The Securities and Exchange Commission's Office of Compliance Inspections and Examinations issued examination priorities for 2014 as part of the office's National Exam Program, whose mission is to protect investors by maintaining fair, orderly and efficient markets.
The program's priorities list for 2014 prominently includes a section on broker-dealers, splitting priorities into two areas: that of core risk and that of new and emerging issues and initiatives. Below are a few of the exam priorities which often become issues in securities arbitration claims.
Core Risks
Under its core risks concentration, the SEC will turn more attention to issues of improper sales practices and fraud. As such, the broker-dealer program will tailor 2014 examinations to address several key aspects and areas of sales practice/fraud concern. These include:
> Senior scams and affinity fraud targeting elderly investors;
> Fraudulent micro-cap and pump and dump schemes;
> Unsuitable recommendations of complex products, including nontraditional ETFs and REITs. This includes questions pertaining to lack of adequate due diligence;
> Unregistered transactions—both as relates to the status of the seller and the offering being sold.
In an effort to prevent securities law violations, the 2014 program will also focus on firm supervision of independent contractors and financial advisors in remote or large branch offices, registered representatives—particularly those with disciplinary histories—and private securities transactions.
Trading makes an appearance on the 2014 priorities list because of the potential for information leakage due to cyber security or technological problems, market manipulation including fraudulent spoofing practices and excessive markups or markdowns and the potential for abuses of SEC regulations.
Data integrity and financial responsibility will bring an increased focus on firm compliance with customer protection and net capital rules, including dealing with concentrated customer debit balances and firm inventory liquidity.
Finally, the program will prioritize review of anti-money laundering ("AML") programs, including examinations of AML programs of trading firms that allow customers access to higher-risk jurisdiction markets.
New and Emerging Issues and Initiatives
As part of this priority area, the SEC and its Office of Compliance Inspections and Examinations will examine firms' application of the July 2011 Exchange Act Rule 15c3-5 ("Market Access Rule"), which was put into place to address risks that may result from automated, rapid electronic trading strategies.
The staff also cited concern about suitability of variable annuity ("VA") buybacks and will accordingly examine this trend in light of insurance companies' recent offers to repurchase certain VAs. Upon review, the SEC determined that sometimes when accepting a buyback offer, the customer may need to purchase a VA at terms less favorable than those associated with the bought-back VA. As such, the staff will review whether such recommendations are suitable and what disclosures are made to the customer about a potential buyback.
If you have invested with a broker-dealer who has exposed you to undue risks, such as through improper sales practices, fraud, failure to supervise, poor trading practices, lack of internal controls or financial responsibility and AML failures, and such shortcomings have proven harmful to your investments or interests, please call The Law Offices of Jonathan W. Evans & Associates at (800) 699-1881 for investigation and consultation.