On June 11 and 12, 2018, the UNC School of Law’s Center for Banking and Finance hosted a two-day “Boot Camp” covering a variety of compliance and legal hot topics in the banking and securities industry. Of particular note, Susan Schroeder, the head of FINRA’s Enforcement Department, addressed the participants on emerging issues and helpful practice points for interacting with FINRA. Key takeaways from the event:

FINRA Enforcement:

  • Firms must ensure that compliance professionals understand the firm’s technology systems and how they impact various aspects of the firm’s business. When a firm detects a systems issue, it is important to assess the potential impact of that issue beyond the immediate fix – failure to do so can be an aggregating factor in FINRA’s assessment of a fine. Ms. Schroeder provided an example where a firm discovered a coding error in one of its systems and fixed the glitch, but failed to investigate the cause of the error. This failure caused other issues to occur within the firm’s systems that went undetected prior to FINRA’s investigation.  So, while systems issues and glitches need to be remedied quickly, the firm should also conduct an investigation into the cause and obtain comfort that other systemic issues are not present.
  • Firms need to understand their data. Ms. Schroeder highlighted an example where a firm generated a detailed supervisory report on a periodic basis, but when FINRA asked about certain metrics in the report, the firm was unable to describe them all. Thus, it is important that firms use data intelligently and understand their system outputs.
  • Attorneys and compliance professionals that interact with FINRA should be technologically competent and strive to provide FINRA with documents and information in an easily digestible and accessible format. Too often, documents are provided in corrupt or inaccessible formats, which only serve to prolong an investigation and frustrate Enforcement’s efforts.
  • Firms need to take a common sense approach to new products and initiatives and examine those new ventures in light of their current supervisory systems and sales force experience. When a firm introduces a new product, educating the supervisors and sales force is essential – particularly when the new product is markedly different from those currently on the firm’s platform. Ms. Schroeder provided an example where a firm that was historically focused on fixed income products launched a new equity business, but failed to enhance its AML processes to address the additional issues presented by equity transactions. 
  • FINRA considers it critical that firms take appropriate remedial action without FINRA’s involvement, and will consider significant cooperation credit when it sees such actions. Accordingly, when a firm discovers an issue, it is important to consider not only the going-forward fix, but also whether the issue caused harm to any clients, and whether those clients deserve some form of remediation.
  • Credibility is key, and being upfront about what you know and whether issues have been appropriately addressed is critical – particularly since FINRA is going to verify those facts anyway. Enforcement staff speak to one another, and bolstering your credibility in one investigation can go a long way towards building relationships in other matters as well. 
  • Avoiding duplication is a major focus for this FINRA administration. If other regulators are investigating the same  event, letting FINRA know could alleviate the pressure of multiple, parallel investigations. FINRA meets regularly with state and other federal regulators to discuss topics, but they do not often share details of specific ongoing investigations.
  • If you are having an issue with your Enforcement contact, do not hesitate to reach out to FINRA supervisors. Ms. Schroeder advised that escalation occurs regularly, and it is often the only way that she and other Enforcement supervisors can address an issue early on. 

Compliance Risk Assessments: The fundamental purpose of CRAs is to identify and fix issues. To do so effectively, it is important to communicate with the business in a way that avoids overly relying on industry “jargon” and “compliance-speak.” In addition, firms should consider whether their reporting lines support compliance’s independence – over the last few years, there has been a significant decrease in the number of firms with compliance lines reporting to the general counsel.

Senior Investors: Senior and vulnerable investors continue to be an area of significant focus at the federal, state and regulatory agency level.  Recently enacted laws and rules include the Senior Safe Act, FINRA’s Trusted Contact Person and Temporary Disbursement Hold rules, and several state financial exploitation statutes.  Designated personnel in compliance and legal should work closely to ensure compliance with the various laws and to stay up-to-date as additional states enact similar legislation. As the first line of defense for the financial firm, associated persons should be given clear procedures and training on how to identify potential financial exploitation and diminished capacity and the internal escalation process. Notably, Bressler, Amery & Ross has a dedicated Senior Issues Group devoted to addressing these specific topics.      

Complex Products: With complex products, firms should continue to emphasize the development and implementation of training programs for their advisors. Advisors must understand the product themselves before they can effectively describe and appropriately recommend the product to their clients.

Conflicts of Interest and Fiduciary Duties: How firms manage risk around the disclosure and mitigation of conflicts continues to be an evolving practice given recent developments with the Fiduciary Rule (vacated by the Fifth Circuit) and the SEC’s proposed Regulation Best Interest. For best practices, firms should evaluate all forms of compensation (revenue sharing arrangements, 12(b)(1) fees, etc.), and confirm whether those methods of compensation are both reasonable and adequately disclosed to investors.

Developments in Compliance and Supervision:  Supervisors need to make sure that they follow the supervisory process through to the end – documentation is important, but once an issue is identified, the supervisor must address it appropriately, which may include client contact or obtaining verification for an explanation provided by the financial adviser.

Compliance continues to present new challenges in our evolving marketplace, and these are just some of the many issues firms should address when evaluating the effectiveness of their compliance programs. 

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