On-Demand Webinar

Top FINRA Enforcement Issues and Trends of 2019 with Eversheds Sutherland

Watch Smarsh and Eversheds Sutherland in this webinar to learn more about:

  • The top regulatory enforcement issues and trends of 2019
  • Early indicators of what the regulators are focusing on in 2020
  • Enforcement Implications from Books and Records, Electronic Communications and Social Media Cases
  • COVID-19 and the remote workforce - what firms can do in 2020

While the amount of FINRA fines, restitution, and cases decreased in 2019 compared with 2018, FINRA continues to target specific areas, such as anti-money laundering violations, which for the fourth consecutive year has resulted in the largest amount of fines.  With the current pandemic and market downturn, we also expect FINRA to focus on business continuity plans, cybersecurity, suitability, and misrepresentations, as well as electronic communications and books and records issues.


Marianna Shafir

Regulatory Advisor, Smarsh

Marianna Shafir

Regulatory Advisor, Smarsh

Marianna Shafir is Corporate Counsel and Regulatory Advisor at Smarsh, where she’s responsible for legal and regulatory affairs worldwide. With her expertise in financial services industry, compliance and eDiscovery, Marianna counsels Smarsh clients on meeting regulatory obligations, leveraging technology and guidance on best practices related to electronic communications supervision. Prior to joining Smarsh, Marianna worked for BNY Mellon and Invesco where she was an instrumental member on compliance teams.Marianna has also served as an adjunct professor at New York Career Institute where she taught Law Office Management and Real Estate Law. She earned her Juris Doctorate from Nova Southeastern University. She is a frequent speaker at industry conferences and a contributor to various online publications.

Brian Rubin

Partner, Eversheds Sutherland
Brian rubin panelist 400x400

Brian Rubin

Partner, Eversheds Sutherland

Brian Rubin is the Washington office leader of the Eversheds Sutherland (US) Litigation group and the head of the firm’s Securities and Exchange Commission (SEC), Financial Industry Regulatory Authority (FINRA) and state securities enforcement practice. With more than 20 years of experience in federal securities law, first prosecuting and now defending, Brian represents clients being examined, investigated and prosecuted by the SEC, FINRA, other self-regulatory organizations and states. As former NASD (now FINRA) Deputy Chief Counsel of Enforcement and Senior Enforcement Counsel at the SEC, he brings an insider’s perspective to defending broker-dealers, investment advisers, investment companies, public companies and individuals in examinations, investigations, enforcement proceedings, litigation, arbitrations and in counseling.

Adam Pollet

Counsel, Eversheds Sutherland

Adam Pollet

Counsel, Eversheds Sutherland

Adam Pollet defends corporations, broker-dealers, investment advisers, and individuals in enforcement and litigation matters involving the U.S. Securities and Exchange Commission (SEC), the Financial Industry Regulatory Authority (FINRA), state regulatory agencies, and numerous federal and state courts. He also represents clients in internal investigations and regulatory examinations and counsels them on various regulatory and compliance matters.

Transcription of Webinar Audio

Davi Schmidt: Thank you for joining us for today's webinar Top FINRA Enforcement Issues and trends of 2019 with Eversheds Sutherland. Please be aware that all participants will be muted for the duration of the call. Feel free to submit any questions you may have via the GoToWebinar messaging app. We'll attempt to answer as many of them as possible during the Q&A session. Before we dive in, let me first provide a standard disclaimer here. Smarsh provides this material for informational purposes only. Smarsh does not provide legal advice or opinions. You must consult your attorney regarding your compliance with applicable laws and regulations.

Davi Schmidt: First we'll go over introductions and then we will jump into today's content led by Eversheds Sutherland and their overview of 2019 enforcement actions and focus for 2020. Intro, joining us today are the presenters, Brian Rubin, Adam Pollet and Marianna Shafir. With that, I will hand it over to you, Adam.

Adam Pollet: As she mentioned, I'm Adam Pollet, counsel at Eversheds Sutherland. My practice generally focuses on representing broker-dealers, investment advisors and their associated persons in securities enforcement matters, securities and financial services litigation, internal investigations, arbitrations and examinations before the SEC, FINRA and state securities regulators.

Brian Rubin: I am Brian Rubin. I'm in the DC office. As you can tell from the picture, Adam borrowed my beard for today's presentation, it looks like. I also do securities enforcement work representing broker-dealers and investment advisors and examinations and investigations. I used to be deputy chief counsel of enforcement at NISD, now FINRA. I was also senior counsel at the SEC in the enforcement division there.

Marianna Shafir: Hi everyone. I'm Marianna Shafir, regulatory advisor at Smarsh, expert on our legal and regulatory affairs. I have more than 10 years of experience with providing thought leadership and client consulting on electronic communications, supervision, compliance obligations, emerging technology trends and new industry regulations. Next slide. Quick facts, who is Smarsh? Founded in 2001, we merged with Actiance in 2017. We're recognized at the market leader by Gartner and Forrester for information archiving. Focused on the use cases, including supervisory review and e-discovery for firms of all sizes. Now, it's over 200 employees around the world. Next slide.

Brian Rubin: As a lot of folks on the webinar probably know, we regularly review FINRA enforcement matters and slice and dice them to look for various trends. Today we'll be looking at 29 enforcement actions. We'll be talking about what we may be seeing in 2020. With Marianna, we'll also be focusing on electronic communications issues. Adam and I primarily will be looking at numbers and trends with regard to certain issues and then focusing on some of the big cases. So you won't leave here with nuts and bolts lessons on how to run your firms better, but you will learn about certain issues that you should be thinking about. The point of today is to get a flavor about what's going on to make sure you're focusing and thinking about the right types of issues that the SEC and FINRA are focusing on.

Brian Rubin: What we do is we have a database of all of FINRA's disciplinary actions. And then for clients, friends, family, children, whatever, we can slice and dice the data to look for trends, types of cases, things like that. We liken it to Moneyball meets plays of the day, assuming that there were professional sports or even amateur sports on TV nowadays, but we'll do the best we can. We'll go to the next slide with Adam.

Adam Pollet: Let's go ahead and dive into the case statistics from 2019. In 2019, regarding fines, FINRA ordered 39.5 million in fines, which was a 35% decrease from 2018 whereas you can see FINRA ordered $61 million in fines. This was the lowest year in recent memory down significantly from the record setting years of 2014 and 2016 and down from even the past couple of years as well. Next slide, please. We'll go to the number of cases now in 2019, these were also down slightly from 2018. As you can see, FINRA brought 854 cases in 2019, 7% fewer when compared to the 921 in 2018. This was actually the fewest number of cases that we've seen since before 2008. Next slide, please.

Adam Pollet: Now let's talk restitution. In 2019, restitution actually increased slightly from 2018. So last year FINRA ordered 28 million in restitution, 8% up from the 26 million ordered in 2018. As you can see, 2019 was on par with the last eight years or so when you take out the record setting years of 2015 and 2017. It's interesting that while FINRA regularly emphasizes, it's focused on getting money back to the harmed investors, the amount of restitution really is staying relatively flat at least the past couple of years. Next slide please, Brian.

Brian Rubin: Yes, thanks. A few years ago, we started looking at total sanctions, which is fines and restitution and disgorgement to see the amount of money ultimately leaving firm's hands and individual's hands as well. You could see in 2019, FINRA ordered $70 million in total sanctions. This is a 44% decrease from $124 million ordered in 2018. As you can also see, it's the lowest it's been since 2013. We'll go to the next slide, please. When we started doing this, my kids were little and McDonald's and supersized things were very, very important to all of us because if you have screaming kids, as you know, everybody's staying at home becomes an issue. So we decided to name fines of a million dollars or more supersized fines to just come up with some category for them.

Brian Rubin: As you can see, in 2019 there were nine supersized fines totaling $27.9 million. In keeping with the theme that we'll be talking about throughout today, the numbers are significantly lower than they've been at the past than any time during the past several years. We can theorize about what's going on and we'll be doing some of that later on with regard to why the numbers are down. Let's go to the next slide, please.

Brian Rubin: A couple of years ago, we decided to add a new category of $5 million or more fines and we decided to call that huuuge. We may change that in a year or two depending upon what happens. But we thought it would be interesting to look at the larger value fines. As you can see in 2019, there was only one huuuge fine. That was actually a really huge fine, it was $15 million. You can see based on the other years that FINRA has been bringing fewer huuuge fines recently. You can see that there were five brought in 2018, only two in 2017. But generally, there are a few or several. I will go to the next slide with Adam.

Adam Pollet: Now let's go ahead and move on to the Top Enforcement Issues in 2019. These are determined based upon the amount of fines per category. I should also note as you would know, some cases touch on multiple issue areas. We put cases in multiple buckets, so there can be overlap at time. We'll start with number one, AML, which is on the top of our list for the fourth year in a row. So, that indicates the issue of continued importance, not just to FINRA but to other regulators. In 2019, there were 12 AML cases reported compared to '17 and 2018. The fines associated with these cases totaled 17.4 million compared to 27.3 million in 2018, so a decrease there. AML produced the largest fine in 2019, the one Brian was just discussing. We'll discuss here in a second. But it also produced the largest single fines in 2018 and 2017 interestingly, so about that $15 million fine.

Adam Pollet: In that case, FINRA found two affiliated firms over the span of four years, had AML failures involving penny stock deposits and wire transfers. Specifically, the firms didn't develop or implement written AML program to reasonably monitor the penny stocks for suspicious activity. The firms also failed to review wire transfers conducted in foreign currencies or involving high-risk entities or jurisdictions. FINRA also noted that the firm's AML program was understaffed and that they hadn't fully revised it for a number of years. Not on our slides, but something we wanted to mention. Last month, FINRA fined a firm $35,000 for AML and customer identification program failures showing that FINRA is brainy in large and small cases in this space.

Adam Pollet: Some of the takeaways from this case, by now, hopefully after four years on the top of this list, we hope that most firms have taken a hard look at their AML policies and procedures to ensure that they're addressing the main issues that continue to result in significant sanctions for firms. Some of those issues would be a firm's AML systems and procedures appropriately tailored to the firm's business. Are they operating as intended, and are they identifying the appropriate red flags? Does the firm have a rep or branch conducting a large amount of penny stock transactions, especially where they're primarily deposits and sales and fee purchases? Does the firm allocate sufficient resources both in the form of personnel and technology to adequately supervise AML concerns? Finally, what's the firm's process for filing SAR reports? Is it operating as intended? Does the firm file a sufficient number of SAR reports for a firm of its size? Next slide, please.

Brian Rubin: Number two on our list in 2019 by fines is exchange traded funds and products with 13 cases totaling $3.5 million. This is actually the first time that this category has been on our list of Top Enforcement Issues since 2012. As you can see, the number of cases increased 30% from 10 in 2018. I mean, fines jumped more than 200% from $1.1 million. In many of 2019's ETF and ETP cases, FINRA fined firms for failing to have adequate supervisory systems reasonably designed to achieve compliance with the sale of nontraditional ETFs such as leveraged or inverse ETFs. The largest fine dealt with a different kind of issue and that was a $2.9 million fine for failing to have a reasonable system governing the delivery of prospectuses for ETFs and ETPs.

Brian Rubin: Every few years, we do see this kind of case of failure to deliver prospectuses. It could be for different products, it just happened to be for this kind of product in 2019. The firm didn't have reasonable supervisory systems to monitor or supervise the employees' performance of their duties with regard to prospectus delivery. So the takeaways here first with the majority of these kinds of ETF case, firms have to ensure that they have adequate supervisory procedures and systems for complex products like leveraged or inverse ETFs to make sure that recommendations for these products are suitable. We expect to see more cases in the space in the coming years given that many of these products have dropped precipitously during the market fall, the market crisis that we're going through now. FINRA will likely be looking at misreps on missions and suitability cases in this area.

Brian Rubin: And then the second big takeaway deals with the one large case, prospectus delivery is an issue for a number of different types of products. So, firms need to ensure that they do have a reliable system in place to ensure proper delivery of prospectuses.

Adam Pollet: The number three issue in 2019 was misleading or inaccurate information that had 28 cases totaling $3.3 million in fines. This is the first time that this category has been in our Top Enforcement Issues. We actually recently added this to the issues that we track a couple years ago. We could see in these types of cases become an issue with FINRA, so we decided to start tracking them separately. We'll talk about this a little bit later. We've already seen some activity in this space in 2020. The number of cases in 2019 was slightly lower than the 34 cases brought in 2018, although the amount of fines represents a 3% increase from 2018.

Adam Pollet: The largest case here was an SEC litigated decision, which affirmed a FINRA case. A firm and its owner were ordered to pay $800,000 in fines among other things, making unbalanced and misleading communications with the public regarding a biotech company that the owner founded. Now, with communications did not provide a sound basis for evaluating the claims. They contained false or misleading claims, weren't fair and balanced, included baseless performance predictions and misleading forecasts, it didn't disclose the firm and its owner's relationship with the biotech company.

Adam Pollet: In repeated instances, the individual claimed in emails that his biotech company had attained the rights to certain diabetes drugs when in fact, this company needed at least $3 million more to purchase it. And the FDA had ordered additional clinical testing of it, which wasn't disclosed. The takeaways here, firms should ensure that they have supervisory systems in place to review any communications with the public. Again, we'll touch on a case that we saw in 2020 a little bit later. This is an area where we may see actions in the future related to COVID-19 issues, possible drugs or vaccines related to COVID-19 as well. Brian?

Brian Rubin: Excellent. The next issue is municipal securities. It was number four in 2019 with eight cases totaling $2.7 million. This was actually the first time that municipal securities was on our Top Enforcement Issue list since 2013. The case is about the same as in 2018, but they were nine, but the amount of fines jumped 50% from $1.8 million in 2018. The reason why it's on our list is because there was a $2 million case. In that case, FINRA fined a firm for repeatedly failing to timely address municipal short positions and for not accurately representing the tax status of thousands of interest payments to customers, incorrectly identifying them as tax-exempt when, in fact, they were taxable.

Brian Rubin: The way this works is when FINRA member firms are short municipal securities that are held in customer accounts, it's the firm rather than the municipality, which is the source of the interest payments. So therefore the interest earned by the customers is technically short. It's called a substitute interest and it's applicable to federal state and local taxation. So, as a result of the firm's actions, it failed to take adequate steps to address the tax consequences of the short position. The takeaways here are really .... this is a one off case. Again, every once in a while we see this case that talks about short positions and adequate, we take into account tax status.

Brian Rubin: Other than that, the muni-securities cases really deal with the kinds of representations, if the firm is making the kinds of procedures that the firms have in place. And then Adam will take us through the last one.

Adam Pollet: Thanks Brian. For the second year in a row, cases related to suitability have made the Top Enforcement Issues. In 2019, it resulted in the fifth most fines. There were 45 cases down 50% from the 91 cases brought in 2018. The amount of fines ordered in 2019 was 2.7 million, which was a significant decrease from the 11.8 million reported in 2018. But FINRA also ordered 17.2 million in restitution and suitability cases in 2019 compared with 11.6 in 2018. So the fines were down, but restitution was way up. Again, this is an area of regular interest to FINRA.

Adam Pollet: In the largest suitability case, FINRA fined a firm $800,000 and ordered it to pay more than 3.8 million in restitution to customers who incurred potentially excessive sales charges caused by early rollovers of unit investment trust. FINRA found that the firm failed to reasonably supervise these early UIT rollovers causing the customers to incur sales charges that they would not have incurred had they held the UITs until their maturity dates. Some of the takeaways here, firm should ensure that they have reasonable supervisory systems in place, some monitor trade and UITs, of course, other products as well. In the AWC, FINRA noted that short term trading of UITs may be unsuitable for calling out that firms should be thinking about when short term trading of UITs occurs, is that raising a red flag for further review of suitability of that transaction given the way FINRA has discussed its view on it?

Adam Pollet: Make sure reps are adequately trained on the nature of UITs. Again, and the fact that FINRA reviews those short term trading as potentially unsuitable, this of course is applicable to other types of products as well. One thing to note in this case, it was noted in the AWC that the firm got extraordinary cooperation credit here for a few things that FINRA identified. One, the firm hired an outside consultant to analyze its UIT trading and shared those results with FINRA. Two, the firm identified itself eligible customers for restitution. Three, it voluntarily employed corrective measures prior to FINRA's intervention here. So things to keep in mind when thinking about how firms can get credit for extraordinary cooperation. Next slide, please.

Brian Rubin: Next we'll talk about some of the key issues from 2019, including electronic communications. And then we'll talk about some trends and some predictions for 2020.

Adam Pollet: AML, it was the number one issue in 2019. As I mentioned before, of four consecutive years in the top five and six consecutive years actually being in the top five, not just at the top of the list. AML continued presence really confirmed what we've been seeing in FINRA. Of course, other regulators are aggressively pursuing how firms comply with AML regulations. While the number of cases decreased in 2019 compared with prior years, the single largest AML case was $5 million more than the largest AML case in 2018, which also happened to be the largest single fine in 2018. As I mentioned that they're also hitting firms with smaller amounts just generally looking to show their continued interest here. That said, FINRA may likely hit firms harder in the future for failing to ensure their AML programs are adequate and reasonably tailored because this message really ought to be loud and clear by now. Next slide, please.

Brian Rubin: Next issue is 529 plan initiative. Taking a page out of the SEC's playbook, in January 2019, FINRA launched a new self-reporting initiative focused on 529 share classes. I'm sure everybody knows, a couple years earlier, the SEC did a self-reporting initiative dealing with [inaudible 00:26:35] and share classes in mutual funds. With regard to the 529, FINRA was concerned that some firms may not have adequately supervised the sale of C-shares to younger beneficiaries. FINRA has noted that approximately 100 firms self-reported through the initiative, although when they brought out the initiative they made clear that not all firms that's self-reported would be sanctioned, that it depends on the facts and circumstances of the cases.

Brian Rubin: We expect that this year we will see a number of firms that will be sanctioned. Given our statistical analysis here, we expect that that will boost FINRA's numbers regarding the number of disciplinary actions they bring as well as the amount of restitution ordered. However, as part of the initiative, FINRA made clear that firms that's self-reported would not be subject to a fine. Those firms that don't self report and maybe found out later through exams or investigations could be fined depending, again, on the facts and circumstances.

Brian Rubin: We got a preview for what the 529 plan settlements may look like when FINRA issued two 529 share class cases. In those cases, the investigations actually predated the initiative, so those firms who are not able to self-report. But in those settlements, FINRA required the firms to pay restitution totaling $12 million to impact customers, but it didn't order a fine against the firms. That's obviously a big number. It's possible that in the future, FINRA may find merit to bringing these kinds of initiatives because they save a lot of time, a lot of resources when firms self-report and these cases can significantly increase the number of cases and the amount of restitution ordered.

Brian Rubin: It's been interesting with regard to these cases. After a couple of my clients self-reported, we had calls with FINRA staff. During the calls, FINRA was saying, "It's so nice that we have the opportunity to work together." It's just an odd position and a dichotomy to think about that the firms are self-reporting and are going to be sanctioned are working together with FINRA, but that's how it was posed to us. As I mentioned before in 2019 or earlier, the SEC announced its self-reporting initiative with regard to share classes. In fiscal year 2019, those cases resulted in 50% of the actions brought against investment advisors and investment companies. So this is a good, efficient resources, if the regulators do want to bring impactful, meaningful cases without using a lot of time and energy and resources.

Adam Pollet: Finally, we want to touch on market access cases. FINRA in coordination with various exchanges brought a string of seven of these cases in 2019. While FINRA fined those firms about $850,000, the exchanges assessed nearly $9 million in fines in those cases. These numbers are increased from 2018 when FINRA brought three cases and fined the firm's approximately 340,000 with 2.8 million in fines from the various exchanges. In the largest case like this in 2019, FINRA in three exchanges fined a firm 6.5 million. About 570,000 of that was from FINRA for failing to establish a supervisory system, including WSPs reasonably designed to monitor for potential spoofing, layering, wash sales and prearranged trading by its direct market access clients. As a result, FINRA found that orders for billions of shares entered US markets without being subjected to post-trade supervisory reviews for such potential manipulative activity. While FINRA's portion of these fines may be relatively small, certainly not enough to get into our top five, a firm should be anticipating that exchanges may assess their own hefty fines for these types of violations. Next slide, please.

Marianna Shafir: I will take this next section into electronic communications and the key issues here for 2019. The largest recordkeeping fine in 2019 was a $700,000 fine against a firm. The CCO was also borrowed from FINRA and fined $100,000 dollars, which is also a trend that we are seeing in 2019 of compliance officer thing personally liable. FINRA found the firm and CCO failed to comply with record keeping obligations. FINRA were also found that the firms failed to maintain a reasonable supervisory system to review electronic communications. The firm's WSPs did not address how reviewers would review the messages, frequency and records of review.

Marianna Shafir: Also, in 2019, FINRA's cases against individuals for record keeping violations rose 6% in 2019 to 48 cases compared to 45 cases in 2018. So that was a slight increase in 2019. The largest electronic communications case of 2019 resulted in a $32,500 fine. In this case, the firm's WSPs lacked methods for reviewing messages. Also, the email selected randomly by the firm's email vendor did not constitute a reasonable amount of the firm's overall electronic communications. The search terms that would flag an email for review were not comprehensive enough for a meaningful sample of flag messages.

Marianna Shafir: Those of you that are using a vendor, you want to make sure that you do have... you are sampling a reasonable amount, there is no right percent. But I have seen cases where FINRA has fined firms for reviewing 1% or 2%, so that would be fairly low. Again, it really does matter and depends on the size of the firms for it to be considered reasonable. You want to really make sure that you are reviewing those messages. Also, in 2019, two social media cases in 2019. Social media is fairly new for FINRA, but we did see in 2019. There were two social media cases compared to 2018, which there was only one. It was actually a very large fine for a social media case. In this case, it was a $90,000 fine. The firm failed to review its rep business related websites and social media pages.

Marianna Shafir: Again, you want to make sure you're reviewing those LinkedIn business related pages on whether it's Facebook and business related, you should be reviewing that as well for your rep. Another note, if you do prohibit social media, you want to make sure you have a check that balances to make sure that they don't have red flags to look for the reps are not using those prohibited applications. Next slide. Trends for 20-

Adam Pollet: Sorry, Marianna.

Marianna Shafir: Sorry, Adam.

Brian Rubin: Can you go to the next slide, please?

Adam Pollet: Okay, great. We'll talk about now, before moving on to some of the trends, what we saw in the first quarter of 2020 with respect to the disciplinary action. Again, this is first quarter of January to March. There were 123 cases, 26 of those against firms. These cases had 7.4 million in fines and 70,000 in restitution. The number of cases and amount of fines were up compared to the first quarter of 2019, while the amount of restitution was down significantly. But these numbers are down relative to the same period in 2018, just to give you some context there.

Adam Pollet: As I'd discussed earlier, the largest settled case that we've seen this in the first quarter, a firm was fined a million dollars for allegedly disseminating inaccurate expense ratio information and historical performance information for numerous investment options in retirement plans. Also, for providing inaccurate third-party ratings for those investment options. Again, this is another example of FINRA coming down hard on a firm for making misleading or inaccurate statements to the public. Next slide, please.

Brian Rubin: What will 2020 bring? Full disclosure, my crystal ball is in the repair shop and unfortunately the repair shop is closed. My kids borrowed my magic eight ball right before we started, so I don't have that either. So, we'll just be relying on some other information that we've read about and heard about. FINRA, as everybody knows, has given a lot of pandemic guidance. There've been a lot of FAQs that have come out. They've been putting on a lot of webinars themselves. I think they're trying to keep firms up to date with regard to what is going on.

Brian Rubin: We want to focus on a few issues here where we think that there might be enforcement actions by FINRA, by the SEC, by DOJ and by the states as well. The first issue is related to COVID-19 issues and scams. Reps and associated persons knowingly or unknowingly may be involved with scams. They may have outside business activities, they might have private securities transactions. They might be recommending certain products that they shouldn't represent. So firms should be careful about monitoring and surveilling those activities. As an example of that, they may want to add terms to their email review search engines.

Brian Rubin: There has been a focus by the SEC and by DOJ on microcap fraud relating to these types of issues. Here are just some examples of the COVID-19 scams that we've been reading about. One of them is treatment scams. Scammers are offering to sell fake cures, vaccines advice, things like that. Supply scams, scammers are creating fake shops, websites, social media accounts, email addresses claiming to sell medical supplies, surgical masks. And then when customers are attempt to purchase those, the fraudsters just take the money and run basically. There are provider scams or scammers contact people by phone or email. This morning on the news I heard about text messages where they're pretending to be doctors, or they say, you were in contact with somebody who has COVID-19, click this link.

Brian Rubin: They're also investment scams. Scammers are offering online promotions in various platforms, including social media, where they claim that they're actually publicly traded companies that could prevent, detect or cure COVID-19. There are research reports on these issues with target prices. So those are some of the things that should be focused on. Should I not be talking about this, is this is the wrong slide, Marianna?

Marianna Shafir: It's okay. I'll just take it over again-

Brian Rubin: There we go, we'll sort this out.

Marianna Shafir: Yeah.

Brian Rubin: Yeah. We should end on a strong note with you ending instead of us.

Marianna Shafir: Okay.

Brian Rubin: Okay. So we already covered the COVID-19 issues. The next one is cybersecurity and technology. There's obviously an increased risk of cybersecurity events during a pandemic due to everybody working remotely like we are right now. Also, there's heightened anxiety and confusion caused by viruses that some people are getting on their computers and just by the market volatility that we've been seeing day in and day out. A few tips for firms looking to avoid enforcement activity.

Brian Rubin: First, firms should focus on whether their remote infrastructure is robust enough to handle all of the work from home demands. I think firms are [inaudible 00:40:11] with all of those issues. Second, firms need to ensure that they keep their employees computers and mobile devices updated with the latest security patches. Third, firms should be protecting against and training for common attacks like phishing scams that referenced COVID-19, coronavirus or related matter. No doubt, firms are trying to do the best job they can do, but they shouldn't lose sight of these issues because either the firms or their customers can be hurt by these activities. The regulators may come in after the fact and second guess what's going on.

Brian Rubin: The next issue is insider trading. We've all read about the four United States senators who sold millions of dollars in stock following classified briefings on the threat of the COVID-19 outbreak. With the increased market volatility and constantly changing news, that could also lead to insider trading. In addition with the number of employees working at home handling MMPI, there's the possibility that family members or others could have access to that information by sharing workspaces or computers. So firms may want to heighten their surveillance and review on these issues.

Brian Rubin: The last thing that I wanted to talk about was misrepresentations, omissions and suitability and then ultimately product failure. After a market crisis, the SEC and FINRA often bring cases involving misleading descriptions about performance or investment risk suitability. Here are some issues that firms may want to focus on and think about. First, were products with this level of risk suitable for these particular types of customers, for retired customers, for seniors, things like that? Did the firms, did the reps understand the risks and did the customers understand the risks? Were their portfolios properly diversified? Those are some of the issues that we will likely see both the regulators focusing on as well as in arbitration actions.

Brian Rubin: Second, how did the investments perform? Did they perform worse than expected, and if so, why? Third, did firms think about or warn customers about the risks of a pandemic? Market risk is one thing, but a pandemic is something else. What did the disclosure say about these kinds of issues? Although firms may not have been thinking about the pandemic the way it's played out, the regulators are growing to be asking these types of questions. Were the firms and the reps compulsive about this, or was there some level of understanding about it so the customers weren't completely surprised? Forth, as things were getting bad, what was the firm doing and what were the reps doing? Were they saying, "Stay the course, it won't be that bad. Things are going to turn around quickly."

Brian Rubin: With these kinds of cases, emails are always critical. It's something that firms may want to get ahead of at this point in time to see what was going on because no doubt, there will be a lot of arbitrations filed. No doubt, there will be a lot of investigations about these issues by the regulators. After the 2007, 2008 financial crisis, there were a lot of exams, a lot of investigations, a lot of cases on this issue. We anticipate that the regulators are going to be informed by their experiences in the previous financial crisis and they'll be using a lot of the same plays in a playbook that they used before.

Brian Rubin: The last issue to focus on here is the product failure issue. This theory is more strict liability, whether the products are mutual funds or ETFs or variable annuities or other structured products. Litigants, claimants, the regulators may argue that they weren't designed properly, that they weren't designed to take into account market failures like this, including pandemics. This is really a product level suitability issue as opposed to a customer specific suitability issues. So the question is, was this product suitable for anyone? The regulators will look at the policies and the procedures and the disclosures, the due diligence that the firms performed on the products. The firms and the reps will argue that this was really a black Swan and the fight will be about the foreseeability of this crisis.

Brian Rubin: As part of the fence, the firms will look at statements announcements by the fed, by the president, by other government officials talking about these kinds of issues downplaying the potential impact of COVID-19 and its effect on the economy. So these are some of the related issues that firms should be thinking about now, even if they haven't received the request from the regulators, and even if they haven't received the statements of claim yet from the claimants and the arbitrations. And then we'll go back a slide to even more important issues.

Marianna Shafir: Thanks Brian for speaking about COVID-19 and the pandemics. The future is being written now, and what firms do in 2020? In recent release a notice, a guidance notice 2008 pandemic, and what has FINRA said there? They still expect firms to maintain a supervisory systems designed to supervise activities of remote workers. So what does that mean? Just because there has been a shift to remote workers and most are working from home, you still need to supervise the activities of your remote workers. So you still need to continue doing those electronic communications reviews, documenting those message reviews, looking at the messages, whether it's email, whether it's text, whether it's social media. You need to make sure you are on top of your reviews.

Marianna Shafir: Also, we've seen a likely increased focus on communication collaboration tools. The significant spike in demand for these tools being used by work from home staff, including mobility Slack and Microsoft Team. Firms, they are the same responsibilities, you still need to capture archive and supervise all of these business communications. So now is really a good time to review those policies and ensure that they address the firm's business and comply with the rules.

Marianna Shafir: Plan longterm. Coronavirus is not the first in this realm, it's only the latest in the series. Firms should plan very longterm, embrace the technology, the tools, the solutions and allow reps engage with clients from their devices in a compliant way. For example, for those firms that prohibit texting, this is something that, right now, I would really consider as long as it's compliant, there are ways of capturing those communications. It would really make it much easier for your reps to communicate with their clients. Foster a remote working culture. That means training, that's critical right now, that doesn't stop. The development of employees remote working skills and updated policies. That will take us into, how can Smarsh help?

Marianna Shafir: Our portfolio of products across three key areas, capture, archiving and applications. Capture, capturing content in a native format, so that context of conversations is preserved. The ability to capture virtually any communication source directly from the source. Archive, our products include our professional archive for smaller firms and enterprise call for archive for global enterprises. Both products are designed to meet financial services, regulatory requirements, such as SEC 17a-4.

Marianna Shafir: Applications, which is huge right now. We've seen such a big spike. Supervision for FINRA and SEC regulate a firm to execute their supervisory procedures, manage policies and identifying remediate issues. Discovery, this enables firms to address the early stages of e-discovery and litigation by enabling case management, legal holds and fast past review. Third party applications, with our enterprise archive, we provide full APIs and accessibility to deliver data to any downstream application, such as legal review or business intelligence tool.

Marianna Shafir: This is a chart of all of our over 80 networks and growing supportive networks, including APIs and SDK to consume custom content sources. This is established technology relationship with Microsoft, with Cisco, Slack and others. The fan top of changes to individual networks and ensure that firms can meet their regulatory obligations. For our existing Smarsh customers, we offer a portfolio of professional services, including policy tuning and lexicon to help firms improve the efficiency and effectiveness of their supervisory policies.

Marianna Shafir: For non-customers, you can sign up for our Watch It Work webinar where we provide an overview of key features of the professional archive products. Any questions you have, feel free to email us at advantage@smarsh.com to learn more about our services. This will take us into questions.

Brian Rubin: I just want to mention one thing. We recently came out with a report about FINRA and SEC enforcement actions against compliance officers. So anybody who wants to receive a copy, they can just send me an email about it. We used the James Bond theme to keep it interesting. Yeah, it's called Double O CCO licensed to comply SEC and FINRA enforcement actions against compliance officers who were shaken and stirred. Fascinating reading.
Davi Shmidt:
We can jump into the Q&A. Brian and Adam's email addresses are up there on the screen right now, if you have any questions for them. If you have any questions for Smarsh, our email address is also up there. Again, advantage@smarsh.com. We had some great questions come in. If you still want to ask the question, feel free to do so in the chat box right now. The first question is, are the lower fine figures a reflection of the fewer number of BBS in business?

Brian Rubin: That's a good question. We don't obviously know the complete answer. I think part of the answer is that when Robert Cook came on board as head of FINRA, he was trying to establish a kinder and gentler FINRA. I think part of it also relates to the fact that until recently, the market has done incredibly well. There is certainly a correlation between a market doing poorly and an increased number of enforcement actions. Part of it may also deal with the fewer number of broker-dealers, but I don't really think that's one of the significant drivers. Adam, anything you want to add?

Adam Pollet: I think that's good.
Davi Schmidt:
We have another one here, what are your thoughts on BCP audits relating to COVID and work from home in 2020?

Brian Rubin: I think it's certainly an area that the regulators will look at. A couple of months ago, there were some articles about an OSI request that went out to at least one firm. There were something like 20 or 30... that OSI was asking the firm and there was an uproar among firms, how can they expect us to answer these kinds of questions when we're dealing with this market crisis? The head of OSI made a number of public pronouncements saying that that letter should not have been sent out. They are interested in focusing on BCP issues, but they were planning on doing that through phone calls, as opposed to making... the answers to these kinds of questions. It's obviously an important issue to firms as well as to the regulators. So, I think that both FINRA and the SEC will be looking at these issues, but they won't bring Gacha cases. I think that will only bring cases where there are significant issues where firms just didn't have anything reasonable in place.
Davi Schmidt:
Great. Have there been any best practices for firms to comply with state regulations and FCPA for prospecting via text? Brian, can you take that one?

Brian Rubin: Marianna?

Marianna Shafir: I have not seen any state regulations based on text messages now. Brian, have you?

Brian Rubin: No.

Marianna Shafir: Adam?

Brian Rubin: I don't remember seeing any either.
Davi Schmidt:
Awesome, okay. We have another one here. [inaudible 00:54:29]. How is FINRA expecting onsite branch inspections by the main BD in the current environment? Are Zoom type conference calls being allowed instead?

Brian Rubin: Yeah. I think that's something you should be talking with your coordinator about. You obviously can't do onsite, so you have to do the best job you can. So that would include Zoom conferencing and other attempts to try to find out what's going on at the branches.

Marianna Shafir: I also know that FINRA is aware of Zoom, the application, the use of it today. Virtual conferencing calls are not captured yet, but Smarsh can capture the instant messages. So if you are using Zoom instant messages, you are required to capture it and Smarsh can capture them.

Brian Rubin: In fact, FINRA is using Zoom itself. I had testimony a couple of weeks ago via Zoom. They were not recording it, but there was a co-reporter there transcribing it.
Davi Schmidt:
Great. What is your recommendation for Reg BI and Form CRS?

Brian Rubin: That's a completely different webinar, which would require at least an hour or more. I don't know that you want us to plug, but we have a lot of resources on our website, if anybody wants to go there, as a lot of law firms do and as FINRA and the SEC do as well.

Marianna Shafir: The deadline has not been pushed, you still need to comply with Reg BI.

Brian Rubin: June 30th, yeah. My son's birthday.
Davi Schmidt:
Okay. I think we have time for one more question here. What is your take on RIAs taking the PPP loans? As a firm that didn't take a loan, I'm curious as to how FINRA will look at the firms that did take it.

Brian Rubin: It's really an SEC issue with the RIAs. They've said that it's permissible, that it has to be disclosed. There is a question as to whether it ultimately makes sense. If firms do need to take that, what is their financial viability? How will clients react to that? I know of a number of firms contemplating it. Some firms took it and then gave it back. It's obviously a significant issue that you have to think about how it applies to you and your clients.
Davi Schmidt:
Awesome. With that, we are pretty much out of time. We'd like to thank everybody for participating in this webinar. If you asked a question and we didn't get to it, we'll definitely have somebody reach out afterwards and make sure all of those questions get answered. If you have additional questions after the webinar, feel free to email us at advantage@smarsh.com or you can email Brian or Adam at their email addresses as well. There has been a recording of this that will be sent out afterwards, so look out for that email. Thank you all for attending and have a great rest of your day.

Adam Pollet: Excellent.

Marianna Shafir: Take care, everyone.