SEC Issues AML Risk Alert for Compliance Issues Related to Suspicious Activity Monitoring and Reporting at Broker-Dealers

The SEC has warned broker-dealers to watch for compliance issues related to suspicious activity monitoring and reporting.

Seeking to improve compliance with federal anti-money laundering (AML) rules and regulations, the Division of Examinations encouraged firms “to review and strengthen their applicable policies, procedures, and internal controls” in an AML risk alert for broker-dealers.

“The SEC encourages broker-dealers to strengthen their policies and procedures for identifying and reporting suspicious activity as examiners have seen that many firms are not fulfilling their obligations under the law,” said Margie Webber, director of regulatory compliance for RegEd. 

The Examination Division has noticed several deficiencies related to broker-dealers’ obligations under the Bank Secrecy Act (BSA), specifically regarding the Financial Crimes Enforcement Network’s (FinCEN’s) AML Program Rule and SAR Rule. Examiners’ findings include the following observations, according to the risk alert issued on March 29.

AML Policies and Procedures

FinCEN’s AML Program Rule requires broker-dealers to establish and implement policies, procedures, and internal controls for identifying and reporting suspicious transactions. “A broker-dealer should look for indicators of illicit activities (generally referred to as “red flags”) and incorporate those red flags into its policies and procedures. Awareness by firm personnel of red flags and how to respond to those red flags, including escalating awareness of the red flags to appropriate firm personnel, will help ensure that a firm is in a position to identify the circumstances that warrant further due diligence and possible reporting,” the SEC explained in its risk alert.

Inadequate policies and procedures for AML

SEC examiners have found that some firms have not established “reasonably designed policies and procedures and internal controls” for identifying and reporting suspicious activity as required. Examiners noted the following examples.

  • No policies or procedures for raising “red flags” for suspicious activities
  • Setting SAR reporting thresholds at amounts “significantly higher” than the $5,000 regulations require
  • Relying on clearing firms to identify and report suspicious transactions in customer accounts

Failure to implement procedures

“Some firms that had reasonably designed written policies and procedures did not implement their procedures adequately and did not conduct adequate due diligence on or report suspicious activity that, per their own procedures, appeared to trigger a SAR filing requirement,” examiners wrote in their risk alert for broker-dealers.

Examples included:

  • Not filing SARs for transactions similar to ones that they previously reported
  • Not monitoring transaction reports and systems for suspicious activity
  • Failing to follow up on red flags that were raised

Suspicious Activity Reporting

The SAR Rule requires a broker-dealer to file a report of any suspicious transaction with FinCEN. The requirement applies to any transaction of $5,000 or more that meets any of the various criteria established by FinCEN, like it seems to be a transaction that the particular customer would not normally be expected to do.

Failure to respond to suspicious activity

“Weak policies, procedures, and internal controls, or the failure to implement existing policies and procedures, ultimately resulted in firms not conducting or documenting adequate due diligence in response to known indicators of suspicious activity especially with respect to activity in low-priced securities, which are particularly susceptible to market manipulation,” examiners wrote.

Examiners also noted that firms failed to act on information within customer accounts like records of liquidations of large volumes of high-risk, low-priced securities or trades of low-priced stock by customers affiliated with the issuer.

Filing inaccurate or incomplete SARs

Some broker-dealers make it difficult for regulators and law enforcement to follow up on suspicious activity by not including transaction-specific details in the SARs that the firm files. Rather, some firms have “filed hundreds of SARs or more containing the same generic boilerplate language, which failed to make clear the true nature of the suspicious activity and the securities involved,” examiners wrote.

Examiners noted the following examples of SARs that contained inaccurate information or lacked sufficient detail on key aspects of the suspicious activity.

  • Failing to include customer-identification information like Social Security numbers
  • Not reporting the liquidation of low-priced securities shortly after they were deposited
  • Not including details of a cyber-intrusion, like time, manner, and method of the incident

Improving AML compliance

“In fulfilling their important AML obligations, broker-dealers play a vital front-line role in assisting regulators and law enforcement in identifying and addressing suspicious activities to prevent our financial systems from being used for criminal purposes,” examiners wrote, in urging broker-dealers to strengthen policies, procedures, and internal controls for identifying and reporting suspicious activities.

“Strong policies, procedures, and internal controls protect broker-dealers and their customers by ensuring that any suspicious activity is quickly identified and properly reported,” RegEd’s Webber said. “Removing improper and illegal trading is key to maintaining the integrity of firms and financial markets.”

RegEd’s Policies and Procedures Management Solution helps broker-dealers comply with their AML obligations and other regulations. It enables comprehensive, end-to-end administration and oversight of all elements of a firm’s policies and procedures through an enterprise workflow, work-process, and task management platform. Broker-dealers can also incorporate AML into their Firm Element Continuing Education Program through RegEd’s learning management technology.

Schedule a consultation to learn more about how RegEd’s compliance solutions enable securities firms to improve efficiency, effectiveness, and transparency across the enterprise.

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.

SEC’s Examination Priorities for 2021 Reflect Continued Concern for Retail Investors

The SEC’s Division of Examinations will continue to emphasize protection for retail investors in the coming year, particularly for seniors and individuals saving for retirement.

The Examination Division will evaluate whether registered investment advisers (RIAs) meet standards of conduct and will examine whether firms appropriately mitigate and disclose conflicts, regulators recently announced in releasing the SEC’s Examination Priorities for 2021. Examiners will also probe sales of retail investment products.

The priorities are a continuation of the SEC’s efforts to protect retail investors. In the fiscal year 2020, the Division of Examinations:

  • Issued more than 2,000 deficiency letters, which prompted many firms to take corrective actions, like by amending compliance policies and procedures or enhancing their disclosures.
  • Ordered firms to return more than $32 million to investors for fees that were improperly calculated and charged.
  • Referred more than 130 cases to the SEC’s Enforcement division, including referrals related to registered investment advisers selecting higher-cost mutual fund share classes for clients when lower-cost options were available; advisers failing to disclose conflicts of interest, and broker-dealers failing to supervise registered representatives who made unsuitable recommendations to retail customers.

“The SEC’s focus on retail investors speaks to the need for education and training for registered representatives, broker-dealers, and investment advisers,” said Margie Webber, director of regulatory compliance for RegEd. 

Firms can protect themselves by addressing the following SEC 2021 examination priorities through compliance action items.

Standards of Conduct

Examiners will focus on compliance with Regulation Best Interest (Reg BI), Form CRS, and whether RIAs have fulfilled their fiduciary duties of care and loyalty. With a compliance date of June 30, 2020, the standards have a “direct impact on the retail investor experience with broker-dealers and RIAs,” the SEC stated in its report on its 2021 examination priorities.

“Your policies and procedures should clearly define what standard applies to any given situation,” Webber said.

Firms and examiners have been adapting to the Reg BI and Form CRS standards since they were adopted in June 2019. In the past year, the SEC has developed new examination approaches for Reg BI and Form CRS “to both promote compliance and inspect firms in both our broker-dealer and investment adviser/investment company programs,” the SEC stated in its priorities report.

The SEC has also communicated with firms about Reg BI and Form CRS, beginning by publishing two risk alerts in April 2020: Examinations that Focus on Compliance with Regulation Best Interest and Examinations that Focus on Compliance with Form CRS. Regulators then shared preliminary observations from their initial examinations at a Roundtable on Regulation Best Interest and Form CRS in October 2020.

Regulation Best Interest

Reg BI requires a broker-dealer to put a retail customer’s interests first when recommending a securities transaction or an investment strategy involving securities. A broker-dealer must meet a four-part standard of conduct that includes obligations for Disclosure, Care, Conflict of Interest, and Compliance.

The SEC says that its initial examinations for compliance with Reg BI showed “that firms generally responded” by updating their written supervisory procedures (WSPs) and conducting training. However, though some firms incorporated specific compliance processes into their WSPs, others “simply restated the standards, but did not provide any meaningful guidance as to how these should be implemented.”

In December, the SEC issued a Statement on Recent and Upcoming Regulation Best Interest Examinations that identified Reg BI components that could be included in future examinations, including how firms consider costs in making a recommendation and the processes firms use to recommend complex products.

And now, per its recently released priorities report, the SEC has advised firms that in 2021 it will also conduct enhanced transaction testing and “will evaluate firm policies and procedures designed to meet additional elements of Regulation Best Interest, the recommendation of rollovers and alternatives considered, complex product recommendations, assessment of costs and reasonably available alternatives, how sales-based fees paid to broker-dealers and representatives impact recommendations, and policies and procedures regarding how broker-dealers identify and address conflicts of interest.”

SEC Commissioner Caroline Crenshaw believes that examination and enforcement data “will illuminate whether the rule is working as promised, or whether changes may be required,” WealthManagement.com reported in an article about the SEC’s plans to assess Reg BI performance, which was based on an interview with Crenshaw.

Form CRS

Form CRS requires broker-dealers and RIAs to give retail investors a brief customer or client relationship summary. “The relationship summary is intended to inform retail investors about: the types of client and customer relationships and services the firm offers; the fees, costs, conflicts of interest, and required standard of conduct associated with those relationships and services; whether the firm and its financial professionals currently have reportable legal or disciplinary history; and how to obtain additional information about the firm.” Firms must also file their relationship summaries with the SEC and post them on their websites.

Firms filed more than 13,000 Form CRSs in the past year, the SEC noted in its report on 2021 examination priorities. The SEC stated, “We saw a wide variety of approaches that firms used to comply with the requirements of Form CRS, and generally observed firms complying with the Form’s requirements. Many firms appeared to make effective use of hyperlinks in their digital Form CRSs. We also observed that many firms are generally avoiding legalese and generic boilerplate language, but we also noted the readability of some Form CRSs could still be improved.

“Some firms did not adequately respond to the Form CRS disciplinary disclosure requirements, an area all firms should ensure they address. In addition, we identified and notified hundreds of firms that they had failed to timely file a Form CRS.”

The SEC will examine broker-dealers and RIAs to assess compliance with Form CRS in 2021.

RIA Fiduciary Duty

The Interpretation Regarding Standard of Conduct for RIAs that the SEC released in 2019 with Reg BI and Form CRS affirmed and clarified aspects of an RIA’s fiduciary duty that comprises duties of care and loyalty to its clients.

In evaluating RIAs for compliance in 2021, SEC examiners will assess, “among other things, whether RIAs provide advice, including whether account or program types continue to be, in the best interests of their clients, based on their clients’ objectives, and eliminate or make full and fair disclosure of all conflicts of interest which might incline RIAs—consciously or unconsciously—to render advice which is not disinterested such that their clients can provide informed consent to the conflict.”

Examiners will also focus on risks associated with fees and expenses, complex products, best execution, and undisclosed or inadequately disclosed, compensation arrangements.

Retail Investments and Sales Practices

In addition to evaluating broker-dealers and RIAs for meeting standards of conduct, the SEC has also prioritized determining whether transactions involving retail investors and advice provided to them are appropriate. Examiners will assess whether firms meet their legal and compliance obligations when providing retail customers access to complex strategies, such as options trading, and complex products in particular. They will also focus “on how firms are complying with the recent changes to the definition of accredited investor when recommending and selling certain private offerings,” according to the 2021 examination priorities report.

RegEd’s Webber suggested that firms address legal and compliance obligations related to retail investors in their education and training programs. She also recommended ensuring that standards, procedures, and solutions for conflicts of interest disclosure are in place.

Examiners are particularly concerned about conflicts of interest that could compromise a broker-dealer’s, RIA’s, or firm’s obligation to act in the best interest of retail investors. So, examiners have prioritized reviewing firms’ disclosures regarding their conflicts of interest, including those related to fees and expenses.

“Fee and compensation-based conflicts of interest may take many forms, including revenue-sharing arrangements between a registered firm and issuers, service providers, and others, and direct or indirect compensation to personnel for executing client transactions,” according to this year’s examination priorities report.

Strengthening Compliance for 2021 and Beyond

Securities firms that address the SEC’s 2021 examination priorities in their education and training programs will strengthen their compliance programs by doing so. Many companies will use technology to comply efficiently.

“The use of technology to facilitate compliance with regulatory requirements (RegTech) has experienced immense growth in recent years,” the SEC wrote, noting that examiners will focus on the implementation and integration of RegTech in firms’ compliance programs to ensure that the technology is configured correctly and used properly. “RegTech, when implemented appropriately, may increase the efficiency of compliance staff, reduce manual processes, and exponentially increase transaction review capabilities.”

As fit-to-purpose tools tailored to the needs of broker-dealers and investment advisers, RegEd’s compliance solutions for securities firms are highly effective as well as cost-efficient. Firms can seamlessly manage all aspects of their compliance programs, reducing risks and costs by automating and streamlining processes. And each solution is configured for optimal performance by RegEd’s implementation experts, who have worked with many of the nation’s largest securities firms.

RegEd’s compliance management platform includes the following solutions (among others).

  • Education and Training Solution Suite – Advanced learning management technology streamlines the creation of a firm’s annual compliance program, simplifies course enrollment, provides access to timely course materials, and efficiently tracks course completion.
  • Policies and Procedures Management Solution – An enterprise workflow, work-process, and task management solution enables comprehensive, end-to-end administration and oversight of all elements of a firm’s policies and procedures.
  • Conflicts of Interest Solution Suite – Automated end-to-end management of request processes, compliance monitoring and exception management associated with conflict of interest policies embeds best practices in a firm’s compliance program. 
  • Outside Business Activities Solution – Centralized, systematized management of OBA disclosures, attestations and amendments reduces review time and facilitates communication on specific requests to speed the decision process.
  • Gifts, Gratuities and Contributions Management Solution – Advanced software ensures that all transactions comply with regulations and firm policy, providing insight into violations, trends, conflicts of interest, reducing the risk of non-compliance.
  • Personal Securities Account Management Solution – Automating the management of personal trading activities delivers extraordinary efficiency and enhances the quality of supervision while dramatically reducing the risk of non-compliance and related consequences.

Schedule a consultation to learn more about how RegEd’s compliance solutions enable securities firms to improve efficiency, effectiveness, and transparency across the enterprise.

For additional ways to strengthen your firm’s compliance program, view our recent webinar on FINRA’s 2021 Examination and Risk Monitoring Program Report.

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 visit www.reged.com.

Modernized Marketing Rule for Investment Advisers Takes Effect on May 4

The countdown to the implementation of the modernized marketing rule for investment advisers has begun.

After years in the making, the sweeping changes that the SEC made in modernizing marketing rules for investment advisers will finally take effect on May 4, 2021, 60 days after being published in the Federal Register on March 5.

Firms will have 18 months, until Nov. 4, 2022, to comply with the rules, Karen Barr, president and CEO of the Investment Adviser Association, told ThinkAdvisor for a story about the effective date for the changes.

A New Era in Compliance for Investment Advisers

“The marketing rule reflects important updates to the traditional advertising and solicitation regimes, which have not been amended for decades, despite our evolving financial markets and technology,” then-SEC Chairman Jay Clayton said in announcing the finalized reforms in December.

“This comprehensive framework for regulating advisers’ marketing communications recognizes the increasing use of electronic media and mobile communications and will serve to improve the quality of information available to investors.”

The SEC created a single marketing rule that modernizes the rules that governed investment adviser advertisements and compensation to solicitors under the Investment Advisers Act of 1940. Neither rule had been amended significantly since its adoption.

The SEC first proposed amendments to modernize the advertising and cash solicitation rules in November 2019. Regulators revised their proposed changes based on public comments before announcing the final rule a year later.  When the SEC announced the new rule, it said it would take effect 60 days after being published in the Federal Register.

Compliance Management for the Present and the Future

The SEC has achieved a “Herculean task” by collecting hundreds of pages of piecemeal guidance that have accumulated over decades as well as “accounting for all of the information technology, social media, and marketing practice advancements over more than half a century, and fusing them into a modern, principles-based, evergreen, workable framework,” IAA President Barr wrote in a note to members in January, according to a ThinkAdvisor article on how advisor advertising rules are entering the 21st century.

The “principle-based provisions” include:

  • A two-prong definition of “advertisement”;
  • Prohibitions of certain general practices;
  • Requirements for using testimonials and endorsements in advertisements;
  • Criteria for the use of third-party ratings; and
  • Restrictions on promoting performance information in advertisements.

The SEC adopted amendments to the books and records rule and amended Form ADV to require advisers to provide additional information regarding their marketing practices to help facilitate the Commission’s inspection and enforcement capabilities as well.

Also, the staff of the Division of Investment Management will withdraw no-action letters and other guidance addressing the application of the advertising and cash solicitation rules as those positions are either incorporated into the final rule or will no longer apply, the SEC announced, noting that a list of the letters will be available on the commission’s website.

Addressing the New Investment Adviser Marketing Rule

“Anyone can read the rule but putting it into play and understanding what’s in and out, that’s really the work to be done,” said attorney Genna Garver, a partner at Troutman Pepper, during a RegEd webinar about understanding and preparing for the modernized marketing rule.

Webinar panelist Suzan Rose expects the SEC to provide additional guidance on some of the rule’s provisions during the transition period. “We have plenty of time to work out the kinks but there’s lots to cover,” said Rose, a senior advisor to the Alternative Investment Management Association (AIMA).

For example, the new “principles-based” approach includes undefined concepts like “fair and balanced.” “It will be a while before anyone can get a grasp on what the SEC truly feels ‘fair and balanced’ means,” Rose said. “And you want to be sure that ‘fair and balanced’ in your judgment does not equate to ‘misrepresentation’ in their judgment.”

Still, there are welcome changes, Garver said. One of the biggest is that the new rule permits testimonials.

“This will be welcome relief for many, especially on the social media front,” Garver said. “This is massive.”

Additional highlights of the rule include flexibility for the continual evolution and interplay of technology and advice, and easing restrictions on references to past investments, Garver and Rose noted.

“Part of this transition period needs to be used to look at everything that’s interfacing with clients and making a decision if this is an advertisement or is it not and having the training and policies and procedures in place to identify things that might be outliers in the types of communication that you have,” Garver said.

Adopting the Modernized Marketing Rule

Some investment advisers may adopt the new marketing rule before the 18-month transition period ends, said Margie Webber, director of regulatory compliance for RegEd. “They may consider rolling it out sooner so that they could use testimonials in their marketing materials as soon as possible after the May 4 effective date.”

Though advisers can voluntarily adopt the new rules before the compliance date, they would be subject to them in full if they do. “If you’re going to do it, make sure that you have policies in place and that you’ve trained your teams,” Garver suggested.

Rose recommended waiting for the SEC to clarify any provisions that could use additional guidance, like those related to the usage of hypothetical performances. “Ask your questions before deciding to adopt the rule as it is and before the compliance date because once it’s in effect that’s what you’ve got,” she said.

Rose expects the SEC to respond to industry comments during the transition period.

But the countdown to Nov. 4, 2022, has begun. Advisers have until then to comply.

RegEd has reduced non-compliance risk for hundreds of financial services firms by providing them with proven, scalable compliance management solutions, including our market-leading Advertising Review software.

View our most recent Advertising Regulation Webinar to learn more about the new modernized marketing rule for investment advisers, its impact on the industry, and what firms can do now to prepare.

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 visit www.reged.com.

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Advertising Review: Is Your Marketing Collateral Review Process 17a-4 Compliant

Is Your Marketing Collateral Review Process 17a-4 Compliant?

RegEd’s Advertising Review solution is built to support firm’s marketing collateral approval process. In addition to robust workflows, Advertising Review is designed with compliance in mind including Worm and D3P support per SEC requirements.

Many regulations imposed by FINRA and the SEC have to do with the archiving of electronically stored information (ESI). Therefore, to ensure compliance firms are required to archive all necessary ESI. However, just archiving the data is not enough. SEC Rule 17a-4 mandates it must be archived in the proper format to meet compliance standards.

Write Once Read Many (WORM)

WORM describes a data storage device in which information, once written, cannot be modified, overwritten or deleted. This write protection affords the assurance that the data cannot be tampered with once it is written to the device.

The SEC defines which books and records to WORM such as purchase and sale documents, customer records, associated person records, customer complaints, and certain other matters. Additionally Rule 17a-3 and Rule 17a-4 specify minimum requirements with respect to these records that broker-dealers must make, and how long those records and other documents must be kept. 

Designated Third Party (D3P)

Broker-Dealers are required to have at least one Designated Third Party (D3P) Compliance Provider for each electronic records archive. RegEd’s D3P service bridges the compliance gap.

D3Ps agree that in the event of the failure or inability of the Broker-Dealer to download requested records, they will undertake that effort to provide to the requesting regulatory or legal body. As your designated D3P provider, RegEd will take the lead on providing the records it holds for you as your WORM storage provider and supply them to regulators if you cannot do so.

Penalties for Non-Compliance

It’s concerning how many firms fall into non-compliance with existing regulations. FINRA is becoming more and more focused on imposing fines and penalties. In 2017 FINRA fined 12 firms for a total of $14.4 million for, “…significant deficiencies relating to the preservation of broker-dealer and customer records in a format that prevents alteration.”

In a statement about the sanctions, the SEC pointed to the importance of record keeping in protecting investors, saying that records are the “primary means of monitoring compliance with applicable securities laws, including anti-fraud provisions and financial responsibility standards.” FINRA further explains how WORM storage is critical due to the increased volume of sensitive data being stored electronically.

WORM Compliance with Advertising Review

RegEd offers a robust, scalable, and configurable WORM storage solution that enables firms to fulfill their books and records obligations.

RegEd’s Advertising Review WORM storage device offers the ability to automate retention events and periods based upon workflow configuration within the application to ensure your data is captured at the required points of submission, revision and approval. Once deployed with your firm, no additional steps must be taken to ensure your data is sent to the WORM storage device with its appropriate metadata and attachments. 

Even if your firm’s marketing team uses a different front-end to create content, Advertising Review can easily integrate with APIs to automatically push content to the compliance review process where final approved files can be properly stored in a WORM compliant format.

Stay Compliant

Using a product like RegEd’s Advertising Review ensures firms interweave compliance within their processes. Compliance is always more cost effective & protective of your business reputation than alternative fines and sanctions. Firms that research, understand, and apply best practices in their marketing collateral review process avoid negative publicity and profit-loss.

Preparing your 2021 Firm Element Training Program – Step Two: the Written Training Plan

Adam Schaub

Vice President, Platform Product Management

RegEd, Inc.

FINRA Rule 1240 requires each of its member firms to conduct an annual evaluation and prioritization of its registered persons’ training needs, develop a written training plan, and implement and track completion of that plan.  Our first article covered the Needs Analysis, and this article covers the second step, which is to develop your firm’s written training plan. 

Similar to our guidance on the Needs Analysis, if your prior year’s plan was successful, you can use that as your template for 2021.  If planning Firm Element is a new task for you, it is recommended that you create a framework that can be reused in subsequent years.  FINRA’s Guide to Continuing Education Requirements has a basic outline of the expected areas that must be addressed in the training plan. Also, keep in mind that FINRA expects that the results of your Needs Analysis be directly translated into your training plan, and so we recommend you revisit our prior article if you’ve not yet done step one.

Establishing an Objective

The first area that needs to be covered is the overall objective of the training program.  FINRA has given us a good start on what that objective needs to include.  Rule 1240 states that the Firm Element CE program is meant to enhance the securities knowledge, skill and professionalism of a firm’s registered persons, and must cover training in ethics and professional responsibility and the following matters regarding securities products, services, and strategies offered by your firm: 

  • General investment features and associated risk factors
  • Suitability and sales practice considerations
  • Applicable regulatory requirements

A few things to note here.  Clearly, these broad topics should be incorporated into the description of your program’s objective.  However, FINRA uses the phrasing that the plan “must be appropriate for the business of the member”, which is one of several indicators that FINRA has given that the plan needs to be specific to what is “offered by your firm” and “applicable” regulatory requirements.  In other words, FINRA’s expectation is that you are tailoring the plan to your specific rep base and business structure and not just a recitation of the bullet points listed in the rule.  This is where you will need to bring some level of focus to the types of products, services and strategies offered by your firm, and tie them back to the objectives listed above.

Knowledge or Skills to be Imparted

The second area listed in FINRA’s Guide, in combination with the results from your Needs Analysis will help with the above.  FINRA states that the training plan must address the “knowledge or skills to be imparted”, and your Needs Analysis has captured the list of knowledge and skill areas that have been identified as gaps, needs, or topics to be revisited with your representatives.  For example, you might explain that your firm is going to train on “General investment features and risk factors of mutual funds, as our rep base consists primarily of Series 6 representatives with 90% of our production in that product, along with feedback from our Needs Analysis that we have seen a gap in knowledge in breakpoints, which is an ongoing regulatory concern.” 

Laying out the Training Plan

Once you have provided a sufficient description of the training program objectives, the next section gets into the details of the actual plan.  There are many formats and structures that a training plan can take, and your firm’s learning/training/development department may have a standard template for you to use.  As such, we will not get into the format as much as we will be discussing what should be covered.  Also, keep in mind that FINRA does not indicate that the Needs Analysis and Written Training Plan must be two separate documents; however, if you do combine them you will need to make sure that there is clear delineation between the areas covered for each component.

The four areas that need to be detailed next center around what, who, how, and when:

  • What – the specific training programs or activities
  • Who – the classifications of individuals to receive training
  • How – the specific delivery mechanism and resources needed to conduct the training
  • When – the specific time scheduled for delivery

In some ways the “What” ties in to the “Who” and “How”, which is covered below in more detail.  However, the underlying purpose of this section is to explain the key areas that will be covered in the training program, as a result of the Objectives and Needs Analysis.  For example, if your firm has decided that due to regulatory focus and/or specific inquiries with your firm, that the regulators are focused on outside business activities, communications via digital/social media, and senior investors, you may assign a course for each of those specific topics.  On the other hand, if the result of your Needs Analysis is a heavy slant on products, then you might assign courses based on the specific products your firm offers, or if possible, based on the products sold by each rep.  The latter is more time intensive, but it paints a better picture to FINRA if a rep is getting specific training on the top three product types that he or she sells, rather than a broad course assignment.

Regarding product training, FINRA provides a list of topics that can be utilized to make sure the training material reasonably addresses specific Firm Element requirements such as:

  • Providing descriptive information regarding the general investment features of the products, services or strategies offered by the Firm
  • Basic techniques for pricing the products and services
  • A discussion of the applicable risk factors (business risk, interest rate risk, etc.) associated with the products and services
  • Any special product features which could impact liquidity, taxability, etc.
  • Product suitability for different types of investors
  • Meeting regulatory requirements including standards for communication

If you are going to require different groups to take different training, you will want to explain that here or within the “Who” section.  For example, perhaps you will you assign a supervision course to supervisors, account processing training to operations staff, and communications with the public content to sales persons.  Be aware that you are required to specifically address the training needs of supervisors.

Given the competition for your representatives’ time, you are limited to the amount of coursework you can assign.  The annual compliance session is where you can compensate and cover a lot more topics in an attempt to hit all of the important training areas and all of the areas identified in your Needs Analysis.  The annual compliance questionnaire can also serve as training on specific topics.  Detail in this section all of the specific areas that you intend to cover in your training.

You will also need to include any other training that your firm plans to conduct.  For example, if your firm has decided that Reg BI and Form CRS training will be an annual requirement, be sure to mention this in your training plan.  If you are conducting branch inspections and a component is a discussion of the importance of cybersecurity, leverage this training and include it in your training plan.

In addition to the above, your firm may have other training programs that are either mandatory or optional, and which may be ongoing or available only this year.  If these training programs cover any of the topics in your training needs or objectives, you should include them here as well.  Providing a description of all of the training that your representatives must or can take will help provide context of your training plan to FINRA.

FINRA does allow firms to count training that representatives undertake outside of the firm, such as CE required for the CFP or other designation that they hold.  If your firm chooses to count this training toward Firm Element, keep in mind that there is an accompanying burden of making sure that the training is related to securities and is related to topics deemed necessary by the Needs Analysis.  To assist in tracking, RegEd offers an “offline uploader” where you can track training that representatives do elsewhere, and it can also be used to track all of the in-person training that your firm does such as in-person compliance session completion information.

A couple other items to note.  First, you will want to include training on anti-money laundering and ethics.  The former is necessary, in particular if you have insurance-licensed representatives, the carriers will ask your firm for documentation that annual AML training has taken place.  Regarding ethics training, this is required as part of Rule 1240 and must be included.

For the “Who”, you’ve likely already included this information in the background section of your Needs Analysis.  You will now want to take the various categories of individuals that your firm has, and indicate if there are any particular training areas needed for each group, and why. 

Regarding the “How”, FINRA expects that the training plan will identify and incorporate the type of delivery vehicles or media used to execute the training, such as direct participation in the form of seminars and lectures, computer-based training, audio/video/internal broadcasts, independent study or internally generated materials, meeting, videos conferences and conference calls, mentor relationships and/or externally developed programs (for which the specific vendors should be listed).  FINRA’s expectation is that the training plan will be reasonable in relation to your firm’s size and resources.

For many firms, the specific training program activities are handled in some common ways.  Firms will provide their representatives with assigned coursework, through an outside vendor such as RegEd that creates, maintains and updates courses, or through internal sources.  The challenge with the latter is no stranger to compliance personnel – lack of time.  While the Compliance team has the knowledge of what needs to be included in the training, they typically do not have the time (nor the PowerPoint skills!) needed to create professional-grade training courses.  If your firm decides to do this internally, it is recommended you leverage your firm’s learning and development team.  FINRA’s Guide covers some examples of how the training material is to be utilized to reasonably address specific Firm Element requirements, which should be reviewed if your firm is going to create its own materials.

Annual Compliance Questionnaire

A second common component is an annual compliance questionnaire.  Some firms conduct these in person, and others will send out an electronic questionnaire.  The questionnaire typically serves multiple purposes.  First, it is a training vehicle in which firms ask their representatives to confirm their understanding of specific firm policies and procedures.  Second, the questionnaire serves as a data gathering tool to obtain information on a variety of topics, such as what designations a rep holds, a list of social media sites they are using, and so on.  Some firms also do a separate questionnaire at the branch level, to be completed by the “person-in-charge” on Form BR or otherwise.  RegEd has deep questionnaire functionality that can not only affirm policy understanding, but can gather information, and create and route tasks for follow-up by Compliance staff.

Annual Compliance Session

The third common component of a firm’s training program is the annual compliance session.  Many firms develop their own content, which is important because so much of the training needs to be focused on the specific needs of that firm’s representatives.  Based on firm specific needs, RegEd offers presentation content modules on investments, suitability, outside business activities, etc. that can be combined into an online compliance session.  Also, keep in mind however that the annual compliance session is required under Rule 3010(a)(7), and the expectation is that the Firm Element training should not be limited to compliance topics from the compliance session if there are product training needs. 

Many firms present the session in person, but given the current pandemic and representatives being geographic dispersed, the session is done online.  RegEd’s Annual Compliance Meeting On-Demand product meets all of the requirements outlined by FINRA in its Interpretive Letter regarding the use of on-demand webcasts for annual compliance meetings.

The “When” should not just include the date the training will first be made available and the due dates for each component, but an explanation of the ramifications for failure to complete the requirements.  Make sure to look at your firm’s calendar of events, as you’ll want to avoid due dates that coincide with your national conference or other events.  Also, consider the particular date that you will use as the due date and how firm you will be.  For example, if your firm uses a Friday as a due date, but you’re willing to give your reps a last warning on the due date, you’ll still give them the weekend to finish completion.  You’ll want to give your reps as long as possible to complete the training, but balance that with giving your compliance staff enough time at the end of the year to contact any ‘stragglers’ to get them to complete the training.

The plan will also need to explain who is in charge of not just creating and implementing the training plan, but who is responsible for tracking completion (and/or who it is delegated to).  RegEd can help drive reps toward completion through a landing page dashboard that highlights completion status and due dates, along with automated email reminders and on-demand completion reports.

Also, as part of the FINRA Interpretive Letter on webcast training, you need to provide your representatives with a mechanism to ask questions.  RegEd’s ACM On-Demand product has this functionality, which not only allows them to ask questions but to also provide feedback.  Feedback is the final area that FINRA expects firms to capture, in order to determine the program’s effectiveness and make any modifications as needed.  You can also capture feedback within your annual compliance questionnaire.

One last item to note, is to make sure your training plan has a discussion of what you did last year.  This is not just important in order to provide context to FINRA about this year’s plan, but also allows anyone reading the document to understand the continuity or changes in the plan from year-to-year.  Also, doing this and using the above framework will allow you to standardize your process and documentation, making it easier on you or whomever puts together your firm’s training plan in subsequent years.

Click here to view the full list, including descriptions, of RegEd’s new Firm Element Courses for 2021.

Meet the Author

Adam Schaub

Vice President, Platform Product Management

Adam has over 20 years of direct experience in financial services compliance. Prior to joining RegEd, Adam was Chief Compliance Officer leading the Compliance Services team at Avantax, formerly known as 1st Global, where he was responsible for overseeing CE, branch inspections, advertising, outside business activities, outside brokerage accounts, regulatory requests, licensing, and many other compliance areas.

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 visit www.reged.com.

Preparing your 2021 Firm Element Training Program – Step One: the Needs Analysis

Adam Schaub

Vice President, Platform Product Management

RegEd, Inc.

It is that time of year again when firms have wrapped up their 2020 CE programs and are ready to reflect and plan their 2021 programs.  For many firms, this entails dusting off of the 2020 Needs Analysis and Written Training Plan, and adjusting for the current year.  If planning Firm Element is a new task for you, it is recommended that you create a framework that can be reused in subsequent years.  FINRA’s Guide to Continuing Education Requirements has a basic outline of the expected areas that should be reviewed and considered by your firm.    In either scenario, this article and the resources available from RegEd can help you.  This article covers the first step, which is to prepare your Needs Analysis, which is an annual requirement under FINRA Rule 1240.

Updating Your Firm’s Background Information

The first area that needs to be covered in your Needs Analysis is (per FINRA’s Guide) “a description of your firm’s business, especially its size, organizational structure, and scope of business including the types of investment products or strategies offered (or planned to be offered) by the firm”.  This is one section that you will be able to reuse each year with minor modifications, such as inserting your current rep and branch office count.  A good starting point is to take content from your firm’s website, internal resources, recruiting materials, and FINRA membership agreement in order to describe the firm, its structure, its rep bases, the products it sells, and services it offers.  No need to start from scratch when the background info is likely already written and just needs to be customized and put in regulatory-friendly terms.

On that point, keep in mind that when writing the Needs Analysis you are writing to multiple audiences.  One key audience is FINRA, which will look to your Needs Analysis as the source document for your Written Training Plan (which is step 2 in the annual Firm Element process).  FINRA will look to make sure your plan incorporates the areas it has indicated are important, and so constructing your Needs Analysis document to clearly highlight the items in FINRA’s Guide can help make that part of a FINRA examination flow smoothly.

Describing Your Rep Base

With regard to writing the document in a regulatory-friendly manner, you will want to highlight any strengths of your reps, which can ultimately help you justify the specific training you assign to reps in the Written Training Plan.  The goal here is to give context to your Needs Analysis and plan.  For example, if you have data on the designations held by your reps, include that information as part of the background.  Indicating that 25% of your rep base holds the CFP designation, or that 75% of your reps hold one or more designations, will only help to demonstrate to FINRA the depth of the knowledge of your rep base.  You can include a breakdown of the number of reps that hold the Series 6 vs. the Series 7.  Also, FINRA expects firms to include feedback received from the Regulatory Element, and if your reps’ scores exceed those of the industry, be sure to include that information as well (and conversely, if your reps’ scores fall short of the industry, FINRA will expect you to address that point in your plan). If you have easy access to data, then it makes the process of adjusting this section of your Needs Analysis simple from year to year.

One other consideration for the background section is looking ahead to the training plan.  FINRA expects the training plan to consider the classifications of individuals to receive training, and so your background section should explain your business structure and the types of reps you have in your organization.  That may include Series 6 vs. 7, but may also have more nuanced distinctions such as whether your firm has reps that fully engage in the business vs. those that simply refer customers to other reps.  While both groups need to be trained, there may be different levels of training needs for each.  The same considerations may come into play if you have different business models at your firm, or internally, different departments that have different training needs.  Any or all of these groups may be subject to other training by the firm, and so this should also be highlighted because it provides good context to your overall training plan.

Market and Economic Environment Considerations

The next area in FINRA’s Guide pertains to a review and consideration of the market and economic environment.  Is the market experiencing large fluctuations on a day-to-day basis or a prolonged downturn?  If so, you may highlight this fact and denote the need for training on guiding clients through difficult market conditions.  Is the market going through the roof as part of an extended rally?  Then you may need to train on client communications in order to avoid exaggerated or promissory statements.  What is the interest rate environment and how might this affect the types of products your reps may sell and therefore need to be trained upon?  Beginning with this area and the ones that follow, you will want to keep a running list of potential topics, which you’ll find useful when we discuss the need to conduct a survey.

Legal and Regulatory Developments

One area where information is readily-available through external resources is with regard to current legal and regulatory developments.  The starting point here will be to review your primary regulators’ publications, including the SEC Exam Priorities Letter and the Report from FINRA on its Examination and Risk Monitoring Program, along with recent and relevant Notices and Investor Alerts.  These publications will give you a clear indication of the areas that the regulators are focusing on.  The association of state securities regulators (NASAA) has resources on its website, www.nasaa.org.  Also, review the Firm Element Advisory from the CE Council.  Review these sources and incorporate all areas of regulatory focus which pertain to your firm’s business and products.

Internal Trends and Considerations

FINRA expects that firms will review or consider trends of customer complaints, regulatory inquiries, arbitrations, litigations, or other forms of disciplinary proceedings involving anyone at the firm.   While FINRA expects firms to collect feedback and input from compliance, internal audit and legal personnel, this is one area where those groups will be reluctant to provide such information in a written format.  This information is best collected verbally from such personnel.  Furthermore, CCO’s will want to avoid putting detailed information on such trends and patterns in the formal Needs Analysis document, so instead you should include high level bullets of the types of items encountered, or just general (summary) information.  There is no need to place such information on a ‘silver platter’ for the regulators; rather, a determination of trends is legwork which they should undertake themselves.

In addition to getting feedback and input on critical training issues from legal and compliance, FINRA expects firms to also get feedback from trading, operations, management, and sales personnel.  This is where your list of market, economic, regulatory, and internal topics can be put to use by sending out a survey to all such parties, to request they provide insight as to which areas they believe need to be trained upon, along with any other areas they think need to be included.  It is helpful to provide lists of general industry topics, product types, financial planning topics, ethics, and other regulatory issues in order to gain an aggregated view of the training areas to be considered for training.  RegEd offers a turnkey Needs Analysis Questionnaire that can be rolled out to your internal stakeholders and reps to gather all of this information and more, which can also be customized to meet your firm’s specific needs.

Depending upon the size of your firm, it may not be practicable to survey your entire sales personnel population.  You might instead focus on surveying branch managers or sales supervisors.  If your firm does an Annual Compliance Questionnaire of your sales representatives, you may be able to use this as your proxy for a “survey”, as you can use the results of the ACQ to find areas where training needs reside.  For example, does your survey ask if the reps are aware that they must consider breakpoints and whether they understand how to calculate them and if so, what percentage of your reps answered “no”?

There is an expectation for a review or consideration of sales and marketing strategies for products and services, with attention to related potential suitability issues, product risk, and other regulatory concerns.  To gather this information, look through your firm’s internal website regarding communications to reps over the past year, where new products, new business lines, new procedures, or changes to any of the aforementioned items may be included.  New products and new business lines will likely have resulted in new sales and marketing strategies, which gets to the root of FINRA’s concern here.  You may also want to talk to or survey management, supervision, sales and sales support for this information, and to see if there has been a shift in product sales over the past year (if you don’t have access to easily-understandable data).

Finally, FINRA expects the use of performance reviews and business plans to identify development needs of individuals or groups of persons within your firm.  The former may be difficult to obtain (if it’s even accessible to you), but the latter can be a sourced from management or other parties which can give you insight into any future considerations (e.g., does the firm plan to offer a new product mid-year, such that you should include it in your training plan now?)

Once you’ve gathered this information, you can begin to fill in the sections of your Needs Analysis to demonstrate to FINRA that you’ve touched on all the areas that have been identified as part of the FINRA Guide.  You won’t want to stick purely to their framework, but doing so at a minimum gives you a good, comprehensive look at the areas that can drive your firm’s training needs.

Final Thoughts

A few final notes on constructing your Needs Analysis and training plan:  Make sure that you’re reviewing for changes in the rules related to CE.  It’s worth revisiting FINRA Rule 1240 to see if there have been any changes or new Notices that relate to CE.  Take a look at the overall regulatory framework to see if any other changes are forthcoming – a great example of this is that NASAA has issued a model rule related to IAR CE in November, 2020.  Depending upon your rep base, you may need to incorporate IAR training as part of your annual training plan.

Once your Needs Analysis is complete, you’ll have a better picture of the types of training your rep base needs.  For example, are there broad topics that were highly ranked in the survey and brought up in verbal feedback (e.g., dealing with senior investors), or are there concerns that your firm is seeing a pattern of complaints on particular product types therefore necessitating specific product training?  The Needs Analysis will be the source document for constructing your Written Training Plan, and by following the above steps, you will have a repeatable process and template to create continuity and consistency from year-to-year.

RegEd has the products and support that can help you collect the information for your Needs Analysis, and for the implementation of your training program.  We offer a Needs Analysis Questionnaire with hierarchy-based reporting, an extensive course catalog that can be tailored to the needs of each specific type, classification, rep or employee you have, an On-Demand Annual Compliance Session, and Annual Questionnaires.  RegEd understands that training programs for firms will vary in structure, timing, content, and audience, and offers the flexibility to help you successfully implement your training plan, no matter where your firm is on this spectrum.

Click here to view the full list, including descriptions, of RegEd’s new Firm Element Courses for 2021.

Meet the Author

Adam Schaub

Vice President, Platform Product Management

Adam has over 20 years of direct experience in financial services compliance. Prior to joining RegEd, Adam was Chief Compliance Officer leading the Compliance Services team at Avantax, formerly known as 1st Global, where he was responsible for overseeing CE, branch inspections, advertising, outside business activities, outside brokerage accounts, regulatory requests, licensing, and many other compliance areas.

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 visit www.reged.com.

L&R Operations and the Shift Toward Automation: Key Drivers

The Drivers of Automation

Managing licensing and registration operations means providing a high level of exceptional service to agents and producers against a challenging backdrop of fluctuating volumes, complex transactions, ever-changing regulations, and rigorous data and reporting demands. It requires extraordinary levels of efficiency and continuous assimilation of best practices. We take a look at the biggest drivers that propel insurers and distributors to implement advanced technology into their licensing operations.

Time to Market, User Satisfaction, and Reduced Risk

There are many drivers of automation in licensing and registration operations, but the most significant are the need for increased staff productivity and, as always, lower costs. Given the fierce competition for top talent within the industry, recruiting and retaining leading agents and registered reps and providing them with a positive, seamless onboarding and credentialing process that speeds their time to market is key. This can influence their choice to do business with a carrier. Also, with significant consolidation, insurers and distributors continue to expand their distribution channels, and they need a dependable way to scale their operations as they acquire new advisers.

As compliance grows more complex, automation can help to ensure successful processes. Proper agent and adviser credentialing and compliance goes well beyond licensing and appointments. It includes FINRA data and completion of mandated state training, such as long-term care, annuity best interest, and product training. This all must be done efficiently so that new accounts can open on time, orders can be placed, trades can happen, and compensation can be paid—compliantly. In addition, market conduct exams have become vastly more thorough. Gone are the days when states looked at just a few files; they now request data on policies written during an entire audit period for an appointed agent and examine closely for exceptions. Licensing has remained one of the top six findings in each of the last 10 years.

Building, Buying, and the Total Cost of Ownership

The largest insurers, brokers, and broker-dealers can easily build internal systems that manage licensing, registrations, and much more, and the cost of an in-house solution can be lower than a commercially built system. However, commercial systems tend to have a substantially lower total cost of ownership when calculated over time.

Commercial systems come fully featured with regulatory rules that are integrated and actively maintained by a team of experienced experts. Also, commercial systems regularly incorporate new capabilities, enable continuous optimization, and take full advantage of the industry’s latest best practices. In-house systems require tremendous maintenance and expertise to accommodate regulatory and business rules that change often and have far-reaching effects on multiple transaction types within the firm. Any IT resources efficiently focused on customer experience and innovation will deliver a real competitive advantage. With best-in-class commercial solutions available in the market, there is a decreasing appetite to build compliance and credentialing applications in-house.

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 visit www.reged.com.

Trends in L&R Operations: A Changing Industry and New Ways to Work

An Evolving Industry and a New Way to Work

The insurance industry and the technology that supports it continue to evolve. Licensing and registration operations must remain at the forefront by providing extraordinary levels of efficiency and continuous assimilation of best practices. In recent years, important trends have emerged, and currently, the industry is responding to a pandemic crisis with grit and ingenuity.

The Growth of Call Centers, Evolving Role of Technology

First, call centers, both internal and outsourced, have grown, a result of the insurance industry’s increased digitization and the popularity of robo-advisers. This, in turn, is driven by a new generation rising higher through the business and overall evolving expectations of what technology should provide. In addition, there are products that are conducive to online purchases, such as term life. When a call center is a part of the distribution model, the ability to onboard and offboard agents rapidly is absolutely critical. This includes credentialing for multiple jurisdictions: licensure, appointment, and completion of mandated product and industry training.

Once a Liability, Now an Asset

Another trend is strategic and has to do with recruiting and retaining top talent. The C-suite has begun to view onboarding, licensing, and registration operations as a vital element of revenue generation rather than a necessary cost center. Top agents and advisers want to be associated with tech-savvy firms that provide them with a seamless experience, and insurance companies acknowledge that such first impressions of themselves are paramount. These producers, many part of an emerging younger generation, expect a firm to know who they are, they expect to know what their credentials are and where they are held, and they expect a frictionless process for onboarding, being affiliated and appointed, and placing business day-to-day. This is especially relevant to insurers, for which independent agents sell products for a dozen or more carriers. The ability to earn and maintain agent loyalty is key—chief distribution, revenue, and sales officers depend on the allegiance of their agents at achieve sales and revenue goals.

Consolidation’s Far-Reaching Effects

Consolidation in the financial services industry has been significant, with more than 649 transactions in 2019, compared with 362 transactions in 2014, and it continues. Even in a pandemic crisis, 2020 is set to meet or exceed last year’s level. In general, companies seek to gain market share, leverage their scale, and increase profit margins.

As broker-dealers consolidate the separate systems and operations they inherit from recent acquisitions, the most innovative firms have consolidated disparate operating functions into unified centers of excellence. To enable such a high level of continuous growth, they depend on highly efficient onboarding, licensing, and registration operations. This means employing for-purpose technology that automates licensing, CE, and renewal processes, and outsourced solutions provide scalability over numerous acquisitions—in some cases, 30 or 40 in a year.

Scaling and Streamlining

A more exacting and demanding regulatory landscape has been an unwitting contributor to the industry’s consolidation. To achieve a scale that supports more stringent compliance requirements and the necessary technological infrastructure, many firms have had to consolidate, divest, reclassify their products, or otherwise regroup. For example, Many fewer carriers sell variable annuity products, and many have divested their broker-dealer businesses. There is consolidation among vendors as well. Many firms are mitigating vendor risk by relying on fewer trusted partners with the ability to fulfill the more exacting requirements traditionally provided by niche participants. This is often a C-suite decision to gain economies of scale and lower the lifetime cost of ownership.

The COVID-19 Crisis and Working from Home

The coronavirus pandemic has created a new reality, affecting licensing and registration operations as we adapt to working from home. In every way, we have become even more dependent on IT, including organizations adapting their single sign-on processes. Transaction volumes fell in the early stages of the pandemic, but as of November 2020, they have risen back to previous levels, and in some cases, transaction counts are higher. Many companies used some of the early downtime to bring new products to market. Others have seen a rise in term life policies, streamlining underwriting processes in response. RegEd’s clients have relied more on its Xchange functionality, using operating and productivity reports as a useful basis of comparison to pre-pandemic metrics and facilitating all aspects of working from home.

Most licensing and registration requirements can be executed from a remote working environment, but there are exceptions. Paper checks still need to be issued for state insurance commissioners, which requires new processes and procedures for compliant close-out. Continuing education for call center agents has also been affected by the new work-from-home transition. Typically, they attend brick-and-mortar classes where their paperwork is collected. Firms dependent on call centers have had to adapt quickly to electronic education and document management to ensure health and safety.

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 visit www.reged.com.

Licensing Technology and Evolving Expectations

Less That Does More

The financial services industry expects dramatically more from the technology that supports it. Once paper-based, systems are now a single application with a frictionless experience for users. The best licensing and registration operations have the ability to aggregate real-time data from multiple sources, provide straight-through processing for a host of functions, and support multiple channels. 

Intuitive and Interactive

Just five years ago, firms said agents were resistant to technology and still preferred paper. Today, that has completely changed. Agents and advisers want interactive systems that have to be online, intuitive, and completely frictionless. They have a magnitude of compliance obligations, and the more time it takes to fulfill them, the less time the agent has to engage with clients and develop business. When they look to associate themselves with insurance companies, broker-dealers and brokers that have invested in compliance technology and have well-honed operational processes so that compliance doesn’t present a hurdle to their success.

They also want everything in one place. Gone are the days of going into LIMRA for AML training, carrier sites for product training, and taking CE for state-mandated training. Everything, including training and education, must be through a single point of access. Firms now expect extremely high levels of efficiency. They look to reduce data-entry points, eliminate human interactions, and embed compliant automation as much as possible in every part of credentialing and licensing today.

Multi-Channel Complexity

Insurance distribution channels have broadened considerably, especially in the past few years. As a result, the industry’s requirements for licensing technology has become vastly more complex, especially for multi- and omni-channel distribution. The ability to accommodate multiple data sources to support the company’s distribution channels fully has become critical. These include third-party appointment aggregators, such as DTCC for life and health carriers; RegEd’s own Xchange, a data source in itself; company websites; and inevitable manual inputs.

Those That Do It Best: Data Sourcing and STP

The most efficient licensing operations are able to source and aggregate data from other sources in real time. For onboarding and building agent profiles, FINRA and PDB are the key resources, combined with internal HR and recruiting systems. The less manual keying in, the more efficient, comprehensive, and reliable the entire process will be. They also employ smart capabilities that reduce human intervention. Automatic transactions based on key events such as license renewals, name changes, or address changes are good examples.

Especially important is straight-through processing, enabling transactions that are in good order never having to be touched by a staff member. Some firms still use manual, paper-based processes, and these tend to have high error and noncompliance rates. Smart technology largely corrects this. For example, a group of RegEd clients was able to reach over 90% straight-through processing for appointments and PDB updates and over 70% for license renewals with our smart appointments and NIPR alerts. These actions all went straight to state systems without having to be touched. Another important feature is management by exception. For example, if during the onboarding process a rep has a questionable record, the technology should be able to route the information directly to compliance for review. It should also be able to document any exceptions. A single such closed system can provide a complete audit trail—avoiding manual combing through emails and retrieving documents—in one place.

Also, insurers and broker-dealers that sell variable products look for a unified solution is capable of supporting insurance and securities transactions and provides a seamless user experience. Bottom line, the best systems are based on a single platform that shares data across the application to identify and manage outliers and improve compliance decision-making.

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 visit www.reged.com.

Business Process Automation (BPA) v. Robotic Process Automation (RPA): Which is best for L&R Operations?

BPA Drives L&R Efficiency

For many the financial services industry, there can be confusion between BPA and RPA. Business process automation, known as BPA, has proven most effective at driving efficiency for licensing and registration operations. Robotic process automation, or RPA, is often seen as the ultimate enabler of efficiency, which is true in other applications. Here, we explain the difference.

Process Management v. Saving Keystrokes

Robotic process automation (RPA) replicates human keystrokes in a repeatable process, such that a bot enters data in fields on a screen to create records, and in some cases, completes a transaction. In short, RPA simply takes over what the licensing person is doing today. Business process automation (BPA), by contrast, actually triggers a transaction based on a time-based requirement, an event, or a business rule. Such automated transaction creation, along with management by exception, enables considerably higher efficiency than simply saving keystrokes.

With BPA and straight-through processing, a system can automatically identify an obligation and execute the process to meet it. For example, a system can be programmed to generate license renewals 45 days in advance of their expiration date. This ensures that agents don’t lose their licenses, which avoids the problems and expenses—additional fees—of license reinstatement. When an exception appears, say an aberration in an agent’s background, the system can route it to appropriate departments for review before the renewal is officially submitted.

When licensing management is integrated with a compensation system, it can use an agent’s production data to measure performance. If performance falls short, say against a particular metric, the system could generate that agent’s termination and appointment termination correspondence automatically and hold all actions related to the termination through any mandated notice periods.

BPA manages transactions that are triggered by events on a different system as well. A good example is address and name changes—one of the top reasons that producers are flagged with a regulatory action. Usually an agent will make any such changes in the HR system. When the systems are integrated, say feeding data through RegEd’s Xchange, licensing management automatically generates the required new form amendments and the CCR filing with NIPR. In short, a feed from HR triggers a transaction in licensing, and pushes it out for regulatory action. Data used from different system keeps a firm compliant and reduces the potential for a fine or headache over a simple task.

Rule maintenance is another area supported by BPA. Usually a developer must manually change any rule parameters within a system. With BPA, a system can be configured to allow an administrator to make changes in real times through a simple user interface. A good example is P&C insurers having to manage underwriting company changes for a particular state. With robotic processing (RPA), a carrier would have to make those changes manually or bring in a developer. With BPA, administrator access rights allow changes as needed and the system automatically generates the new appointments and, if necessary, terminates the old ones.

Significant Cost Savings

Just-in-time appointments and straight-through processing are other efficiency drivers. Some large carriers can spend upwards of $50 million a year in appointment fees—a significant sum. The most efficient licensing operations generate appoints on demand at the time new business is placed, avoiding the significant expense to support nonproductive producers. Agents are usually appointed in multiple states during the onboarding process, anticipating they will place business in each. Most carriers can save considerable costs when they enter agents in their systems, issue the writing codes, and automatically generate an appointment, sending it to the state, with no intervention, only at the time it’s required.

More Compliant with Less Interaction

Straight-through processing is a type of BPA that removes human contact in transactions. For example, in licensing, if all conditions and business rules are met, a transaction goes straight through to the NIPR gateway. Renewals are a good use case. The system notifies agents of their CE obligations and asks for background information to be updated. Once completed, renewals are generated and pushed to the state automatically. Say an agent in the northeast obtains a new P&C license in New York. That agent would be appointed automatically once that system receives the information, downloaded through NIPR alerts to the appropriate carriers. Based on the state and that customer’s business rules, there could be multiple appointments. Or, if that same agent were to get another license independently, say to sell health insurance on the side. That agent’s information would likely come in from the PDB, but the carrier’s system wouldn’t generate the appointment, although it may notify compliance about the agent getting a license outside the company’s selling agreement.

To summarize, BPA integrates the front end and enables insurers to update business rules in real time, with no need for development, and the cost savings is significant. RegEd’s Xchange solution leverages BPA to drive such efficiency, speed time to markets, ensure transactions are always in good order, and enables management by exception.

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 visit www.reged.com.

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