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How FINRA’s 2017 Exam Findings Report, 2018 Priorities Letter May Impact Digital Communications Policies

January 25, 2018

In its annual tradition, FINRA recently published two reports, one summarizing enforcement actions that took place in 2017 and the other providing a preview of important topics it will focus on in 2018. As usual, the report highlighted FINRA’s continued emphasis on investor protection and market integrity.

However, what do these reports tell member firms about their electronic communications policies?

2017 Examination Findings Report, December Board of Governors Meeting

The 2017 year-in-review report highlighted continued problems with member firms’ inability to comply with FINRA rules regarding broker-dealers properly disclosing outside business activities to member firms.

Indeed, this was a topic addressed at FINRA’s December Board of Governors meeting. Specifically, FINRA will be seeking comment on a practice to “require registered persons to provide their member firms with prior written notice of a broad range of outside activities, and would impose on firms a duty to reasonably assess a narrower set of activities that are investment-related, allowing firms to focus on outside activities that are more likely to raise potential investor-protection concerns.”

The best case scenario is that FINRA will develop a list of criteria in order to help firms determine a smaller set of activities that will represent a real conflict of interest. Currently, because there isn’t any concrete guidance on what outside activities are a conflict of interest, compliance departments spend an inordinate amount of time reviewing advisor activities that are clearly not prohibited.

If adopted, this new proposal would immensely help compliance departments in reducing the amount of review of advisors’ outside business activities. This could also mean that member firms would be more willing to allow their advisors to disclose outside business activities, hobbies and other interests on their social media profiles.

2018 Regulatory and Examination Priorities Letter

The 2018 preview report offers some insight that FINRA is looking deeper into the technical and security controls that member firms employ when dealing with customer information. The report has an extensive section on cybersecurity considerations, including risk assessments of technology systems as well as vendor management programs.

Compliance departments in charge of company electronic communications channels would do well to critically examine the vendors employed to enable these channels and ensure compliance on an annual basis. This is especially important given additional legislation looming on the horizon, such as New York’s cybersecurity regulation that will come into effect on March 1, 2018, placing increased pressure on financial services companies to take cybersecurity – including the cybersecurity of its vendors – seriously.

Overall, FINRA’s reports show a continued focus on eliminating fraud and consumer deception. By highlighting concerns with cybersecurity in 2018, new technology might come under heightened scrutiny as it evolves to meet consumer demands (for instance, increasing consumer demand for text messaging options).

For more information, check out these excellent summaries of the wide variety of topics addressed in the reports: The Broker-Dealer Law Corner, Financial Services Observer and the BD/IA Regulator.

Disclaimer: The material available on this blog is for informational purposes only and not for the purpose of providing legal advice. We make no guarantees on the accuracy of the information provided herein.

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Christopher Fernandes

Director of Legal

Christopher Fernandes joined Hearsay in 2015 and is responsible for the company’s legal affairs including commercial, compliance, regulatory and privacy matters. Chris earned his J.D. from Santa Clara University and B.A. from the University of Chicago.

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