IAA 2022 Investment Adviser Compliance Conference

What’s in the news: the top five compliance articles for July 23 – August 5, 2022

Compliance innovation moves fast, but the news moves faster. To keep you and your team up to speed on the latest happenings and goings-on in the compliance world, we’ve aggregated the top five articles from the past few weeks to provide you with an in-depth look at the regulatory ecosystem.

Stay up-to-date and in the know on everything happening in the compliance world as of August 5, 2022.

Top five compliance articles

Rein in a Common Expungement Tactic – Author Melanie Waddell

In a recent discussion paper, the Financial Industry Regulatory Authority (FINRA) says that it plans to continue to reform its expungement process “so that it operates as intended – as a remedy that is appropriate only in limited circumstances in accordance with the narrow standards in FINRA rules.” FINRA has filed a rule proposal to modify “straight-in expungements,” a process relating to the expungement of customer dispute information.

FINRA’s expungement process has faced increasing criticism from industry experts that its arbitrators allow too many brokers to wipe their records clean. Michael Edmiston, an attorney with Jonathan Evans & Associates and president of the Public Investors Advocate Bar Associate said, “the percentages of expungements granted between 2016 and 2021 are still too high for what is supposed to be an extraordinary remedy.”

The proposed rule would include changes such as:

  1. “A straight-in request must be decided by a three-person panel that is randomly selected from a roster of experienced public arbitrators with enhanced expungement training.”
  2. “Strict time limits on the filing of straight-in requests.”
  3. “The unanimous agreement of the panel to issue an award containing expungement relief.”

“FINRA’s plan must be approved by the Securities and Exchange Commission (SEC).”

New Requirements Are Comings. ‘Compliant by Design’ Is the Answer – Author Adrian Johnstone

In May, the Securities and Exchange Commission (SEC) Chairman Gary Gensler announced that the commission would consider requiring broker-dealers to adopt measures that address cybersecurity risks in a manner “very similar” to the agency’s proposal issued earlier this year for investment advisors.

“Proposals including a requirement to report significant cybersecurity incidents within 48 hours have the industry asking whether it’s prepared to deal with mounting regulations, audits and due diligence — without creating extra work for wealth management teams.”

“Random audits are increasingly common, which means any evidence of nonconformance with regulatory obligations can expose firms to official sanctions and reputational damage.”

“Implementing a system that runs continuously across every record so that it’s not a random sample, but rather a full review of every client in the database, dramatically helps firms mitigate the risk of noncompliant data practices being discovered in exams.”

FINRA proposes 3-year pilot program for remote office inspections – Author Mark Shoeff Jr.

The Financial Industry Regulatory Authority (FINRA) has filed a rule proposal with the Securities and Exchange Commission (SEC) that would establish a three-year voluntary pilot program for financial firms that want to continue remote inspections of branch offices and other locations. Essentially, the pilot program would extend the online supervision that FINRA has allowed since November 2020 in response to the pandemic.

In its proposal, FINRA acknowledges that the trend toward remote work and remote office inspections has not ceased since the pandemic.

The proposal states “Insights obtained from member firms and other industry representatives through various pandemic-related initiatives and other industry outreach have led FINRA to carefully consider whether some processes and rules, including the manner in which a firm may satisfy its [supervision] obligations, should be modernized.”

The SEC must approve the proposal before it goes into effect. If the SEC approves the proposal, FINRA will announce an effective date.

The SEC’s Gensler Steps Up Push to Get Crypto Exchanges to Register – Author Lydia Beyoud

“Securities and Exchange Commission (SEC) Chairman Gary Gensler is stepping up his push to get crypto trading platforms to register with the Wall Street regulator.”

Gensler said that he’s asked the agency’s staff to work with digital-asset exchanges so that they are ‘regulated much like securities exchanges.’

“Look, there’s no reason to treat the crypto market differently just because a different technology is used,” Gensler said. He has raised previous concerns that some platforms are shirking rules and may be betting against their own customers. For that reason, he has suggested that several considerations must be made in pushing crypto exchanges to register. “Agency staff are also considering whether to address potential conflicts of interest when crypto platforms also serve as market-makers,” Gensler said.

New SEC Guidance Tackles How to Handle Conflicts of Interest – Author Melanie Waddell

In its new guidance, the Securities and Exchange Commission (SEC) notes that it’s “important that firms and their financial professionals review their business models and relationships with investors to address conflicts of interest specific to them.”

The SEC warns that in some cases, firms will need to take much more aggressive action in addressing those conflict. In some instances, this action might include eliminating these conflicts of interest or refraining from providing advice or recommendations that could be influenced by conflicts to avoid violating the obligation to act in the retail investor’s best interest.

The SEC notes that there are no conflict-free business models and that steps to address conflicts need to be tailored to a firm’s particular business model. The SEC expects to release further guidance on broker and advisor care obligations to further help firms to tackle conflicts of interest.