2021 was quite the year in the securities industry — another year of incredibly-volatile markets, as COVID-19 continued to interrupt daily life, and another year of FINRA attempting to prove that there’s value to its existence. FINRA Enforcement’s trends in 2021 included important changes to the regulatory landscape. In 2022, we can expect a focus on the new FINRA Rule 4111, Reg BI, and more.
When comparing FINRA Enforcement actions from 2020 to 2021, two interesting facts jump out: (1) Enforcement had substantially the same number of actions from year to year; and (2) even though the number of actions stayed the same, Enforcement reported an increase of 102% in penalties received from firms alone.
The increase in penalties is part of FINRA’s growing trend to create a more aggressive regulatory landscape — a move that is pushing many advisors into the independent Registered Investment Adviser, or RIA, space. From 2017 to 2020, the number of RIA reps with no broker-dealer registrations jumped 23%, and FINRA lost 400 member firms between 2016 and 2020.
Meanwhile, FINRA has been drumming up more investor complaints. Though it has yet to publish its 2021 statistics, it received just under 3,000 investor complaints in 2019, and that number nearly doubled in 2020, to 5,472. This can be attributed not only to FINRA’s rule changes requiring BrokerCheck links to be more readily apparent on firm pages, but it’s also a result of FINRA’s close association with investor plaintiff attorneys, PIABA (Public Investors Arbitration Bar Association).
On October 20, 2021, FINRA released a new addition to its Sanction Guidelines, which are supposed to be the guiding principles behind the punishments that Enforcement attorneys and hearing officers dole out to bad actors. The new guidelines include a section on the Consolidated Audit Trail (CAT) system, which covers late reporting, failure to report, clock-synchronization failure, and false, inaccurate, or misleading reporting. This new focus on CAT reporting is coupled with changes to FINRA’s surveillance and monitoring programs.
When analyzing the past year’s settlements between FINRA Enforcement and advisors or firms, industry experts have noted that there are many settlements that fall outside of the lines of the guidelines for the rule violations involved. This is important to know, not only as an advisor believing that they can take on Enforcement on their own but also as an attorney. It’s more imperative than ever that advocates ensure that Enforcement considers all mitigating factors in a given case and that the advocates push back against Enforcement attorneys and hearing officers who attempt to skirt the rules.
Though it may seem like ages ago now, at the beginning of 2021, there was a series of hacks and privacy breaches that shook financial institutions. FINRA reacted by focusing on security and privacy. It also looked at retail communications and advertising regulation.
What I saw personally, from my own caseload, was a ton of interest by Enforcement in PPP (Paycheck Protection Program) loans. In the first round of PPP loans, more than 1,400 investment advisors received more than $150,000 each. FINRA took a keen interest in ensuring that advisors were not receiving compensation off the books.
The PPP loan cases that arose involved OBA (outside business activity) reporting issues, the accuracy of the applications themselves, and receiving funds for allegedly-fraudulent companies. Not only were advisors fired by their firms, but some were also suspended by FINRA or even forced to leave the industry entirely. I expect OBA and lien reporting to be a continued favorite of Enforcement.
This is only a small sliver of everything that went on in this tumultuous year, but let’s move on to what we will be looking ahead to in 2022.
2022 Preview Of Initiatives And Predictions
As we all know, or should know, FINRA’s big new rule is Rule 4111. This rule enables FINRA to punish BDs that they determine to be high risk, due to the number and severity of the firm’s disclosures and of the firm’s advisors’ disclosures. The Rule establishes designations for those firms that are deemed “restricted.” Once labeled as restricted, firms are required to deposit cash or qualified securities in a restricted account, which are to be set aside for paying out to aggrieved customers and regulators.
Also included in the Rule are provisions, under FINRA Rule 3170, or the “taping rule,” which require all phone conversations with customers to be recorded. While there is some recourse for appeal, the alternative to complying with the requirements of a restricted status is to simply terminate enough advisors with disclosures so that the designation is lifted. This new rule is likely to make hiring advisors who have not sought expungement of their disclosures more difficult, and it will punish the smaller, up-and-coming firms.
The other big Enforcement focus of the year is the SEC’s Regulation Best Interest or Reg BI. Reg BI is a step up in standard from the suitability rule. As such, FINRA’s president and CEO, Robert Cook, has stated that it is looking at “how some of our rules need to be re-evaluated since they were adopted before Reg BI was in existence.” This retrospective look at FINRA’s rules will also take into account the pervasive virtual office emergence amid COVID.
Although Reg BI’s release resulted in enforcement actions, a 2021 NASAA (North American Securities Administrators Association) study found that Reg BI actually had a minimal impact on firm operations, with only some firms engaging in what are deemed pro-investor best practices. This means that we can expect more action against firms this year.
With the rise and continued use of cryptocurrency carrying into 2022, don’t get me started on NFTs (non-fungible tokens), FINRA has stated that it plans to issue a regulatory notice on the topic, the focus of which has been hinted to be advertising and disclosure requirements. This will be of significant importance to the social media-savvy advisor who uses those platforms for advertising. FINRA is taking a look at the supervision of these influencers, aka “finfluencers,” as well as their compliance with advertising and communication rules. However, Cook has admitted that crypto is “above our (FINRA’s) paygrade” and that it will be deferring to the SEC and federal government to do the heavy lifting on rule-setting.
Naturally, there’s a lot more going on in the financial industry, and in a world where change seems to be happening at an exponential rate, 2022 will be an unpredictable year.
It’s crucial that advisors stay on top of compliance and reporting and develop a close relationship, not only with their OSJ, but also with their securities attorneys.
AdvisorLaw provides representation against all threats, including FINRA and SEC Enforcement, state regulators, the CFP Board, firm compliance, and retail investors. Our services were created exclusively for financial advisors and wealth managers. We can protect your livelihood.
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