Securities Litigation

The Securities Industry and Financial Markets Association (“SIFMA”) recently proposed sweeping modernization of industry self-regulatory rules to reflect firms’ successful pivot to remote operations over the past year.  SIFMA suggests significant remote work likely will continue, even after the COVID-19 “pilot program.”

SIFMA proposed a “location agnostic” overhaul of the Rules in its February 16 comment letter in response to FINRA’s call for “lessons learned” during the COVID-19 pandemic.  See FINRA Reg. Notice 20-42 (Dec. 16, 2020).

Firms’ Supervision obligations under FINRA Rules historically have been mostly location-based.  But

At least for firms of sufficient sophistication, the rapid adoption of near 100% remote work practices has showcased capabilities built up over the last decade that allow firms to conduct the full scope of their business activities electronically. These capabilities are location agnostic, even if, before the pandemic, they had been largely utilized from within brick-and-mortar locations, whether designated as an office of supervisory jurisdiction (“OSJ”), branch office, or non-branch location.

At 2.  The SIFMA proposal recognizes that many firms (and indeed other industries) are unlikely simply to the status quo ante.  SIFMA’s proposals include:

• Risk-based, not location-based, supervision with the office of supervisory jurisdiction (“OSJ”) and branch designations reserved for customer-facing or custodial operations.
• Centralized books and records.
• No custodial activities at remote locations.
• Updated definitions of “branch” and “OSJ” in Rule 3110(f).
• Continuance of remote inspections, allowed by FINRA as a temporary COVID-19 response. See FINRA Rule 3110(c).

Qualifications.  SIFMA suggests expanding the number of testing vendors and allowing remote examination.

Reporting Requirements.  SIFMA proposes eliminating the “wet signature” requirement of Rule 1010 and allowing electronic delivery of Form U5 to formerly associated persons.

Office Expansion.  Current FINRA rules restrict the number of offices a firm may add each year without triggering an expensive and time-consuming continuing membership review under FINRA Rule 1017.  See FINRA IM-1011-1.  SIFMA recommends modernizing these Rules consistent with the temporary COVID relief afforded by FINRA in its Reg. Notice 20-08, here.

Technology.  SIFMA recommends a broad rule review in light of technological efficiencies demonstrated during the pandemic, including:

• E-signatures.
• Electronic document delivery.
• Development of a “pandemic playbook” to augment existing business continuity plans. SIFMA suggests it may be beneficial to develop a testing mechanism similar to  SIFMA’s Quantum Dawn industry-wide cybersecurity exercises.

Regulatory Relief.  FINRA’s current norm when issuing temporary regulatory relief is to grant relief for only a brief period, expiring on a date certain, unless extended.  SIFMA suggests flipping that script to grant temporary relief indefinitely, subject to expiration upon advance notice.  That would remove the need for (and uncertainty from) seriatim extensions.

SIFMA’s comment letter is here.