Oyster Consulting Blog

When complying with the financial world’s ever-increasing regulation, one requirement causes compliance headaches for many firms: determining the value of your assets. 

While traditional investments are reasonably straightforward, pricing illiquid and hard-to-value securities can feel more like a guessing game — and the process can be much more challenging for some businesses than others. For instance, how do you price:

• Mortgage-backed securities? 
• Structured products? 
• REITs? 
• Athletic teams? 
• Highly specialized (and occasionally classified) equipment? 

And the list goes on …

In fact, the topic is so charged and heavily questioned that the 2012 FINRA Annual Financial Regulations Letter addressing the detail opens by saying this issue “continues to raise concerns.” So, creating accurate pricing is absolutely essential. If your firm is a broker-dealer and has non-traded or illiquid assets, FINRA wants to see your valuation processes and procedures  — regardless of whether those assets are in a client’s account, part of your inventory or held as collateral. 

FINRA isn’t the only one concerned with valuation. At Oyster Consulting, we are working with many investment advisors who need support accurately and consistently valuing their assets —from private fund advisors that are now required to register with the SEC to real estate and hedge funds who want to mitigate their regulatory risks. Our consultants have the experience and understanding to address a wide range of illiquid and hard-to-value securities, and we are here to help protect you. 

If you have questions about how your non-traded assets are priced or just want to ensure you’ve adequately documented your processes and choices, email me or call me at 804.965.5403. I may not always be by my phone, but I will always call you back. 

These days, financial services are so closely watched and regulated that diligently keeping up with all the reviews and regulations can be a tightrope act — and balancing the nuances on your own becomes a tremendous burden. At Oyster, we’re here to help ensure you have the support and guidance necessary to avoid tripping over any regulatory updates by staying on top of changes as they occur.  

In my last blog post, I addressed FINRA’s Annual Regulatory and Examination Priorities Letter, which they released on January 31. Ensuring financial services companies comply with FINRA’s guidance is minimum expectation — and this year they selected a number of perennial hot topics for their Examination Priorities, including outsourcing. 

At Oyster Consulting, we think outsourcing key functions will be the future of financial service success. We built our company on the strong belief that by offering thoughtful outsourcing, we can free financial service firms from the myriad of organizational and compliance details that distract them from focusing on their greatest opportunities and challenges and leverage our resources that keep us on top of the regulatory environment. But while outsourcing is an effective way to create efficiency, improve controls and manage risk, we recommend you also pay special attention to third-party compliance. 

Like in years past, firms are still responsible for complying with securities laws, rules and regulations even if they use third-party vendors — but now FINRA is attempting to codify these rules in Regulatory Notice 11-14. In other words, if you take advantage of the many benefits outsourcing can provide, you must also ensure the people you rely on correctly conduct business, or you will be held liable. 

At Oyster Consulting, we provide clients with everything they need to comply with this proposed rule — and can help you protect your firm before the proposal becomes law. If you have any questions or concerns about where you stand today or hope to be in the future, email me or call me at 804.965.5403. I may not always be by my phone, but I will always call you back.

At a time when new financial regulations seem to wait around every corner, having a crystal ball to see exactly what concerns and changes lie ahead would be extremely helpful! Sadly, there are no magical remedies to see the future. At Oyster, we spend countless hours reviewing regulatory information, industry changes and speaking with our friends to help our clients prepare for and protect their firm’s future by understanding how to comply with regulation and mitigate risk.  

One resource we use is FINRA’s Annual Regulatory and Examination Priorities Letter. Recently released on January 31, their 2012 letter provides a view into  some financial regulations that most interest FINRA this year. And for regulatory terms, that level of foresight provides some planning insight. 

FINANCIAL REGULATION DEVELOPMENTS

After reading the 2012 letter, we immediately noticed that the Regulatory Program Developments section is shorter and less change-riddled than in recent years. Rather than addressing Dodd-Frank implementation or new FINRA rules and departmental changes, this year’s developments focus on the Risk Control Assessment — a survey FINRA will use to better understand the “granular operational and risk data” that helps them determine each business model’s innate risk levels. You can expect to receive this survey in the first quarter. 

Along with the upcoming survey, this year’s letter addresses a number of examination priorities FINRA will focus on as they analyze members’ potential risky behavior. Over the next few weeks, we will highlight some of the critical priorities to address, including:

• Outsourcing
• Pricing of illiquid, hard-to-value securities
• 15c3-5
• High-Frequency Trading

 

In the meantime, if you have any questions about the letter or want to ensure you’re complying with all financial regulations, give me a call at 804.965.5403. I may not be able to exactly predict the future, and may not always be by my phone, but I will always call you back and provide practical advice for facing uncertain times. 

At Oyster Consulting, we help clients address a variety of regulatory compliance and operational requirements — and the laws often differ depending on whether we’re serving broker dealers, Registered Investment Advisors, hedge funds, private equity firms or mutual funds. Sometimes legislation impacts all of our clients. The new law out of Massachusetts is about to impact every financial institution that has customers living in the Bay State.

For the past few years, anyone with customers in Massachusetts has had to follow their state’s information security laws regarding confidential customer information, data in motion, data encryption and more — regardless of where the company is based. Starting March 1, however, a new law will require any third parties with confidential customer data to comply with the information security rules, too.

In other words, if you have customers in Massachusetts, you’d better be certain all of your third-party vendors — including offsite storage, outsourced operations, statement vendors, backup data, etc. — understand these regulatory compliance requirements. Whether you’re offshoring processes or outsourcing services, you and your organization could be legally liable for any potential information security breaches if you do not certify your vendors’ regulatory compliance.

As a third-party vendor, Oyster Consulting fully meets the Massachusetts standards, and we are working to help our clients ensure that their other relationships understand and abide by the information security laws, as well. If you’re unsure whether you and your vendors are in compliance, or you have questions on what they need to certify, don’t hesitate to call me at 804.965.5403. I may not always be by my phone, but I will always call you back.

This year, the SEC has a new Valentine’s Day gift for Private Fund Advisors: Your Form ADV Parts 1 and 2 are due. Thanks to Dodd-Frank [and Madoff fallout], many firms that previously could avoid registering with the SEC through the Investment Advisers Act of 1940’s “private adviser” exemption will no longer enjoy this immunity. Now, most private fund advisors with at least $150 million assets under management must register by March 30, 2012 — and file their Form ADV by February 14 to allow proper processing time. 

With only a few weeks before this due date, we know a lot of private fund advisors are scrambling to complete this process for the first time, but it’s not too late to find help. If you aren’t finished — or are concerned about mistakes and omissions — Oyster Consulting can work with you to:

• Interview your leaders. 
• Craft your responses to ADV part 1.
• Create your ADV part 2.  
• Draft policies, procedures and a code of ethics.
• Complete the registration process.
• Prepare for a visit from the SEC.

Oyster’s consultants are diligent, experienced guides who can help you comply with this new regulatory change for private fund advisors — but we aren’t miracle workers. So, we ask that any interested firms contact us by January 31, to allow adequate time to thoroughly support you. 

Even if you prefer to prepare for these new requirements alone, don’t hesitate to call me at 804.965.5403 with any questions or concerns. I might not always be by my phone, but I will always call you back.

As the regulations keep on rolling in, I have a great New Years resolution suggestion for all broker dealers, registered investment advisers and financial professionals: Make sure your cost basis reporting systems are in line now — thanks to new IRS requirements, this tax season could be a doozy. 

The Regulatory Compliance Situation

Last year, provisions from the Emergency Economic Stabilization Act of 2008 (aka “the bailout bill”) went live, requiring broker dealers to provide cost basis reporting for all equities. Additional changes began on January 1, 2012, expanding the IRS’ cost basis reporting requirements to include:

• Mutual funds
• DRIPs
• Most ETFs 
• RIAs 

The Risks

Discrepancies between your firm’s data and your clients’ 1099-Bs could create unwelcome issues, including client audits (which would certainly not be good for client relationships) and IRS penalties. While accidentally incorrect 1099-B cost basis reporting comes with fines up to $350,000, the penalties are unlimited for purposefully disregarding the new requirements. 

What You Need to Do

To ensure regulatory compliance, you must engineer your systems to accurately track and report cost basis. If you are not absolutely certain about your data, we can help you prepare for reporting by:

• Connecting you to the right data vendor. 
• Managing your costs basis projects.
• Providing staff to help maintain and update correct cost basis information.

Accurate cost basis reporting is crucial — and can be much simpler with the right support. As you work to prepare for these new requirements, don’t hesitate to call me at 804.965.5403 with any questions or concerns. I might not always be by my phone, but I will always call you back.

Earlier this year, I wrote a four-part series on social media compliance, because few topics seem to generate as much uncertainty and confusion for financial professionals — and regulators — these days. FINRA presented notice 10-06 last January, but just as social media tools change rapidly, so does the guidance controlling them. Consequently, FINRA released regulatory notice 11-39 in August, with additional information on how firms must supervise and record their social media activities. 

The new notice does not alter 10-06; instead, it gives direct responses to user questions regarding recordkeeping, supervision, links to third-party sites, data feeds and personal devices. Some of the further clarification includes:

• FINRA supervision requirements differ for static and interactive communications, but the recordkeeping requirements do not.
• Interactive content can become static depending on how you use it.
• Firms must train and educate their employees regarding their specific social media policies and procedures.
• Firms that “co-brand” a third-party site — including prominent placement of their logo — are responsible for all site content.
• Firms must ensure social media compliance in all business communications — regardless of whether they occur on company- or employee-owned equipment.

Notice 11-39 offers brief explanations and 14 Q&As, but many firms still have questions about how to best protect themselves from social media risks. If you have any questions or concerns about your firm’s social media compliance before, give me a call at 804.965.5403. Ultimately, education, training and firm policies are the foundation of a healthy social media presence — and I’d be happy to help ensure you are protected.

As of October 17, FINRA’s new requirements for the Order Audit Trail System (OATS) are live — is your firm ready for these regulatory compliance changes? 

 

Prior to the updates, the OATS recordkeeping and reporting requirements in FINRA Rules 7410 through 7470 only applied to orders for equity securities listed on the NASDAQ Stock Market and OTC equity securities. But now, FINRA is phasing in an expansion so that OATS Rules apply to orders for NMS stocks, as defined in Regulation NMS Rule 600(b)(47), including those listed on markets other than NASDAQ. 

 

To date, FINRA is implementing the OATS Rule expansion to all NMS stocks in three phases based on the security’s symbol. Key changes include:

• Creating standard values for Receiving and Originating Department ID fields. 
• Adding a new Order Origination Code. 

• Eliminating the Received By Desk ID. 
• Aligning the OATS Account Type Code with the NYSE Account Type Indicators. 
• Creating a new Exchange Participant ID field on all Route Reports identifying routes to a national securities exchange. 
• Generally requiring each reporting MPID to use unique Routed Order IDs and Branch/ Sequence Numbers each day. 
• Reducing the allowable clock drift from three seconds to one second, and requiring timestamps to be reported to OATS in milliseconds if the firm captures the time in milliseconds. 

 

Many of our clients have been working closely with their technology partners to test the regulatory compliance changes prior to implementation, but this initial work is not enough. Without a consolidated industry testing process, testing every possible scenario before implementation was impossible, so firms should carefully review their OATS reports over the next six weeks to ensure they are complete and accurate. Pay special attention to the new destination codes and account type code fields to make sure you report them accurately. 

 

As you work to ensure a smooth OATS implementation, now is the time to review your written procedures related to trade reporting to make sure they are in synch with regulatory requirements and your business practices. Oyster is fortunate to have key resources to help firms evaluate their trade reporting platforms and practices — if you have any questions about trade reporting or Oyster Consulting, call me at 804.965.5403. I might not always be by my phone, but I will always call you back. 

 

I hate to be the bad news monger, but summer is over. The calendar (and thermometer!) might say we have a few more days before fall begins, but for financial professionals, Labor Day is the unofficial end of summer vacation season and beginning of annual requirement season. Of course, most people would rather be beach lounging than conducting an AML review or worrying about regulatory compliance. But, addressing these tasks now can help ensure you complete them thoroughly and on time — with as little pain and frustration as possible.

With less than four months left in the year, now is the time to finish required annual tasks and plan for 2012, including:

Broker/Dealer Annual Requirements

• Deliver annual training/annual compliance meeting.
• Conduct independent Anti-Money Laundering reviews.
• Begin supervisory control testing, including FINRA Rule 3012 and Rule 3130.
• Complete annual branch audits.

 

RIA Annual Requirement

 

• Review Policies and Procedures against business practices and regulatory requirements.

Firm Responsibilities

On top of regulatory requirements, both broker/dealers and RIAs must:

• Complete the annual renewal process. Annual renewals take time and effort, but they can be a great way to save money by removing unnecessary state registrations.  
  

• Finalize their annual budget and plans for 2012. A massive number of proposed regulation and legislative changes could affect your business in the near future, so you must make sure you are up to speed with what may come and adequately budget your resource needs.

If you’re wondering how you can possibly complete these tasks in time, Oyster Consulting is here to help. Unlike most people, we love analyzing minutiae and wading through regulatory compliance language to ensure we address each requirement efficiently and effectively. (How could that not sound fun?!) Whether you have a quick question or need complete advice and planning, call me at 804.965.5403 — I’m happy to help. I might not always be by my phone, but I will always call you back.

Oyster Consulting has grown significantly over the past three years — and as a result, we simply ran out of room to fit all of our experienced consultants. So, after months of preparation, we’re moving our headquarters down the street into a bigger Oyster space located at:

4405 Cox Road, Suite 150
Glen Allen, VA 23060

Our new office is large enough to house Oyster’s growing team of consultants who dedicate their time to supporting our clients’ complete financial consulting needs.
The move is mostly taking place on August 17 and 18, and we may experience some disruption in email and phone service Wednesday night and early Thursday. We expect the down time to be limited, however, thanks in large part to Rob Ketch at Comverge and Bret Westphalen at MABC.

Remember our last blog about business continuity planning, and how you never know what challenges your company might face? We prepared for transferring our phones, Internet and servers during the move, but certainly didn’t anticipate a major strike by our service provider in the process. Rob and Bret’s creativity, client focus and problem-solving skills have been critical to ensuring our team is available to clients — even when Verizon is not.

We look forward to using our new office after we complete the inevitable final scramble that comes with moving — and would like to thank our loyal clients, because without you, we would have no space to fill. In appreciation, we plan to host an open house in early October to formally thank our clients, consultants and friends who have supported Oyster Consulting over the years. Additionally, we will hold a CCO roundtable soon to discuss best practices for reporting and resolving issues. Please let me know if you would like to attend.

I also would like to personally thank Lacy Hatton, Cheryl Brown and Gladys Robinson for leading this project and coordinating the move. Oyster is fortunate to have consultants who are experienced transition managers, which has allowed everyone to stay focused on our clients and avoid distractions. We look forward to our next phase of growth and remain dedicated to providing the highest quality advice and support to our clients.

If you have any questions about our new space or Oyster Consulting, call me at 804.965.5403. I might not always be by my phone, but I will always call you back.