Last year, the financial services industry saw significant regulatory activity, with enforcement actions and new or proposed rulings capturing the headlines almost weekly. And this year is no different. To keep compliance teams informed of the latest happenings within the regulatory industry, we’ve rounded up the top five compliance articles from the past few weeks.
Keeping up with these compliance news items will help compliance teams stay informed and up to date on important regulatory changes and trends for 2023 and beyond.
FINRA can start indicating on BrokerCheck whether firm is ‘restricted’ – Author Mark Schoeff, Jr.
FINRA announced that starting Apr. 11, 2023, it will start indicating on its BrokerCheck database whether a brokerage firm is subject to regulatory restrictions. This new feature is intended to give investors more transparency and help them avoid doing business with firms which have been penalized or faced disciplinary action. The restrictions can include being under temporary suspension or having limits on activities or business operations.
FINRA’s decision to add this information to BrokerCheck comes after public criticism that the current database does not provide enough information about brokers and firms with a history of misconduct. In addition to providing transparency to investors, the new feature may encourage firms to comply with regulations and avoid actions that could lead to regulatory restrictions.
Hundreds of pages of regulations amount to nothing until they’re enforced – Author Mark Schoeff, Jr.
The SEC’s Reg BI regulation has been in effect since June 2020, but some industry experts are questioning whether it is being properly enforced. Reg BI establishes a standard of care for broker-dealers when making recommendations to retail clients.
However, since the rule has been in effect, there have been very few enforcement actions taken by the SEC. Critics argue that the rule is toothless without proper enforcement, while supporters point out that the SEC has stated it is still examining compliance with the rule and that it may take time to bring enforcement actions. Overall, the effectiveness of Reg BI remains to be seen, and its impact on investor protection is still unclear.
SEC emphasizes probing marketing rule, Reg BI compliance – Author Mark Schoeff, Jr.
The SEC has stepped up its scrutiny of broker-dealer firms’ compliance with Reg BI and the marketing rule that took effect in May 2021. The SEC’s focus on the two regulations includes evaluating how firms supervise their registered representatives’ recommendations and ensuring that firms follow the disclosure requirements in the rules.
The regulator has been conducting Reg BI exams since July 2020 and now expects to expand the scope of the exams to include the marketing rule’s compliance. SEC examiners are now expected to focus on how firms address conflicts of interest, disclose fees and document the steps taken to identify target audiences when marketing investment products. The SEC’s OCIE will also scrutinize firms which rely on marketing materials created by third-party firms.
More advisers would have custody under new SEC plan. Here’s how. – Author Melanie Waddell
The SEC has proposed an amendment to Section 206(4)-2 of the Investment Advisers Act of 1940, which sets out the custody requirements applicable to registered investment advisers. If passed, the proposed amendments would extend the scope of the custody requirements beyond client “funds and securities” to apply more generally to client “assets.” The change is aimed at protecting customer assets from various risks, including misuse by the investment adviser or entanglement in the adviser’s estate in the event of bankruptcy.
However, the proposed amendments could potentially shut investors trading through investment advisers out of the crypto markets, unless the centralized crypto exchange model evolves to allow off-exchange settlement through third-party intermediaries. The changes could also have significant implications for investment advisers who would have to meet additional regulatory requirements, including implementing stronger cybersecurity measures, hiring additional personnel and adopting new policies and procedures.
Is the sweep of advisors’ texting legal? – Authors Nick Morgan & Tom Zaccaro
The SEC’s OCIE has issued a risk alert related to investment advisers’ use of text messaging. The alert said that the staff has observed deficiencies in the use of electronic communications that fall under the books and records requirements of the Investment Advisers Act of 1940. The SEC has said that advisers must retain records of all communications related to their business, including text messages. The alert provides several examples of practices that would potentially violate the Advisers Act. The OCIE has recommended advisers review their policies and procedures to ensure they are complying with the Advisers Act and have properly trained their personnel.