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Bates Research  |  01-24-22

Highlights from SIFMA’s “One-on-One” with FINRA CEO Robert Cook: Previewing the Regulator’s 2022 Priorities

In a SIFMA “One-on-One” virtual event sponsored by Bates Group, FINRA CEO Robert Cook sat down with SIFMA President Ken Bentson to discuss FINRA priorities for 2022. The conversation offered a first glimpse at the issues to be covered in the self-regulatory organization’s Annual Exam and Risk Monitoring Report, due out in the next few weeks. That report serves as an important guide for firms to ensure their policies, programs and practices are aligned with the latest guidance. Mr. Cook emphasized that the “theme” in 2022 will remain the protection of retail investors, due to the surge in the number of retail investors entering the market in the last few years. Here are some highlights from that conversation.

FINRA's 2022 Priorities

Enforcement

The “sweeps” (targeted exams) begun last year will continue, with a particular focus in 2022 on options account openings, SPACs, and influencers. On the latter, Mr. Cook stated that FINRA will be looking at how member firms engage with influencers on social media to promote products and whether they are complying with existing rules.

Proposed Rulemakings

Mr. Cook reported that firms should expect updates to rules on options accounts and other complex products. In response to a question on the scope of that update, Mr. Cook elaborated, saying that the current options account rules are obsolete. At the time they were adopted, he said, “you would probably not open an options account unless you were going through a registered representative, who would conduct reviews, dependent on the nature of your trading activity and your experience, and make determinations on the appropriateness of trading the option and what restrictions ought to apply.” He highlighted the tremendous technological innovation that has taken place since then, “making the markets more accessible to investors” and making the older rules – based on certain assumptions about how one would open an options account – inapplicable.

Cryptocurrency and Digital Assets

Mr. Cook also relayed that firms should expect a Notice soliciting comment on the sale of crypto assets, particularly as to advertising and disclosure requirements. He noted that FINRA would solicit comment not only on the rules as they exist today, but also how they might evolve in the changing environment to better protect investors. In response to a question posed by Mr. Bentsen on the scope of FINRA’s digital asset review, Mr. Cook said:

“[FINRA is] not looking to regulate or change the regulatory structure here – that is for Congress and other federal regulators to determine what are the rules of the road here – but our member firms are involved in the sale of digital assets – some securities, some non-securities – and when customers interface with one of our members and then buy a cryptocurrency or a digital asset, they need to comply with disclosure rules that currently apply.”

Describing the inquiry as more of an “early-stage concept release type of Notice,” Mr. Cook framed his answer as an investor protection issue, stating: “We want to take the opportunity to … see if there are additional enhanced requirements … [W]hen people buy a securities product and then buy a product that is not regulated, they may not know that they may be flipping out of one regulatory regime into another even though they are dealing with the same broker-dealer.”

New Regulations

FINRA will be “rolling out” the SEC-approved “High Risk Regime” (Rule 4111 - Restricted Firm Obligations), said Mr. Cook.  It will propose amendments to the regime as necessary (for example, a proposal to disclose on BrokerCheck the status of firms that are restricted). Further, Cook said to look out for a Notice in the next few weeks concerning the first evaluation of Rule 4111.

Retrospective Rule Review

FINRA continues to undertake a retrospective review of rules in a number of areas. Mr. Cook highlighted rules with respect to (i) borrowing and lending with customers; (ii) COVID and the evolving workplace; (iii) liquidity risk management practices; (iv) FINRA’s MAP (“Membership Application Program”) program, which allows for members to come in and apply or change their memberships; and (v) Regulation Best Interest (“Reg BI”). On the latter, Mr. Cook noted that FINRA would be taking a broader look at “how our rules may need to be reevaluated given that they were adopted before Reg BI.”

Resources and Education

Expect FINRA to offer firms more compliance resources and information to help them with their regulatory obligations this year. Specifically, he said that FINRA would offer more guidance related to cyber security, but also as to technology products that support compliance programs. He reported that FINRA would also be “adding a few features to facilitate digital interaction on our platform this year.” 

Bates Offers FINRA Registration and Compliance Solutions for Broker-Dealers

Pandemic-Related Examination and Arbitration Programs Going Forward

Mr. Cook offered several insights on post-pandemic practice, including on (i) FINRA’s examination program (“I expect we will adapt and form a risk-based approach on whether to go on site or not, though there will always be some in-person element”); (ii) FINRA arbitration (“We expect to continue to offer zoom hearings to parties as an option … We have created a Zoom taskforce”); (iii) FINRA workforce (“We will be adapting to hybrid environment – remote and in-person. Our philosophy is what we are calling ‘Presence with Purpose.’”)

Mr. Cook also weighed in on pandemic-accelerated developments concerning firm moves toward hybrid models and the future of branch inspections. He opined that these are complex questions requiring consideration by all stakeholders. He noted that the current rulebook was based on certain historical assumptions about brick-and-mortar offices and that stakeholders will need “to reassess the office construct and all the supervisory issues tied to that concept.” He stated: “our role is not to tell people how to organize their workforce. But our rules need to adapt to the evolution of different workplaces while still prioritizing investor protection.” He also noted that , “it’s more than just the inspection issue, we need to look at what functions are being performed at each location, what are the risks associated with those functions, and what are the registration supervision and inspection requirements that flow from those functions and risks.”

Arbitration and Expungement

In response to a question on the withdrawal of a comprehensive rulemaking on expungement requests, Mr. Cook stated that FINRA wants to work with stakeholders, including the state regulators, to reimagine how expungement decisions are made “to ensure we are striking the right balance among all the relevant interests.” He expects FINRA will issue a white paper “where we provide data and statistical analysis and discussion about what is happening today in the space and suggesting alternative approaches on handling expungement.” On a parallel track, he noted, FINRA will continue working on a revised package of amendments to the existing arbitration rules to give greater confidence that these expungements are only happening in accordance with circumstances identified in our rules.

Continuing Education and Testing

Mr. Cook highlighted three significant changes to FINRA’s continuing education program. They include: (i) the move to an annual regulatory element, rather than every 3 years, together with the requirement that registered representatives take courses for the license they hold, allowing for more timely and relevant training on significant regulatory developments; (ii) the extension of the regulatory and firm elements to all registered persons effective January 1, 2023; and (iii) the creation of a “Maintaining Qualification Program” which would allow previously registered persons to keep their qualifications active for up to 5 years after terminating registration, as long as they remain up-to-date with their continuing education requirements. That program begins on March 15, 2022. Starting Jan 31, 2021, representatives can notify FINRA about participating in this program (2 years retroactive).  

Mr. Cook also noted developments in online testing. He said that more than 100,000 exams were delivered this way. Here too, Mr. Cook, described the circumstances that necessitated the shift. While not anticipating any changes, he said that FINRA “needs to be thinking about maintaining our capacity and capability so we can maintain business continuity, if this [the pandemic or other exigency] happens again, so that we will be able to use it if we need to use it.”

Diversity, Equity, and Inclusion

FINRA is reviewing feedback on ways to improve diversity, equity and inclusion in the industry and referred to significant changes already underway. These include changes to the continuing qualifications program and the promotion of the SIE (“Securities Industry Essentials”) exam. He noted that FINRA dropped the requirement that an applicant needs to be affiliated with a firm to be able to sit for that exam. He cited recent data that over 300,000 signed up to take the test since the change, and that two-thirds of the test takers were not affiliated. He further noted outreach to broader communities, including through the SIFMA investor club and vouchers to take the SIE. He suggested that further changes are being considered.

Annual Report on Risk Monitoring

Mr. Cook previewed the annual report which will include an overview of relevant rule obligations, what to consider when firms are adjusting their compliance programs, FINRA’s recent examination findings and priorities, and effective practices that FINRA observed and wants firms to know as they apply this information to their business models.

Along with “carryover” areas of focus, he mentioned new priority areas for 2022, including: (i) the “Trusted Contact person” requirement, (ii) portfolio margining, (iii) intraday trading, and (iv) complex products and options. He also said that the report will update observations on firm practices regarding Reg BI and Form CRS, and compliance with best execution obligations given the many evolving changes in the market (including with advent of zero commissions). Finally, he reemphasized FINRA’s focus on liquidity risk management – “an essential element management responsibility” and an ongoing focus for risk monitoring and stress testing (given issues raised by certain events last year like Gamestop).

Conclusion

The conversation with Mr. Cook provides valuable insight on how FINRA is balancing the exigencies of the pandemic and rapid technology developments in the financial services industry. While the Annual report will be the ultimate guide, Mr. Cook’s list of subjects for target examinations and compliance priorities suggests a very busy year for both FINRA and the firms it regulates. In the coming weeks, we will be bringing you more coverage on FINRA and other regulators’ priorities as they are released, along with Bates Group's annual regulatory priorities chart.

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Contact Bates Group

Bates Group is with you every step of the way. Contact us today for more information on how our End-to-End Solutions can help your firm.