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
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
“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
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
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
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,
“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.
will protecting retail investors, as Gensler and others stated. Though many
themes emerged, that was the most common of all.
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