I had the privilege of attending the FINRA Annual Conference last month. It is always a great time to step away from the day to day to be future focused, which was the theme of the conference. As usual, the event covered a wide variety of topics: technology, crypto, cybersecurity, analytics, enforcement trends, regulation best interests (Reg BI), and off-channel communications. Here I’ll focus on the last two: Reg BI and off-channel.
It seems that Reg BI continues to be a top exam priority. Of course, broker/dealers must always act in the customer’s best interests when communicating with clients and be aware and upfront about any conflicts of interest. It was discussed that Reg BI is being applied rigorously to customized communication constituting a recommendation.
In fact, the SEC charged a top securities firm and five of its brokers with violations related to sales of risky, illiquid debt securities. The SEC said this firm and the named brokers specifically failed to comply with Reg BI’s care obligation for failing to properly determine and disclose the risks, rewards, and costs associated with the bonds and for recommending the investment to at least seven customers without a reasonable basis for believing it was in their clients’ best interests.
Another hot topic that stood out to me was the emphasis on record-keeping of off-channel communications. Off-channel communications, sometimes referred to as off-platform communications, are when members of organizations subject to FINRA and SEC regulations use an un-approved form of communication to discuss business. Typically, the communications are through text messaging or online messaging services. In the ever-evolving world of quick communications, chats, DMs, etc., it is hard to keep up with communications for personal vs. business purposes. And these myriad platforms are especially challenging for record-keeping.
The SEC has signaled the importance of this topic to the industry via a number of recent cases. The SEC fined broker/dealers and one affiliated investment advisor $1.1 billion to settle charges of “widespread and long-standing failures” when it comes to the firms’ communication practices. Specifically, the SEC charged the firms with widespread failures, “including at senior levels,” in meeting record-keeping requirements, particularly for private communications, in which employees communicated via personal text messages and through platforms like WhatsApp. The affected firms include many of the largest players in financial services and Wall Street, each of which agreed to pay $125 million to settle the charges. SEC Chair Gary Gensler said the firms had failed to meet record-keeping and books-and-records obligations and had thus “failed to maintain” the trust financial services depend upon. When Chair Gensler spoke at the FINRA conference, he noted that since the earlier fines of $5-10 million did not seem to have such a dramatic effect, a fine of this size just might have that impact.
The FINRA Annual Conference serves as a reminder that the industry needs to always be vigilant in informing and protecting our customers. I sensed a community at this conference with participants in agreement with the goal and responsibility of serving the public and client’s best interests.
The opinions provided are those of the author and not necessarily those of Fidelity Investments or its affiliates. Fidelity does not assume any duty to update any of the information. Fidelity and any other third parties are independent entities and not affiliated. Mentioning them does not suggest a recommendation or endorsement by Fidelity.
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