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Missouri House Representative Steven Weber is sponsoring House Bill 1480 (“HB 1480”) which proposes to amend the Missouri Securities Act to include provisions that establish a whistleblower program.
HB 1480 defines whistleblower as a person who, under the whistleblower program, discloses information regarding a violation or potential violation of securities law or a rule adopted or order issued under securities laws.  The whistleblower must be employed by or associated with the following: (1) a broker dealer; (2) an issuer; or (3) a person that receives compensation for advising others of the value of securities or the advisability of investing, purchasing, or selling securities or issues or promulgates analyses or reports relating to securities as a regular part of their business.
Since many whistleblower programs would not be as effective without the promise of anonymity, HB 1480 permits the Commissioner of Securities to collaborate with the Attorney General or other appropriate prosecuting attorney to implement procedures to ensure the confidentiality of the whistleblower.  However, the actual language of the bill states, “The ‘Whistleblower Program’ is created to receive information or records from whistleblowers and, in the discretion of the Commissioner, to maintain the confidentiality of whistleblowers.”  Thus, while it appears that maintaining the confidentiality of a whistleblower is a goal of the program, it is not guaranteed.
In line with the notion that the identities of whistleblowers should remain anonymous, records maintained by the Commissioner as a part of the program are not public records unless the Commissioner finds that disclosure is necessary or appropriate in the public interest or for the protection of investors.  The records can also be disclosed through the legal process if they are subject to a subpoena or court order.
The Bill would also provide whistleblowers with a cause of action against an employer for retaliation if adverse action is taken against the employee for participation in the whistleblower program.  Whistleblowers are afforded one year to bring such claims and can request the following relief: (1) reinstatement to their position without loss of seniority; (2) back pay; (3) punitive damages; and (d) costs and reasonable attorneys’ fees.  However, whistleblowers are prevented from obtaining relief if their employer proves the employee participated in the violation, was criminally convicted for the violation, or the action is clearly frivolous or vexatious.
Whistleblower programs also exist for federal violations of securities law.  In 2010, the Dodd-Frank Act amended the Securities Act of 1934 to add a section titled, “Securities Whistleblower Incentives and Protection.” Under this program, individuals who voluntarily provide the SEC with original information that leads to successful enforcement actions resulting in monetary sanction over $1,000,000 may be eligible to receive an award from 10 – 30% of the monies collected by the SEC.  The program also prohibits retaliation from employers.
In January, the SEC issued its 2013 report to Congress on the Dodd-Frank Whistleblower Program.  The report noted that Fiscal Year 2013 was historic for the SEC’s Office of the Whistleblower (“OWB”), paying $14,831,965 to whistleblowers whose information contributed to the success of enforcement actions.  Of the 3,238 tips received in 2013, 17.2% concerned corporate disclosures and financials, 17.1% concerned offering fraud, and 16.2% concerned manipulation, with the most over-all tips coming from California, New York, Florida, and Texas.  Missouri ranked 26th on the number of reported tips with only 31.  Whistleblower submissions were also received from individuals from fifty-five foreign countries.
Since the program’s creation, six individuals have received awards, four of them occurring in 2013.  The report also indicates that the program paid its largest award of over $14 million to one whistleblower whose information led to the recovery of substantial investor funds.  Thus, the awards given to the other three individuals in 2013 were much less substantial.
Dodd-Frank’s Whistleblower Program prompted Utah to pass a similar Act in 2011 that also allows for payment to a whistleblower for voluntarily providing information that leads to the successful enforcement of a judicial or administrative action.
Unlike Dodd-Frank’s or Utah’s Whistleblower Programs, the HB 1480 doesn’t provide for any payment for information that assists in the prosecution of securities violations.  Should this bill pass, the likelihood of the program’s success remains to be seen since there is no financial incentive to report potential wrongdoings, the anonymity of the whistleblower doesn’t appear to be guaranteed, and Missouri residents are less active in submitting tips under Dodd-Frank’s program.

Currently, HB 1480 has been introduced and referred to the Missouri House Financial Institutions Committee.  We will keep you updated on the Bill’s progress.

Earlier this month, The Investment Adviser Rep Syndicate interviewed Ms. Patricia Struck, Chair-Person of the Investment Adviser Section for the North American Securities Administrators Association (NASAA) and the Administrator of the Division of Securities of the Wisconsin Department of Financial Institutions.  The interview, relevant to state and SEC registered Investment Adviser Representatives and Registered Investment Advisers is posted below.



The Syndicate:    Let’s start with the basics – What is NASAA?

Patricia Struck:   The North American Securities Administrators Association is oldest international organization devoted to investor protection. It’s a voluntary association whose membership consists of 67 state, provincial, and territorial securities administrators in the 50 states, the District of Columbia, Puerto Rico, the U.S. Virgin Islands, Canada, and Mexico.


TS:                   For how long have you been the administrator of the Wisconsin Division of Securities?

PS:                   I’ve been the administrator since 1995.


TS:                   What advisers do the states regulate as opposed to the SEC?

PS:                   Generally, the states regulate “small” (with assets up to $25 million) and “mid-sized” (with assets up to $100 million) advisers.  Of the 28,366 advisers currently on IARD, more than 17,000 are state advisers. The rest of the universe – nearly 11,000 advisers – are SEC advisers.


TS:                   It is my understanding that NASAA has different “working groups”. Is there a working group  focused on the advisory as opposed to the broker industry?

PS:                   NASAA has “sections” divided into 5 subject matter areas; one of the five is the investment adviser section and another is the broker-dealer section. But while the sections are separate on paper, they work very closely together – especially the investment adviser and broker-dealer section.


TS:                   For how long have you been the head of NASAA’s Investment Adviser Section?

PS:                   I just became chair of the section in October of 2013. This is my third term as chair.


TS:                   Can you give me some examples of some of the positions held by the folks in this section?  What exactly does this section seek to accomplish and how does it go about meeting those goals?

PS:             The section includes nearly 50 volunteers from across the US and Canada with vast expertise in the whole range of regulatory issues relating to investment advisers. Some are the administrators in their jurisdictions. Some are registration chiefs or lead examiners in their states. Many are examiners who perform exams in advisers’ offices. All have specific subject matter expertise in issues


TS:             As you know, the Investment Adviser Rep. Syndicate focuses on the training, compliance, and business goals of the representative rather than the RIA. What observations did you make in 2013 that would be of interest to advisory representatives?

PS:             In 2013, as state securities regulators assumed the increased regulatory oversight of investment advisers managing under $100 million in assets, NASAA released an updated series of recommended best practices that investment advisers should consider to minimize the risk of regulatory violations. These recommendations were based on the sample data reported by examiners in 44 state and provincial securities agencies between January and June 2013. The 1,130 reported examinations uncovered 6,482 deficiencies in 20 compliance areas, compared to 3,543 deficiencies in 13 compliance areas identified in a similar 2011 examination of 825 investment advisers.

As regulators, we are concerned about investor confusion stemming from the blurred lines between traditional brokerage, investment advisory, and financial planning services; partially because of the expectations the brokerage industry has set, and partially because of the marketing approach the industry uses – the proverbial ‘financial adviser’ who is your partner in retirement every step of the way. As long as the broker-dealer industry continues to engage in advice driven marketing the confusion will persist. That’s one reason why state securities regulators have long advocated that broker-dealers must be held to the fiduciary duty standard of care currently applicable to investment advisers and be required to place retail investor interests ahead of their own.


TS:             What are the section’s goals for 2014?

PS:             The section always strives to look for ways to enhance uniformity in investment adviser firm and investment adviser representative registration practices. We also will continue our ongoing efforts to support states in conducting investment adviser exams. And of course, we will review our existing “best practices” for IA firms to consider while developing their own compliance programs and evaluate whether additional practice areas are necessary.


TS:             How is the migration of RIA’s pursuant to the Dodd-Frank Act going?

PS:             The IA Switch, involving the transfer of more than 2,100 investment advisers from federal to state oversight, was one of the most significant achievements in the history of the North American Securities Administrators Association (NASAA).

The Switch stemmed from Section 410 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the Dodd-Frank Act), which raised the assets under management (AUM) threshold for state regulation of investment advisers from $25 million to $100 million.

This report documents the work that went into the successful completion of the Switch.


TS:             If there were three things you would like to see the Syndicate accomplish what would they be?

PS:             1. Helping IARs have a better understanding of the role of their state regulator

2. Helping to create an ongoing dialogue between the IAR and regulatory communities

3. Helping IARs appreciate investor confusion stemming from the blurred lines between traditional brokerage, investment advisory, and financial planning services – and work to cut through that confusion


TS:             What is the one thing you would be grateful to see investment adviser representatives take away from this interview?

PS:                   I would like them to appreciate that we are their partners in putting investors first. State securities regulators are accessible, both to investors and to the people we regulate. We work closely with the IAR communities in our states and appreciate the value and importance of communication. We share the same goal of providing the best level of service to investors. We’re in this together.

          Too many small and mid-size investment advisory firms fail to adequately self-audit.  There – I said it.  Do you agree with me?

         There was much debate and wrangling over the SEC to state regulatory transition prompted by the Dodd-Frank Act.  The state regulators vowed that they had the capacity to regulate and audit the over 3,000 mid-sized RIA’s that came under their purview with the increase in the SEC AUM threshold.  And they have been living up to their vow.  As such, small to mid-size independent RIA’s are more likely to be subjected to a routine exam.  In just the first six months of 2013, state regulators conducted over 1,000 audits, finding over 6,000 deficiencies.  In my experience, the vast majority of these firms fail to retain outside legal counsel for routine guidance, to assist with self-audits, or to step in quickly when the regulators arrive at the front door.

         A couple of years back, my law firm represented an investment advisor representative whose small satellite office was subjected to a routine state exam.  The regulators found a myriad of problems a self-audit would have discovered.  Rather than accepting responsibility for the exam deficiencies, the RIA threw the representative under the bus and blasted him on his U-5.  An arbitration panel subsequently awarded our client almost $3.5 million.  Regular counsel and self-exams would have been a lot less expensive.

         Not long after that case, I served as an expert witness for an investor whose representative steered her towards unregistered securities purportedly backed by real estate in England.  The small RIA’s CCO couldn’t even define a security during the hearing.  A more robust audit program would have unveiled the representative’s arguably well-intentioned but utterly ignorant advice regarding the investment contracts.

         So my admittedly self-serving advice is this: if you are a small or mid-sized RIA, budget for consistent legal advice and self-exams.  Saving a buck on compliance isn’t even “penny wise”.

Investment adviser representatives should consider attending the AICPA‘s conference in Las Vegas later this month.  “The 2014 Advanced Personal Financial Planning Conference is an intensive, high-level event that will help you prepare for the impact legislative and regulation changes will have on your practice and clients” according to the AICPA’s website.  We have already heard back from IAR’s inquiring as to whether their RIA will approve of them joining the Syndicate or attending the upcoming conference.  Those inquiries alone exemplify the long-standing need for the Syndicate.  But back to the AICPA conference:  it has four tracks for focused learning, and a variety of interesting featured speakers.  It looks to me like you can “invest in yourself” with this opportunity for as little as $2,500 total.  Think about it.