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 June 23, 2023.
FINRA warns brokerages to pay attention to rising cybersecurity threats – Author Mark Schoeff, Jr.
The Financial Industry Regulatory Authority (FINRA) has issued a warning to brokerages regarding the increasing cybersecurity threats and emphasized a recent ransomware attack advisory. The advisory, jointly issued by the Cybersecurity & Infrastructure Security Agency and the Federal Bureau of Investigation, examined the tactics of the Ransomware Gang targeting financial services and other critical sectors. The criminals exploited a vulnerability in the MOVEit file transfer system to gain unauthorized access to technology systems. FINRA urged all member firms to review its cybersecurity alert and advised immediate action to strengthen cyber programs. With regulators focusing on cybersecurity, firms cannot afford to disregard the warning and should prioritize risk assessment, policies and procedures, testing, training programs and incident response plans.
Both FINRA and the Securities and Exchange Commission (SEC) have identified cybersecurity as an examination priority this year.
How advice standards have converged 3 years into Reg BI – Author Mark Schoeff, Jr.
The SEC implemented Regulation Best Interest (Reg BI) in June 2020, sparking a debate over how it would compare to the fiduciary duty standard for investment advisers. As Reg BI reaches its third anniversary, the SEC claims that the two standards are converging, stating that both prioritize acting in the best interest of retail investors and avoiding conflicts of interest.
The SEC’s recent guidance on Reg BI emphasizes the obligation for brokers and advisers to consider reasonably available alternatives when making recommendations, going beyond mere disclosure. Critics of Reg BI raise concerns about its practical application and question whether it goes beyond the previous suitability rule. Critics also argue that it blurs the line between investment advice and product sales. While the SEC has brought only one significant enforcement case related to Reg BI, observers anticipate further developments in investment-advice policy, including the Department of Labor potentially expanding the definition of fiduciary and state-level adoption of the annuity suitability rule.
SEC to weigh new artificial-intelligence rules for brokerages – Author Lydia Beyoud
The SEC is considering the implementation of new regulations regarding the use of artificial intelligence (AI) by brokerages. These rules would aim to address potential risks and ensure proper investor protection in an increasingly AI-driven financial landscape. Additionally, the SEC is exploring the need for transparency of AI algorithms used by brokerages, as well as potential biases and conflicts of interest that may arise from their implementation. These proposed regulations reflect the growing recognition of the importance of AI governance and accountability within the financial industry and may be introduced as early as October.
SEC warns advisers about disclosures for testimonials in exam alert – Author Mark Schoeff, Jr.
The SEC is placing emphasis on the use of client testimonials and endorsements by investment advisers in their advertising, following the implementation of the new Marketing Rule. The rule, which came into effect in November, permits advisers to feature client testimonials and endorsements for the first time.
In a recent risk alert, the SEC expressed concern over compliance issues surrounding testimonials, endorsements and third-party ratings. The agency is reviewing whether advisers are disclosing important information such as the relationship between the endorser and the adviser, compensation received and conflicts of interest. The alert suggests that the SEC may have found instances of testimonials lacking appropriate disclosures. Advisers are advised to ensure compliance before utilizing testimonials and endorsements and to provide clear and prominent disclosure when using third-party ratings.
Despite the recent alerts, industry experts believe compliance with the rule should not be overly challenging for firms.
Emojis could prompt a customer complaint, FINRA exec warns – Author Melanie Waddell
The use of emojis in emails and text messages by broker-dealers and their representatives may lead to customer complaints, according to Michael Solomon, head of FINRA’s national exam program. Solomon emphasized that emojis are a relatively new addition to electronic communication and could potentially trigger Rule 4530 customer complaints. FINRA examiners will be scrutinizing written supervisory procedures to ensure that they adequately address text messaging surveillance and supervision, as text messaging presents unique challenges compared to email. While a FINRA spokesperson clarified that there are no plans to enforce emoji regulations, Solomon encouraged firms to broaden their thinking on how to effectively supervise texting. Contextual understanding of emojis is crucial, and industry experts caution against imposing untested requirements without careful consideration.