February 24, 2021 Practice Points

Key Takeaways from ABA Panel on FINRA’s 2021 Exam Findings and Regulatory Priorities

The report revamps two prior FINRA publications—its retrospective exams findings and its priorities letter—into one streamlined document that is required reading for every financial services industry legal and compliance professional.

By Taylor E. Anderson and David G. Buffa

On February 17, 2021 the SRO and States Subcommittee of the ABA Securities Litigation Committee hosted a panel of senior representatives from FINRA and in-house legal/compliance departments to discuss FINRA’s 2021 Report on Exam Findings and Regulatory Priorities. The report revamps two prior FINRA publications—its retrospective exams findings and its priorities letter—into one streamlined document that is required reading for every financial services industry legal and compliance professional. Bressler recently issued an alert summarizing the primary takeaways from the report.

The panel featured FINRA’s Bari Havlik (Head of Member Supervision), Erin Vocke (Firm Group Examinations, Member Supervision), Bill St. Louis (Firm Group Leader, Member Supervision), and for the in-house perspective, Joan Schwartz (Chief Legal Officer, Pershing), K.C. Waldron (Compliance Regulatory, Charles Schwab), and Bob Brunton (Associate General Counsel, Edward Jones). Over the course of the program, the panelists shared valuable insights, including tips for using the report effectively (e.g., create checklists for each area and share the report with business partners). Highlights from the discussion include the following:

Form Client Relationship Summary (CRS) and Regulation Best Interest (Reg BI)

As FINRA exams concerning these rules (which only became effective June 30, 2020) are still in the early stages, the report did not contain any specific observations or concerns. However, during the panel discussion, FINRA staff highlighted a few concerns and best practices. With Form CRS, FINRA praised firms’ effective use of technology to deliver the forms and document required aspects of delivery (how, when, and to whom). On the other hand, FINRA noted that some firms improperly relied on vendors and third parties to comply with components of form CRS delivery and filings that are more appropriately performed by the firm, such as filing with CRD and/or IAPD and tracking delivery. For Reg BI, FINRA representatives noted that many firms excelled in training their staff during the remote working environment and reminded member firms of the obligation to train both associated persons and supervisory staff on the new requirements. However, examiners also have seen a number of firms improperly view themselves as outside the scope of Form CRS and Reg BI based on the mistaken view that their clients are not “retail investors” due to their net worth, even though Reg BI expanded the definition of retail customers to include high net worth investors.

Supervising Associated Persons (OBAs and PSTs)

Outside business activities (OBAs) and private securities transactions (PSTs) are an area of growing concern for regulators, amplified by the remote working environment and increased use of technology by associated persons and investors alike. FINRA and in-house panelists agreed that firms should use both common sense approaches and increased training programs to address this increased risk. Annual attestations should ask clear questions that cover a variety of potentially problematic activities away from the firm. Training programs should clearly delineate prohibited activity and be updated to account for emerging areas of concern. Firms also should review FINRA’s monthly disciplinary report for real life examples and socialize them with their supervisors, and “boots on the ground” staff should be on the lookout for lifestyle changes for financial advisers that seem out of the ordinary. FINRA recommended that firms review public databases for improper activity, noting that the staff has found that some associated persons received Paycheck Protection Program (PPP) loans for undisclosed OBAs.

“Gamification” and Communications with Clients

With the recent events involving GameStop Corp. (GME) capturing national media attention, it should come as no surprise that FINRA will be focused on how member firms use interactive, “game-like” trading applications while trying to comply with longstanding rules requiring that communications with the public be “fair and balanced and not misleading.” Firms that use interactive features such as pop-up alerts, confetti explosions, and the like should expect that FINRA will be reviewing those interactions to determine whether they improperly influence customer behavior. As data has shown a deluge of younger, tech-savvy investors more inclined to use these app-based trading systems, this area will likely be a primary focus in the coming years. The same concepts apply to communications regarding digital assets. FINRA staff noted examples of problematic communications touting the upside of digital assets without balanced risk disclosure, and certain statements to customers regarding the regulatory outlook (e.g. “Bitcoin isn’t going away”) as potentially problematic and misleading.

The SRO and States Subcommittee panels of the ABA are moderated by Lara Thyagarajan of FINRA; David C. Boch of Morgan, Lewis & Bockius, LLP; Christian J. Cannon of Equitable Life Insurance Company; and Andrew Sidman of Bressler, Amery & Ross PC.

Taylor E. Anderson is an associate and David G. Buffa is a principal with Bressler, Amery & Ross in New York City, New York.


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