Four Takeaways from our Exam Priorities Webinar

Joined by Foreside Financial Group’s, Myles Blechner and Ginny Voos, Quest CE hosted a webinar to discuss some of the challenges compliance officers and firms faced in 2020, as well as some of the top takeaways from this year’s examination priorities letters. The one-hour webinar was jam-packed with information and provided attendees with plenty of tips and best practices for moving forward with their compliance obligations. Here are some of the top takeaways from the presentation.

2020 Was a Big Pivot Year (For Firms and Regulators) 

It’s safe to say that 2020 threw everyone for a loop. Compliance officers, firm members, and even the regulators themselves were not excluded from the challenges brought on by the COVID-19 pandemic. The transition from working in an office to working remote placed firms under a lot of pressure. That being said, it’s not surprising that firms experienced an uptick in phishing scams and cyber breeches. While many firm members found themselves working from unsecure networks, cyber criminals took no time jumping on the opportunity to launch their attacks.

Aside from the cybersecurity issues, FINRA was in the process of rolling out their restructured exam program when the pandemic hit. The new consolidated structure was focused on moving away from a geographical model to a program based specifically on the particular business model in which a broker-dealer was engaged. When the pandemic hit, FINRA put a pause on the program to allow firms to get settled into their remote working situations. After a few weeks, FINRA was able to get the new program rolling but worked closely with firms to conduct the exams remotely.

From an SEC standpoint, 2020 became a year of guidance. As always, the regulator was focused on protecting retail investors, but the events of 2020 moved things like business continuity plans, remote work environments, cybersecurity, and supervision to the top of their priorities list. Additionally, the SEC went ahead with the June 30, 2020 implementation date for Regulation Best Interest (Reg BI), despite many investment advisors and broker-dealers pushing for an extension.

Regulators Stayed Fairly True to 2020 Priorities

Circling back to Reg BI, this was one of the few items that was mentioned in the 2020 priorities letters that FINRA and the SEC didn’t shy away from. However, the regulator’s shifted their focus on this priority from ensuring that firms were fully prepared with training and updated policies and procedures, to ensuring that firms were practicing “good faith compliance” with Reg BI and Form CRS. Similarly, market integrity and trading, cybersecurity, communications with the public, and digital channels were cited on the 2020 priorities letters and became heightened focus areas due to the pandemic.

Like FINRA, the SEC focused heavily on remote work and business continuity plans in the early months of the pandemic. As the year trekked on, the SEC released several risk alerts which not only supplemented the annual priorities, but also provided guidance to the examination and inspection process. Additionally, the SEC conducted their regulatory audits as scheduled, even though the new processes sometimes took longer due to the remote nature of the examinations.

FINRA Will Focus on Reg BI and OBAs/PSTS in 2021 

In discussing what FINRA and the SEC have in store for 2021, Blechner and Voos both stressed the expanded focus on Reg BI. Voos mentioned that FINRA will be looking specifically at recommendations that are being offered to retail clients. On top of that, FINRA will be looking for documentation of the reps’ analysis that was used to make the recommendation to ensure that it was made in the best interest of the customer. Heightened oversight is also expected for certain recommendations, including variable annuity exchanges, complex products, or rollovers.

Outside business activities and private securities transactions (OBAs and PSTs) are also an area of concern that has been amplified by the remote working environment and increased use of technology. In fact, both Blechner and Voos discussed the challenges for firm members to properly disclose their outside business activities and private securities transactions. Even though this has been a focus area for several years, firms continue to get flagged by regulators for falling short in this area.

Outside of Reg BI and OBAs and PSTs, some additional areas FINRA will be focused on in the coming year include cybersecurity, anti-money laundering, conflicts of interest, digital assets, cash management accounts, and zero commission trading. During exams, FINRA will be on the lookout for training regarding these and other topics, as well as properly implemented policies and procedures.

The SEC Will Look at Cybersecurity + Investor Protection in 2021 

On the SEC side of things, Blechner reiterated the importance of keeping cybersecurity top-of-mind in 2021. In fact, he offered several tips and best practices, which included periodic password changes, not storing information on portable devices unless password protected and/or encrypted and being wary of unsecure wi-fi connections (i.e. the airport).

Blechner also noted a trend in examinations and enforcement actions in relation to best execution, specifically in mutual fund share classes, as we move towards a “zero commission” environment for many of the major custodians. Blechner added that an important best practice when it comes to mutual fund share classes is to do not only a periodic review (a few times a year, with your custodian), but also when onboarding new clients.

Blechner added that the SEC has been slowly updating its rules, starting with the Advertising and Marketing Rule in 2020. This is a huge step for the SEC, as they have been relying on rules and comment letters that in some cases are over 30 years old. Additional SEC focus areas mentioned during the webinar include, senior investor protection, robo-advisors, fees and expenses, conflicts of interest, portfolio management and trading, microcap securities, digital assets, and private funds. 

As we move further into 2021, FINRA and the SEC will continue monitoring firms and registered persons to ensure they are meeting their compliance obligations. If you would like to view the webinar recording, click here. To speak with a Quest CE associate about the related course options that are available, click here.