On the Radar with FINRA: Remote Offices, Expungements, Customer Account Transfers, Digital Signature Forgeries

FINRA remained active this summer with a series of important proposed rule changes and risk-related compliance reminders. Here’s a summary to keep you up to date.

Recent Proposed Rule Changes

Remote Offices: FINRA has been methodically moving toward allowing the use of remote offices on a permanent basis. Previously, Bates described a recent proposal to FINRA Rule 3110 (“Supervision”) to allow a home office to be considered a non-branch “residential supervisory location.” (The proposal was published in the Federal Register on August 2, 2022, and the deadline for comments was August 23, 2022.)

On August 9, 2022, FINRA published a new proposal to create a pilot program allowing broker-dealers to conduct remote annual office inspections. The new proposal amends FINRA rules on supervision to set up a pilot which would effectively extend previously granted COVID relief from the requirement of on-site inspections. (That relief is due to expire by the end of the year.) FINRA limited participation in the pilot program by excluding high-risk firms. Another limitation in the proposal requires firms to conduct a risk assessment for each office designated for remote inspection and to have related written supervisory procedures for that assessment. The comment deadline is September 6, 2022.

Expungement: On July 29, 2022, FINRA proposed amendments to the Code of Arbitration Procedure to change the process for the expungement of customer dispute information. The 300-page proposal recounts the history of FINRA’s expungement rules and explains how the new amendments would balance the interests of (i) state and federal securities regulators—to have accurate and relevant information; (ii) investors—to have access “to accurate and meaningful information about associated persons with whom they may entrust their money”; (iii) broker-dealer firms—to have information for employment decisions; and (iv) the brokerage community—to have “a fair process to address inaccurate customer dispute information.”

The new rules would impose additional requirements for expunging customer dispute information. Among them: a “straight-in request” must be decided by a randomly selected three-person panel of experienced public arbitrators with enhanced expungement training, a request must provide notification to state securities regulators who can participate in the hearing, and a request must include a requirement for unanimous agreement of the panel to issue an award containing expungement relief. The proposal would also update procedures for requesting expungement of customer dispute information during simplified arbitrations. (The proposal was published in the Federal Register on August 15, 2022 and the deadline for comments is September 6, 2022.)

Compliance and Risk Reminders

Customer Account Transfer Contracts: On August 8, 2022, FINRA reminded members of their obligations on customer account transfer contracts (FINRA Rule 11870) between broker-dealer firms. Customer account assets move between broker-dealers through a system established for such account transfers (“ACATS”). In the Notice, FINRA reminded members to (i) expedite and coordinate their activities when a customer gives authorized instructions to transfer securities account assets; (ii) not remove an asset from the ACATS system unless it is a “nontransferable asset” (i.e., “an asset that is a product of a third party – e.g., mutual fund/money market fund – with which the receiving member does not maintain the relationship or arrangement necessary to receive/carry the asset for the customer's account”; and (iii) for a receiving member who removes a nontransferable asset using the new “receiver-delete” function in the ACATS system (i.e., a function that a receiving member may use “to designate an asset as a nontransferable asset and remove it from the list of assets to be transferred,” to provide the customer with a list of the nontransferable assets and a request in writing including instructions from the customer with respect to the disposition of the assets. FINRA stated that member obligations “do not end with the designation of an asset as nontransferable” when using the receiver-delete function. FINRA also stated that members must remember to request, in writing, instructions for the disposition of nontransferable assets, and “to expedite and coordinate their response to customer instructions with respect to the transfer of customer account assets.”

Digital Signature Forgery and Falsification: FINRA reminded firms that allow digital signatures “to have adequate controls to detect instances of signature forgery or falsification.” Many of the issues raised concern registered representatives and associated persons attempting to manipulate third-party digital platforms to forge or falsify customer signatures. To help mitigate the risks for firms, FINRA’s Notice details current regulatory obligations, and highlights digital signature scenarios reported to FINRA.

FINRA identified regulatory obligations under FINRA Rule 2010 (“standards of commercial honor and just and equitable principles of trade”), FINRA Rule 4511 (“books and records”), and FINRA Rule 3110 (“Supervision”), describing how signature forgery or falsification violates each. Signature forgery and falsification scenarios were identified in account opening documents and updates, account activity letters, discretionary trading authorizations, wire instructions and internal firm documents related to the review of customer transactions. To combat the problem, FINRA suggested that firms be attentive to potential signature forgery or falsification issues during customer inquiries or complaint investigations, digital signature audit trail reviews, e-mail correspondence reviews, administrative staff inquiries, and customer authentication supervision reviews.

Conclusion

Proposed rules on remote offices and expungement reflect efforts to make processes and procedures current in a changing marketplace. The updates address a broad set of stakeholders and attempt to take advantage of new technological tools. The FINRA compliance Notices demonstrate a recognition that firm’s need to constantly review obligation and procedure to remain in compliance with the consequences of constantly changing market and regulatory conditions. Bates will keep you apprised.

Email us at contact@batesgroup.com or call 503-670-7772 to speak with a Bates representative about how we can help you with your FINRA case, ongoing compliance, or project compliance needs.

The Consultants and Experts at Bates stand ready to support clients with their FINRA matters. Bates Compliance delivers guidance and tailored compliance consulting solutions to our broker-dealer, investment adviser and hybrid firm clients on an as-needed or ongoing basis. Our compliance team includes senior compliance staff and former regulators with expertise in the development of policies, procedures, supervisory and compliance processes, and best practices to enhance compliance and supervisory systems. Our Securities and Financial Services Litigation practice provides retail and institutional litigation consulting and data-driven analytic support and solutions for BDs, RIAs, banks and insurance companies. Our quantitative analysis and qualitative case strategy, advice, and expert testimony cover the full spectrum of investment activity, employment, and regulatory matters.