On January 30, 2020, SIFMA sponsored a luncheon discussion between Kenneth Bentsen Jr., President and Chief Executive Officer of SIFMA, and Robert Cook, President and Chief Executive Officer of FINRA. The candid conversation covered a broad range of topics that members can anticipate in 2020, many of which stem from the FINRA360 program and the 2020 FINRA priorities letter, including: (1) the financial structure and stability of FINRA, (2) examination structural changes and priorities for 2020, (3) issues related to sanctions, (4) the change in enforcement leadership, (5) Regulation Best Interest (“Reg BI”), and (6) the Consolidated Audit Trail (“CAT”).
FINRA’s Financial Structure and Stability: Mr. Cook began the discussion with an assessment of FINRA’s current financial status and what can be anticipated in the future as far as member fee increases. While stating that fees have not increased in the last eight years and will not increase this year, Mr. Cook noted the potential for fees to increase in the near future. However, because it is important to FINRA to avoid major shocks to the membership, FINRA intends to focus on introducing incremental fee increases in the coming years in an effort to be fair and reasonable to its membership.
Examinations Priorities and New Business-Model: A major change to examinations will be the implementation of the more risk-based, business model framework announced in November 2019. Firms will be grouped according to the type of business(es) in which they are engaged, and examiners and risk monitors will be grouped in the same way. Thus, the examination team and its leader assigned to firms could be different than under the district office model, which was based on the geographic placement of the examiners and the firm. Firms will have contact with a “single point of accountability,” and that person will be responsible for all firm interactions. Mr. Cook explained the change as one that will help examinations become less duplicative and more tailored to the risks of each firm. Additionally, it is FINRA’s goal to have an increasingly open dialogue with firms about not only violations, but also FINRA’s observations as to whether firms are using best practices. Mr. Cook expressed hope that the changes and continued dialogue with firms will improve the efficiency of the examination process through its integration of multiple platforms into one.
Sanctions: Mr. Cook also discussed FINRA’s 2019 updated guidance to help firms better understand when extraordinary cooperation credit may be available. While recognizing that extraordinary cooperation does not lend itself to a strict formula, he stated that FINRA has and will continue to give members guidance as to what they can do to receive such credit. Further, with respect to proportionality of sanctions, Mr. Cook stated that FINRA will continue to be sensitive of the needs of both large and small firms when considering appropriate sanctions. Additionally, when extraordinary cooperation credit is granted, FINRA is including a sanctions considerations section in AWCs so that firms can better understand when such credit may be available.
New Enforcement Leadership Goals: On January 17, 2020, FINRA promoted Jessica Hopper by removing the “Acting” qualifier to her title as Head of Enforcement. Mr. Cook said that he was “delighted” at Ms. Hopper’s promotion and noted that she had played a major role in the consolidation of enforcement departments at FINRA. According to Mr. Cook, Enforcement is continuing to focus on traditional areas of concern such as: investor harm, fraud, conversion, unauthorized trading, high risk brokers, and senior protection, while also focusing on trending areas, some of which have been triggered by market changes.
Regulation Best Interest: As the June 30, 2020 compliance date for Reg BI approaches, Mr. Cook affirmed that FINRA is coordinating efforts with the SEC in implementing guidance and addressing interpretation issues. FINRA’s examination teams are calibrating exams and addressing firm readiness in their firm examinations. He stressed that there is no “gotcha” mentality with Reg BI and recognized that compliance is a “heavy lift” for firms. However, he also cautioned that Reg BI will not be an excuse for non-compliance in existing areas of FINRA enforcement, e.g., where conduct would have violated the suitability rule, FINRA will bring a Reg BI without the grace period that might apply to a “new” type of violation. Additionally, FINRA continues to monitor developments with state fiduciary laws.
Consolidated Audit Trail: The discussion also included emphasis on the importance of data protection and privacy issues which surround the implementation of a unified CAT database, enabling regulators to conduct cross-market analysis while obtaining and merging data from different firms. FINRA is currently accepting testing data for its CAT system and equities reporting is set to go live in April 2020, shortly followed by options reporting in May 2020. Mr. Cook emphasized that he is aware of concerns surrounding data security risks implicated in such an extensive and complex system but stated that data privacy will be top-of-mind during the rollout and in the future.
Lastly, Mr. Cook stressed throughout the conversation the importance of feedback from firms and constant re-evaluation of all of FINRA’s programs. FINRA’s recent efforts to increase both communication with members and transparency seem like positive steps in facilitating effective self-regulation.
*Taylor Anderson, Law Clerk (NY Bar Admission Pending) also contributed to this article.