Financial Institutions Law Alert

            On July 21, 2021, SIFMA hosted a panel titled Ask FINRA: A Panel of Senior FINRA Officials Respond to Your Questions. The panel covered the following important topics: (1) key issues of oversight for market regulation and transparency services; (2) current issues arising out of the gamification of the markets; (3) supervision in remote work and return to the office; (4) advancements in technology; and (5) Regulation BI.

Key Issues of Oversight for Market Regulation & Transparency Services

            Equities & Options. FINRA is specifically concerned with CAT integration as 2021 is expected to be a significant year for the phasing in of this system. FINRA has been building and enhancing its member compliance program and evaluating the quality of the data they have collected. This enhancement is part of a larger development of new techniques for surveillance patterns.  

            Extreme Market Volatility. FINRA is very focused on best execution and the process that firms use for evaluating execution quality. While the core rule has stayed relatively constant, the expectation is that member firms stay abreast of what is happening in the markets and apply that knowledge to their own best execution approach. Recently, FINRA issued Reg Notice 21-12 and 21-23 to assist with best ex compliance. These regulatory notices focus on the recent market volatility and how equities, options and fixed income markets are affected by these changes. Other notable areas of interest include: market order placement; payment for order flow; market access; compliance with 15c3-5; how firms evaluate and apply market controls; Reg SHO; Reg MMS; order routing systems and firm application of those systems; and fixed income TRACE enhancements.

Current Issues Arising Out of the Gamification of the Markets and New Rule Making

            FINRA issued several regulatory notices in response to the market issues arising out of the GameStop trading. In the wake of the GameStop market volatility and the increase in the gamification of the markets it became clear that more guidance was needed on these topics. Thus, FINRA continues to work to define how gamification of trading and self-directed trading fit into the current regulatory scheme. FINRA has been closely coordinating with the SEC to resolve these concerns, particularly gamification in self-directed accounts; zero commissions; and payment for order flow.

            The panel emphasized that the rules apply no matter what is happening in the market and in times of volatility the rules are of particular importance. Firms should be sure that their supervision systems are equipped to handle these events.

Supervision in Remote Work and Return to the Office

            Member supervision is focused on examining the supervisory programs implemented during the pandemic and member firm response to COVID-19. Specifically, FINRA requires confirmation that firms memorialized changes to policies and procedures that were revised in response to the pandemic. FINRA recently issued a regulatory notice asking for lessons from the pandemic and most of the responses focused on the supervisory requirements for different types of offices. Many of the responses took issue with the rules focusing on a physical locality and how technology has made that aspect of the rules outdated. For example, if firms were required to register branch offices, under the current definition of branch office, some would have to register 1,000 new locations based on the way the firms have been functioning during the pandemic. These are all important topics as it is critically important that there is an effective supervisory structure in place for wherever work is being conducted.

Advancements in Technology

            Increase in Customer Access. In recent years, the securities industry has evolved immensely through the use of technology. A great benefit of technology is the increase in customer access. In response to this, FINRA’s goal is to guarantee that if a customer is participating in the securities markets that the firm has robust policies and procedures in place to comply with FINRA rules and the securities laws. 

            Artificial Intelligence & Exams. FINRA is consistently focused on improving technology capabilities, specifically enhancing tools to process data to continue to assist FINRA in finding misconduct quickly and mitigating potential harm to investors. FINRA utilizes predictive analytics and machine learning algorithms to assist in supervision of member firms. Additionally, FINRA is creating analyst tools for investigation of various scenarios of regulatory interest – these custom analytics will help analyze particular problems that involve common themes and risk factors.

            Crypto Currency. This emerging area is driven by custody and therefore it is essential that there is an assured place where transactions are done and records are kept. Both FINRA and the SEC are working through this issue and the SEC has issued some no action relief. FINRA is mainly concerned that firms are clear with their customers about where the crypto currency is being custodied because varying levels of protections apply depending on the answer. FINRA does not anticipate drafting a new rule in this area until the custody issue is clarified.

Reg BI

            As FINRA conducts more exams, more information is gathered on best practices and deficiencies concerning Reg BI. Notably, firms should consider reasonably available alternative investments in determining whether there is a reasonable belief that a recommendation is in the customer’s best interest. This analysis depends on the facts and circumstances at the time of the recommendation, but does not require an examination of every possible alternative, nor does it require a broker-dealer to recommend the best possible product. Firms need to have a process in place to establish and understand the scope of reasonable alternatives.


            In this complicated period for the securities industry, there are many areas of focus for FINRA, but it is critical that firms have robust policies and procedures and the right tools for compliance officers to do their jobs. This usually means staying abreast of regulatory notices and compliance communications from FINRA. Additionally, as the market sees an increase in new products, it is imperative that firms not act precipitously and hope for forgiveness if issues arise, but rather ensure compliance before taking action.

            The Ask FINRA panel was moderated by Ben A. Indek, Partner Morgan, Lewis & Bockius, LLP; the panel was comprised of: Ornella Bergeron, Senior Vice President, Member Supervision, FINRA; Robert L.D. Colby, Chief Legal Officer, FINRA; Stephanie Dumont, Executive Vice President and Head of Market Regulation and Transparency Services, FINRA; Jessica Hopper, Executive Vice President and Head of Enforcement, FINRA. 

Practice Areas

Jump to Page