By Sven Collins, HRO. The SEC soon will have another basis for suing regulated entities. On August 4, 2009, the SEC published final rules--Regulation S-AM--prohibiting broker dealers, registered investment advisors and registered transfer agents from using "eligibility information" received from affiliates to market to customers without first getting permission to do so. A firm gets permission by disclosing to the customer that the customer's information may be used for marketing by affiliates, by giving the customer a reasonable opportunity to opt out from such use, and where the customer does not opt out. The SEC provides model forms for disclosure and opt out. There are also exceptions to the rule, including where the affiliate has a preexisting business relationship with the customer. The new Reg S-AM goes into effect September 10. The full notice of the final rule is published at http://www.sec.gov/rules/final.shtml
Reg S-AM is a "sister" regulation to Regulation S-P, which prohibits disclosure of certain financial information. As previously reported, Reg S-P is in the process of being overhauled to increase restrictions on what information broker dealers and reps may transfer when registered reps leave firms and requiring firms to adopt procedures to prevent and respond to improper disclosure of private customer information. See HRO Alert re Reg S-P. The proposed new Reg S-P is still not yet final. In the meantime, the SEC has instituted a number of enforcement actions under Regulation S-P where broker dealers are accused of failing to adequately protect customer information. In some cases, the SEC is going after broker dealers for apparent sloppiness. For example, on July 17 the SEC issued an order instituting administrative cease and desist proceedings against a broker dealer accused of leaving 5,000 customer records curbside for a trash pick up that never happened. See Rel. 34-60325 at www.sec.gov/litigation/admin.shtml. In other cases, the SEC is reacting to overly aggressive account transfer tactics, such as where a broker dealer was, among other things, found to have pre-populated account transfer forms for incoming registered representatives using detailed client and bank account information taken directly from the representatives' current firms. See HRO Alert re SEC's First Enforcement Action Under Reg S-P; see also Initial Decision Release No. 349 at http://www.sec.gov/alj/aljdec/aljdecarchive/aljdecarc2008.shtml. The SEC is expected to continue suing firms for violating Reg S-P and, starting in September 10, will start policing companion Reg S-AM.
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