The annual report from the Financial Industry Regulatory Authority (FINRA), released during the first quarter of the year, lays out new and continuing priorities for financial services oversight in the United States. This year, FINRA CEO Robert Cook noted that much of the new regulations “will be protecting the surge in retail investors who have entered the market in recent years.” Here are the three main takeaways from the report as they relate to broker-dealers and registered investment advisors (RIAs).
Takeaway #1 – The Reg BI Grace Period Is Over
Regulation Best Interest (Reg BI), the SEC’s standard of conduct for broker-dealers, went into full effect on June 30, 2020. And because 2021 was the first full year of implementation, the 2022 report includes several updates to effective implementation. The primary areas of increased focus include “establishing and enforcing adequate written supervisory procedures (WSPs); filing, delivering and tracking accurate Forms CRS; making recommendations that adhere with Reg BI’s Care Obligation; identifying and mitigating conflicts of interest, and providing effective training to staff.” And, as Cook noted during a Q&A with industry executives, that includes re-evaluating processes that were established before the implementation of Reg BI.
Additionally, because Reg BI is now almost two years into implementation, FINRA and the SEC will no longer consider “good-faith efforts” sufficient for compliance. The grace period is officially over — both broker-dealers and registered investment advisors can expect stricter oversight in 2022, and beyond.
Takeaway #2 – Digital Investing is Exploding Online
Although Securities and Exchange Commission (SEC) Chairman Gary Gensler recently announced several initiatives to expand investor protections in the crypto market; indicating that the agency plans to register and regulate crypto exchanges, and will explore separating out asset custody, FINRA is paying closer attention to digital assets and how broker-dealers promote them to investors. Though a more detailed regulatory notice is still forthcoming, firms have been encouraged to keep close tabs on any digital asset-related transactions, including anything that uses a form of distributed ledger technology or blockchain technology. Firms should take extra care to ensure their risk management and compliance systems are up-to-date and prepared to track digital assets.
The report goes on to highlight another tech-driven trend: mobile investing. Apps used primarily by retail investors must have “established and implemented a comprehensive supervisory system for communications through mobile apps.” Additionally, FINRA notes that mobile and web platforms for retail investors must adhere to Reg BI standards in their interfaces and designs, so as not to subconsciously promote certain choices over others.
Finally, FINRA is also applying increased scrutiny on how member firms partner with social media influencers to gain new customers, with Cook highlighting the need for stricter compliance with rules regarding supervision and advertising during a January discussion. The agency is clearly signaling broader oversight of all digital transactions and communications in the future, as finance increasingly moves online.
Takeaway #3 – Evaluations Tighten for High-Risk Firms
FINRA is rolling out its new high-risk regime in 2022, which includes evaluations of any broker-dealers with a significant history of misconduct, or of firms that have a large population of such individuals working for them. Evaluations will start on June 1, 2022 and are expected to continue annually on or around that date going forward (though there will be a bit of a lag between the evaluation date and the formal designation of restricted broker-dealer firms, to account for disclosure reporting delays).
And firms can expect more updates in the future. “We’re probably going to be making some amendments to that regime as necessary going forward,” Cook said. A list of expelled firms, as well as other resources and calculations, will be available in June 2022.
