included engaging an independent

consultant to review the firm’s procedures and implement

corrective action regarding obligations to seniors and training

related to senior, sales contests and suitability

Massachusetts vs. IPI (cont.)

12


VALIC Financial Advisors, Inc. AWC (2014042360001)

(November 28, 2016)

Conflicts of interest in compensation policy when customers

moved assets out of VALIC variable annuities (VAs), many of

which were in retirement plan accounts

Failed to maintain systems to adequately supervise certain

aspects of individual VA sales

A $1,750,000 fine

Recent Actions

13


Questions

14

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