The Financial Industry Regulatory Authority (“FINRA”) recently released its annual Risk Monitoring and Examination Activities Report (the “Report”).
Among other things, the Report states that FINRA will increase its focus on “risks associated with app-based platforms with interactive or ‘game-like’ features that are intended to influence customers . . . .”1 FINRA’s focus on this area comes in the wake of growing attention and scrutiny received by securities trading applications, like the one developed by Robinhood Financial LLC.
The Report states that FINRA will expand its review of companies’ compliance with Regulation Best Interest (“Reg BI”) and Form CRS.2 Reg BI creates a “best interest” standard for broker-dealers when they make recommendations to their customers relating to securities transactions or investment strategies.3 Form CRS is a brief relationship summary broker-dealers are required to provide to their customers. It details “the types of client and customer relationship and services the firm offers; the fees, costs, conflicts of interest, and required standard of conduct associated with those relationships and services; whether the firm and its financial professions [sic] currently have reportable legal or disciplinary history; and how to obtain additional information about the firm.”4 The U.S. Securities and Exchange Commission held a roundtable on Reg BI and Form CRS on October 26, 2020.
Broker-dealers that offer app-based securities trading should be prepared for their communications with customers to be the subject of increased scrutiny by FINRA. The Report notes that FINRA will increase its monitoring of firms’ compliance with FINRA Rule 2210 (Communications with the Public), including “communications relating to certain new products, and how member firms supervise, comply with recordkeeping obligations, and address risks relating to new digital communication channels.”5 Rule 2210 provides “principles-based content standards” that are meant to stay current with developments in communications-technology.6 The Rule requires that broker-dealers communicate with customers in good faith, and provide a reasonable basis for evaluating facts surrounding the trading of securities to ensure those communications are not misleading.7
The Report disclosed that FINRA had identified broker-dealers that had failed to comply with Rule 2210, specifically noting instances of deficient communications relating to entities that were “responsible for digital asset offerings,” misrepresentations made in cash management account communications, insufficient supervision and recordkeeping for digital communications, and a failure to have written supervisory procedures and controls for communications that use “doing business as” names.8
Accordingly, broker-dealers should review their procedures for communicating with customers to ensure they comply with Reg BI, Form CRS, and Rule 2210. A few points to consider when assessing the strength of those procedures include:
- Does your firm have policies, procedures and controls in place to assess recommendations using a best interest standard?
- Does your firm have policies, procedures, and controls addressing Reg BI’s recordkeeping requirements?
- Do your firm and your associated persons consider the express new elements of care, skill, and costs when making recommendations to retail customers?
- Does your firm have policies, procedures, and controls in place regarding the filing, updating, and delivery of Form CRS?
- If your firm has a website, has it posted its Form CRS in a prominent location on that website?
- Do your firm’s communications include material information necessary to make them fair, balanced, and not misleading?
- Do your firm’s communications contain predictions or projections of investment performance to investors that are generally prohibited by FINRA Rule 2210(d)(1)(F)?
1 FINRA, 2021 Report on FINRA’s Examination and Risk Monitoring Program (Feb. 2021) (hereinafter “The Report”).
2 Financial Industry Regulatory Authority, Selected Highlights (Feb. 2021), https://www.finra.org/rules-guidance/guidance/reports/2021-finras-examination-and-risk-monitoring-program/selected-highlights.
3 The Report at 18.
5 Id. at 2-3.
6 Id. at 19.
8 Id. at 21.