Thanks to Chris for not only making the personal sacrifice of traveling from frigid Chicago to sunny Florida to attend the SIFMA Compliance and Legal conference last week, but for providing these helpful comments about the sessions he attended. – Alan


I attended the four-day SIFMA Compliance and Legal seminar last week, and there were a bunch of interesting soundbites from regulators that folks might find interesting.  The challenge at these conferences is always separating the chaff from the wheat.  There’s still plenty of responses that begin by stating, “Without going into the details on that,” and “That will be addressed more by the next panel.”  And, as is tradition, they saved some of the best panels for the last day.  By that time, some common themes were emerging across many of the panels.  Here’s a recap of some of the highlights.

Regulation Best Interest.  Every time a question on this topic was addressed to a FINRA staff member, it was met with the same tepid response: “that’s the SEC’s rule, and we are going to let them run with it.  If people have questions about it, we can help you engage in a dialogue with the SEC to get some clarity.  But it’s their rule.”  Every. Single. Time.  If there isn’t an internal memo floating around that talks about how to answer Reg BI questions, I would be shocked.  You can’t help but sympathize with FINRA a little.  Suitability was one of FINRA’s bread and butter concepts for decades.  They were the go-to source for suitability questions – including numerous rule revisions, Reg Notices, and FAQs.  Now that Reg BI has all but taken over, it makes sense that FINRA wants to give the SEC its space to call the shots on interpreting Reg BI.  The problem, however, is that FINRA still needs to enforce the rule, don’t they? One of the more entertaining – and candid, in a good way – FINRA staff members who spoke at a breakout session actually said, “we are not leading the charge on this with enforcement cases.” I was so shocked I wrote it down verbatim.  FINRA is certainly taking a look at Reg BI and Form CRS issues in their exams. They also have created guidance like the Reg BI checklist.  So, while FINRA might not be leading the charge, they are certainly following close behind.  SEC Commissioner Pierce, on the other hand, fully acknowledged that Reg BI will be shaped by how the SEC chooses to enforce it.

Bringing brokers back to the industry.  A few folks from FINRA mentioned they were pleased that Reg Notice 21-41 extended the time period – from two years to five years – for inactive advisors to rejoin the industry without having to retake exams.  FINRA President/CEO Robert Cook mentioned that he hoped this would help bring people back to the industry who may have left due to “life events.”  Mr. Cook really seemed excited about the change, at one point reminding the audience that advisors who are already out of the industry can still take advantage of the change, but they just need to “opt in.”  It is no secret that FINRA’s members have been declining for years.  We’ve blogged about it.  In fact, one of the other panels at the seminar also acknowledged that many advisors have been leaving the broker-dealer side of business that is under FINRA’s jurisdiction and moving to the registered investment advisor side regulated by the states and the SEC.  Perhaps FINRA has decided that it would benefit investors if they have more advisors to choose from.

CCO Liability.  This topic arose a few times because of the recent Reg Notice 22-10 that assures CCOs that “FINRA will not bring an action against a CCO under Rule 3110 for failure to supervise except when the firm conferred upon the CCO supervisory responsibilities and the CCO then failed to discharge those responsibilities in a reasonable manner.”  FINRA CEO Robert Cook acknowledged compliance personnel have a tough role, but hoped that the new Reg Notice would “give them comfort” because there is lots of room within the rules to operate safely.  Jessica Hopper, Executive Vice President and Head of Enforcement at FINRA, directly addressed the compliance personnel in the room by saying “we heard you,” and she reassured them that “it is not open season on CCOs.”  According to Ms. Hopper, most CCO liability cases are ones where the CCO is “dual-hatted” as CCO and either CEO, branch manager, or has been assigned some specific supervisory responsibility.  She also reminded folks that the standards at issue in these types of cases are ones of “reasonableness,” not perfection.  She did, however, point out that BDs should not try to use Reg Notice 22-10 as a shield to hide behind by calling something “compliance” rather than “supervision.”  Fair enough.

Crypto.  A lot was said about crypto at the conference, too much to go into detail here (to quote many of the SIFMA speakers).  Some of the more interesting comments came from SEC Commissioner Hester Peirce (who, it should be mentioned, is a republican appointee operating under a democratically appointed Chair).  She suggested the SEC hasn’t gone about this the right way by pursuing enforcement actions before they fully understand the technology.  She is in favor of slowing down and thinking about how calling something a security might impact it later down the line.  She even suggested allowing small scale experimentation with various rules and regulations might help “figure it out” now before crypto gets even bigger.  In fact, slowing down was a theme of her entire session.  For instance, she reiterated her disagreement with the SEC’s new policy that reduces the comment period for new rule proposals from 60 days to 30.  In her view, she would rather have a more robust and careful dialogue regarding a rule proposal, rather than acting too quickly.  Other speakers indicated that many broker-dealers are currently hesitant to sell crypto because they fear they will be accused of a Section V violation for selling unregistered securities.  So what do they do? Set up an affiliate entity to sell crypto instead. Hmmmm.

SEC sanctions / admissions.  The head of the SEC’s Division of Enforcement, Gurbir Grewal, provided some useful insight into the calculation of sanctions and the use of admissions with settling defendants.  Mr. Grewal indicated that most settlements will still use language that the defendant neither admits nor denies the allegations.  But, he warned that when the SEC does seek admissions in a settlement, they are signaling that they are willing to litigate that case to the end.  He basically said, “when we put admissions on the table, we won’t take them off.”  Melanie Lubin, the President of NASAA, added that admissions are beneficial to help customers recover their losses in civil litigation.  That’s an important point to keep in mind – an admission in a settlement with a regulator may start a feeding frenzy among plaintiffs’ lawyers who use the admission to find investors and convince them they have personally been harmed.  Both Mr. Grewal and Ms. Lubin shared another tip with regards to sanctions: when a defendant brings them a list of “comparable” cases that settled in order to try to negotiate a similar sanction, that often backfires.  Why? Because when a defendant shows them a list of other cases with lesser sanctions, that can indicate to the regulators that those lesser punishments are not having the desired deterrent effect, so they may need to ratchet up the sanctions to send a message.  Yikes!

Use of Personal Communication Devices.  Several panels briefly touched on the topic of advisors using personal communication devices (i.e., cell phones, text messages) to communicate with clients.  The message on this issue was pretty clear: the same old rules apply regarding communications with the public, supervision, and books/records (2210, 3110, 4511).  But BDs must apply those rules to current behaviors and technology.  (Specific guidance exists on these issues as well: Reg Notice 17-18, 11-39).  Folks from FINRA and the SEC explained that most firms have policies regarding the use of personal devices to communicate with customers, but the problem is they fail to adequately implement those policies.  And the policies may need to be updated for current real world behavior.  The current sentiment is that having a policy stating you prohibit use of personal devises (and since you have banned personal devices, you don’t need to supervise them) is inadequate in 2022.  Everyone is going to use a personal device from time to time, either intentionally or inadvertently, so you had better figure out how to address it.

Complex Products.  This was a hot topic because of the recent publication of Reg Notice 22-08 which “reminds” members of their obligations regarding complex products and options.  Folks from FINRA described options as the “mother” of all complex products.  And yet, FINRA staff also reported that option trading in 2021 was up 30% from 2020, and was up 100% from 2019.  If that’s true, did the investing public suddenly get a lot smarter? Maybe.  Or are we going to see a run of options-related customer arbitrations / enforcement actions filed in the coming years?  Also maybe.  Chris Kelly, Senior Vice President and Deputy Head of Enforcement, said there are two problems.  First, brokers often don’t understand the complex options spread transactions they are recommending, so they have no reasonable basis for recommending them.  Second, “options approval bots” for self-directed accounts cause problems where investors who might not qualify for options trading at first then decide to go back, reapply, and check different boxes that will get them approved.  That should raise red flags that BDs investigate – and sometimes don’t.  There was some suggestion that even though these are self-directed accounts, there needs to be stricter protocols in place to potentially protect the customers from themselves. For instance, risk disclosures for options accounts may need to be amplified, even for self-directed accounts where an investors might not fully appreciate what they are getting themselves into.  But, it is interesting to note that one of the other panel members got Chris Kelly to agree that “most” customers are knowledgeable and know what they are doing (generally speaking, not when it comes to options).  I wish I had that on video!

Acquiring Customers Through Social Media.  The topic of using “finfluencers” to gain customers was raised a few times, but disappointingly, not much was said about it.  The message was a familiar one: same old rules, new application.  FINRA staff said that tons of new client accounts were opened during the Covid pandemic, largely as a result of influencers on social media networks hyping certain platforms and firms.  Chris Kelly admitted this issue appears in the exam stages right now, but there are no enforcement cases yet.  Some important questions they are exploring are ones that you would expect: What’s the relationship between the BD and the influencer? Is the BD paying the influencer? Is the BD supervising the influencer? What about reviewing the communications? You can see how classic compensation and communications rules might come into play here. Stay tuned.

Senior Investors.   This issue is highly topical given the recent Reg Notices 22-05 and 22-09. FINRA staff discussed that the goal of Reg Notice 22-05 was to provide BDs additional time to freeze (and protect) monies of elderly clients suspected of being defrauded – and to encourage more freezes.  They have not see firms placing many holds on accounts, which they suspect is out of fear that they would face litigation.  FINRA hoped that Reg Notice 22-05 would give BDs further comfort that they have a “safe harbor” if they freeze senior investors’ accounts in certain situations.  This helps protect investors, but also BDs.  If a BD is threatened with litigation for freezing an account, it can point to the Reg Notice and related rules to argue they were acting within their rights – and hopefully avoid liability (while at the same time stopping the investor’s assets from getting taken by a scam-artist or manipulative family member).  In order to detect potential fraud against senior investors, one broker-dealer on the panel described how they use various algorithms with 75 data points to analyze changes in client behavior that might indicate they are being manipulated by an external fraudster or family member.  They compare the customer’s withdrawals for the past three months compared to the past three years, looking at items such as new recipients getting cash from the account, amounts being withdrawn in round numbers, etc.  They also look at the number of client contacts and the length of those contacts to determine of someone may be working behind the scenes to manipulate the senior investor and steal the investor’s assets.

The Upshot.  Overall, it was good to hear from some high profile regulators about what to expect in the coming year.  FINRA had a good showing and a presence on many panels, which people appreciated.  And even though there are always some competing views expressed at seminars like this, EVERYONE was in agreement that it was good to be able to share these views in-person once again.