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 Mar. 3, 2023.
FINRA encourages brokers to increase scrutiny, controls when using finfluencers – Author Mark Schoeff, Jr.
The Financial Industry Regulatory Authority (FINRA) has issued a warning to brokerages to apply greater scrutiny and controls over the use of finfluencers – individuals who help firms attract new customers via social media. The regulator has recommended that brokerages evaluate finfluencers’ background and prior activities for potential compliance and reputational risks. FINRA has also encouraged firms to outline prohibited finfluencer conduct, provide training on using them and prevent the release of private customer information.
The warning is a reminder that greater access to retail investors requires greater vigilance and that every individual post matters. The update allows FINRA to put another stake in the ground on a popular trend that the Securities and Exchange Commission is also scrutinizing. FINRA has stressed brokerages should ensure their supervisory systems are up to the task of monitoring their social media activity and keeping it in bounds. The update is FINRA’s way of being transparent about its expectations and it wants to see more than updated policies and procedures— it is looking for evidence firms are putting them into practice.
‘This is where we are now’: Cyber environment calls for continuous monitoring – Author Adrianne Appel
As cyber threats become more sophisticated and frequent, traditional point-in-time assessments are no longer sufficient to provide effective cybersecurity. Continuous monitoring provides real-time visibility into an organization’s security posture, allowing companies to identify and respond to threats more quickly. Artificial intelligence and machine learning can play a pivotal role in helping companies manage their cybersecurity risks. Cybersecurity is not just an IT issue, but a business issue that requires ongoing attention and investment.
How Broker/Dealers Are Staying on the Right Side of Reg BI – Author Bill Robbins
Broker/dealers and their representatives are now expected to act in the “best interest” of the retail investor and be transparent about any conflicts of interest arising from their sales activity. The SEC put firms on notice that recent retail-focused examinations of broker/dealer compliance practices revealed numerous “deficiencies and weaknesses” which could erode investor trust in the financial system.
Broker/dealers have begun sharing best practices amongst themselves, knowing that if one of its competitors gets sanctioned, so might their firm. Many such best practices focus on how firms create, update and distribute the three key disclosure documents they must file and furnish to investors.
More Advisers Would Have Custody Under New SEC Plan. Here’s How. – Author Melanie Waddell
The SEC’s proposed custody rule will bring more financial advisers under its scope by expanding the types of assets and activities which are covered. The proposed rule will apply to other assets, such as cryptocurrencies, artwork, real estate and precious metals, expanding from funds and securities. The rule will also expand the activities which fall under the definition of custody, specifying that discretionary authority to trade is included. This will eliminate the authorized trading exception from having custody, which is commonly relied upon today. The new rule narrows the position the SEC staff has taken over the past few years applying the Custody Rule differently based on how a transaction settles. The new rule also mandates extensive new contractual relationships between investment advisers and their clients’ custodians, which will be challenging to establish or repaper for substantial portions of the investment management and the banking industry.
Stablecoins Attract Scrutiny in SEC’s Drive to Control Crypto – Author Dave Michaels
The SEC is reportedly investigating whether stablecoins, a type of cryptocurrency designed to maintain a fixed value, violate investor-protection laws. A lawsuit over stablecoins could be difficult for the SEC to win because stablecoin users do not expect to profit from owning the tokens, which is a crucial element of the Supreme Court’s Howey test used to determine which cryptocurrencies are securities.
Stablecoins are typically used to trade other digital assets and are backed 1-for-1 by cash or cash equivalents such as U.S. dollars and Treasury securities. Regulating stablecoins could also bring the SEC into the realm of overseeing payment products, which is outside its usual remit. Other regulators have classified stablecoins as virtual currencies or banking products, however, there is a lack of consensus on which regulatory framework is appropriate.