FINRA 2021 Exam Priorities – Innovations & Regulations

For years FINRA has shared its priorities for the coming year, and 2021 was no exception. However, this year’s new format and FINRA’s higher expectations are worth checking into so you have a successful exam. Join Oyster CEO Buddy Doyle and consultants Ed Wegener, Evan Rosser (former FINRA regulators) and Jeffrey Hiller (former SEC regulator) as they discuss how the new format can help you ensure your compliance program will meet regulator expectations.

This podcast is the first of several we will be producing to help you utilize and understand this year’s priorities.

Transcript

Speaker 1: 0:09

Welcome to the oyster stew podcast, where we discuss what’s happening in the industry. Based on what we see as we work with regulators and clients, oyster consultants, our industry practitioners, we aren’t career consultants. We’ve done your job and we know the issues you face. You can learn more about oyster consulting and the value we can add to your firm by going to our website, oyster llc.com.

Speaker 2: 0:45

Hi everybody. I’m buddy Doyle, chief executive officer of oyster consulting. And I am joined today by three members of our team, Evan Rosser, Jeffrey Hiller, and ed Wagoner . Today, we’re going to be talking about the 2020 report on FINRA’s examination and risk monitoring program. And give you a little bit of overview of our reaction to the report. And why don’t we start with you, if you could sort of give us your initial thoughts after going through this.

Speaker 3: 1:18

Sure. Thanks buddy. So what I found interesting is that many of the areas in this year’s letter had been addressed in priority prior priority letters, things like cybersecurity, AML, outside business activity is private securities transactions, variable annuities. What was interesting and what I think is new is , um, how the letter looked to apply traditional rules and requirements to new and technology enabled products and tools. So things like focusing on digital assets came up quite a bit throughout the priorities letter on the use of digital apps and specifically game-like tools that, that you can use an app . So I found that very interesting. And then, you know, with communications, communications has always been an area of focus, but the specific focus on communicating, using new digital methods for communicating things like the communications that are in digital apps using social media and to the sites such as Reddit. The interesting thing was it was taking traditional rules and requirements and applying them in this new and quickly changing environment. The only thing I would add to that, yeah ,

Speaker 2: 2:36

They , uh , when we have these new digital environments that has a , an impact on record keeping . And so you have to make sure

Speaker 3: 2:43

That as you adopt and integrate these new technology and other matters that you also keep in mind that you have to maintain those books and records consistent with FINRA’s

Speaker 2: 2:55

Mandates

Speaker 3: 2:57

Know , as we work with our broker dealer clients,

Speaker 4: 3:00

We can certainly see that the way broker dealers communicate with their customers is changing the way customers are trading and where customers get their information, it’s all changing. And you can see that FINRA is trying to catch up here. It’s changing fast. And I think a lot of these items in this letter from FINRA reflects that, that changing environment that Fender’s trying to catch up with, certainly there are some new rules that we’ll talk about reg BI cat , but a lot of the letter, I think captures the fact that everything about the broker dealer world of trading and investing and communication and cybersecurity is changing.

Speaker 3: 3:48

And the tricky thing for the regulators are to take rules that were written before these changes happen and apply them with these new technologies and things. And it’s definitely a challenge

Speaker 2: 4:01

I will say too, that it is always been the case that innovation outpaces regulation, but the change is so rapid right now, and it’s never going to slow down. At least it doesn’t appear like that’s going to happen. And so I think it’s great that that fender is getting out , uh , closer to being in front of these issues. And I I’m sure FINRA has recognized as we has recognized that sort of the Silicon valley and wall street combination that has , has already begun has changed the personalities of a lot of , of firms. And a lot of entrepreneurial type of , of individuals are coming into the broker dealer space now. And it is a very different change control process, creating apps to engage in communication or apps to accomplish a task. And you have to apply the FINRA standards to those applications. And sometimes it’s not completely clear , uh , as you’re blazing new territory. And so it’s great that I think we’ve got some, some direction there that will help at least folks understand that there’s while they may not get to the very specific issue that affirm is facing, they at least can take the theme and concepts and apply them better to this ever-changing world.

Speaker 3: 5:30

You know, buddy , um, it , it seems like both FINRA and the sec have taken real, tangible steps in terms of balancing that need that desire to support innovation while also at the same time, making sure that they’re , you know, that that investors are protected and that the markets are safe. The sec recently created its fin hub group and FINRA created its office of financial innovation. And I think both of those groups

Speaker 4: 5:57

Have been helping their respective regulators sort of navigate that, those tricky issues that we’ve been talking about. So they really seem to be very open and encouraging of, you know, keeping innovation going while making sure that the regulations can catch up to them.

Speaker 5: 6:14

I really wish that I’ve , that’s my observation too. And it really goes to their emphasis on principle-based compliance and rules, which has to do with the broader concepts that ed is talking about rather than a prescriptive rule that you can say, yes, this is it, black and white. You now have to anticipate as technology and better forms or more effective forms of communications occur. You’ve got to keep the principles in mind of fairness

Speaker 4: 6:44

And what’s , and what’s obvious to me from this letter is that this innovation is not calming . A lot of this innovation is not coming from the broker dealer industry it’s coming from outside. It’s coming from technologists, it’s coming from social media platforms. And that’s a challenge that really wasn’t an issue for many years. The industry has always been innovating, but it was the broker dealer community innovating new products, new practices. Now a lot of this, the broker dealer industry now must react to changes and innovation that are really coming outside the broker dealer community.

Speaker 2: 7:31

Yeah, I think it’s hard for people that are in the technology business or in the social media business to understand the rules of the game with FENRA it, when you build an application you want to attract the most customers you can, right? And when you build social media, you want as many users as you can, you can get, and you don’t go through this whole best interests , suitability, no guarantees. You’re right. You’re, you’re used to seeing advertising out there for a technology that is totally different than the rules and regulations that we’ve had to use since I started in the industry. And since all of this started in the industry, and I think that mindset and the education of the , the new players that, that needs to take place so that they it’s not that they don’t want to follow the rules. At least not the ones that , that we talked to , uh, because they wouldn’t be talking to us if they didn’t, but they just have to get that level of understanding. And I think it’s, again, good reason why FINRA has come out with some of these things. And I think it’s , uh , going to have to continue to go down that path. And I think particularly, you know, as we’re dealing with new clients that are in the digital assets space, for example, I mean, there’s been a lot of questions that have gone on answered and we’re starting to see those answers and , and we’re seeing them in this document. So I think it’s, I think it’s a positive step, both for the industry and for, for the investor, but there’ll be some bumps along the road, for sure. So ed, what other topics did you see in this document that , that really stand out

Speaker 3: 9:20

Like and past priority letters? FINRA continues to use the priorities letter to highlight and focus on some of the newer rules that have come out a couple of examples. I know we’ll get into reg BI shortly, but there clearly was an emphasis on reg BI and they’re moving from expecting good faith efforts, compliance to, you know, having higher expectations of firms in this year’s go around. Another thing that was identified that’s a generally a newer rule is looking for appropriate and accurate disclosures and fixed income markups and markdowns on customer confirmations. That rule was passed a few years ago, but it is something that they’re focusing on and taking a look to make sure that those disclosures are again accurate and appropriate. Another interesting thing that , that they mentioned it , it was interesting to see how that the layout of this year’s priorities letters are formatted unlike previously years, instead of having a separate priorities letter and a letter with a report with common findings, they combine that into one letter, which was actually really good, I think because it , the way it was formatted and the way it was laid out, it makes it real easy for firms to see things like considerations and common findings and effective practices all in one place so that when they assess their programs against the, the letter this year, all of that will be right in the same place so that they can do a real effective assessment. So I think the layout of this, this year’s priorities letter was a particularly good

Speaker 5: 10:52

Along that line. And I, and I agree with you is they have said throughout the letter, and it sort of really struck me. They intend to expand the scope of their reviews to get a more comprehensive picture of firms and their practices. And so, as we talk through all of these issues, we should keep in mind, both at there’ll be an expanded review that we need to be more comprehensive in terms of making sure that we have our books and records and other activities that a are covered by FINRA are not only performed well, but being able to document those comprehensively. Yeah.

Speaker 2: 11:31

Now say, I thought that I liked the structure of this document. The one thing that I would have done, and you may have read our blog on this is I would have put page 45 at the beginning, that sort of last page where it tells you all the things you should be thinking about as you go through that report. If you haven’t it yet, you might want to start there with the assessment of applicability, the risk assessment, the gap analysis, getting your team together. And I think those are really important things to do with the list of priorities. And the common findings is to ask yourself, do you have these topics covered or not? If you don’t and they are applicable to the kind of business you do, it’s a really nice roadmap that they’ve created for us to , to follow.

Speaker 4: 12:23

It is a good method. I think, to put the exam findings and common findings in this report, because those findings often drive the priority areas. If they have significant material or frequent findings that pose a problem that will find its way into the report. And I think also that’s an important consideration for firms as they read this, what are they finding and what are the things that we need to avoid? What are the things we need to fix based on what they’re finding and FINRA is having a problem.Speaker 2: 12:57

All right . Thanks everybody. Hope you have a great week.

Speaker 1: 13:10

Thanks for listening. And if you like what you heard, make sure to follow the oyster stew podcast on whatever platform you listen to. If you’d like to learn how we can help firms start, run, protect, and grow their business, visit our website@oysterllc.com.

About The Authors

As CEO of Oyster Consulting, Buddy Doyle has led the charge to create a successful organization built on the belief that transforming experienced industry practitioners into consultants adds more value to our clients.

Ed Wegener is an innovative compliance, risk management and supervisory controls expert with deep understanding of Federal Securities Laws and the rules of self-regulatory organizations, as well as technology optimization and risk mitigation. Prior to joining Oyster, Ed held several posts in FINRA, most recently as  Senior VP and Midwest Regional Director.

Evan Rosser is an experienced and respected securities industry professional with over 25 years of experience managing complex securities investigations for NASD/FINRA and providing compliance expertise to both broker-dealers and investment advisors.  Evan has served as CCO for both investment advisors and broker-dealers, as well as providing compliance support to numerous broker-dealers and registered investment advisors.

Jeffrey Hiller is an industry professional with over 25 years of experience, specializing in Investment Advisor services.  Prior to joining Oyster, Jeffrey was Chief Compliance Officer and Managing Director of Principal Global Investors where he created and managed the firm’s global compliance program. Jeffrey began his compliance career as Senior Counsel in the Securities and Exchange Commission’s Division of Enforcement in Washington, D.C.

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