Thanks to Blaine not only for attending this conference, but for actually listening, so he could share with you the insights he gleaned from the local securities regulators here in Chicago. – Alan
While much of the broker-dealer world has been trying to figure out how to protect the financial welfare of their customers, in addition to watching Netflix and searching in vain for Lysol wipes online, our trusty securities regulators have been hard at work figuring out just how to regulate in the new circumstances brought on by the pandemic. I know this, because senior officials from the SEC, FINRA and Illinois Securities Department said as much as during a recent (virtual) meeting of the Securities Law Committee of the Chicago Bar Association. Industry members might be wondering exactly how their interactions with regulators might change or stay the same in the future as a result of Covid, and the Panel’s comments might provide some, albeit limited, insight.
While the regulators did not verbalize it in so many words, their overarching theme seemed to be that bad apples are figuring out ways to get rich by taking advantage of the pervasive fear and corresponding hope that people are feeling as a result of the pandemic. The SEC wants to stop those bad apples by focusing on areas such as insider trading, non-public information (who exactly is in your Zoom meeting?) and corporations putting out false or misleading information, especially as it relates to potential treatments or, even vaccinations. In response to false or unrealistically optimistic information, the SEC has halted trading for certain corporations and instituted at least one fraud case with more expected.
Purported treatments and cures are also keeping FINRA up at night, and if you are a broker dealer, they might give you pause too. The reason is that FINRA indicated selling away has become a concern with brokers trying to make a quick dollar on private offerings or unregistered securities for corporations that supposedly have a miracle drug or cure. Selling away is, of course, an age old problem associated with supervising brokers, and with most if not all of them working from home these days, the task just got more difficult for firms.
But it is not just supervision that is more difficult with so much of the work force at home. As FINRA pointed out, technological intrusions, aka hacking, are likely to become more prevalent since individual brokers are unlikely to have robust computer security at home. FINRA is concerned that many firms, but especially the smaller ones, might lack the financial means to implement stronger measures for all their home bound employees, which could have serious financial consequences for the customers and firms alike. If you are not sure how your brokers are connecting from home, and if those connections are truly secure, you might want to look into it because odds are that FINRA will be doing just that the next time it conducts an exam.
Speaking of which, industry professionals will, no doubt, be delighted to hear that FINRA’s ability to conduct exams has not been impacted to any great extent. While on-site exams have been postponed, most of the examinations these days consist of the Staff reviewing large amounts of electronic data, which can be safely transmitted via the internet. Thus, firms should be prepared to proceed if they have exams scheduled in the not too distant future.
Another area that industry participants should be prepared for are “virtual” interviews by the respective enforcement agencies. The SEC indicated that they have had success conducting interviews on one platform ( e.g., WebEx) and allowing the industry professional and his or her lawyer to confer on another platform (like FaceTime or Zoom). Moreover, as FINRA explained, its investigations are all predicated on the ability to conduct OTRs, so it has not and will not cease conducting them. In fact, the FINRA representative indicated that the SRO has taken over 80 remote OTRs since the start of the pandemic with very few problems (although, he admitted, in most cases, they have reduced the number of exhibits used during the OTRs, for the sake of simplicity).
So what does the future hold? The FINRA official mentioned that there has been an uptick in arbitration filings due, in large part, to some of the wild swings that have permeated the market. However, in a statement that was music to the ears of this lawyer, he conceded that it was not clear there would be a corresponding increase in enforcement cases, since customers losing money on account of a market correction does not necessarily mean their investments were unsuitable or their accounts poorly supervised.
Finally, lest the reader think that EVERYTHING has changed as a result of the pandemic, you can take solace in the fact that the regulators all indicated that a priority going forward will be protecting senior investors. Their focus on the wellbeing of seniors, which has always been paramount, seems magnified because older investors, who are now quarantined, tend to prefer face to face meetings and are now being forced to rely on unfamiliar technology such as virtual meetings. The fear is that unscrupulous brokers can take advantage of that unfamiliarity or, more simply, that seniors might have more difficulty comprehending their options over a Zoom call and end up with unsuitable investments.
So there you have it; the collective focus of the regulators seems relatively unchanged since the onset of the pandemic, but the ways that they are implementing their supervision and enforcement have changed and will continue to change as events dictate.