I have not heard anyone exclaim “Oh good, my securities account statement is here!” In fact, in down markets its arrival is often the harbinger of unwelcome news. Nonetheless, it remains a useful tool for broker-dealers to make certain regulatory disclosures. (Arbitration lawyers will also tell you that statements sometimes play a significant role in deciding a claim.) I also look at it as an opportunity for firms to strengthen their relationships with their clients, depending, of course, on how the disclosure is made. Either way, FINRA has new requirements for the broker-dealer community coming on 1/1/24.
SIFMA President Ken Bentsen raises a great point about the risks associated with reporting client data to the Consolidated Audit Trail. (And I am especially sympathetic to being in a position of “having all of the responsibility but none of the authority”.) However, from where I sit, this is not a new concern for a CCO. Or, at least it shouldn’t be. For years broker-dealers have had to report certain client data to the regulators in bluesheet reports. CAT simply (he says with tongue planted firmly in cheek) increases the scope and cadence of this reporting.
To Bentsen’s point, although a reporter has no say over how FINRA CAT treats the data after it is sent, it can still take steps to protect the data that it holds. This can range from ensuring that its procedures for assigning FDIDs to client accounts are sufficient to protect the actual account numbers from disclosure to, of course, deploying an adequate cybersecurity program to guard the data on premises and in transit.
Surveilling for the use of unapproved communication channels remains the $64,000 (okay, $1.8B) question for compliance personnel. Short of periodically inspecting its associates’ mobile devices, the path forward must be some combination of surveillance, training, attestations, and as seen here, deterrence. Of course, a broker-dealer has wide latitude in disciplining its associates for violating its procedures, but aggressive sanctions will not necessarily protect it from a regulator’s ire for recordkeeping violations. Not a criticism, but an observation.
Rule 605 disclosures may not just be for market centers any longer. The SEC’s proposal would require broker-dealers that introduce or carry at least 100,000 customer accounts to prepare these disclosures. And, among other things, prepare summary reports with aggregated execution information.
The SEC estimates that about 7% of retail broker-dealers would be affected. I am not seeing it that way. I note that, if enacted, Proposed Regulation Best Ex would impose standards on a wide swath of the industry for surveilling trade execution quality. I cannot help but to think that these proposed revisions are a signal that Rule 605 report data need to be part of the analysis.
Compliance officers are going to have to be increasingly conversant with large and varied data sets and analytics. And they said there would be no math . . .
The SEC Division of Examinations posted a Risk Alert concerning broker-dealers compliance with Regulation Best Interest. Of course, the Risk Alert is not a rule or Securities and Exchange Commission policy statement, but compliance personnel and other industry practitioners are always well-served to pay attention to the Division’s – uh – observations. I could not help but to note that here the first four observations concerned:
- “Policies and Procedures to Comply with the Disclosure Obligation”;
- “Policies and Procedures to Comply with the Care Obligation”;
- “Policies and Procedures Related to Training and Periodic Reviews and Testing”; and
- “Written Procedures” (concerning the Conflict of Interest Obligation).
In fairness to the Division, it told the industry some time ago that its focus would be on firms’ policies and procedures. However, as I see it, this is only part of the story; systems are often necessary to see that these procedures are completely and timely executed. Systems do not have to be expensive or elaborate, just effective. As a colleague once told me, whether it is a painting of dogs playing poker or a Rembrandt, it is still art.
The first ProVisors DC8 meeting is in the books! Many thanks to Morgan (Giovannucci) Florio, Eric Grorud, Richard Kelsey, Dasol Kwan, Christopher Larcade (Group Leader for Philadelphia 2; check them out), Brian Lundeen, CPA, CFE (Group Leader for DC5; check them out too), Ginni Matern, Wendy Moore, Laura Nash, CFP®, Paul Sullivan and Scott Sweitzer for their contributions. It was, indeed, time well spent.
We meet on the first Wednesday of every month. Please contact me if you are interested in learning more.
It’s that time of year again for compliance officers. We just saw the publication of the 2023 Report on FINRA’s Examination and Risk Monitoring Program. (Members of the National Society of Compliance Professionals, stay tuned for more on that shortly.) Today, we get the SEC Division of Examinations’ 2023 Examination Priorities. Between these and the nearly 1,700 pages of recent rule proposals, I certainly do not have to worry about what to load on my Kindle.
As many have noted, earlier today the SEC proposed a new “Safeguarding Rule” to replace the Custody Rule’s provisions. The fact sheet to which I link below summarizes those changes.
Practitioners know that not all rule proposals are the same. Some are overly aggressive and unlikely to see the light of day in the same form. (Does anyone remember FINRA’s “CARDS”?) And with others, what you see is what you are going to get. I will have to read this to get a better sense of where this proposal falls, but at first blush, it seems to be closer to the latter as opposed to the former.
Thank you for reading this article. Please know that I wrote it for informational purposes only (some may consider it ADVERTISING MATERIAL) and did not intend for it to be legal advice or to form an attorney-client relationship with you – especially in jurisdictions where I am not licensed to practice law. I encourage you to seek your own counsel to help you with your specific situation. To that end, I invite you to contact me if you would like to discuss my services.
I enable broker-dealers, registered investment advisers and their associates to spend more time growing their business by helping them address a wide range of legal and compliance responsibilities.