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STUDENTS

Compliance as an Asset

Presented by:Paul S. Caron

Chief Compliance Officer

Today’s Topics

Anti-Money LaunderingBranch FilesNew FINRA Supervisory RulesRecent Disciplinary Actions

Anti-Money Laundering

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Anti-Money Laundering

What is Money Laundering?Engaging in acts designed to conceal or disguise the true origins of criminally derived proceeds so that the unlawful proceeds appear to have derived from legitimate origins or constitute legitimate assets.

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Anti-Money Laundering

Stages of Money Laundering

PlacementLayering

Integration

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Anti-Money Laundering

“Placement”Cash is converted to monetary instruments:

Money Orders

Traveler’s Checks

Deposited into Financial Institutions

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Anti-Money Laundering

“Layering”Funds transferred or moved into other accounts or other

Financial Institutions.

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Anti-Money Laundering

“Integration” Funds are reintroduced into

the economy and used to purchase legitimate assets, to fund legitimate businesses, or to fund other criminal activities.

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Anti-Money Laundering

Terrorist Financing Concealing origin or

intended use of the funds which will later be used for criminal activity

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Anti-Money Laundering

Account Opening Red Flags• Client reluctant to provide some personal

information. • Information provided is inconsistent.• Client wishes to open account with cash, credit

card checks, starter checks, or multiple money orders.

• Source of investible funds inconsistent with other information.

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Anti-Money LaunderingOngoing Red Flags

• Client is not concerned with high risk investments. • Information provided is inconsistent.• Multiple deposits just below $10,000.• Frequent wires with no apparent business reason.• High volume of wire transfers with low account

balances.• Deposits followed by immediate outgoing wires.• Excessive journal entries for no apparent reason.

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Anti-Money Laundering

Responding to Red Flags

• Immediately report to the AML Officer.• AML Officer will open an investigation.• AML Officer will determine if a SAR is

filed with FinCEN.

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Anti-Money Laundering

Sanctions• Personally fined up to

$250,000• Personally imprisoned for up

to 5 years• Heavier sanctions for more

severe violations

Branch Files - Before

Branch Files (Compliance Forms):– Advertising– Incoming Correspondence– Outgoing Correspondence– Client Meeting Notes– Checks/Securities Received– Variable Annuity Trade– Direct Business– Signature Guarantee (STAMP)– Complaints– Options Complaints– Gifts/Gratuities– Political Contributions– Municipal Bond Material Events

Client Files (Separated by):– Account Registration– JWC– JWCA– JWC Insurance– IRIA– Other Businesses (Example: Tax)

Examples of Contents (All Optional)– Applications & Forms– Instructions & Correspondence– Checks & Securities– Statements & Confirmations– Illustrations & HypotheticalsDO NOT KEEP DOCUMENTS FROM PRIOR FIRM IF THEIR PRIVACY POLICY PROHIBITS PORTABILITY!

Branch Files

Advertising – 3 Years• Resources:

– JWConnect™ Dashboard (My Operations)– Written Supervisory Procedures (Pages # 16 & 17)– Branch Files – Retention Requirements (Compliance Forms)– Social Media Compliance Guidelines (Compliance Forms)– Social Media Resources (Compliance Forms)

• File Must Contain:– Final Version of any Piece Marked “Approved with Changes”– Attendee List for any Client Events (Compliance Forms)– Mailing List for any Mass Approved Template

• File Should Contain (Best Practices):– Marketing Reimbursement Request Form (Compliance Forms)– Communications with the Public and Social Media Attestation (Compliance Forms)– DBA Approval Form (Compliance Forms)– Website Review and Approval Form (Compliance Forms)

Incoming Correspondence – 3 Years

• Resources:– Written Supervisory Procedures (Page # 18)– Branch Files – Retention Requirements (Compliance Forms)

• File Must Contain:– Copies of all Non-electronic Incoming Client Correspondence (Postal)– Evidence of Principal Review

• File Should Contain (Best Practices):– Original Envelope– Notation as to any Action Item Taken

REMEMBER TO PLACE A COPY IN THE CLIENT FILE ALSO

Outgoing Correspondence – 3 Years

• Resources:– Written Supervisory Procedures (Page # 18)– Branch Files – Retention Requirements (Compliance Forms)

• File Must Contain:– Copies of all Non-electronic Outgoing Client Correspondence (Postal)– Any Consolidated Statement– Evidence of Principal Review

• File Should Contain (Best Practices):– Notation as to Date & Method of Shipment if Non-standard USPS– Notation as to any Scheduled Follow-up

REMEMBER TO PLACE A COPY IN THE CLIENT FILE ALSO

Client Meeting Notes – 6 Years

• Resources:– J.W. Cole Financial Forms– Important Notices (12-004)– Branch Files – Retention Requirements (Compliance Forms)

• File Must Contain:– Copies of all Client Meeting Notes or Acceptable Substitute– Evidence of Principal Review

• File Should Contain (Best Practices):– Client Signature(s)– Minimum Annual Review (Advisory - Profile, Fees, Performance & Restrictions)

REMEMBER TO PLACE A COPY IN THE CLIENT FILE ALSO

Checks/Securities Received – 6 Years• Resources:

– Written Supervisory Procedures (Pages # 9 & 35)– Branch Files – Retention Requirements (Compliance Forms)

• File Must Contain:– Entry Log (Compliance Forms)– Copies of Checks/Securities– Evidence of Principal Review

• File Should Contain (Best Practices):– Copies of Backs of Checks Especially if Endorsed– Checks/Securities Receipt (Template Under Construction)

REMEMBER TO PLACE A COPY OF THE CHECKS/SECURITIES IN THE CLIENT FILE ALSO

Variable Annuity Trade – 6 Years• Resources:

– Written Supervisory Procedures (Pages # 19 - 33)– Branch Files – Retention Requirements (Compliance Forms)

• File Must Contain:– Entry Log (Compliance Forms)– Proof of Approval Prior to Submitting to Carrier– Evidence of Principal Review

• File Must NOT Contain:– Variable Annuity Additions (Direct Business)

Direct Business – 6 Years• Resources:

– Written Supervisory Procedures (Pages # 19 - 33)– Branch Files – Retention Requirements (Compliance Forms)

• File Must Contain:– Entry Log (Compliance Forms)– Indexed Products, Alternatives, 529 Plans, M/Fs, VULs & VA Additions – Evidence of Principal Review

• File Should Contain (Best Practices):– Sell Transactions Effected

• File Should NOT Contain (Best Practices):– PIPs & SWPs– Non-Securities Business Written Away from J.W. Cole (Example: Term Life)

Signature Guarantee – 6 Years• Resources:

– Allyson Snow– Branch Files – Retention Requirements (Compliance Forms)

• File Must Contain:– Entry Log– Evidence of Principal Review

• File Must NOT Contain:– Evidence of STAMP Use for Non-J.W. Cole Business

Complaint – 6 Years• Resources:

– Written Supervisory Procedures (Page # 36)– Branch Files – Retention Requirements (Compliance Forms)

• File Must Contain:– All Documents & Communications for any Non-option Complaint– Entry Log (Compliance Forms)– Evidence of Principal Review– Evidence of Escalation to Compliance

• File Should NOT Contain (Best Practices):– Documentation of any Non-J.W. Cole Complaint (Example: Term Life)

Options Complaint – 6 Years• Resources:

– Written Supervisory Procedures (Page # 36)– Branch Files – Retention Requirements (Compliance Forms)

• File Must Contain:– All Documents & Communications for any Options Complaint– Entry Log (Compliance Forms)– Evidence of Principal Review– Evidence of Escalation to Compliance

Gifts/Gratuities – 6 Years• Resources:

– Written Supervisory Procedures (Page # 36)– Branch Files – Retention Requirements (Compliance Forms)

• File Must Contain:– Entry Log (Compliance Forms)– Evidence of Principal Review– Evidence of Principal Pre-approval if Value Exceeds $100

Political Contributions – 6 Years• Resources:

– Branch Files – Retention Requirements (Compliance Forms)• File Must Contain:

– Entry Log (Compliance Forms)– Evidence of Principal Review– Evidence of Voting Jurisdiction

• File Must NOT Contain:– Evidence of Contribution Exceeding $250

Municipal Bonds Material Events – 6 Years

• Resources:– Branch Files – Retention Requirements (Compliance Forms)

• File Must Contain:– Entry Log (Compliance Forms)– Evidence of Principal Review– Evidence of Material Event being Forwarded to Client

• File Must NOT Contain:– Material Events not Forwarded

Branch Files - After

New FINRA Supervisory Rules

Regulatory Notice 14-10

Inspection Report Content Requirements

Specifically, a firm must test and verify a location’s supervisory policies and procedures for:

1) safeguarding of customer funds and securities;

2) maintaining books and records;

3) supervision of supervisory personnel;

4) transmittals of funds or securities from customers to third party accounts; fromcustomer accounts to outside entities; from customer accounts to locations otherthan a customer’s primary residence; and between customers and registeredrepresentatives, including the hand-delivery of checks; and

5) changes of customer account information, including address and investmentobjectives changes, and validation of such changes.

Regulatory Notice 14-10

Covered Accounts

FINRA Rule 3110(d) defines the term “covered account” to include any account introduced

or carried by the firm that is held by (1) the spouse of a person associated with the firm;

(2) a child of the person associated with the firm or such person’s spouse, provided that

the child resides in the same household as or is financially dependent upon the personassociated with the firm; (3) any other related individual over whose account the

personassociated with the firm has control; or (4) any other individual over whose account the

associated person of the firm has control and to whose financial support such personmaterially contributes.46 Once a firm has identified a potentially violative trade, the

firmmust conduct promptly an internal investigation into the trade to determine whether a

violation of the relevant laws or rules has occurred.

Regulatory Notice 14-10

Recent Disciplinary Actions

SEC Brings Down the HammerOn March 26th, the SEC suspended trading of shares of Advanced Cannabis Solutions. By market cap, this was the largest suspension of any stock in the pot sector. The stocks that have been suspended by the SEC recently besides CANN include Growlife Inc. (OTC:PHOT), Citadel EFT, Inc. (OTC:CDFT), Aventura Equities, Inc. (OTC:AVNE), and Petrotech Oil & Gas, Inc. (OTC:PTOG). The SEC gives different reasons for the suspension of each company. These are the relevant statements from the SEC's press releases for the reason each marijuana stock was suspended, in reverse chronological order. PHOT: The Commission temporarily suspended trading in the securities of PHOT because of questions that have been raised about the accuracy and adequacy of information in the marketplace and potentially manipulative transactions in PHOT's common stock. The Commission acknowledges FINRA's assistance in this matter.(There is a great discussion of PHOT's suspension in this SA article.) CANN: The Commission temporarily suspended trading in the securities of Advanced Cannabis due to a lack of current and accurate information concerning the securities of Advanced Cannabis. There are questions regarding whether certain undisclosed affiliates and shareholders of Advanced Cannabis common stock engaged in an unlawful public distribution of securities.(Undisclosed affiliates, and not questioning operations)CDFT: The Commission The Commission temporarily suspended trading in the securities of Citadel because of questions that have been raised about the accuracy and adequacy of publicly disseminated information concerning, among other things, the company's business operations and assets. In particular, there are questions regarding the accuracy, completeness, and validity of Citadel's several recent press releases, Form 8-Ks, and other public statements since January 2014 relating to transactions involving standby letters of credit ("SBLC's"), see Prime Bank Instrument Fraud, TreasuryDirect.gov (U.S. Department of the Treasury), www.treasurydirect.gov/instit/statreg/fr... (last visited Mar. 20,2014) and Brazilian Letras Tesouro Nacional ("LTN's"), see Frauds Related to Public Bonds,Tesouro Nacional (Brazil),www.tesouro.fazenda.gov.br/en/about-the-... (last visited Mar. 20, 2014).(Information concerning operations and assets)PTOG: The Commission temporarily suspended trading in the securities of PTOG because of questions that have been raised about the accuracy and adequacy of publicly disseminated information concerning, among other things, the company's operations. The Commission acknowledges FINRA's assistance in this matter.(Notice the difference between "operations" and CANN's "securities")AVNE: The Commission temporarily suspended trading in the securities of Aventura because of questions concerning the adequacy and accuracy of publicly available information about Aventura, including, among other things, its financial condition, the control of the company, its business operations, and trading in its securities.

Mark Raymond Talley (CRD #4969783, Registered Representative, Ft. Mitchell, Kentucky) submitted an Offer of Settlement in which

he was barred from association with any FINRA member in any capacity. Without admitting or denying the allegations, Talley consented to the described sanction and to the entry of findings that he recommended that his customer replace an existing variable annuity with a new variable

annuity. The findings stated that Talley misrepresented orally and in writing that the existing variable annuity was out ofthe surrender period and could be sold without incurring a surrender fee when in fact, the annuity was still in the surrender period and the

customer would incur a $15,000 surrender fee if it was sold. As a result of Talley’s representation, the customer sold the annuity and purchased a new one. On a switch form related to the transaction, Talley falsely stated

that he verified that the customer’s existing annuity was out of the surrender period and claimed he had obtained this information by speaking to an individual he claimed was an employee of the insurance company that underwrote and issued the annuity. Talley did not in fact, contact

the insurance company. Therefore, the information he placed on the switch form was false. The customer signed the switch form and Talley submitted it to his member firm. The firm filed a Uniform Termination Notice for Securities Industry Registration (Form U5) in which it disclosed

that Talley was permitted to resign after the firm determinedthat he had provided inaccurate information on a client disclosure document. The findings also stated that in connection with FINRA’s

investigation into that disclosure, Talley provided false answers to FINRA in response to a request for information. Talley provided partial testimony in a FINRA on-the-record interview, but failed to appear to complete the testimony. (FINRA Case #2012032650301)

Kam Poi Yee (CRD #2393601, Registered Representative, Edison, New Jersey) was fined

$7,500 and suspended from association with any FINRA member in any capacity for 10 business days. The fine shall be due and payable on Yee’s return to the securities industry. The sanctions were based on findings that Yee falsely attested that she had

confirmeda request for a fund transfer with a customer and as a result, caused her member firm’s books and records to be inaccurate. The findings stated that Yee processed the fund transfer request that she thought a customer had sent, but the transfer request was

actually sent by an imposter who hacked into the customer’s email. In order to finalize the transfer of funds, and to accommodate what she believed in good faith to be the customer’s wishes, Yee provided a false attestation in her firm’s electronic wire transfer

system. In reliance upon Yee’s attestation and the information the imposter provided, the firm wired the funds from the customer’s account to the account the imposter specified. The imposter requested a second transfer and at that point, Yee and the adviser she

assisted became suspicious. Yee and the adviser brought the incident to a branch manager after they determined the signature on the letter of authorization (LOA) did not match the customer’s signature on file. As a result, the firm investigated the incident and

terminated Yee based on her false attestation. Yee initially represented that she mistakenly checkedthe box attesting that she had spoken with the customer and later volunteered that she did so knowingly.

FINRA Fines Brown Brothers Harriman a Record $8 Million for SubstantialAnti-Money Laundering Compliance Failures

Highest Fine Levied by FINRA for AML-Related Violations; Former AML Compliance OfficerAlso Fined and Suspended

The Financial Industry Regulatory Authority (FINRA) fined New York-based Brown Brothers Harriman & Co. (BBH) $8

million for substantial anti-money laundering compliance failures including, among other related violations, its failure to have an adequate anti-money laundering program in place to monitor and detect suspicious penny stock

transactions. BBH also failed to sufficiently investigate potentially suspicious penny stock activity brought to the firm’s attention and did not fulfill its Suspicious Activity Report (SAR) filing requirements. In addition, BBH did not have an

adequate supervisory system to prevent the distribution of unregistered securities. BBH’s former Global AML Compliance Officer Harold Crawford was also fined $25,000 and suspended for one month.

FINRA Fines Berthel Fisher and Affiliate, Securities Management & Research,$775,000 for Supervisory Failures Related to Sales of Non-Traded REITs andLeveraged and Inverse ETFsThe Financial Industry Regulatory Authority (FINRA) fined Berthel Fisher & Company Financial Services, Inc. and its affiliate, Securities Management & Research, Inc., of Marion, Iowa, a combined $775,000 for supervisory deficiencies, including Berthel Fisher’s failureto supervise the sale of non-traded real estate investment trusts (REITs), and leveraged and inverse exchange-traded funds (ETFs). As part of the settlement, Berthel Fisher must retain an independent consultant to improve its supervisory procedures relating to its sale of alternative investments. Brad Bennett, FINRA’s Executive Vice President of Enforcement, said, “A strong culture of compliance is an essential element of the proper marketing of complex products. Berthel’s supervision of the sales of non-traded REITs, inverse ETFs and other products fell shortof this standard, as it failed to ensure that its registered representatives understood the unique features and risks of these products before presenting them to retail clients.” FINRA found that from January 2008 to December 2012, Berthel Fisher had inadequate supervisory systems and written procedures for sales of alternative investments such as non-traded REITs, managed futures, oil and gas programs, equipment leasing programs and business development companies. In some instances, the firm failed to accurately calculate concentration levels for alternative investments, thus, the firm did not correctly enforce suitability standards for a number of the sales of these investments. Berthel Fisher also failed to train its staff on individual state suitability standards, which is part of the suitability review for certain alternative investment sales. FINRA also found that from April 2009 to April 2012, Berthel Fisher did not have areasonable basis for certain sales of leveraged and inverse ETFs. The firm did not adequately research or review non-traditional ETFs before allowing its registered representatives to recommend them to customers, and failed to provide training to its sales force regarding these products. The firm also failed to monitor the holding periods of these investments by customers, resulting in some instances in customer losses.

Questions? Comments?

Thank you for attending!

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