Documentation and Compliance Key in FINRA Sweep Exams of Options Accounts

Broker-dealers need to document their firm’s processes for supervising options trading and demonstrate compliance with them in new FINRA sweep exam on option accounts.

The industry self-regulator is conducting targeted examinations of broker-dealers’ supervision of options trading as part of its ongoing efforts to protect retail investors. FINRA CEO Robert Cook had indicated in July that the sweep would be coming and the regulator followed through shortly thereafter, releasing its Targeted Examination Letter on Option Account Opening, Supervision, and Related Areas in early August.

“Options are tricky and can be difficult to understand for certain investors. Even registered representatives recommending them can struggle understanding and explaining their inherent risks to investors. This sweep exam attempts to determine if firm compliance and supervision programs are adequate to protect investors holding option accounts,” said Margie Webber, Director of Regulatory Compliance for RegEd.

Auditors Seek Specific Information

FINRA and other regulators use targeted exam letters, or sweeps, to focus examinations and pinpoint regulatory responses to emerging issues. The number of firms included in targeted exams and the criteria for inclusion vary.

FINRA’s targeted exam sweep of broker-dealers’ options account activity covers the period from January 2020 to August 2021. In its letter, FINRA asks firms to provide the following information for both self-directed accounts and accounts in which registered representatives recommended options for retail investors.

  1. Written Supervisory Procedures (WSP), compliance manuals, and any other written guidance related to the firm’s processes and procedures regarding the firm’s options account opening and due diligence activities specific to each level of trading permission
  2. Compliance manuals and any other written guidance pertaining to the firm’s supervision of options trading in customer accounts
  3. Methods for surveilling activity of existing options customers
  4. Descriptions of the technology and processes for approving or denying customer options account applications and the supervisory review of those systems
  5. Requirements to open margin accounts or otherwise be approved for margin in connection with options activity as well as descriptions of any technology or process for approving or denying margin accounts
  6. Instances where options limitations (account approval or transactions in options accounts) were not appropriately applied, and any steps taken to date to prevent future breaches of requirements 
  7. Whether the firm reviewed non-options customers and/or existing options customers for promotion or recommendation of a new options account, and if so, how it conducted the review(s) and how often
  8. Means of advertising options accounts and how applications were provided to and submitted by customers
  9. Sample options account applications or similar records used to collect information from customers as part of the firm’s options account approval process 
  10. Sample options-related disclosure materials or other communications provided to customers that explain firm practices and policies

Responding to Auditors’ Requests

“Firms leveraging technology in their compliance and supervision programs are well-positioned to respond to this sweep,” Webber said. “Enterprise compliance solutions give firms visibility throughout the organization and allow for the ownership of procedures and delegation of responsibilities, enabling the compliance professional to more efficiently respond to regulatory examinations such as this options account sweep” she said.

As built-for-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).

  • Policies and Procedures Management Solution – An enterprise workflow, work-process, and task management solution, it enables comprehensive, end-to-end administration and oversight of all elements of a firm’s policies and procedures.
  • Education and Training Suite – Robust technology and content power firms’ compliance programs. Solutions like CE Program Management and Firm Element Training simplify training and education and improve compliance.
  • Advertising Review – Automates and streamlines compliance reviews to reduce compliance risk and speed time to market. Hallmarked by unmatched flexibility and ease-of-use, it drives the highest levels of efficiency, enabling firms to handle projected volume growth without compromising review quality or turnaround.

Schedule a consultation to learn more about how RegEd’s compliance solutions enable broker-dealers 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.

Form CRS Enforcement Begins with $910,092 in Fines

The grace period for firms to furnish investors with Form CRS customer relationship summaries has indeed ended now that the SEC has sanctioned firms for the first time, a little more than a year after the requirement took effect.

The SEC has fined 21 investment advisers and six broker-dealers a total of $910,092. Without admitting or denying the findings, the firms agreed to be censured, cease and desist from violating the charged provisions, and pay civil penalties ranging from $10,000 to $97,523.

“Registration with the SEC as an investment adviser or broker-dealer comes with mandated filing and disclosure obligations,” Gurbir S. Grewal, director of the SEC’s Enforcement Division, stated in a July 26 release announcing why the SEC charged 27 financial firms for Form CRS filing and delivery failures.

“Today’s cases reinforce the importance of meeting those obligations and providing retail investors with information that is intended to help them understand their relationships with their securities industry professionals.”

Form CRS Requirements Protect Retail Investors

Customer relationship summaries are meant to explain the types of services a firm offers as well as the fees and costs it charges for them and to alert investors to any potential conflicts of interest or disciplinary histories on behalf of the firm or its financial professionals. Firms must also disclose any standards of conduct that they are obligated to fulfill.  The relationship summary must be written in plain English and be concise.

Firms have been required to provide customer relationship summaries to retail investors since June 30, 2020. They are also to post the summaries to their websites. Broker-dealers are to complete Form CRS while advisers use Form ADV Part 3.

Regulators shared their expectations for summaries with firms leading up to last year’s effective date and during the first 12 months that they were required. They also offered guidance on completing, filing, and distributing Form CRS.

For example, in April 2020, the SEC issued a risk alert regarding Examinations that Focus on Compliance with Form CRS. It then shared preliminary observations from their initial examinations at a Roundtable on Regulation Best Interest and Form CRS in October 2020. Then it went on to list Form CRS in the examination priorities for 2021 that it released in March.

More recently, at FINRA’s annual conference in May, executives from the industry regulator said that enforcing Form CRS would be a top item on examiners’ agendas this year. They would no longer take a “good faith approach” in which they largely assessed a firm’s implementation progress.

“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.

Form CRS Training Key to Compliance

If any questions as to regulators’ priorities or intents had lingered in the months since FINRA’s conference, the SEC’s first enforcement actions for Form CRS violations have since dispelled those doubts. According to the SEC’s orders, each of the firms charged missed regulatory deadlines for filing or delivering its Form CRS, or posting it to its website, until being twice reminded of the missed deadlines by their regulators — in the case of investment advisers, by the SEC’s Division of Examinations, and in the case of broker-dealers, by FINRA.

“It’s noteworthy that chief compliance officers weren’t named in these enforcement cases since they were reminded at least twice by FINRA and/or the SEC before complying,” said Margie Webber, Director of Regulatory Compliance for RegEd. “It will be interesting to see if state securities regulators will piggyback on the SEC enforcement.”

Regulators’ intent to enforce Form CRS reinforces the need for related education and training for firms, advisers, and brokers, Webber said. “Investor protection is a top regulatory priority for state and federal regulators. It should be a top priority for industry as well.”

As built-for-purpose tools tailored to the needs of broker-dealers and investment advisers, RegEd’s compliance solutions for securities firms are effective and cost-efficient. Firms 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. 

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, SEC, and State Securities Enforcement Trends.

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.

Broker-dealers Hope for Permanent Remote Inspections as FINRA Ponders Extension

Regulators remain open to extending remote examinations for broker-dealers into 2022 and firms hope the relief will last even longer.

FINRA President Robert Cook recently reiterated the need for exams to remain remote into 2022 during a conference held by the Securities Industry and Financial Markets Association’s (SIFMA), WealthManagement reported. “What I’d like to see happen here, at least where my thinking currently is, is we would extend it into next year, and that we would also step back and look at that rule more holistically, and think about whether it could use some updating to accommodate a thoughtful, risk-based approach to when in-person exams would be necessary,” Cook said, according to WealthManagement.

FINRA Chief Legal officer Bob Colby expressed a similar desire to extend remote exams into 2022 during the regulator’s annual conference in May, noting that FINRA had been discussing a possible extension with the SEC. “That is intended to buy a little time in order to figure out how to do this in the longer term,” he said.

FINRA granted firms temporary relief to allow remote inspections for calendar years 2020 and 2021 last November. “The temporary rule change is necessitated by the compelling health and safety concerns and the operational challenges member firms are facing due to the sustained COVID-19 pandemic,” FINRA noted in explaining why firms could complete remotely their inspection obligations under FINRA Rule 3110(c) (Internal Inspections) without an on-site visit to the office or location.

Firms have pushed for lasting changes to FINRA’s onsite branch inspection component. “Many broker-dealers believe they can maintain compliance remotely with the right technology and processes through a risk-based approach to branch supervision,” said Margie Webber director of regulatory compliance for RegEd. “They’ve been able to achieve branch supervision efficiencies through the use of technology during the pandemic by streamlining audit management, with the added bonus of eliminating travel risks and costs.” 

Pandemic shows that remote branch inspections can work.

SIFMA has urged FINRA to make permanent changes to branch inspections for broker-dealers.  “A remote inspection should be the default, and if firms determine that there are additional risks, only then should an on-site inspection be warranted. If significant concerns are discovered within a location that cannot be addressed in a virtual environment, an on-site inspection could be conducted,” SIFMA wrote in a February letter in response to a request for comment on lessons from the COVID-19 pandemic that FINRA issued in December. In its request, FINRA asked the industry for comment on the utility of current office definitions as well as the use and effectiveness of remote inspections.

“In order to implement risk-based inspection scheduling, we recommend that FINRA remove the annual requirement of FINRA Rule 3110.12 and the FINRA Rule 3110.13 presumption that such locations require inspection at least every three years in favor of a risk-based schedule,” SIFMA continued in its response.

“Risk factors weighed by firms, such as business conducted, access to firm books and records, heightened supervision of certain persons, and access to firm capital, could be documented. This process would allow for greater flexibility in handling supervision of lower risk areas of firm business without increasing risk of customer harm and would significantly lower costs on firms as more employees work more frequently from remote locations.”

Firms say the industry is prepared to conduct proper supervision virtually, noting as well that most broker/dealer functions can be performed remotely without on-site supervision and that many employees will not return full-time to a physical office, WealthManagement wrote in reporting that FINRA firms want inspectors to work remotely, permanently.

At FINRA’s annual conference in May, the regulator’s senior director of examinations, John Edmonds, and brokerage compliance officers agreed that remote examinations have been effective but challenging. As participants in a panel discussion, they noted challenges like tracking outside business activities and private securities transactions.

Technology improves remote supervision for broker-dealers.

“Firms need the proper technology to reduce risks associated with remote supervision,” said Webber from RegEd, whose conflict of interest suite includes solutions for tracking outside business activities, personal securities account management, and gifts, gratuities and political contributions.

RegEd assists broker-dealers in overcoming challenges associated with remote supervision through its Audit Management solution as well, which enables firms to implement an effective audit program per FINRA Rule 3110. Also, RegEd’s compliance questionnaires streamline the annual certification of the registered representative population in accordance with FINRA’s Supervision Rule.

During the COVID-19 pandemic, RegEd has helped firms review their branch exams with remote work and remote exams in mind, like with pre-audit questionnaires (PAQs) that streamline audit coordination and data input. “The PAQ is a perfect tool for compliance teams that want to cover the basics for a large volume of branch exams,” said Lindsay Restrepo, product manager for RegEd. “With auditors free to focus their on-site visits on higher-risk individuals and branches, the firm can prioritize travel based on federal and local health and safety guidelines. “

As built-for-purpose enterprise compliance solutions 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.

Schedule a consultation to learn more about how RegEd’s enterprise compliance solutions improve efficiency, effectiveness, and transparency for broker-dealers.

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.

New State Insurance Regulations Surge as Regulators ‘Catch Up’ on Non-Pandemic Issues

State insurance regulations are changing faster than they did before the COVID-19 pandemic, though it may be hard to tell.

While a flood of pandemic-related state regulations (laws, administrative rules, bulletins and notices) pushed the numbers of insurance regulations to a record 3,600 in 2020, this year’s regulatory activity has proven to be just as busy as the previous record-breaking year, 2019. Many of this year’s insurance changes have been included in omnibus bills, some of which have reached an unprecedented 2,500 pages, rather than being introduced as stand-alone bills.

“This legislative season has been busy because last season got delayed. Regulators are playing catch up,” said Merlinda Johnson, Director of Insurance Regulatory Compliance for RegEd. “It’s not just straight insurance legislation either. States are putting insurance regulations into bills with a bunch of other changes to get everything passed.”

RegEd’s Regulatory Affairs team has vetted more than 40,000 pieces of legislation in 2021, looking for even the most subtle insurance-related changes. “It’s not uncommon to go through something in detail and find there’s nothing actionable for insurance companies,” Johnson said.

A 1,200-page bill may have one paragraph pertaining to insurance regulations, for example. Of the changes that RegEd regulatory analysts have found, many reflect the increasing complexity of state insurance regulations. Regulators are addressing issues like cybersecurity, diversity, equity and inclusion (DEI), artificial intelligence (AI), and environmental, social, governance (ESG) matters.

ESG issues are at the forefront, Deloitte found in surveying 100 chief financial officers and senior finance executives at US insurers in May. “The ‘E’ of ESG should be a particularly hot topic in the second half of 2021, with two-thirds of respondents taking additional steps to address and disclose climate risks, while about half are reconsidering their investment strategy and portfolio to better reflect climate risk concerns and goals. More carriers are also appointing chief sustainability officers or their equivalent to at least orchestrate ESG initiatives and reporting, while many are taking steps to reduce their own carbon footprint,” Deloitte wrote in its midyear 2021 US insurance outlook.

Though regulators will make fewer changes in the coming months as the state legislative season winds down, with most legislatures finishing business by the end of September, insurers will be busy identifying relevant changes that have been made and implementing the necessary responses.

RegEd’s Regulatory Affairs team has already notified clients if they have been affected by any of the 1,749 changes in state insurance regulations from the first half of 2021. Comprised of more than 30 regulatory experts with over 300 years of combined knowledge and experience in the insurance and/or securities industries, the team provides insurance companies with clear and concise regulatory summaries. Reportable events can then be curated within RegEd’s Regulatory Change Management solution and auto-assigned based on a firm’s specific requirements.

Regulatory Change Management helps firms manage regulatory change through the delivery of actionable content, in a closed-loop process, across the enterprise. This strengthens the firm’s compliance program, lowers compliance costs, and reduces non-compliance risk.

Schedule a consultation to learn how RegEd’s Regulatory Change Management solution helps compliance leaders:

  • Free resources to focus on high-value work;
  • Improve relationships with business units; and
  • Achieve peace of mind knowing that regulatory changes are handled.

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.

State Appeals Overturning of New York Regulation 187

New York’s Department of Financial Services is taking its fight for NY Regulation 187 to the state’s highest court.

As expected, the DFS has appealed a lower court’s decision overturning NY Reg 187 to the New York Court of Appeals, InsuranceNews.Net reported. The Supreme Court Appellate Division struck down the controversial best-interest standard for the sales of life insurance and annuities in April.

The DFS implemented the best-interest standards for annuity sales on Aug. 1, 2019, and for life insurance sales on Feb. 1, 2020. But insurance industry associations, an insurance agency, and a registered representative sought to overturn the standards by suing the DFS.

A state Supreme Court judge ruled in regulators’ favor in August but the Supreme Court Appellate Division overturned NY Reg 187 on April 29, siding 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. InsuranceNews.Net reported regulators’ subsequent appeal to the state’s highest court on June 10, citing a source with the DFS.

“Though some uncertainty remains around NY Reg 187, we expect that most insurance companies will follow it until the state’s highest court decides its fate,” said Brandi Brown, senior vice president of regulatory affairs for RegEd.

Lower court cites “vagueness” in overturning NY Reg 187

In siding with the plaintiffs in April, the appellate court wrote that NY Reg 187 failed to meet the two-part test that is used to evaluate “a vagueness challenge,” noting that the regulation 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,” the 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,” the justices continued.

Industry groups largely welcomed the lower court’s ruling because they favor a 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 National Association of Insurance and Financial Advisors New York Chapter (NAIFA-NY) noted in expressing its support.  However, the NAIC model does not apply to the sale of life insurance as does NY Reg 187.

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. Eleven states have adopted revisions to the model and the NAIC continues to work with regulators nationwide.

Insurance companies will continue to need training on NY Reg 187 until the New York Court of Appeals rules, Brown said. 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.

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.

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.

NASAA Investment Adviser Report Highlights New Model Rules for CE and Policies and Procedures

The North American Securities Administrators Association (NASAA) recently released its annual report on the state-registered investment adviser industry and the related regulatory activities of state securities regulators.

NASAA’s 2021 Investment Adviser Section Annual Report includes an updated snapshot of the investment adviser population in the United States, an updated profile of the average state-registered investment adviser, and a recap of the work of the Investment Adviser Section over the past year. It also includes suggestions for compliance areas that state-registered investment advisers should consider in handling the remote working environments that have become common due to the COVID-19 pandemic.

“State securities regulators devote significant resources toward helping state-registered investment advisers, many of which are small- and mid-size businesses, better serve their clients by remaining in compliance with state securities law,” said Lisa A. Hopkins, NASAA President and West Virginia Senior Deputy Securities Commissioner, in announcing the release of NASAA’s annual investment adviser report.

Model rules to help advisers and their clients

In this year’s report, NASAA highlighted new model rules that states could implement to strengthen protections for investors and compliance by advisers.

IAR continuing education model rule

The Investment Adviser Representative Continuing Education Model Rule that NASAA members approved in November set parameters by which states can implement continuing education programs for investment adviser representatives (IARs) in their jurisdictions. Unlike other financial service professionals, IARs have not been subject to a continuing education requirement to maintain their licenses with state regulators but the model rule helps states close that gap, NASAA explained in its investment adviser report.

NASAA’s IAR continuing education model rule requires IARs to take 12 hours of continuing education annually and includes a products and practices component as well as an ethics component. The model rule is intended to be compatible with other continuing education programs.

“The model rule represents the culmination of years of work by state securities regulators and industry to develop a relevant and responsive continuing education program,” NASAA wrote in its report. “The collaboration between the public and private sectors is intended to promote heightened regulatory compliance while also helping IARs better serve their clients by remaining knowledgeable of current regulatory requirements and best practices.”

NASAA expects the CE program criteria, requirements, and application material to be complete and available by the end of the second quarter, according to an IAR continuing education update released in January. NASAA and Prometric planned to spend the first four months of 2021 standardizing the criteria under which potential IAR CE content providers, instructors, and courses will be approved.  

NASAA answers frequently asked questions about the model rule for continuing education for IARS on its website in the meantime.

IA written policies and procedures model rule

Like the continuing education model rule, NASAA members approved the Investment Adviser Policies and Procedures Model Rule and accompanying Compliance Grid in November. NASAA’s IA Policies and Procedures model rule requires investment advisers to establish, maintain, and enforce written policies and procedures tailored to their business model, accounting for the size of the firm, type(s) of services provided, and the number of locations.

The model rule is meant to facilitate compliance with state securities laws, rules, and regulations. “Enhanced investment adviser compliance inures to the benefit of investors, regulators, and advisers themselves,” NASAA wrote in its investment adviser report.

The Compliance Grid that accompanies the model rule addresses common compliance and supervision issues that should be considered in the creation of policies and procedures, NASAA explained. “Ultimately, an enhanced culture of investment adviser regulatory compliance minimizes the effects of conflicts and other risks unique to investment advisers; minimizing the effects of these conflicts and risks serves to protect the investing public,” it wrote.

NASAA intended for the model rule to align with the Securities and Exchange Commission (SEC) Rule 17 CFR 275.206(4)-7 (SEC Rule 206(4)-7), thereby “enhancing uniformity with federal investment adviser regulatory standards on the topic.” Like SEC Rule 206(4)-7, the model rule stops short of identifying specific topics that firms must address in their compliance and supervision policies and procedures. Instead, it requires advisers “to identify their own unique conflicts and risk exposures” and to design their policies and procedures accordingly.

“The Model Rule coupled with the Compliance Grid establish regulatory expectations for registrants, create a blueprint for examiners to follow in reviewing policies and procedures, encourage uniformity with SEC standards on the topic, and further the goal of identifying and minimizing conflicts and risks to the investors that we all serve,” NASAA summarized.

Guidance for maintaining compliance during the COVID-19 pandemic

NASAA also suggested that firms implement and update their written procedures and practices to address changes brought by the COVID-19 pandemic. “These new realities include the possibility of serious health and safety risks for firm personnel and clients, remote work environments, the increased use of electronic communication and devices, and recent market volatility,” according to its report.

A firm should have a business continuity and succession plan (BCS plan), for example. Though requirements for such plans may vary by state, NASAA’s model rule on business continuity and succession planning requires firms to provide for at least the following measures in their policies and procedures.

  1. Protection, backup, and recovery of books and records
  2. Alternate means of communications with customers, key personnel, employees, vendors, and service providers
  3. Office relocation in the event of temporary or permanent loss of a principal place of business
  4. Re-assignment of duties in the event of the death or unavailability of key personnel
  5. Minimizing service disruptions and client harm that could result from a sudden significant business interruption

In addition to revisiting their BCS plans, NASAA suggests that firms assess their cybersecurity plans and consider the potential risks and vulnerabilities associated with remote work. It recommends reviewing NASAA’s Cybersecurity Checklist for Investment Advisers as well as contacting state securities regulators about any state-specific resources or training they may offer on cybersecurity topics.

Regulations for investment advisers and protections for investors

State securities regulators have regulatory oversight responsibility for almost 17,500 investment advisers with assets under management of $100 million or less. States also have sole regulatory oversight of all investment adviser representatives, the financial professionals who work directly with retail investors, whether the adviser is registered with a state or with the SEC. 

According to NASAA’s report on state-registered investment advisers and the related regulatory activities of state securities regulators, the organization’s regulatory policy and review priorities for 2021 include:

  • Engaging investor advocacy and industry groups to discuss the evolving nature of investment adviser fee models;
  • Creating a guidance document related to investment adviser alternative fee models;
  • Monitoring and assisting in commentary to SEC rule proposals to amend or add to investment adviser rules and forms;
  • Reviewing the adequacy of current model rules related to investment adviser marketing;
  • Collaborating with the broker-dealer section to propose a model rule on unpaid arbitration awards;
  • Finalizing written guidance on standing letters of authorization as they relate to custody; and
  • Other topics of interest to the investment adviser and regulatory communities.

“NASAA and its members remain very involved in helping investment advisers and protecting investors. From their new model rules for IAR training and IA policies and procedures to their ongoing guidance for maintaining compliance during the pandemic, they prioritize investor protection through state regulations for investment advisers,” said Margie Webber, director of regulatory compliance for RegEd.

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).

  • Policies and Procedures Management Solution – An enterprise workflow, work-process, and task management solution, it enables comprehensive, end-to-end administration and oversight of all elements of a firm’s policies and procedures.
  • Education and Training Suite – Robust technology and content power firms’ compliance programs. Solutions like CE Program Management and Firm Element Training streamline training and education and improve compliance.

Schedule a consultation to learn more about how RegEd’s compliance solutions enable investment advisers 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 Addresses Compliance Concerns in ESG Risk Alert

The SEC wants investment advisers to strengthen compliance practices related to environmental, social, and governance (ESG) investing, which is increasingly popular.

“This rapid growth in demand, increasing number of ESG products and services, and lack of standardized and precise ESG definitions present certain risks,” the SEC’s Division of Examinations wrote in a risk alert for ESG investing that examiners released on April 9.

“For instance, the variability and imprecision of industry ESG definitions and terms can create confusion among investors if investment advisers and funds have not clearly and consistently articulated how they define ESG and how they use ESG-related terms, especially when offering products or services to retail investors. Actual portfolio management practices of investment advisers and funds should be consistent with their disclosed ESG investing processes or investment goals,” examiners continued.

Regulators emphasized that their concern lies in the consistency with which advisers disclose ESG investing processes and goals, or rather the lack thereof—and not in the merits of a firm’s ESG investments themselves.

“Firms claiming to be conducting ESG investing need to explain to investors what they mean by ESG and they need to do what they say they are doing. This same rule applies no matter what label an adviser puts on its products and services,” SEC Commissioner Hester Peirce said in a follow-up statement on the staff ESG risk alert.

The SEC’s intensifying interest in ESG investing reflects its emphasis on protecting retail investors, said Margie Webber, director of regulatory compliance for RegEd. “Examiners want firms to apply the same rigorous compliance efforts to ESG investing as they do to other investments.”

ESG Compliance Concerns

Examiners cited the following examples of deficiencies and internal control weaknesses in firms’ current compliance efforts for ESG investing in their risk alert.

  • Portfolio management practices that differ from disclosures about ESG approaches
  • Weaknesses in policies and procedures governing implementation and monitoring of the advisers’ clients’ or funds’ ESG-related directives
  • Unsubstantiated or otherwise potentially misleading claims regarding ESG approaches
  • Inadequate controls to ensure that ESG-related disclosures and marketing reflect the firm’s practices
  • Lack of policies and procedures addressing ESG investing analyses, decision-making processes, or compliance review and oversight
  • Limited knowledge of relevant ESG-investment analyses or oversight of ESG-related disclosures and marketing decisions among compliance personnel

Though firms do not need a special set of policies and procedures for ESG investing, they should design their policies and procedures around whatever investment strategies they employ and comply accordingly, Peirce stated.

“As with any other investment strategy, advisers and funds should not make claims that do not accord with their practices, and our examiners will be looking for that consistency between claims and practice,” she said.

Effective Practices for ESG Compliance

Examiners also included the following examples of effective practices in their risk alert so that firms can develop and enhance their compliance practices.

  • Disclosures that were clear, precise, and tailored to firms’ specific approaches to ESG investing, and which aligned with the firms’ actual practices
  • Policies and procedures that addressed ESG investing and covered key aspects of the firms’ relevant practices
  • Compliance personnel that were integrated into firms’ ESG-related processes and knowledgeable about firms’ ESG approaches and practices

“The compliance personnel in these firms appeared to: provide more meaningful reviews of firms’ public disclosures and marketing materials; test the adequacy and specificity of existing ESG-related policies and procedures, if any (or assess whether enhanced or separate ESG-related policies and procedures were necessary); evaluate whether firms’ portfolio management processes aligned with their stated ESG investing approaches; and test the adequacy of documentation of ESG-related investment decisions and adherence to clients’ investment preferences,” examiners wrote in their risk alert.

Like with any area of importance, examiners expect firms to support ESG investing with effective policies and procedures and adequate disclosures, RegEd’s Webber said. “As usual, examiners want firms to comply with their practices internally and to be forthcoming in their communications externally.”

Strengthening Compliance for ESG Investing

The SEC will watch firms closely as ESG investing grows, Peirce stated. “This alert comes as many financial firms are finding gold in the green—they are offering ESG products because it is lucrative to do so. Therefore, as I have noted previously, asset manager accountability in the ESG space is important.”

In concluding their risk alert, examiners wrote, “The Division encourages market participants promoting ESG investing to clients, prospective clients, investors, and prospective investors to evaluate whether their disclosures, marketing claims, and other public statements related to ESG investing are accurate and consistent with internal firm practices.

“Additionally, firms should ensure that their approaches to ESG investing are implemented consistently throughout the firm where relevant and are adequately addressed in the firm’s policies and procedures and subject to appropriate oversight by compliance personnel.”

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).

  • Policies and Procedures Management Solution – An enterprise workflow, work-process, and task management solution, it enables comprehensive, end-to-end administration and oversight of all elements of a firm’s policies and procedures.
  • Advertising Review – A single, integrated solution that streamlines the end-to-end processes for advertising and customer communication submission, review, collaboration, and approval, Advertising Review speeds time to market for review items so that sales campaigns are launched in the expected timeframes and with the highest level of quality.

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.

CFPB Becomes More Vigilant about Abusive Practices as it Strengthens Consumer Protections

The Consumer Financial Protection Bureau has signaled that it will be more aggressive in policing abusive acts or practices as part of a broader shift in priorities under the direction of the Biden administration.

Under the leadership of acting director Dave Uejio, who assumed the position after Biden took office in January, the CFPB recently rescinded a year-old policy that it had implemented during the Trump administration. In rescinding the policy, in which the CFPB had focused on achieving compliance with regulations prohibiting abusive acts or practices through supervisory measures rather than enforcement actions, the CFPB aligned itself with Biden’s intention of strengthening consumer protections during his presidency.

“The CFPB has made these changes to better protect consumers and the marketplace from abusive acts or practices, and to enforce the law as Congress wrote it,” the CFPB stated in a press release announcing the rescission of the 2020 Statement of Policy Regarding Prohibition on Abusive Acts or Practices on March 11. “The 2020 Policy Statement was inconsistent with the Bureau’s duty to enforce Congress’s standard and rescinding it will better serve the CFPB’s objective to protect consumers from abusive practices.”

The CFPB will likely shine a brighter spotlight on bank sales practice as it seeks to protect consumers. “Regulators want to ensure that marketing and advertising complies with the Dodd-Frank Act,” said Margie Webber, director of regulatory compliance for RegEd. 

Section 1031(a) of the Dodd-Frank Act authorizes the CFPB to identify unfair, deceptive, or abusive acts or practices (UDAAPs) by banks with more than $10 billion in assets and to pursue relief for affected consumers through enforcement. Given that marketing and advertising are among the primary places that the CFPB looks for UDAAPs, the bureau’s recently stated preference for enforcement could lead to more actions against banks and larger penalties.

Defining UDAAPs

Congress both created the CFPB and banned UDAAPs through the Dodd-Frank Act in 2010, in which it sought to protect consumers from problems like those they endured during the Great Recession, which was caused in part by easy credit that led to borrowers accumulating more debt than they could afford.

The Dodd-Frank Act prohibits financial services providers like banks from coercing, deceiving, or misleading consumers into purchasing products, including through specific statements or lack of clear and full disclosure. Legislators charged the CFPB with creating the rules around UDAAPs.

In releasing its since-rescinded 2020 Policy Statement, the CFPB noted that uncertainty remained as to the scope and meaning of abusiveness a decade after the Dodd-Frank Act’s passage. “This uncertainty creates challenges for covered persons in complying with the law. The Bureau wants to make sure that such uncertainty does not impede or deter the provision of otherwise lawful financial products or services that could be beneficial to consumers,” the CFPB stated in releasing its then policy last January.

Stating that it intended “to convey and foster greater certainty about the meaning of abusiveness” through the policy, the CFPB noted that it would approach the abusiveness standard as follows.

  • Focusing on citing conduct as abusive in supervision or challenging conduct as abusive in enforcement if the harms to consumers outweighed the benefits
  • Avoiding challenging conduct as abusive as well as unfair or deceptive.
  • Refraining from seeking monetary relief for violations if the financial services provider had made a good-faith effort to comply with the abusiveness standard

“The Bureau substantiated the 2020 Policy Statement as being necessary in order to provide certainty to market participants, and to advance the goal of promoting innovation in financial products and services that would benefit consumers,” Seyfarth Shaw attorneys wrote in noting that the CFPB wasted no time shifting focus to consumer protection by rescinding the Trump-era policy statement on abusive acts and practices.

Refocusing on enforcement

However, in rescinding the policy statement last month, the CFPB noted that its three principles “do not actually deliver clarity to regulated entities” and in fact “add uncertainty to market participants,” Alston & Bird attorneys wrote in parsing the CFPB’s recent rescission of its abusiveness policy statement.

Furthermore, no additional explanation of the abusiveness standard is needed because the Dodd-Frank Act gives the CFPB sufficient authority to declare an “abusive act or practice,” the CFPB wrote. “Had Congress intended to limit the Bureau’s authority to apply the full scope of the abusiveness standard, it could have prescribed a narrower abusiveness prohibition, but it did not,” the CFPB wrote in its rescission statement. “Thus, rescinding the Policy Statement is consistent with the Bureau’s statutory authority.”

The CFPB also asserted that stricter enforcement of the provisions of the Dodd-Frank Act would be more effective in deterring abusive acts than supervisory oversight. “Declining to apply the full scope of the statutory standard pursuant to the policy has a negative effect on the Bureau’s ability to achieve its statutory objective of protecting consumers from abusive practices.

“In particular, the policy of declining to seek certain types of monetary relief for abusive acts or practices—specifically civil money penalties and disgorgement—is contrary to the Bureau’s current priority of achieving general deterrence through penalties and other monetary remedies and of compensating victims for harm caused by violations of the Federal consumer financial laws through the Bureau’s Civil Penalty Fund,” the CFPB wrote in its rescission statement.

Maintaining advertising compliance

Avoiding UDAAPs in marketing and advertising will be key for banks and other financial services providers that do not wish to be subject to enforcement actions or penalties from the CFPB, particularly for abusive acts or practices. Ensuring that their marketing and advertising are free from misleading statements or omissions is vital.

“When banks offer investments or other products through their marketing and advertising, they must confirm that all of the proper statements and disclosures are in place so that they comply with all applicable regulations,” RegEd’s Webber said.

RegEd’s market-leading Advertising Review enterprise software solution makes it easier for banks to comply with federal and state consumer protection laws like those that the CFPB intends to enforce more vigorously.

Advertising Review helps banks overcome regulatory scrutiny by enabling them to have consistent and methodical processes for complying with regulations like those for UDAAPs. The solution streamlines the end-to-end processes for advertising and customer communication submission, review, collaboration, and approval, thereby speeding time to market for review items so that sales campaigns are launched as scheduled, with the highest level of quality, and in compliance with state and federal regulations.

Schedule a consultation to learn more about how RegEd’s fit-for-purpose solutions like Advertising Review enable banks to gain the effective oversight that they need to ensure that compliance obligations are fulfilled, compliance gaps are readily identified and remediated, and strong audit trails that demonstrate compliance are captured and memorialized.

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.

Posts navigation

1 2 3
Scroll to top