1 / 24

Dual Hatting: Issues and Solutions

This presentation discusses the concept of dual hatting, where employees perform functions for multiple entities, and the associated issues. It also explores potential solutions to address these issues.

zanaj
Download Presentation

Dual Hatting: Issues and Solutions

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript

  1. FIRMA PresentationDual HattingMelody BohlmannIM&T Investment Risk ManagerMarch 31, 2010

  2. Dual Hatting • What is “Dual Hatting” • What are the Issues • What can be done to address the issues This presentation is for informational purposes only. WEALTH MANAGEMENT GROUP

  3. Disclosure • The comments and opinions expressed in today’s session are my own and not necessarily those of Wells Fargo • Wells Fargo does not provide tax or legal advice. This presentation is for informational purposes only. WEALTH MANAGEMENT GROUP

  4. What is “Dual Hatting”? • When an employee is performing functions for multiple entities • Examples: • Bank Trust employee is also a registered rep for affiliated or unaffiliated Broker-Dealer • Bank Trust employee is also an employee of an affiliated or unaffiliated Registered Investment Advisory Firm • Private Banker is also a registered rep for affiliated or unaffiliated Broker-Dealer This presentation is for informational purposes only. WEALTH MANAGEMENT GROUP

  5. What are the Issues with “Dual Hatting” Bank Trust employee also a Registered Rep of an affiliated Broker-Dealer Rule 3030 Outside Business Activities of an Associated Person Proposed FINRA Rule 3270 Outside Business Activities of an Associated Person Proposed FINRA Rule 3270 would eliminate both NASD Rule 3030 and NYSE Rule 346 Limitations – Employment and Association with Members and Member Organizations Rule 3040 Private Securities Transactions of an Associated Person Proposed FINRA Rule 3110 GLB Reg R Use of Soft Dollars Compensation This presentation is for informational purposes only. WEALTH MANAGEMENT GROUP

  6. Rule 3030 & NYSE Rule 346(b) • Rule 3030 • Prohibits any registered person from being employed by or accepting any compensation from any person as a result of any outside business activity, other than passive investment, unless they have provided prompt written notice to their member firm. • NYSE Rule 346(b) • Prohibits any member (as defined in the NYSE rules) or employee of a member organization from being engaged in any other business, or being employed or compensated by any other person, or serving as an officer, director, partner or employee of another business organization or owning any stock or having any direct or indirect financial interest in any other organization engaged in any securities, financial or kindred business. This presentation is for informational purposes only. WEALTH MANAGEMENT GROUP

  7. Proposed FINRA Rule 3270 Outside Business Activities of Registered Persons • Would prohibit any registered person from being an employee, independent contractor, sole proprietor, officer, director or partner of another person, or being compensated, or having the reasonable expectation of compensation from another person as a result of any business activity outside the scope of the relationship with their member firm unless they have provided prior written notice to the member. • FINRA proposing to adopt NASD Rule 3030 with the moderate changes as FINRA Rule 3270 • Incorporates several NYSE Rules • Rule 346 Limitations – Employment and Association with Members and Member Organizations This presentation is for informational purposes only. WEALTH MANAGEMENT GROUP

  8. What can/should be done • Written Agreement needed between each of the appropriate entities - Affiliated or Unaffiliated Broker-Dealer and the Bank or RIA • Agreement needs to specify what functions will be performed by the Registered Rep/Bank Employee/RIA employee such as: • Referrals • Investment Management • Ministerial duties • Recordkeeping • Notification of non-compliance or other employee issues • Form and Timing of notice to Firm This presentation is for informational purposes only. WEALTH MANAGEMENT GROUP

  9. What can/should be done (continued) • Process for approval/notification of each dual employee – Broker-dealer, Bank, RIA • Timing of notice – Prior vs. Prompt • Review the registered persons participation in the outside activity to determine whether it raises investor protection concerns • If the activity raises investor protection concerns, implement procedures or restrictions on the activity to protect the investors, or prohibit the activity • Evaluate the proposed activity to determine whether it should be treated as an outside securities activity subject to requirements of NASD Rule 3040 • Training on the roles and policies/procedures/processes of each entity for dual employees This presentation is for informational purposes only. WEALTH MANAGEMENT GROUP

  10. NASD Rule 3040 Private Securities Transactions of an Associated Person • 3040. Private Securities Transactions of an Associated Person • (a) Applicability • No person associated with a member shall participate in any manner in a private securities transaction except in accordance with the requirements of this Rule. • (b) Written Notice • Prior to participating in any private securities transaction, an associated person shall provide written notice to the member with which he is associated describing in detail the proposed transaction and the person's proposed role therein and stating whether he has received or may receive selling compensation in connection with the transaction; provided however that, in the case of a series of related transactions in which no selling compensation has been or will be received, an associated person may provide a single written notice. This presentation is for informational purposes only. WEALTH MANAGEMENT GROUP

  11. NASD Rule 3040 (continued) • (c) Transactions for Compensation(1) In the case of a transaction in which an associated person has received or may receive selling compensation, a member which has received notice pursuant to paragraph (b) shall advise the associated person in writing stating whether the member:(A) approves the person's participation in the proposed transaction; or • (B) disapproves the person's participation in the proposed transaction. • (2) If the member approves a person's participation in a transaction pursuant to paragraph (c)(1), the transaction shall be recorded on the books and records of the member and the member shall supervise the person's participation in the transaction as if the transaction were executed on behalf of the member. • (3) If the member disapproves a person's participation pursuant to paragraph (c)(1), the person shall not participate in the transaction in any manner, directly or indirectly. This presentation is for informational purposes only. WEALTH MANAGEMENT GROUP

  12. NASD Rule 3040 (continued) d) Transactions Not for Compensation • In the case of a transaction or a series of related transactions in which an associated person has not and will not receive any selling compensation, a member which has received notice pursuant to paragraph (b) shall provide the associated person prompt written acknowledgment of said notice and may, at its discretion, require the person to adhere to specified conditions in connection with his participation in the transaction. (e) Definitions • For purposes of this Rule, the following terms shall have the stated meanings: (1) "Private securities transaction" shall mean any securities transaction outside the regular course or scope of an associated person's employment with a member, including, though not limited to, new offerings of securities which are not registered with the Commission, provided however that transactions subject to the notification requirements of Rule 3050, transactions among immediate family members (as defined in Rule 2790), for which no associated person receives any selling compensation, and personal transactions in investment company and variable annuity securities, shall be excluded. (2) "Selling compensation" shall mean any compensation paid directly or indirectly from whatever source in connection with or as a result of the purchase or sale of a security, including, though not limited to, commissions; finder's fees; securities or rights to acquire securities; rights of participation in profits, tax benefits, or dissolution proceeds, as a general partner or otherwise; or expense reimbursements. This presentation is for informational purposes only. WEALTH MANAGEMENT GROUP

  13. NASD Rule 3010 Proposed FINRA Rule 3110 Supervision Proposed FINRA Rule 3110(a) Supervision Amends NASD Rule 3010 which requires a firm to designate an appropriately registered principal(s) with authority to supervise each type of business in which the firm engages that requires registration as a broker-dealer to require the designation of an appropriately registered principal(s) with authority to supervise each type of business in which the firm engages regardless of whether registration as a broker-dealer is required for that activity. Proposed FINRA Rule 3110(b) Written Procedures Incorporates several provisions of NASD Rule 3010(d)(1), NASD Rule 3040, and NYSE Rule 401A rules • Requires member firms to establish, maintain and enforce written procedures to supervise the types of business in which it engages • Requires principal review, evidenced in writing, of all transactions including transactions relating to the investment banking and securities business of the member firm • Review of transactions may be risk-based This presentation is for informational purposes only. WEALTH MANAGEMENT GROUP

  14. Proposed FINRA Rule 3110(b)(3) Supervision of Outside Securities Activities • Would replace Rule 3040 • Would require that an associated person obtain members prior written approval before engaging in any outside investment banking or securities business, regardless of whether the associated person receives any compensation • If the member firm gives written approval, the activity is within the scope of the member firm’s business and must be supervised in accordance with Proposed FINRA Rule 3110 • The activity becomes the business of the member firm • FINRA is proposing an exception for bank-related securities activities of a dual employee to the extent such securities activities fall within any of the statutory or regulatory exemptions from registration as a broker or dealer (See GLB Reg R slides) This presentation is for informational purposes only. WEALTH MANAGEMENT GROUP

  15. Proposed FINRA Rule 3110(b)(3) Supervision of Outside Securities Activities (continued) To rely on the proposed exception: • Member firm must receive written notice of and approve the securities activities • To guard against fraud, a member bank would not be able to approve a dual employee to engage in investment banking or securities business in a bank unless the member firm has written assurance that: • The bank, or a supervised bank affiliate will have a comprehensive view of the dual employee’s securities activities • The bank or the supervised bank affiliate employs policies and procedures reasonably designed to achieve compliance with the anti-fraud provisions of the federal securities laws, and • The bank or the supervised bank affiliate will promptly notify the member firm of any violation of the policies and procedures by the dual employee • The proposed rule defines a “dual employee” as “a natural person who has prior written approval from the member to perform as both an associated person of a member and a bank employee” This presentation is for informational purposes only. WEALTH MANAGEMENT GROUP

  16. Proposed FINRA Rule 3110(b)(3) Supervision of Outside Securities Activities (continued) • A member may rely upon the written representation of the bank or a supervised bank affiliate that it is employing the policies and procedures required to achieve compliance with the anti-fraud provisions of the federal securities laws provided the member supplies access and information, in compliance with SEC Regulation S-P, as is necessary for the execution of such policies and procedures. • Upon receiving notice of a dual employee’s violation of the policies and procedures required, the member shall assure itself that the polices and procedures of the bank or supervised bank affiliate are: • Reasonably designed to achieve compliance with the anti-fraud provisions of the federal securities laws or have been amended to achieve compliance. • If the member cannot reach assurance, the member must revoke its approval of the dual employee’s bank-related securities activities. This presentation is for informational purposes only. WEALTH MANAGEMENT GROUP

  17. Proposed FINRA Rule 3110(b)(3) Supervision of Outside Securities Activities (continued) • The term “supervised bank affiliate” means a bank affiliate that is subject to consolidated supervision by the Board of Governors of the Federal Reserve System, the Comptroller of the Currency, the Federal Deposit Insurance Corporation, or the Director of the Office of Thrift Supervision • The supervisory procedures required include procedures for the review of incoming and outgoing written correspondence (including electronic) with the public and internal communications relating to the member’s investment banking or securities business and have to be appropriate for the members size, structure, and customers. • The supervisory procedures must ensure that the member properly identifies and handles in accordance with firm procedures: • Customer complaints • Customer instructions • Funds and securities • Communications that require review under FINRA and MSRB rules and fed securities laws • The reviews of correspondence with the public and internal communications must be conducted by a registered principal and must be evidenced in writing – either electronic or paper This presentation is for informational purposes only. WEALTH MANAGEMENT GROUP

  18. Proposed FINRA Rule 3110(b)(3) Supervision of Outside Securities Activities (continued) • Supervisory personnel are prohibited from supervising their own activities and reporting to , or having their compensation or continued employment determined by a person or persons they are supervising This presentation is for informational purposes only. WEALTH MANAGEMENT GROUP

  19. Gramm-Leach-Bliley Act – Reg R • Exceptions for Banks from the Definition of Broker in the Securities Exchange Act of 1934 • Defines the scope of securities activities that banks may conduct without registering with the Securities Exchange Commission as a securities broker and implements the most important exceptions from the definition of the term broker for banks under section 3(a)(4) of the Securities Exchange Act of 1934. • The regulation implements the statutory exceptions that allow a bank, subject to certain conditions, to continue to conduct securities transactions for its customers as part of its trust and fiduciary, custodial, and deposit "sweep" functions and to refer customers to a securities broker-dealer pursuant to a networking arrangement with the broker-dealer. This presentation is for informational purposes only. WEALTH MANAGEMENT GROUP

  20. GLB – Reg R (continued) • Trustee and Fiduciary Exemption: • Chiefly Compensated Test: • Requires that trustee’s be chiefly compensated on basis of assets under management; administrative or annual fee; or a flat or capped per order processing fee that does not exceed cost; or any combination of these • Requires a comparison of Relationship Compensation to Total Compensation Relationship compensation includes fees from all types of assets; and fees paid out of mutual fund assets from a distribution plan under Rule 12b-1; administrative fees include personal services, tax prep, and real estate settlement fees • Not included as Relationship Comp- commission-type compensation or sales charges compensation to see if chiefly compensated test met This presentation is for informational purposes only. WEALTH MANAGEMENT GROUP

  21. Gramm-Leach-Bliley (GLB) – Reg R • Trustee and Fiduciary Exemption (continued) Method of Measuring Relationship to Total Comp: • Bank-wide basis • Account-by-Account basis • Bank-wide method can be used if the relationship comp to total comp is 70% or higher, otherwise must be account-by-account • If account-by-account method used, relationship comp for each account must be greater than 50% • Condition – to use the trust and fiduciary activities exemption, the securities transactions must be effected in the trust department or other department that is regularly examined by bank examiners for compliance with fiduciary principles and standards • Annual conditional safe harbor • Measure and meet chiefly compensated test in one year to determine status for next year and cure periods provided • Use a two-year rolling average of the compensation, so if fiscal year is based on calendar year, bank will first need to demonstrate compliance with the tests on 1/1/2011 This presentation is for informational purposes only. WEALTH MANAGEMENT GROUP

  22. GLB – Reg R (continued) • Custody Exemption: • Allows Banks to accept securities orders to buy or sell securities for customers who hold their securities in employee benefit plans, health savings plans, individual retirement and similar accounts. • Limits the availability of order taking exemption for other customers to “accommodation trades” – “accommodation” not defined • Sweep Exemption: • Allows Banks to sweep into no-load money market mutual funds No load defined as: - No front end sales charges - No back end sales charges - No 12b-1 fee in excess of 25 bps (doesn’t include shareholder servicing fees) If the fees are in excess of 25 bps then the Bank would have to provide the customer with a prospectus and could not characterize the fund shares as no-load This presentation is for informational purposes only. WEALTH MANAGEMENT GROUP

  23. GLB – Reg R (continued) • Networking Exemption: • Allows banks to partner with third party and affiliated broker-dealers • Limits compensation of unregistered employees to nominal, defined as: - Twice the avg. of the minimum and maximum hourly wages for the employee’s job family; -1/1000th of the avg. min and max annual base salary for that employee’s job family, - or 1/1000th of the employee’s actual annual base salary; or - A flat $25 dollar amount; or - Employee’s base hourly rate (2X ), an inflation adjusted amount • Allows bank employees referring institutional and high-net worth clients to be paid more than nominal amount but defines institutional clients as having at least $10 million in investments or $20 million in revenues; or $15 million in rev if the bank employee refers the customer to the broker-dealer for investment banking services • Defines high net worth clients as a natural person who either individual or with spouse have $5 million in net worth excluding principal residence and assoc liabilities; a natural person may also fit high-net worth if they have $5 million in a rev, inter vivos, or living trust. This presentation is for informational purposes only. WEALTH MANAGEMENT GROUP

  24. What can/should be done • The written agreement between the entities should address the requirements of notice, books and records, approved activities, and supervision • Written policies and procedures specific to dual employees • Procedurally ensuring the rules are met is more difficult • Ensure that dual employee’s e-mail is set up for electronic monitoring • Correspondence should follow both the Broker-dealer’s and the Bank’s review procedures as each Compliance or Supervisory review is looking for compliance with different rules • Complaints associated with a dual employee should be reported to both the Bank and the Broker-dealer with appropriate notes on the referral process and indicating which is the appropriate jurisdiction and which will be responding • Monitoring of personal securities transactions of dual employee’s should follow the most restrictive rules with notification to other entity (Bank or B-D) for any violations and corrective actions • Clearly defining the roles for what functions are bank functions and which functions are B-D functions that a dual employee may be performing and ensuring that clients know which “hat” the employee is wearing with regard to each of the activities • Monitoring of securities transactions of the dual employee’s – both Bank and the B-D securities transactions This presentation is for informational purposes only. WEALTH MANAGEMENT GROUP

More Related