FINRA Annual Conference 2021: 4 Key Takeaways

Perhaps SEC Chairman Gary Gensler summed up the predominant theme of the recently concluded 2021 FINRA Annual Conference best in the comments he made in the event’s final session.

 “We need to do whatever we can to ensure that bad actors aren’t playing with working families’ savings and that the rules are enforced aggressively and consistently,” Gensler said in his remarks at this year’s conference, which ran virtually from May 18-20.

Traditionally one of the financial services industry’s largest events, the FINRA annual conference, gathers practitioners, peers, and regulators to exchange ideas on timely compliance and regulatory topics. This year’s event was no different. Several key themes emerged as speakers such as Gensler discussed major industry trends and compliance issues.

1. Protecting retail investors is paramount.

Whether it was guarding seniors against scams, educating a new generation of online investors, or ensuring that registered representatives were squarely on a client’s side when recommending a transaction, regulators repeatedly stressed the importance of protecting retail investors.

“Best interest means best interest. Best execution means best execution,” Gensler said.

“So, if you’re asking a lawyer, accountant, or adviser if something is over the line, maybe it is time to step back from the line. Remember that going right up to the edge of a rule or searching for some ambiguity in the text or a footnote may not be consistent with the law and its purpose.”

Gensler may have been the most prominent advocate for retail investors, in stating, “Every day, I am animated by working families and what the SEC means to them.” But other regulators made similar pledges in sessions covering topics like “Fraud Detection and Prevention,” “Gamification, Social Media, and Digital Communications Perspectives,” and “Enforcement Developments.”

“We have a substantial amount of fraudulent activity that originates from organized criminal rings,” said Lisa DeVos, managing director of the Financial Crimes Training & Awareness program for the Financial Crimes Risk Management unit of Charles Schwab & Co., Inc., during the panel discussion about fraud.

Fraudsters often dupe individuals into paying for services that they don’t receive or into cashing falsified checks. Scams around employment and romance have been particularly common, DeVos said.

Victims are also being asked to send money via virtual currency through platforms like Coinbase. “It comes back to educating clients to be on the lookout for scams and how to avoid them,” DeVos said.

2. Enforcing Reg BI and Form CRS tops examiners’ agendas.

In keeping with the emphasis on protecting retail investors, regulators said that they expect more from firms in this year’s exams when it comes to assessing compliance with Regulation Best Interest and Form CRS. Whereas examiners took a “good faith approach” in which they largely assessed a firm’s implementation progress a year ago because the provisions took effect amidst the COVID-19 pandemic in July, the focus will be on compliance this time around.

“Form CRS is the first stop for examiners at the beginning of an exam, both to look for compliance with Form CRS instructions and also for getting a high-altitude understanding of the firm for the exam,” said Bill St. Louis, senior vice president and firm group leader for FINRA member firms assigned to the Retail and Capital Markets firm grouping, in a panel discussion about Reg BI and Form CRS observations and expectations.

St. Louis noted that the disciplinary history section of Form CRS was an area in which examiners observed shortcomings last year. For example, firms sometimes “massaged” the title of the section, gave ambiguous answers, or omitted it entirely.

He also noted that firms sometimes failed to address major business lines or product areas in their Form CRS. Exceeding page limits for the form, filing it late, or not tracking its delivery to investors properly were other areas of potential improvement, St. Louis said.

In regards to Reg BI, examiners will focus on a firm’s product offerings as well as its policies and procedures and their effectiveness, said Pete Driscoll, director of the SEC’s Division of Examinations (EXAMS), who was on the same panel as St. Louis. “It’s in the early stages for our Phase Two but these are much more in-depth exams looking at a lot of the trading and a lot of the recommendations.”

Examiners want to know how firms make the recommendations that they do and why. In doing so, they will look at areas like product costs, registered representative compensation, and disclosure obligations.

Panelists referred conference attendees to an SEC Roundtable on Reg BI and Form CRS from October 2020 for additional information about observations from last year’s exams. For additional information on this year’s exams, panelists noted that regulators address Reg BI and Form CRS in the SEC’s Examination Priorities for 2021 and in the 2021 Report on FINRA’s Examination and Risk Monitoring Program.

3. Remote exams will continue, at least for now.

Regulators also noted that they will probably try to retain some of the efficiencies that they have realized through remote exams, like eliminating the need to travel to firm offices if an examiner can be just as effective without visiting. But the nature of future exams is still evolving, like that of the workplace itself as firms transition from remote environments to back to the office or to a hybrid arrangement that blends off-site and on-premises work.

FINRA and the SEC are considering extending remote inspections under 3110(c) through 2022 to let firms and examiners adjust to the post-pandemic environment, said Bob Colby, FINRA’s Chief Legal Officer, during a question-and-answer session with members of FINRA’s senior staff.

“That has not been resolved yet, but I feel like the conversations are going well,” Colby, said of discussions with SEC staff. “That is intended to buy a little time in order to figure out how to do this in the longer term.”

Branch definitions are being thought through and FINRA, SEC and states are coordinating signaling that firms could expect some branch-related rulemaking at some point down the road. “Locations aren’t what we used to think they are,” said Colby, noting that definitions like “OSJ” [Office of Supervisory Jurisdiction],” “branch office” and “non-branch office” need to be reviewed.

State regulators will likely insist that no compliance loopholes exist before agreeing to remote inspections as rule rather than an exception. “The states have warned that before they would be willing to agree to any sort of changes, we’re going to need to show that the concerns that have historically been there have been addressed, that we’re not leaving any gaps by which misconduct or inattention or errors could take place,” Colby said.

Firms would need to track work remotely as if it were being done within a traditional office. “We’ll need to get information from the firms to make sure that if we go away from a location-based approach to a functional approach, that we’re going to get the same level of protection and supervision that we’ve had in the past,” Colby said.

4. Leveraging technology and data is important to examiners.

Meanwhile, data is playing a larger role in exams and within FINRA as a whole.

Within exams, data specialists help examiners leverage historic data. They also reduce duplicative data requests and solicit industry feedback that helps FINRA enhance its data analytics and tools, said Yolanda Trottman-Adewumi, senior director, Specialist Programs in FINRA’s Member Supervision Office of Examinations and Risk Monitoring Program during a discussion about FINRA’s Examination and Risk Monitoring program.

FINRA’s Enforcement department is also focused on how it can continue to leverage advanced analytics to better identify risk in transactions. “To be smarter and more efficient in our investigations is key,” said Lara Thyagarajan, FINRA’s senior vice president, head of Market Regulation Enforcement and Litigation, during a panel discussion about enforcement developments.

FINRA is also looking to standardize how it requests and analyzes data so that there is a more consistent experience for firms, said fellow panelist Terry Bohan, vice president of investigations for the FINRA Enforcement department. It is seeking similar consistency internally as well.

“We’re working to standardize data analytics in a way that we may be able to upskill our staff and also bring in new people so that we can gain more insights into the large amounts of data that were seeing,” Bohan said. It is becoming a more data-focused organization.

Looking beyond exams and enforcement, FINRA is marrying data analytics with business processes and people across the organization, said Eileen Murray, chairperson and FINRA public governor, in a fireside chat with FINRA CEO Robert Cook. Within talent management, for example, FINRA uses data analytics to understand its employees’ current skills as well as its future needs. Data helps the organization with succession planning and retraining workers so that they have the skills they will need in the future.

“Reskilling and upskilling are important when you look at what is going on with technology,” Murray said. Though they are exciting and create tremendous opportunities, advances like artificial intelligence, machine learning, and mobile-business models also require workers to have different skills, she said.

“There will be jobs created but if we don’t re-train and re-skill people, we’ll end up leaving them behind,” Murray said, noting that many jobs could be lost at the current pace of innovation. She also noted that hiring a new employee costs less than re-training an existing worker.

Other speakers during the 2021 FINRA Annual Conference joined Murray in stressing that data and technology will be increasingly important as FINRA moves into the future.  So too will protecting retail investors, as Gensler and others stated. Though many themes emerged, that was the most common of all.

RegEd’s Margaret Bragg Elected to SILA Foundation Board of Trustees

RegEd Senior Vice President Sales Margaret Bragg has been elected to the SILA Foundation Board as the new Compliance Trustee. As Compliance Trustee, Bragg will help ensure that the Foundation complies with its rules and bylaws.

As the charitable arm of the Securities & Insurance Licensing Association (SILA), one of the SILA Foundation’s missions is to identify students who are aspiring to work in the financial services industry with financial assistance with their education by distributing 10 scholarships of $1,000 each to college students annually. It also supports the onboarding and continued education of financial services industry professionals through the SILA Foundation Certification Program.

Prior to becoming a trustee, Bragg began assisting the Foundation more than a year ago as a volunteer on the Scholarship & Grants Committee, which considers applications for students focused on careers in the insurance and securities industry.

Bragg’s experience with her and her husband’s scholarship program that awards scholarships for high school students from her hometown drew her to the opportunity to support the SILA Foundation in its efforts. Having seen how her local students benefited from the Bragg scholarship program throughout her 11-year involvement, Bragg appreciated the chance to help make a similar impact through the SILA Foundation.

“This group is doing yeoman’s work in trying to positively affect the lives of individuals,” she said of the Foundation’s work. “That resonated with what was already an important piece of my life.”

In addition to its scholarship program, the Foundation runs the Footprint Project, in which it gives $1,000 a year to an organization whose mission is to enhance the personal careers and/or general wellbeing of people located in the city that hosts the annual SILA National Education Conference. And, as an educational forum that helps the public learn about financial services, particularly insurance and securities, the SILA Foundation’s efforts include educational content, online course, virtual classes, free public webinars and career development assistance as well.

Bragg will remain on the SILA Foundation’s scholarship review committee while she also serves on the board of trustees and addresses compliance for the organization. She is now one of two RegEd executives on the Foundation’s board of trustees.

Susan Boles, senior regulatory compliance analyst at RegEd, was elected to the SILA Foundation Board in early 2020 as the new Scholarships & Grants Trustee. As the Scholarships & Grants Trustee, Boles oversees all of the scholarships and grants given by the SILA Foundation.

Also, Brandi Brown, senior vice president of regulatory affairs at RegEd, is co-chair of the SILA Education and Training Subgroup (SETS). SETS provides a forum for SILA Members to address issues related to education and training requirements for producers, adjusters, and registered representatives.

To learn more about the SILA Foundation, please visit http://www.silafoundation.org/.

About RegEd

RegEd is the market-leading provider of RegTech enterprise solutions with relationships with more than 200 enterprise clients, including 80% of the top 25 financial services firms.

Established in 2000 by former regulators, the company is recognized for continuous regulatory technology innovation with solutions hallmarked by workflow-directed processes, data integration, regulatory intelligence, automated validations, business process automation, and compliance dashboards. The aggregate drives the highest levels of operational efficiency and enables our clients to cost-effectively comply with regulations and continuously mitigate risk.

Trusted by the nation’s top financial services firms, RegEd’s proven, holistic approach to RegTech meets firms where they are on the compliance and risk management continuum, scaling as their needs evolve and amplifying the value proposition delivered to clients. For more information, please schedule a consultation.

NY Reg 187 Could Reach State’s Highest Court After Being Struck Down

A controversial best interest standard for sales of life insurance and annuities in New York may be headed to the state’s highest court now that it has been deemed unconstitutional by an appellate court.

The New York Court of Appeals would be the last stop within the state’s court system should regulators appeal the Supreme Court Appellate Division’s April 29 unanimous decision that the amended New York Regulation 187 is unconstitutional.

“It appears likely that the decision will be appealed to the state’s highest court and, if the appeal is filed, a stay of the appellate court decision will be requested. This would be granted as a routine matter so that Reg 187 would continue to be the law until a final decision,” said Brandi Brown, senior vice president of regulatory affairs for RegEd.

Though the best interest standards established under the amended version of New York’s Reg 187 came into effect for annuity sales on August 1, 2019, and for life insurance sale on February 1, 2020, insurance industry associations, an insurance agency, and a registered representative sought to overturn them by suing the state’s Department of Financial Services (DFS). A state Supreme Court judge ruled in regulators’ favor in August but the Supreme Court Appellate Division’s sided with the remaining plaintiffs, Independent Insurance Agents of New York (Big I NY) an industry trade association, and Testa Brothers, one of its members, in their appeal.

Appellate court rules NY Reg 187 unconstitutional

The appellate court agreed with Big I NY and Testa Brothers and their contentions that the amendment violates their due process rights as it is unconstitutionally vague.

 “It provided little if any protection beyond the already robust laws of conduct and accountability for insurance agents, and actually harmed consumers by reducing access to affordable life insurance products and the trusted advice of an agent,” Lisa Lounsbury, CAE, president and CEO of Big I New York said after the ruling, according to an association blog post about winning its lawsuit appeal against NYSDFS.

In siding with the plaintiffs, the appellate court wrote that NY Reg 187 failed to meet either both prong of the two-part test that is used to evaluate “a vagueness challenge.” That is, NY 187 was not sufficiently defined and standards for enforcement were not specific enough.

“While the consumer protection goals underlying promulgation of the amendment are laudable, as written, the amendment fails to provide sufficient concrete, practical guidance for producers to know whether their conduct, on a day-to-day basis, comports with the amendment’s corresponding requirements for making recommendations and compiling and evaluating the relevant suitability information of the consumer,” justices wrote.

Furthermore, “given the resulting ambiguities in the language employed, coupled with its lack of clear standards for how these provisions will ultimately be enforced, respondents have ‘virtually unfettered discretion’ in determining whether a violation has occurred,” justices continued.

Industry favors NAIC best interest standard

“The amendment to Regulation 187 created unintended consequences that placed unnecessary barriers between Main Street New Yorkers and the insurance and financial services professionals who serve them,” said Gary Cappon, president of the National Association of Insurance and Financial Advisors New York Chapter (NAIFA-NY), according to an association blog post regarding the appellate courting ruling NY Reg 187 unconstitutional. The NAIFA-NY was among the plaintiffs that initially challenged NY Reg 187 but it was not part of the appeal.

“The court’s ruling on Regulation 187 gives New York a fantastic opportunity to make a fresh start and create a regulation to protect consumers based on the NAIC model,” Cappon said, referencing the National Association of Insurance Commissioners (NAIC) model regulation on annuity transactions.

The NAIC model regulation requires financial professionals to act in the best interests of consumers during annuity transactions and aligns with the Securities and Exchange Commission’s federal Regulation Best Interest, the NAIFA-NY noted in expressing its support.

The NAIC explains that its annuity suitability and best interest standard requires agents and carriers to act with “reasonable diligence, care, and skill” in making recommendations. Three states have adopted revisions to the model and the NAIC continues to work with regulators nationwide.

Meanwhile, in New York, insurance companies may have to wait to see if DFS will appeal the recent ruling that the best interest standards put forth in NY 187 are unconstitutional.

“Until the appeal of the Supreme Court’s recent decision, some companies may opt to delay training of new agents under Reg 187, but we believe that most insurers will continue to follow Reg 187 until its fate is finally decided,” said Brown, RegEd’s senior vice president of regulatory affairs.

“This means they will continue to need training. And RegEd’s courses will continue to be available for as long as needed.”

RegEd offers three courses that insurers may use for this purpose.

  • NY Reg 187: Suitability and Best Interest of Clients in Life Insurance and Annuity Transactions (484_NY)
  • Best Interest of Clients in Life Insurance Transactions: NY Reg 187 Course(484_NY_L)
  • Best Interest of Clients in Life Insurance or Annuity Transactions: NY Reg 187-1 Hour Course (485_NY)

Visit our website to learn more about RegEd’s Insurance CE solution, or RegEd’s CE Authority website to learn more about continuing education (CE) courses for insurance professionals.

About RegEd

RegEd is the market-leading provider of RegTech enterprise solutions with relationships with more than 200 enterprise clients, including 80% of the top 25 financial services firms.

Established in 2000 by former regulators, the company is recognized for continuous regulatory technology innovation with solutions hallmarked by workflow-directed processes, data integration, regulatory intelligence, automated validations, business process automation, and compliance dashboards. The aggregate drives the highest levels of operational efficiency and enables our clients to cost-effectively comply with regulations and continuously mitigate risk.

Trusted by the nation’s top financial services firms, RegEd’s proven, holistic approach to RegTech meets firms where they are on the compliance and risk management continuum, scaling as their needs evolve and amplifying the value proposition delivered to clients. For more information, please schedule a consultation.

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