Regulators Going Online to Reach Firms

The NASD and SEC have stressed over the last year or so the importance of maintaining open lines of communications with the industry and both have been using technology to make those conversations easier.

The SEC rolled out its first ComplianceAlert to industry representatives last month. The Alert is primarily an online bulletin sent to compliance officers in the securities industry. It gives them an insight into not only what investigators are looking for during sweeps, but what they are finding and what firms need to look out for.

“By sharing information about our examination findings, our goal is to alert firms to areas of compliance weakness so that they can take steps to proactively address any problems,” said Lori Richards, director of the Office of Compliance Inspections and Examinations, in a statement. “Compliance staffs at securities firms have often told us that they really value this kind of information, because they can use it as a roadmap to ensure that their firms have strong compliance and supervisory programs in these areas.”

A big topic of concern the regulator focused on in its first Alert has been finding for investment advisers is advertising deficiencies. Many advisers did not deduct advisory fees from performance results, or disclose whether results included dividends. Those oversights resulted in the potential for some of the ad numbers to be wrong, the letter stated.

Other concerns for advisers included closed-end fund distributions and the firms’ disaster recovery plans.
In its first Alert, the SEC also highlighted a number of problem areas for broker-dealers including SMA charges, expense-sharing agreements and sales of 529 college savings plans, collateralized mortgage obligations and real estate trusts. Examiners also found that broker-dealers had problems with their supervisory procedures in regards to Reg SHO.

“Some of the firms examined appeared to have incorrectly marked short sales and long sales, many firms did not have procedures or a system to monitor whether long sales were resulting in fails to deliver, and some firms did not perform a locate or adequately document a locate prior to the execution of a short sale,” the Alert stated.

Over at the NASD, the regulator has been using podcasts to get a short audio message out to its members to remind them about ongoing issues and potential future problems. Executives do not necessarily need a MP3 player to listen, but they can subscribe to the program and have the podcasts regularly sent to them over the internet.
“NASD podcasts are short online audio recordings that highlight news, regulatory updates and other compliance topics. NASD has created podcasts as a convenient way to get compliance-related information into the hands of compliance professionals. Podcasts cover compliance topics, updates and speeches,” the regulator said.

The NASD began offering them more than a year ago, and some of the topics have included monthly recaps, discussions about books and records, AML red flags, a discussion about Life Settlements, as well as guidance and definitions on structured products.

There does not appear to be a routine schedule for either the podcasts or the ComplianceAlert, but the regulators release one when there is a specific topic or message they want to get out to the industry.

There has always been a concern among industry executives that they didn’t know what regulators were looking for during sweep exams or where in their business they should improve their compliance. The podcasts and ComplianceAlerts are just another tool regulators are using to shed some light in this area. The two regulators have been making an effort to improve communication especially when it comes to sweep exams.

The SEC has also promoted its hotline, while the NASD continues to push its liaison programs. Both of those ways firms can ask questions or, if need be, lodge a complaint against a particular examiner.