Quest CE

This year at Quest CE we have a great deal to be thankful for. Within the past few months we have celebrated our 5th Anniversary as Quest Continuing Education Solutions; awarded one of the ”Top Milwaukee Workplaces” by the Milwaukee Business Journal; and honored on Inc. Magazine’s 500|5000 List of the Fastest Growing Private Companies in America.

However, we would not have been able to accomplish this without our clients. It has been a pleasure to work with you and we truly value your business. At Quest CE, we strive to satisfy our clients by providing a level of customer service unparalleled in this industry.

We would like to show our appreciation by extending to you a 10%* discount on our suite of products listed below:

• Instructor Filings
• New Course Filings
• Custom Course Authoring
• Voucher Card Orders
• Custom Portal Development
• Quest Proprietary Course Licensing
• Firm Element Training
• ACM - Annual Compliance Meeting
• ACQ - Annual Compliance Questionnaire
• NA - Needs Analysis Survey
• OBA’s - Outside Business Activities
• G&E’s - Gifts and Entertainment
• AML – Anti-Money Laundering Training
• State Insurance Training

As an additional thank you to our retail customers, we are proud to offer a 10%* discount on our CE courses at learn.questce.com during the month of September. Simply use the discount code “THANKYOU” during checkout to receive the discount.

For more information on this limited special promotion, please contact Quest CE at 877-593-3366 or e-mail us at info@questce.com.

We are happy to have served you in the past, and we look forward to continuing to meet your Continuing Education needs in the future.

* Discount not applicable to State Fees

Quest CE is proud to announce the latest addition to our Firm Element suite of surveys and annual tracking solutions: Political Contributions.

The Securities and Exchange Commission (SEC) Rule (Rule 206(4)-5) sets forth several restrictions on investment advisers that are meant to help minimize or eliminate manipulation of the market for advisory services provided to state and local governments.

The Municipal Securities Rulemaking Board (MSRB) Rules G-37 and G-38 prohibit municipal brokers and dealers from engaging in municipal securities business with an issuer after making political contributions to officials of that issuer.

Like all of our other surveys, your Political Contributions Tracking will be built directly into our proprietary learning management system. The application is web based and available to edits, additions and reporting instantly. You will have the ability to flag questions to receive automatic e-mails based on specific responses and incorporate pipe logic so that certain responses ask for additional information.

If you are already tracking one of your Annual Surveys with Quest CE the Political Contributions Tracking Survey will be an easy addition to your Compliance Suite. If you are new to Quest or would just like more information about our Survey Solution contact us at 877.593.3366 or e-mail sales@questce.com and request a demo.

If you would like to view a demo of our surveys on your own click HERE.

FINRA continues to have concerns about the sale of new products and alternative investments in particular. It is important to note that firms must fundamentally understand a products natures and risks before creating or selling it.

A common problem advisors run into when recommending alternative investments is not fully understanding the risks and potential consequences of the products because they are new and/or complex.

Quest CE offers a course which provides an introduction to alternative investments and the importance of understanding the risks associated with them before selling them.

Course Summary:

Portfolio diversification can be achieved through alternative investments. Investments made into assets that do not fall under one of the three traditional asset types (cash, stocks and bonds), are called alternative investments.

This course will cover the most often utilized alternative investment options:

• Futures
• Options
• ETFs
• Hedged Funds
• REITS
• Gold

For more information on this course or to speak to a representative from Quest call 877.593.3366 or e-mail sales@questce.com.

In a partnership with the Financial Industry Regulatory Authority, (FINRA), Quest CE is proud to offer the full line of FINRA’s own E-Learning Firm Element Courses through their proprietary Learning Management System, Renaissance LMS.  FINRA course content was designed in the same platform as Quest’s own firm element courses, ensuring compatibility in their LMS and a seamless learning experience for their clients.

Quest CE offers a complete solution to Firm Element Training through their own Firm Element content, Needs Analysis Survey, Annual Compliance Meeting and Annual Compliance Questionnaire. FINRA courses are a welcomed addition to Quest’s already robust training library.

“We are proud to offer FINRA’s complete E-Learning library to our clients as an option for completing their annual training,” said Alan Krenke, Quest CE President and CEO.

“FINRA’s courses look and function seamlessly in Renaissance enhancing the student experience and allowing for a more comprehensive and successful firm element program. It is a major accomplishment to deliver FINRA content in our LMS and provide Quest’s own custom tracking and reporting solutions to our clients with these courses.”

Quest CE is based out of Milwaukee and has been providing custom advanced solutions to the Compliance Continuing Education Industry for over 20 years. Quest offers a suite of firm element solutions to meet the needs of the securities industry including:

•    Firm Element Training
•    Needs Analysis Survey
•    Customizable On-Demand Annual Compliance Meeting
•    Proprietary Annual Compliance Questionnaire Software
•    Proprietary Outside Business Activity and Gifts and Entertainment Tracking, Reporting and Retention
•    Anti-Money Laundering Training
•    FINRA Securities License Exam Prep

Quest CE offers unparalleled customer service as well as innovative and custom solutions to guarantee the individual client’s unique needs are met and their expectations are surpassed. For more information on establishing a firm element program with Quest contact their Sales Team at 877-593-3366 or sales@questce.com.

Following the consolidation of NASD and the member regulation, enforcement and arbitration functions of NYSE Regulation into FINRA, FINRA established a process to develop a new consolidated rulebook (Consolidated FINRA Rulebook).  FINRA proposed new consolidated rules in phases for approval by the SEC as part of the Consolidated FINRA Rulebook.

In February and March 2010, the SEC approved six rule filings, (see below) relating to the Consolidated FINRA Rulebook. The effective date for all of the proposed rule changes is June 14, 2010.

•    FINRA Rule 2261
•    FINRA Rule 3160
•    FINRA Rule 3240
•    Information Notice 03/12/08
•    Information Notice 10/06/08
•    Regulatory Notice 08-57

Recently, FINRA issued new guidance for broker-dealers regarding their obligations in conducting due-diligence investigation of issuers and the securities they recommend in offerings made under the U.S. Securities and Exchange Commission’s Regulation D under the Securities Act of 1933, also known as “private placements”.

FINRA details broker-dealers’ obligation to conduct a reasonable investigation of the securities they recommend and the issuer’s representations about them. Specifically, FINRA notes that a broker-dealer ‘may not rely blindly upon the issuer for information concerning a company,’ nor may it rely on the information provided by the issuer and its counsel in lieu of conducting its own reasonable investigation.” FINRA also emphasizes that dealing with a sophisticated and knowledgeable investor who is eligible to participate in a private placement does not preclude the broker-dealers’ duty to investigate.

In addition to conducting a reasonable investigation of the issuer and its securities, a broker-dealer must: (i) have reasonable grounds to believe – based on a reasonable investigation – that its recommendation to purchase, sell or exchange a security is suitable for the particular customer to whom such recommendation is offered and (ii) ensure that the customer fully understands the risks involved in the investment. In order to ensure compliance with suitability responsibilities, FINRA states that a reasonable investigation by a broker-dealer should concern, at a minimum, the following:

•    the issuer and its management;
•    business prospects of the issuer;
•    review of assets held by or to be acquired by the issuer;
•    claims being made; and
•    intended use of proceeds of the offering.

Finally, a broker-dealer has an obligation to note, investigate and follow up on any “red flags” encountered during its inquiry. When encountering “red flags” or any substantial adverse information about the issuer during its investigation, a broker-dealer has the duty to conduct further independent investigation of the issuer’s financial condition under the circumstances, in order to fulfill its due-diligence obligations.

Effective, March 25, 2010

Rule 9550 Series provides a procedural mechanism for FINRA to address certain types of misconduct in an accelerated timeframe. The rule series allows firms and associated persons to request a hearing that often results in a stay of the action.

The amendments shorten the time within which a hearing must be held from 60 days after a hearing request to 30 days after the request in relation to the following FINRA rules:

•    Rule 9551 (Failure to Comply with Public Communication Standards);
•    Rule 9552 (Failure to Provide Information or Keep Information Current);
•    Rule 9553 (Failure to Pay FINRA Dues, Fees and Other Charges);
•    Rule 9554 (Failure to Comply with an Arbitration Award or Related Settlement);
•    Rule 9555 (Failure to Meet the Eligibility or Qualification Standards or Prerequisites for Access to Services).

Additionally to modifying the timing of hearings, the amendments shorten the period before a suspension automatically turns into an expulsion or bar under Rule 9552.

That rule generally allows FINRA to suspend a firm or associated person for failure to provide any information requested or required to be filed pursuant to the FINRA By-Laws or rules. Under Rule 9552, FINRA may provide written notice to such firm or person specifying the nature of the failure and stating that failure to take corrective action within 21 days after service of the notice will result in suspension. The rule previously provided that a firm or person suspended under the rule who fails to request termination of the suspension within six months is automatically expelled or barred.

The recently approved amendments shorten that timeframe from six months to three months.

The amendments modify Rule 9554, which contains expedited procedures for failures to comply with FINRA arbitration awards, to also explicitly permit FINRA to take expedited action for failures to comply with FINRA orders of restitution or FINRA settlements providing for restitution. In general, restitution is a remedy used to restore victims to their position before the wrongful conduct occurred and to compensate them for unjust losses or injury suffered as the result of another’s wrongdoing.

The amendments also harmonize the remedy for an individual’s failure to comply with an arbitration award in Rule 9554 with the remedy for the same misconduct in Article VI, Section 3(b) of the FINRA By-Laws. Specifically, the amendments limit the remedy available in such actions to suspensions.

A reverse convertible is a structured product that typically consists of a high-yield, short-term note of the issuer that is linked to the performance of an unrelated reference asset, usually common stock, a basket of stocks, an index or another instrument.

Reverse convertibles are complex investments that often involve terms, features and risks that can be difficult for retail investors and registered representatives to evaluate.

Firms that sell reverse convertibles are reminded to ensure that their promotional materials or communications to the public regarding these products are fair and balanced, and do not understate the risks associated with them. Firms are also reminded to ensure that their registered representatives understand the risks, terms and costs associated with these products, and that they perform an adequate suitability analysis before recommending them to any customer.

Effective Date – February 8, 2010

FINRA Rule 4521(d) governs filing requirements for customer margin accounts and became effective on February 8, 2010. The rule, adopted as part of the new consolidated financial responsibility rules, replaces Incorporated NYSE Rules 421(2) and 421.40 and applies to all FINRA members that carry customer margin accounts.

FINRA Rule 4521(d) provides that, unless otherwise permitted by FINRA in writing, each member carrying margin accounts for customers is required to submit, on a settlement date basis, as of the last business day of the month: (A) the total of all debit balances in securities margin accounts; and (B) the total of all free credit balances in all cash accounts and all securities margin accounts.

Please note: members must submit three separate data points, as the free credit balance total for cash accounts and the free credit balance total for securities margin accounts are two separate items.

If a member has no information to submit, it should note that on the report. Reports are due as promptly as possible after the last business day of the month, but in no event later than the sixth business day of the following month. In connection with this requirement, members should note:

•    The data in the member’s report should reflect the status of all accounts on a settlement date basis, as of the last business day of each month.
•    Each member must submit a single combined report (including all domestic and foreign main offices and branches).
•    Customer balances in the account(s) of guarantors and in the related guaranteed accounts should not be combined.

Rule 4521(d) requires that a member must only include free credit balances in cash and securities margin accounts in the report. Balances in short accounts and in special memorandum accounts (see Regulation T of the Board of Governors of the Federal Reserve System) are not considered free credit balances. Members should note:

•    “Balances in short accounts” refers to balances derived from the proceeds of short sales.
•    Credit balances in cash accounts and securities margin accounts are considered free (withdrawable) when the firm has no lien or claim against them, nor has imposed any other encumbrance, irrespective of whether the same customer has offsetting debits in another account.

Lastly, Rule 4521(d) requires that reported debit or credit balance information not include the accounts of other FINRA members, or of the associated persons of the member submitting the report where such associated person’s account is excluded from the definition of “customer” pursuant to Exchange Act Rule 15c3-3.

The use of social media sites continues to grow at an increasing rate over time.  Over the past 3 years, the use of social media sites has increased by 500%.  With this new form of communication available today, it is critical to ensure that investors are protected from false and misleading claims.  Firms are responsible to appropriately supervise their employee’s participation in the use of these mediums.  It is recommended that firms focus on the following areas:

•    Recordkeeping
•    Suitability
•    Supervision
•    Third-Party Posting

The use of social media sites such as Facebook, Linkedin and Twitter has grown tremendously in recent years.  Each of these are becoming an ever-popular way of communicating.

FINRA’s rules regarding communicating with the public apply to social media sites that are sponsored by a firm or its registered representatives.  Although utilizing these various forms of communicating presents tremendous opportunities, it also presents unique challenges, especially in regard to recordkeeping and investor protection.

Recordkeeping

One of the primary concerns for using social media sites for communication is recordkeeping.  Just like all other forms of public communication, firms are required to retain records of its business related communications made through social media sites.  This requirement covers everything that is posted on these sites about a firm’s business.  This includes messages on a customer’s wall in Facebook or comments on a blog.

If a firm communicates through these sites or permits employees to use these sites for business, it must ensure that it can retain the records of those communications under all applicable FINRA and SEC rules.

Suitability

Suitability is another area that needs to be considered when using social media sites.  According to FINRA’s suitability rule, “any recommendation to buy or sell a security must be suitable for the customer”.  Firms are required to ensure that a recommendation is suitable for every investor to whom it’s made.  This needs to be kept in mind when using blogs and social networking sites because these communication tools can easily make content widely available.  Many of these sites include options to limit access to content.  Firms are however, still required to take great care to identify the entire potential audience of a communication and make sure any recommendations made through them are suitable for every single audience member.  Whether a particular communication constitutes a recommendation depends on its fact and circumstances.  To make this determination FINRA Notice to Members 01-23 describes guidance about suitability focusing on the content, context and the manner of presentation.

Supervision

Firms are also required to supervise the use of social media sites, especially when recommendations about specific investment products are being made.  These communications are required to comply with the suitability and recordkeeping rules.  They are also required to include additional disclosures like those required by the Federal Securities Laws.

Firms are responsible to adopt policies and procedures that are reasonably designed to address these communications.  Many firms prohibit representatives from using any interactive electronic communications to recommend or mention a specific investment product unless a registered principal has previously approved the content.  Firms should also maintain a database of previously approved communications that employees can use as a template.

Social networking sites can include interactive communications as well as static communications.  This may require a different kind of communication.  Unscripted communication in an interactive forum like a chat room or online seminar is considered a public appearance.

These are subject to FINRA communications rules but unscripted remarks do not require prior principal approval.  However, static posting are often times considered advertisements and do require documented prior principal approval.  This presents a challenge as each firm may be required to supervise blogs differently based upon how they are constructed and used.

If a blog is used by a firm or representative to engage in real-time interactive communications, it would be considered as an interactive communications forum that require supervision but not prior principal approval.  Static posts by a blogger are considered advertisements which require documented prior pre-approval by a registered principal.

Social networking sites like Facebook, Linkedin and Twitter also include both static and interactive content.  Static content like profile and background information must be treated as an advertisement.  However, non-static, real-time communications such as interactive Facebook comments and Twitter Tweets constitute an interactive electronic forum.  It is important to keep in mind that regardless of whether the communication is interactive or static, supervision is required to ensure that communications through social media sites do not include any misleading statements or claims and comply with FINRA’s communications rules.

Firms are allowed to use risk-based rules to determine how much review of its incoming and outgoing and internal electronic communications is necessary for the proper supervision of its business.  Risk-based-principles can take into account the firm’s business model, size, location, number and types of transactions as well as other factors.  Based upon your firms unique risk profile, you may be required to obtain principal review for some or even all interactive electronic communications prior to use.  This is true even if the type of communication does not require prior principal approval under FINRA rules.

To ensure compliance and proper supervision, your firm may place restrictions on which of its personnel are permitted to establish a social media site.  Regardless of the type of supervisory system a firm utilizes, it must also have policies and procedures in place for supervisory review of all electronic communications regarding certain areas such as customer complaints and order errors.

Firms should prohibit any unsupervised use of social media sites for any business communications and require proper training for those individuals that do engage in such communications.  Additionally, your firm may restrict or prohibit the use of social media sites by employees who have presented compliance risk historically.  If a firm discovers any problems with the way that social media sites are being used, it should make sure to take appropriate disciplinary action.

Third-Party Postings

Third-party content does not generally constitute communications with the public by a firm.    However, if a firm is involved with preparing the content of a third-party post, or explicitly or implicitly endorses or approves the content, a firm may be held responsible for the content and may be required according to FINRA rules to archive and supervise the content.  It is suggested that firms consider a disclaimer on its site that informs customers that third-party posts do not reflect the views of the firm and have not been reviewed by the firm.  This type of disclaimer is not required, however, it would be considered as a part of the facts and circumstances in a FINRA compliance analysis.  Disclaimers can be a factor based upon how prominently or consistently they are displayed.

If a firm currently utilizes, or is considering utilizing social media site, it is imperative that your policies and procedures include the necessary steps to comply with all appropriate regulatory requirements.

If you would like more information regarding this topic or training tools to ensure that you and your firm comply, contact our Sales Department at 877-593-3366 or sales@questce.com.