Compliance May 29, 2015

FINRA Updates FAQs on Public Communication Rule

The Financial Industry Regulatory Authority (FINRA) has updated a helpful frequently asked questions (FAQs) section on its website outlining the scope and limits of FINRA Rule 2210, which covers adviser communications with the investing public.
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For the most part, the updated FAQs section outlining enforcement of Rule 2210 seeks to inform advisers about the limits of restrictions set out by the rule. For example, looking to non-promotional communications, one question asks whether “a firm [is] required to file with FINRA, or have a principal approve prior to use, a retail communication that is limited to market commentary concerning overall changes in the market on a particular day, or a discussion of economic news?”

Finra says the answer is “no” in this case: General market commentaries or economic discussions that are not used for the purpose of promoting a product or service of the firm would be considered retail communications that do not make any financial or investment recommendation or otherwise promote a product or service of the member (see FINRA Rules 2210(b)(1)(D)(iii) and 2210(c)(7)(C)).

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Another question asks whether a firm is required to file, or have a principal approve prior to use, “a retail communication that merely explains factual information regarding an individual retirement account, qualified plan or 401(k) account?” Again the answer is no, FINRA says. These kinds of retail communications also would be considered to be non-promotional and thus not subject to the principal pre-use approval or filing requirements—per FINRA Rules 2210(b)(1)(D)(iii) and 2210(c)(7)(C).

Other subjects addressed in the FAQs include whether stationary or business cards need to be filed with FINRA, and in what limited cases a firm is required to file, or have a principal approve prior to use, a retail communication that merely provides information to participants in an employee retirement plan as required by the Employee Retirement Income Security Act (ERISA) or the current Department of Labor (DOL) rules under ERISA.

“For example, would a firm be required to file a retail communication that merely informs participants in an employee retirement plan of changes to the investment options that are available through the plan? In most cases, no,” the FAQs explain.

Social media posts in online interactive electronic forums are also addressed, including whether the adoption of FINRA Rule 2210 changes the exceptions from the principal pre-use approval and filing requirements for posts in the interactive electronic forum portions of social media as compared to the requirements under NASD Rule 2210. In short, these exceptions have not changed, FINRA says.

Many other forms and communications are addressed in the FAQs section, available in full here.

Compliance May 29, 2015

Fiduciaries Removed for Misusing Retirement Plan Funds

The Department of Labor filed suit against fiduciaries of a medical corporation’s pension plan for using plan assets for personal expenses, citing multiple violation of the Employee Retirement Income Security Act. 
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An investigation by the U.S. Department of Labor’s Employee Benefits Security Administration (EBSA) found that Alfred and Judy Chan, the fiduciaries of a pension plan for the employees of their Lakewood, Washington, medical corporation, violated their fiduciary duties to administer the plan prudently and solely on behalf of its participants.

The Chans relocated to Taiwan in February 2011 shortly before an impending indictment for Medicare fraud. Once in Taiwan, Alfred and Judy Chan did not appoint an administrator of the pension plan in their absence, did not file mandatory reports about the plan, and did not give their former employees the pension benefits owed to them.

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Instead, EBSA alleges in a lawsuit, the Chans used the pension plan’s assets to pay for personal debts, personal legal fees and other personal, non-plan expenses and investments. Specifically, the complaint says Judy Chan invested $200,000 of the pension assets in Facebook Stock LLC under a different name to repay a debt. She also took more than $100,000 of the plan assets to pay for personal legal fees, and failed to deposit $31,137 of plan assets into the pension plan’s accounts.

On May 21, the U.S. District Court for the Western District of Washington approved a consent judgment permanently enjoining the defendants from causing any assets to be removed from any account or limited liability company held in the plan’s name. The court has ordered that upon the appointment of an independent fiduciary selected by EBSA, the defendants shall be removed as fiduciaries to the plan and the Chans permanently enjoined from serving as fiduciary or service provider to any employee benefit plan subject to ERISA.

The court also orders that Alfred and Judy Chan shall not recover any amount from the plan unless and until the rest of the participants receive the distributions owed to them in full, which is more than $400,000.

The court’s consent judgment and order is here.

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