In a recent decision, handed down on October 10, 2012, the U.S. District Court of Connecticut denied a motion to vacate a judgment, which judgment was initially entered in our client’s favor in April 2010. The lawsuit was originally filed by our client in the U.S. District Court of Connecticut in 2006. After the defendant failed to appear and after a hearing in damages, the Court finally entered the judgment in 2010. We then successfully registered the judgment in the District of Massachusetts (in an effort to collect on the judgment via seizure or property and assets). Subsequently, the defendant sprang to life and filed motions to vacate the judgments in both the District Court of Connecticut and the District Court of Massachusetts. Because the District of Connecticut was the original court, Massachusetts deferred taking action until the District Court of Connecticut rendered its decision. The District Court of Connecticut ordered discovery and ultimately, a hearing on the merits. After discovery closed and on the eve of the hearing, we filed a motion to compel the production of certain documents and information due to the defendant’s evasiveness throughout the discovery process. The Court ultimately granted the motion to compel in full and awarded all attorneys’ fees in preparing and filing the motion. After the hearing, Judge Donna Martinez denied defendant’s motion to vacate, giving our client yet another victory in the years long legal battle to recover monies rightfully owed to it.
Author: Liam Mennitt
How Billing Statements Relate to Cease and Desist Orders
Occasionally the issue arises for debt collectors where they need to send their debtors a billing statement but they have received a cease and desist letter from the debtor they must adhere to. The question then becomes whether a billing statement is a violation of a cease and desist request. While not addressed head on, one court in California appears to have held that it would not be. This article looks at the issue as applied to Florida and Federal Courts.
Relevant Statutory Provisions:
15 U.S.C. § 1692b(6) – “Any debt collector communicating with any person other than the consumer for the purpose of acquiring location information about the consumer shall— (6) after the debt collector knows the consumer is represented by an attorney with regard to the subject debt and has knowledge of, or can readily ascertain, such attorney’s name and address, not communicate with any person other than that attorney, unless the attorney fails to respond within a reasonable period of time to the communication from the debt collector.”
15 U.S.C. § 1692c(a)(2) – “(a) COMMUNICATION WITH THE CONSUMER GENERALLY. Without the prior consent of the consumer given directly to the debt collector or the express permission of a court of competent jurisdiction, a debt collector may not communicate with a consumer in connection with the collection of any debt— (2) if the debt collector knows the consumer is represented by an attorney with respect to such debt and has knowledge of, or can readily ascertain, such attorney’s name and address, unless the attorney fails to respond within a reasonable period of time to a communication from the debt collector or unless the attorney consents to direct communication with the consumer;”
15 U.S.C. § 1692c(c) – “(c) CEASING COMMUNICATION. If a consumer notifies a debt collector in writing that the consumer refuses to pay a debt or that the consumer wishes the debt collector to cease further communication with the consumer, the debt collector shall not communicate further with the consumer with respect to such debt, except— (1) to advise the consumer that the debt collector’s further efforts are being terminated; (2) to notify the consumer that the debt collector or creditor may invoke specified remedies which are ordinarily invoked by such debt collector or creditor; or (3) where applicable, to notify the consumer that the debt collector or creditor intends to invoke a specified remedy.”
Fla. Stat. § 559.72 “Prohibited practices generally.—In collecting consumer debts, no person shall: (18) Communicate with a debtor if the person knows that the debtor is represented by an attorney with respect to such debt and has knowledge of, or can readily ascertain, such attorney’s name and address, unless the debtor’s attorney fails to respond within 30 days to a communication from the person, unless the debtor’s attorney consents to a direct communication with the debtor, or unless the debtor initiates the communication.”
Marcotte v. General Electric Capital Services
In April of 2010 the Southern District Court of California held that under the California Fair Debt Collection Practices Act (CFDCPA) debt collectors, collecting on their own behalf, may send billing statements to consumers even if represented by an attorney. The case was brought by Phillip Marcotte against GE Money Bank (GEMB) for a violation of the CFDCPA. Marcotte claimed G.E Capital violated the act by sending two billing statements to Marcotte after being informed that he was represented by an attorney, and all communications should go to the attorney. Plaintiff references 15 U.S.C. §§ 1692b(6), 1692c(a)(2), and 1692c(c) and the court pointed out that these “generally prohibit any communications from a debt collector once the debt collector knows the consumer has an attorney or once the consumer requests in writing that the debt collector cease communications.”
GEMB pointed to California Civil Code § 1788.14(c), which prohibits communications except “statements of account.” However, Plaintiff proceeded under section 1788.17, which incorporates by reference the federal Fair Debt Collection Practices Act (FDCPA) and there is no exception for billing statements in the prohibition of communication.
The court looked at the statutory structure, noting that the incorporation of the federal statute was later in date, and did not address the conflict regarding the billing statements. The court also noted that a repeal of a provision by implication is disfavored. Additionally, GEMB pointed to the Truth in Lending Act (TILA) provision that requires credit car companies to send monthly billing statements. GEMB also noted that under the FDCPA the definition for “debt collector” does not include collectors on their own behalf. These factors ultimately led the California court to find that the billing statements sent by GEMB did not violate the CFDCPA’s prohibition on communications to consumers once they are represented by counsel. By comparison, and seeing that the court referenced the two scenarios together, it would appear that the mailing of billing statements would also not violate a cease and desist request.
Applying Marcotte in Florida
One court in Florida addressed a circumstance where this would not hold true however. In Keliher v. Target National Bank, the defendants tried to use the Marcotte case, but the court found it did not apply. The difference between the two situations according to the Florida district court was that the billing statements sent by Target National Bank, also contained collection language that’s not part of the TILA requirements and violates the FDCPA as well as the Florida Consumer Collection Practices Act (FCCPA).
Interestingly, the defense in Marcotte argued that sending billing statements to the consumer rather than their attorney offered greater consumer protection due to the time constraints the consumer has to challenge the accuracy of any billing statement. Looking at these two cases along with the statutory language of both the FCCPA and the FDCPA it seems there is a fine line for creditors to walk. One important thing to note is that both cases addressed the prohibition on communication based on the creditor’s knowledge that the consumer is represented by counsel, and not based on a cease and desist request. Due to the fact that the language is similar for both situations, it can be inferred that courts may treat the two scenarios similarly. The safest solution for creditors is to carefully stick to the requirements of TILA and not include excess language that could be construed as a violation of either state or federal collections laws.
Commodity Futures Trading Commission Proposes New Conflict of Interest Rules
The Commodity Futures Trading Commission recently proposed new rules to implement statutory provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act. The proposed rules relate to the conflicts of interest provisions set forth in section 732 of the Dodd-Frank Act, which amends section 4d of the Commodities and Exchange Act, to direct futures commission merchants and introducing brokers to implemental conflict of interest systems and procedures to establish safeguards within the firm. The proposed rules seek to ensure that any person researching or analyzing the price or market for any commodity is separated by appropriate informational partitions. The proposed rules also address other issues, such as enhanced disclosure requirements.
Section 732 of the Dodd-Frank Act requires that futures commissions merchants and introducing brokers “establish structural and institutional safeguards to ensure that the activities of any person within the firm relating to research or analysis of the price or market for any commodity are separated by appropriate informational partitions within the firm from the review, pressure, or oversight of persons whose involvement in trading or clearing activities might potentially bias the judgment or supervision of the persons.” While section 732 could be read to require informational partitions between persons involved in any research or analysis and persons involved in trading or clearing activities, the Commission believes that the Congressional intent underlying section 732 was primarily intended to prevent undue influence by persons involved in trading or clearing activities over the substance of research reports that may be publicly distributed.
The proposed rule establishes restrictions on the interaction between persons within a futures commission merchant or introducing broker involved in research or analysis of the price or market for any derivative and persons involved in trading or clearing activities. Further, the proposed rules also impose duties and constraints on persons involved in the research or analysis of the price or market for any derivative by, for example, requiring such persons to disclose during public appearances and in any reports any relevant personal interest relating to any derivative the person follows. The proposed rule also prevents futures commissions merchants and introducing brokers from retaliating against a person for producing a report that adversely impacts the current or prospective trading or clearing activities of the firm.
If the proposed rules are implemented, they would require that futures commission merchants and introducing brokers adopt written conflicts of interest policies and procedures, document certain communications between non-research personnel and provide other disclosures. They would also prevent non-research personnel from reviewing a research report prior to dissemination, except to verify the factual accuracy of the report and provide non-substantive edits. Non-research personnel may only communicate with research personnel through authorized legal or compliance personnel. The firm’s business trading unit may not influence the review or approval of a research personnel’s compensation and may not influence the research personnel. Futures commissions merchants and introducing brokers must keep a record of each public appearance by a research analyst. The proposed rule applies to third-party research reports as well, except where the reports are made available upon request or through a web site maintained by the futures commissions merchants or introducing brokers.
While the Commodity Futures Trading Commission is continuing to receive public comments on any aspect of the proposed rule, the Commission is particularly interested in comments about whether the rules should apply to futures commission merchants and introducing brokers of all sizes or whether the nature of the partitions should depend on the size of the firm.
June 2011 – CFTC Proposes New COI Rules
Commodity Futures Trading Commission Proposes New Conflict of Interest Rules
Securities Industry Practice Alert
The Commodity Futures Trading Commission recently proposed new rules to implement statutory provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act. The proposed rules relate to the conflicts of interest provisions set forth in section 732 of the Dodd-Frank Act, which amends section 4d of the Commodities and Exchange Act, to direct futures commission merchants and introducing brokers to implemental conflict of interest systems and procedures to establish safeguards within the firm. The proposed rules seek to ensure that any person researching or analyzing the price or market for any commodity is separated by appropriate informational partitions. The proposed rules also address other issues, such as enhanced disclosure requirements.
Section 732 of the Dodd-Frank Act requires that futures commissions merchants and introducing brokers “establish structural and institutional safeguards to ensure that the activities of any person within the firm relating to research or analysis of the price or market for any commodity are separated by appropriate informational partitions within the firm from the review, pressure, or oversight of persons whose involvement in trading or clearing activities might potentially bias the judgment or supervision of the persons.” While section 732 could be read to require informational partitions between persons involved in any research or analysis and persons involved in trading or clearing activities, the Commission believes that the Congressional intent underlying section 732 was primarily intended to prevent undue influence by persons involved in trading or clearing activities over the substance of research reports that may be publicly distributed.
The proposed rule establishes restrictions on the interaction between persons within a futures commission merchant or introducing broker involved in research or analysis of the price or market for any derivative and persons involved in trading or clearing activities. Further, the proposed rules also impose duties and constraints on persons involved in the research or analysis of the price or market for any derivative by, for example, requiring such persons to disclose during public appearances and in any reports any relevant personal interest relating to any derivative the person follows. The proposed rule also prevents futures commissions merchants and introducing brokers from retaliating against a person for producing a report that adversely impacts the current or prospective trading or clearing activities of the firm.
If the proposed rules are implemented, they would require that futures commission merchants and introducing brokers adopt written conflicts of interest policies and procedures, document certain communications between non-research personnel and provide other disclosures. They would also prevent non-research personnel from reviewing a research report prior to dissemination, except to verify the factual accuracy of the report and provide non-substantive edits. Non-research personnel may only communicate with research personnel through authorized legal or compliance personnel. The firm’s business trading unit may not influence the review or approval of a research personnel’s compensation and may not influence the research personnel. Futures commissions merchants and introducing brokers must keep a record of each public appearance by a research analyst. The proposed rule applies to third-party research reports as well, except where the reports are made available upon request or through a web site maintained by the futures commissions merchants or introducing brokers.
While the Commodity Futures Trading Commission is continuing to receive public comments on any aspect of the proposed rule, the Commission is particularly interested in comments about whether the rules should apply to futures commission merchants and introducing brokers of all sizes or whether the nature of the partitions should depend on the size of the firm.
April 2011 – Brokers and Advisors Beware
Brokers and Advisers Beware: Taking Customer Information Could Get You Fined and Suspended
Securities Industry Practice Alert
In the last two months, the SEC and FINRA have, for the first time each, taken Enforcement action — including against a broker-dealer’s chief compliance officer — in regard to the safeguarding of confidential customer information under a 10-year-old SEC rule called “Regulation S-P.” These actions seem likely to cause a significant shift in how brokers, investment advisers and their firms handle customers’ confidential information, particularly when it comes to a broker or adviser taking his or her “book” of business to another firm.
Overview
Previously, when brokers or advisers left for new firms, they and their new firms usually only had to worry about their former firm suing them for breaches of non-compete, non-solicitation and non-disclosure clauses in their agreements, or suing the new firm for “raiding” the former firm’s agents (and, thus, their customers).
But recent SEC and FINRA actions put brokers, advisers and their firms on notice that each could suffer formal regulatory consequences (including fines and suspensions) from brokers or advisers casually — or clandestinely — taking confidential customer information to their new firms.
Background
The SEC adopted Regulation S-P in 2001 pursuant to a mandate in the Gramm-Leach-Bliley Act of 1999, and amended it in 2005 pursuant to a mandate in the Fair and Accurate Credit Transactions Act of 2003 (the FACT Act).
Broadly speaking, Regulation S-P requires broker-dealers, investment advisers and other financial firms to protect confidential customer information from unauthorized release to unaffiliated third parties. Included in Regulation S-P is the “Safeguard Rule” (Rule 30(a)), which requires broker-dealers to, among other things, adopt written policies and procedures reasonably designed to protect customer information against unauthorized access and use.
Of course, several headlines in recent years have focused on the reported thefts or losses of large caches of confidential customer information from banks and other businesses, so it comes as no surprise that the SEC and FINRA would seek to assert their Enforcement powers in this area. Each of the recent SEC and FINRA Enforcement actions arose from departing registered representatives taking customer information to new employers without providing said customers with sufficient notice and opt-out procedures under ۬Regulation S-P.
Case Study # 1: Recent SEC Disciplinary Actions
In an administrative settlement dated April 7, 2011, the SEC fined a brokerage firm’s president, national sales manager and chief compliance officer between $15,000 and $20,000 each in regard to the transfer of 16,000 customer names and addresses, account numbers and asset values to a new firm. It did not matter that customers approved the transfer after the fact, nor did it matter that the transfer occurred because the broker-dealer was winding down its business and thus simply transferring many of its accounts to a new broker-dealer. The SEC found the firm and its senior executives liable for Regulation S-P violations and fined each of them accordingly.
Especially noteworthy is that the SEC fined the firm’s chief compliance officer for “aiding and abetting” these Regulation S-P violations by failing to improve the firm’s “inadequate” written supervisory procedures for safeguarding customer information (the “Safeguard Rule”) after “red flags” arose from prior security breaches at the firm. (Significantly, those security breaches did not involve other instances of intentional transfer of customer data to a new firm, but rather mostly theft by outsiders of a few RRs’ laptops and the unauthorized access by a former employee of a current employee’s firm e-mail account.)
Case Study # 2: Recent FINRA Disciplinary Action
This past December, FINRA’s National Adjudicatory Council affirmed a $10,000 fine and 10-day suspension ordered by a FINRA hearing panel in a contested hearing against a broker for his downloading confidential customer information from his firm’s computer system onto a flash drive on his last day of employment and then sharing that information with a new firm. FINRA found the broker’s actions prevented his former firm from giving its customers a reasonable opportunity to opt out of the disclosures, as required by Regulation S-P. FINRA also found the broker’s misconduct caused his new firm to improperly receive non-public personal information about his former firm’s customers.
Conclusion
These Enforcement actions will change the legal and practical landscape concerning the portability of a broker’s “book” of customers. From a contractual point of view, brokers and advisers would be well-advised to build Regulation S-P-compliant language into their agreements with their current and new firms if they anticipate ever switching firms again, as these Enforcement actions effectively sound the alarm that the SEC and FINRA will sanction a broker or adviser for furtively taking customer information to a new firm. Likewise, investment adviser and brokerage firms would be well-advised to understand the relevance of Regulation S-P when it comes to brokers or advisers moving to other firms and taking firm customer information with them.
€¨Finally, from a regulatory point of view, a broker’s or adviser’s “former” firm should implement reasonable policies and procedures to ensure compliance with Regulation S-P by all firm personnel, including brokers or advisers looking to leave the firm, and a broker’s or adviser’s “new” firm should take similar care and caution when a broker or adviser brings in confidential information regarding new customers (lest the new firm also be found liable for a Regulation S-P violation, which would have happened in the above FINRA case had the new firm done anything with the customer information it got from the subject broker).
Brokers and Advisors Beware
In the last two months, the SEC and FINRA have, for the first time each, taken Enforcement action — including against a broker-dealer’s chief compliance officer — in regard to the safeguarding of confidential customer information under a 10-year-old SEC rule called “Regulation S-P.” These actions seem likely to cause a significant shift in how brokers, investment advisers and their firms handle customers’ confidential information, particularly when it comes to a broker or adviser taking his or her “book” of business to another firm.
Overview
Previously, when brokers or advisers left for new firms, they and their new firms usually only had to worry about their former firm suing them for breaches of non-compete, non-solicitation and non-disclosure clauses in their agreements, or suing the new firm for “raiding” the former firm’s agents (and, thus, their customers).
But recent SEC and FINRA actions put brokers, advisers and their firms on notice that each could suffer formal regulatory consequences (including fines and suspensions) from brokers or advisers casually — or clandestinely — taking confidential customer information to their new firms.
Background
The SEC adopted Regulation S-P in 2001 pursuant to a mandate in the Gramm-Leach-Bliley Act of 1999, and amended it in 2005 pursuant to a mandate in the Fair and Accurate Credit Transactions Act of 2003 (the FACT Act).
Broadly speaking, Regulation S-P requires broker-dealers, investment advisers and other financial firms to protect confidential customer information from unauthorized release to unaffiliated third parties. Included in Regulation S-P is the “Safeguard Rule” (Rule 30(a)), which requires broker-dealers to, among other things, adopt written policies and procedures reasonably designed to protect customer information against unauthorized access and use.
Of course, several headlines in recent years have focused on the reported thefts or losses of large caches of confidential customer information from banks and other businesses, so it comes as no surprise that the SEC and FINRA would seek to assert their Enforcement powers in this area. Each of the recent SEC and FINRA Enforcement actions arose from departing registered representatives taking customer information to new employers without providing said customers with sufficient notice and opt-out procedures under ۬Regulation S-P.
Case Study # 1: Recent SEC Disciplinary Actions
In an administrative settlement dated April 7, 2011, the SEC fined a brokerage firm’s president, national sales manager and chief compliance officer between $15,000 and $20,000 each in regard to the transfer of 16,000 customer names and addresses, account numbers and asset values to a new firm. It did not matter that customers approved the transfer after the fact, nor did it matter that the transfer occurred because the broker-dealer was winding down its business and thus simply transferring many of its accounts to a new broker-dealer. The SEC found the firm and its senior executives liable for Regulation S-P violations and fined each of them accordingly.
Especially noteworthy is that the SEC fined the firm’s chief compliance officer for “aiding and abetting” these Regulation S-P violations by failing to improve the firm’s “inadequate” written supervisory procedures for safeguarding customer information (the “Safeguard Rule”) after “red flags” arose from prior security breaches at the firm. (Significantly, those security breaches did not involve other instances of intentional transfer of customer data to a new firm, but rather mostly theft by outsiders of a few RRs’ laptops and the unauthorized access by a former employee of a current employee’s firm e-mail account.)
Case Study # 2: Recent FINRA Disciplinary Action
This past December, FINRA’s National Adjudicatory Council affirmed a $10,000 fine and 10-day suspension ordered by a FINRA hearing panel in a contested hearing against a broker for his downloading confidential customer information from his firm’s computer system onto a flash drive on his last day of employment and then sharing that information with a new firm. FINRA found the broker’s actions prevented his former firm from giving its customers a reasonable opportunity to opt out of the disclosures, as required by Regulation S-P. FINRA also found the broker’s misconduct caused his new firm to improperly receive non-public personal information about his former firm’s customers.
Conclusion
These Enforcement actions will change the legal and practical landscape concerning the portability of a broker’s “book” of customers. From a contractual point of view, brokers and advisers would be well-advised to build Regulation S-P-compliant language into their agreements with their current and new firms if they anticipate ever switching firms again, as these Enforcement actions effectively sound the alarm that the SEC and FINRA will sanction a broker or adviser for furtively taking customer information to a new firm. Likewise, investment adviser and brokerage firms would be well-advised to understand the relevance of Regulation S-P when it comes to brokers or advisers moving to other firms and taking firm customer information with them.
€¨Finally, from a regulatory point of view, a broker’s or adviser’s “former” firm should implement reasonable policies and procedures to ensure compliance with Regulation S-P by all firm personnel, including brokers or advisers looking to leave the firm, and a broker’s or adviser’s “new” firm should take similar care and caution when a broker or adviser brings in confidential information regarding new customers (lest the new firm also be found liable for a Regulation S-P violation, which would have happened in the above FINRA case had the new firm done anything with the customer information it got from the subject broker).
November 2010 – SEC Adopts New Rule
On November 3, 2010, the Securities and Exchange Commission (SEC) voted unanimously to adopt a new rule requiring broker-dealers to implement risk controls before they provide customers with electronic access to the equities markets. The new rule will effectively end so-called “naked” (or “unfiltered”) access by customers to the markets, and is part of a larger effort by the SEC “to help ensure the markets are fair, transparent and efficient.”
Specifically, the rule prohibits broker-dealers from providing customers with unfiltered access to an applicable exchange or alternative trading system (ATS). It requires brokers who directly access an exchange or an alternative trading system — including those who “sponsor” customers’ access to same — to put in place financial and regulatory risk management controls and supervisory procedures that are “reasonably designed to prevent the entry of orders that exceed appropriate pre-set credit or capital thresholds, or that appear to be erroneous.” Among other things, these controls must include the programming and implementation of pre-order-entry filters by brokers in their own systems for orders directed either by them or their customers to the equities markets.
This issue of unfiltered access has been the subject of much debate, especially involving the high-frequency trading firms that use algorithms and high-speed and high-capacity computers to capture minimal and fleeting arbitrage (and other quantitative) opportunities in the markets. Some observers have estimated that such activity constitutes upwards of 70 percent of the volume traded in U.S. equity markets today.
Broker-dealers have eight months — which includes 60 days from publication of the rule in the Federal Register plus an additional six months — to comply with this new rule.
November 2010 – SEC Adopts New Rule
SEC Adopts New Rule Preventing Unfiltered Market Access
Securities Industry Practice Alert
On November 3, 2010, the Securities and Exchange Commission (SEC) voted unanimously to adopt a new rule requiring broker-dealers to implement risk controls before they provide customers with electronic access to the equities markets. The new rule will effectively end so-called “naked” (or “unfiltered”) access by customers to the markets, and is part of a larger effort by the SEC “to help ensure the markets are fair, transparent and efficient.”
Specifically, the rule prohibits broker-dealers from providing customers with unfiltered access to an applicable exchange or alternative trading system (ATS). It requires brokers who directly access an exchange or an alternative trading system — including those who “sponsor” customers’ access to same — to put in place financial and regulatory risk management controls and supervisory procedures that are “reasonably designed to prevent the entry of orders that exceed appropriate pre-set credit or capital thresholds, or that appear to be erroneous.” Among other things, these controls must include the programming and implementation of pre-order-entry filters by brokers in their own systems for orders directed either by them or their customers to the equities markets.
This issue of unfiltered access has been the subject of much debate, especially involving the high-frequency trading firms that use algorithms and high-speed and high-capacity computers to capture minimal and fleeting arbitrage (and other quantitative) opportunities in the markets. Some observers have estimated that such activity constitutes upwards of 70 percent of the volume traded in U.S. equity markets today.
Broker-dealers have eight months — which includes 60 days from publication of the rule in the Federal Register plus an additional six months — to comply with this new rule.
September 2010 – Advisors Beware of the “Switch” from SEC Oversight to State Regulation
By July 21, 2011 — the one-year anniversary of the passage of the Dodd-Frank Wall Street Reform and Consumer Protection Act — investment advisors with less than $100 million in assets under management will be required to register with the states. This impacts all advisors, whether currently registered with the Securities and Exchange Commission. The “switch” to state regulation is likely to raise a number of issues — and confusion — for advisors.
- Advisors with more than $25 million in assets under management previously were able to opt out of federal registration — and state registration as a result — if they had fewer than 15 direct clients. With the passage of Dodd-Frank, that 15-client threshold has been removed outright from the Investment Company Act of 1940. Thus, absent another exemption, many advisors will face federal or state registration for the first time.
- Advisors with clients in multiple states may have to register in multiple states, potentially creating burdensome requirements for advisors. (One exception: an advisor that must register in 15 or more states may choose to remain SEC-registered.)
- States differ on their registration, custody, books and records and other requirements. Just to cite one arcane but significant difference, Connecticut does not require its state-registered investment advisor representatives to have a 65 (or 7 and 66); it instead only requires them to have sufficient “experience.” New York, meanwhile, not only requires the 65 (or 7 and 66), but also mandates that representatives have taken the exams within two years prior to registering with New York. (That means that a neophyte advisor in New York can sail through the state registration process with flying colors, while a more veteran advisor in New York has to file for a waiver on the state’s exams-in-the last-two-years requirement to become registered (if such representative got his or her 65 (or 7 and 66) more than two years ago).)
September 2010 – Advisors Beware of
Advisors: Beware of the “Switch” From SEC Oversight to State Regulation
Securities Industry Practice Alert
By July 21, 2011 — the one-year anniversary of the passage of the Dodd-Frank Wall Street Reform and Consumer Protection Act — investment advisors with less than $100 million in assets under management will be required to register with the states. This impacts all advisors, whether currently registered with the Securities and Exchange Commission. The “switch” to state regulation is likely to raise a number of issues — and confusion — for advisors.
- Advisors with more than $25 million in assets under management previously were able to opt out of federal registration — and state registration as a result — if they had fewer than 15 direct clients. With the passage of Dodd-Frank, that 15-client threshold has been removed outright from the Investment Company Act of 1940. Thus, absent another exemption, many advisors will face federal or state registration for the first time.
- Advisors with clients in multiple states may have to register in multiple states, potentially creating burdensome requirements for advisors. (One exception: an advisor that must register in 15 or more states may choose to remain SEC-registered.)
- States differ on their registration, custody, books and records and other requirements. Just to cite one arcane but significant difference, Connecticut does not require its state-registered investment advisor representatives to have a 65 (or 7 and 66); it instead only requires them to have sufficient “experience.” New York, meanwhile, not only requires the 65 (or 7 and 66), but also mandates that representatives have taken the exams within two years prior to registering with New York. (That means that a neophyte advisor in New York can sail through the state registration process with flying colors, while a more veteran advisor in New York has to file for a waiver on the state’s exams-in-the last-two-years requirement to become registered (if such representative got his or her 65 (or 7 and 66) more than two years ago).