Here are my thoughts after Day One.

At a minimum, you would have to admit that FINRA has a sense of humor: the song they played when Rick Ketchum, FINRA’s Chairman, was introduced to give his keynote speech was “Why Can’t We Be Friends,” the 1975 song by War. Predictably, there were few laughs after that.

Rather than give his usual pep talk to members, Rick opened the conference by taking the opportunity to announce FINRA’s strong support for the adoption of a universal standard governing the conduct of brokers, broker-dealers and investment advisors, namely, the “best-interest-of-the-customer” standard. Interestingly, he denied that this new standard was mandated by any failure on the part of FINRA or its existing regulatory program, which, as everyone knows, is based on suitability of recommendations. Instead, he insisted that it was simply an effort to align the needs of investors with the goals of securities firms. Hmmm. Not sure if all BDs would concur with that conclusion, but it does seem somewhat inevitable that BDs will, sooner or later, become fiduciaries to their customers. When that happens, be prepared to make what Rick described as “Form ADV-like disclosures” to customers, both on an annual basis as well as at point of sale, to ensure that customers are made well aware of the characteristics of the products they are buying, especially the risks attendant to those products. That would be a drastic change from how BDs presently operate, so it is difficult to imagine such a requirement being imposed without a long period of time to prepare for it.

After the general session, I attended “Top Ten Regulatory Concerns,” a roundtable discussion with Susan Axelrod and Chip Jones from FINRA, as well as three industry members. (Notably, the panel only got through the first seven before time expired!) Here they are:

  • Firm culture: creating a culture of compliance, i.e., a “tone at the top.” FINRA wants to see clear evidence that firm management, regardless of the size of the firm, has bought into the concept that compliance is a paramount consideration.
  • DOL Fiduciary proposal: as noted above, FINRA is backing a universal fiduciary standard, although that standard is somewhat different than the DOL proposal (principally because the DOL standard is restricted to IRAs and 401(k) accounts). One of my favorite moments of the day occurred here, when the panel acknowledged that one of the challenges of implementing a new standard will be achieving “regulatory consistency,” as the new standard is interpreted and parsed by regulators, hearing panels, courts, etc. What made that comment so remarkable is that today, when we deal with the “reasonableness” standard that governs so many existing FINRA rules, there is already fairly little consistency. Why would FINRA expect that to change with a new fiduciary standard?
  • Cybersecurity: if you’re looking for one take-away from today’s session, it is that it is a matter of when, not if, you will find yourself the subject of some cybersecurity issue. Given that, it is best to take precautions now, while the barn door is still closed. Another good moment here: Susan Axelrod said FINRA’s goal is merely to “have a dialogue” with its member firms about cybersecurity. Assuming that’s true, I wonder how long it will be before Enforcement cases ensue?
  • Hiring practices: this topic led to a discussion of FINRA’s review of all the data in CRD. Ms. Axelrod said FINRA’s intent was to ensure the accuracy of the data. That may be true, but I found it curious that she didn’t bother to mention or even allude to the dozens and dozens of Enforcement cases FINRA is bringing and has brought against RRs who have failed to disclose pending tax liens on their Form U-4. Clearly, FINRA’s goal is not simply to get the data right, but also to sanction anyone who fails to do that. One more interesting point here: going forward, it will not be enough for a BD to blindly rely on annual attestations from RRs about their outside business activities, their financial disclosures, etc. Instead, BDs are going to need to take independent steps to verify the accuracy of RRs’ attestations to satisfy FINRA.
  • AML: it was news to absolutely no one that FINRA is excited about AML.
  • Senior investors: same here. FINRA seemed quite pleased with its efforts to protect senior investors, including its new hotline.
  • Conflicts of interest: there is no specific rule that dictates that BDs address conflicts of interest, but FINRA expects that firms do it anyway. As with cybersecurity issues, Susan Axelrod said that while FINRA examines for conflict management, the goal is for FINRA to “understand” how firms are managing that part of their business. The cynic in me can only wonder whether, and when, that goal will change, and encompass Enforcement actions.
  • Fixed income matters: the panel never got to discuss this.
  • Regulatory exam process: or this.
  • New product due diligence: or this.

The next session I attended was an Enforcement roundtable, with FINRA representatives, members of the industry, and a lawyer who represents BDs. (I was not invited to participate on this, or any, panel!) Here were the highlights:

  • Enforcement says they approach the question of what cases to bring using a risk-based analysis. Despite that, or perhaps because of that, the number of cases Enforcement has brought is up 30%.
  • There was a discussion about the value of cooperating with FINRA. No consensus was reached. In fact, the FINRA members of the panel seemed surprised to learn that, sometimes at least, lawyers counsel their clients NOT to cooperate with FINRA, given that there is nothing to be gained from doing so. The one thing that the panelists agreed on was that if you are going to self-report, you need to wait long enough so you can conduct an internal review to figure out what happened, but not so long that FINRA figures out for itself what transpired.
  • If you receive an 8210 request that appears to be overly broad in scope, you should immediately call FINRA to try to reduce it. Don’t be shy about going over the head of the person who sent the letter, either, if necessary.
  • Don’t respond to 8210 requests without consulting an attorney, if possible. Members that handle these requests themselves often give away too much.

I then attended two other sessions, one on Fraud, and one on Alternative Investments/Complex Products. Neither was remarkable.

Finally, and maybe not surprisingly, the best things I heard all day came at lunch, from members, not during any panel presentation. These stories will curl your hair.

First: The owners of BD A are in the process of purchasing BD B, because they want to get in the business of selling private placements, but BD A’s Membership Agreement doesn’t include that line of business, while BD B’s does. Specifically, the owners of BD A want to sell oil and gas deals. BD B’s Membership Agreement has no restrictions whatsoever on its ability to sell ANY private placement, include oil and gas deals. Despite that, FINRA has indicated that even if BD B is acquired, along with all of its approved lines of business, FINRA may not permit BD B to sell oil and gas deals. How can that be? How can FINRA prevent a firm from conducting business that it is approved to conduct? The answer is, of course, that it cannot. But, that does not stop FINRA from attempting to intimidate the owners of BD A.

Second: The owner of a BD passed away, suddenly. Pursuant to his will, his ownership interest in the BD passed to a trust. In light of the change in ownership, the BD proceeded to file a CMA under Rule 1017. In response, believe it or not, FINRA questioned why the firm had changed its ownership without first giving 30-days’ notice. The BD responded by pointing out that the owner, rather inconveniently, it seems, failed to give any notice, let alone 30-days’ notice, of his impending demise. So far, apparently, FINRA is satisfied with that answer.

You can’t make this stuff up.