1AUGUST 2020 NSCP CURRENTS

NSCPCurrentsFOR COMPLIANCE. BY COMPLIANCE. AUGUST 2020

In this Issue:

An Interview About Mentorships & Compliance Decisions

Introducing NSCP’s 2020 National Conference Keynote Speakers

Just When You Thought it Was Safe to Go Back In The Office (or at Least Think About it): SEC and FINRA Examination and Enforcement Actions in July 2020

Form CRS and Reg BI are Here: Now What?

Getting to Know NSCP’s National Conference Speakers

Tips and Tools for Attending the Virtual National Conference

©2020 National Society of Compliance Professionals, Inc.

Special National Conference Issue

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NSCP would like to thank our Platinum Sponsors:

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An Interview About Mentorships & Compliance Decisions

By Beth Haddock and Michelle Ellis

About the Authors: Beth Haddock is a Managing Partner of Warburton Advisors. She can be reached at beth@warburtonadvisers.com.Michelle Ellis is a Compliance Officer at NatAlliance Securities. She can be reached at mellis@natalliance.com.

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Mentors & 2020

Beth Haddock: Why did you decide to apply for a NSCP mentor?

Michelle Ellis: I reached a point where I wanted to talk with other professionals in the field, but it was difficult to get out and meet people on my own. A mentor has proven to be a good option to help with some of questions and the insight I needed. With the NSCP program, I had access to mentors across the country. I am in Texas and you are in New York. Participating in the mentor program has been valuable, even though we have not met in person yet. NSCP’s mentor program provided me a chance to meet a few other individuals as well, some local and others not. It has been a great resource to get varying opinions.

Beth Haddock: What is your biggest challenge this year -- COVID-19, remote work, new privacy regulations, Regulation Best Interest, to keep-up with the business or something else?

Michelle Ellis: There have been several challenges in 2020; the biggest has been Regulation Best Interest (“Reg BI”). As a small firm, which does very little retail business, I am the primary person responsible for the implementation of Reg BI, including training, while maintaining my current workload. I have been reviewing compliance software systems to determine if this could alleviate some of my work, but the costs are well over our small firm’s budget. My plan is to continue to review and evaluate compliance software systems to keep on top of current solutions in the event my firm’s budgetary restrictions change for the better. I may also get some ideas for workflow improvements through research and demonstrations.

Beth Haddock: What are some examples of guidance and advice you received from your mentor?

Michelle Ellis: Sometimes I forget that not everybody likes or knows about compliance rules. The best piece of advice I received from you was “to know your audience.” I work with an older group of individuals and they tend to be somewhat set in their ways of doing business. I often get emails back that make it clear to me they do not understand why I am asking them to do something or report information to compliance. In the past, these emails would frustrate me. I could not understand how they were not familiar with the

When Beth Haddock is not mentoring Michelle, Beth is Managing Partner of Warburton Advisors helping others build, manage and audit their compliance programs. For more information, see WarburtonAdvisers.com and please reach out to connect.

When Michelle Ellis is not learning and developing her CCO expertise, Michelle is helping management and employees at NatAlliance Securities. Please reach out to connect on LinkedIn.

In this article, Beth Haddock (mentor) interviews Michelle Ellis (mentee). They discuss how compliance officers can be effective in the midst of challenges and how a mentor relationship can help compliance officers do more with less as budgets are expected to contract.

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particular compliance rule. Typically, I would have several email exchanges before I could get what I needed from the individual. You helped me understand that while I like compliance and following the rules, not everyone is as eager as I am! You helped me learn to frame my emails differently, so I can get the person on board at the start. You helped me accept that it is fine to help the person asking the question by giving them enough information so they understand they are accountable going forward.

Another important piece of advice I received from you was to stop asking for more resources without giving support for the need. I had a habit of asking for resources without providing research, sources or clarity on the regulatory need. For example, I tried to get my team on board for purchasing new software and the response was always no. On my last attempt, I did not ask without supporting the request more thoroughly. I said exactly what was needed and why. The response was much quicker and everyone agreed that software was needed.

Beth Haddock: What has been the greatest benefit you have received from NSCP Mentoring Program?

Michelle Ellis: Peace of mind. It makes a huge difference. You know you have someone in your corner that has had similar experiences and can help guide you. I know if a problem arises and am stuck, I can always call or email you. Even being able to bounce ideas off of someone in the same role is a great benefit. There is no downside to having a mentor help you grow into a better compliance professional.

Beth Haddock: What did you learn about NSCP that you did not know before engaging in the program?

Michelle Ellis: I have been a member of NSCP for a few years, so I am pretty familiar with the website, educational opportunities and the overall helpfulness of the group. Before engaging in the mentorship program, I would have been more likely to ask current and previous coworkers for help with issues. Engaging in the mentorship program has helped me see the true benefit of the NSCP community. It has allowed me to confide and ask questions without worrying about whether the person I am asking has the time to work through issues with me. I have found NSCP members are eager to help. I have talked with several members and have personally seen how much they want to help other professionals. NSCP has a great membership base with a wealth of knowledge, I do not think I would know the true scope of the knowledge available had I not joined the mentor program.

Beth Haddock: Having experienced the benefits of a mentor, would you ever consider being one in the future?

Michelle Ellis: Yes, I would definitely consider being a mentor in the future.

Documenting Decisions & Regulatory Experience

Beth Haddock: Do you think about documenting high risk, routine or all decisions in your procedures? Could you please provide an example of when documentation was beneficial in preparing a response to a regulatory inquiry?

Michelle Ellis: I think about documenting everything, but it is not feasible for me at the moment. I tend to document anything that I consider high risk or outside of routine processes and procedures. That is in line with regulatory expectations and my procedures, but of course I think there is always more I can do.

As an example, in the past, I handled a situation with a trader. The trader was not showing-up to work and was slow to respond to requests. We were concerned with his quality of work, but the firm had not encountered this situation before and the individual was not necessarily doing anything wrong. Regardless, in an abundance of caution, we decided to document our interactions with the trader and increase the frequency of our reviews. Through that work, we discovered that the individual was engaged in an unapproved outside business activity, and his failure to disclose that activity to the firm resulted in his termination. Later, we received an inquiry from FINRA about his termination. We were then able to provide the documentation FINRA requested. The firm demonstrated that customers suffered no harm and that we appropriately monitored the registered representative and terminated his affiliation upon discovery of his unapproved outside business activity.

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Beth Haddock: Has your work been examined by a regulator? If not – is that something you think about?

Michelle Ellis: Our compliance programs have been reviewed by regulators. The reviews have been routine with nothing out of the ordinary so they have not been too concerning for me. That said, I think about the compliance program being examined all the time. It’s always a work in progress. I try to find ways to improve our program by building on the basics.

My greatest concern is the compliance responsibilities I delegate to others in the firm. Being the only compliance professional at my firm, if I need help I have to delegate. I try to only delegate the less technical compliance tasks. I have to trust that the person I give the task to will properly complete it or ask questions if needed. As you know, we have discussed smart delegation and you have encouraged me to document and delegate particular operational tasks to those I believe have the requisite skills and experience. I rarely delegated work before the pandemic. Working from home is not always as fast and easy as I would like, so I have had to delegate more often. Sometimes delegation saves me time but not always. To supervise the delegated work, I need to make sure I understand the thought process of the person helping me and often I revise documents to clarify points or add information.

Contemporaneous Records & Supplements Thereto

Beth Haddock: In 2019, the SEC settled a case against Deer Park https://www.sec.gov/litigation/admin/2019/ia-5245.pdf for among other things violations of the compliance rule 206(4) -7 because its valuation and pricing procedures were not adequate. Part of the settlement was an agreement to hire a new CCO. When you think about investment management compliance, how do you make sure compliance and management/supervision is clearly separated and documented? How do you know you have written enough? Do you use Committees or independent audits?

Michelle Ellis: I try to keep everything as separate as possible between compliance and management/supervision. Compliance saves its documents to different drives, and compliance is in a different location, so there is a clear separation of duties. Additionally, the firm uses committees and we have independent audits. Our asset management firm is small having only 3 people, so I clearly define each person’s role in our policies and procedures. However, as we have discussed, particularly with Reg BI and delegating tasks, there is a fine line between accurately delineating a process and writing procedures that are overly burdensome and potentially unrealistic. It is a matter of accurately identifying a risk and knowing when more documentation is needed.

Beth Haddock: This spring, the SEC announced a settlement with Ares Management. https://www.sec.gov/news/press-release/2020-123 “Ares did not require its compliance staff, prior to approving the trades, to sufficiently inquire and document whether the board representative and members of his Ares team possessed material nonpublic information relating to the portfolio company.” Can you explain what you think are best practices for documenting approvals for directorships or personal trades? How do you make sure conflicts are described and mitigated? Do you ever say “no” to a request?

Michelle Ellis: My number one best practice is pre-approval. I know a lot of people find it annoying to seek pre-approval for outside business activities or personal trades, but this is the first and best chance I have to prevent someone from breaking rules or taking on unmitigated conflicts. It also allows me an opportunity to create boundaries and rules before anything takes place. Conflicts can be tricky for me, so I tend to try to find all the conflicts myself first, discuss any conflicts the individual may feel are present, and get with a select group of managers to discuss any conflicts they may have found. Then as a team we work to mitigate the conflict uncovered.

Yes -- I have said “no” to requests. In these cases, I documented the reason for rejecting the request and I also let the individual know if it would ever be open for discussion again. As part of a routine exam, regulators will ask this question, so it is good to document when something is not approved.

Beth Haddock: In the SEC matter against Judy K. Wolf (2015), https://www.sec.gov/alj/aljdec/2015/id851ce.pdf, the SEC took action because Ms. Wolf supplemented her insider trading surveillance

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records in an inappropriate way. How do you make sure supplements to your records are dated so if the regulators inspect them there is a clear record of material revisions?

Michelle Ellis: After changing a record, I save it under a new file name and date. Changes are a natural part of a functioning compliance program, and it’s my job to identify gaps and augment where needed. Sometimes when reviewing, I don’t receive all the facts at once so updates need to be made to a review. Sometimes someone else is doing the review work. When I review their work, I have changes which may be due to current regulatory developments or something I learned through NSCP. This would also require an update to the review. I also prefer that individuals email me documents instead of submitting hard copies. I keep a date stamped copy of the entire email in the file.

The Year Ahead

Beth Haddock: As you think about the year ahead, what advice do you have for compliance officers to manage compliance programs in this environment?

Michelle Ellis: In the current environment, many of us are working from home, partially working at the office or working in an almost empty office. This can leave compliance officers feeling isolated. I encourage compliance officers to reach out to each other, join a NSCP committee or join a local compliance group. I also highly recommend seeking a mentor or becoming mentor. Many of us will encounter things in compliance that we have not experienced in the past. Having people to call upon for guidance and advice will be tremendously helpful in the coming year.

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Introducing NSCP’s 2020 National Conference Keynote Speakers

By Holly Orefice

About the Author: Holly Orefice is the Conference Manager at the National Society of Compliance Professionals (NSCP).

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This year’s NSCP National Conference offers 68 educational sessions, all eligible for continuing education credits, plus 3 informative keynote addresses over 3 days. The conference will be virtual this year, so you can participate from wherever you are. Most of the live sessions will also be recorded for attendees to view and have access to after the conference. Networking is also encouraged during the conference and the virtual platform will allow for attendees, speakers and venders to connect and interact with each other through direct messaging and optional one on one video calls.

For more information and to register, please visit: https://national.nscpconferences.org

MONDAY, OCTOBER 19, 2020

SEC Commissioner Hester Peirce will share her perspectives on the SEC’s most important initiatives for compliance.

Commissioner Peirce has been a vocal proponent of compliance professionals. In her remarks at NSCP’s National Conference on October 30, 2018, Commissioner Peirce stated that she “believes in building certain norms into the industry that foster compliance…and encourage an understanding of the purpose behind rules and regulations. Overreliance on enforcement and second guessing of compliance officers cast doubt on where the responsibility for compliance lies.”1

From her speaker bio:

Hester M. Peirce was appointed by President Donald Trump to the U.S. Securities and Exchange Commission (SEC) and was sworn in on January 11, 2018. In June, she was renominated to a 5-year term that extends to June 2025.

Prior to joining the Commission, Commissioner Peirce served as Senior Research Fellow and Director of the Financial Markets Working Group (now Program on Financial Regulation) at the Mercatus Center at George Mason University. While at the Mercatus Center, Commissioner Peirce’s research explored how financial markets foster economic growth and prosperity and the role well-designed regulation plays in protecting investors and consumers while promoting financial stability and innovation. Commissioner Peirce co-edited two books, authored publications, testified before Congress, and served on the SEC’s Investor Advisory Committee.

Before joining the Mercatus Center, Commissioner Peirce worked on Senator Richard Shelby’s Committee on Banking, Housing, and Urban Affairs staff as Senior Counsel. In that position, she oversaw financial regulatory reform efforts following the 2008 financial crisis and conducted oversight of the regulatory implementation of the Dodd-Frank Act.

From 2004 to 2008, Commissioner Peirce worked as counsel to SEC Commissioner Paul S. Atkins. Prior to serving Commissioner Atkins, Commissioner Peirce worked as a Staff Attorney in the Division of Investment Management.

Before working at the SEC, Commissioner Peirce was an associate at Wilmer, Cutler & Pickering (now WilmerHale) and clerked for Judge Roger Andewelt on the Court of Federal Claims.

Commissioner Peirce earned her B.A. in Economics from Case Western Reserve University and her J.D. from Yale Law School.

1. Hester Peirce, Commissioner, U.S. Securities and Exchange Commission, Costumes, Candy and Compliance: Remarks at the National Membership Conference of the National Society of Compliance Professionals (Oct. 30, 2018), available at https://www.sec.gov/news/speech/speech-peirce-103018

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TUESDAY, OCTOBER 20, 2020

Former regulator and CCO, Christian Hunt, will speak about Human Risk: Bringing Science to Compliance.

From his speaker bio:

Christian Hunt is the founder of Human Risk Limited, a Behavioral Science Consulting and Training Firm, specializing in the fields of Risk, Compliance, Conduct and Culture. He was previously Head of Compliance & Operational Risk Control (C&ORC) for UBS EMEA and Global Head of C&ORC for UBS Asset Management. Having pioneered the use of Behavioral Science in these functions,

he became Head of Behavioral Science at UBS; a role specifically created for him. Prior to joining UBS, Christian was Chief Operating Officer of the Prudential Regulation Authority (PRA), a subsidiary of the Bank of England responsible for the regulation of Financial Services. He joined the PRA’s predecessor organization, the FSA, as Head of Department, International Banking Supervision. He began his career at Arthur Andersen, before joining Deutsche Bank in Investment Banking. Christian was also Chief of Staff to the Chairman of Deutsche Bank, London and represented the Firm at the UK Panel on Takeovers and Mergers. He also worked as a Principal for a Family Office. Christian is a Fellow of the Institute of Chartered Accountants of England & Wales and a Fellow of the Royal Academy of Arts, Manufactures & Commerce. He holds a Masters from the University of Oxford.

WEDNESDAY, OCTOBER 21, 2020

Norm Ashkenas will conduct a candid interview with Robert Cook, FINRA’s President & CEO, to discuss FINRA’s priorities and initiatives.

Robert W. Cook is President and CEO of FINRA, and Chairman of the FINRA Investor Education Foundation.

From his speaker bio:

From 2010 to 2013, Mr. Cook served as the Director of the Division of Trading and Markets of the U.S. Securities and Exchange Commission. Under his direction, the Division’s professionals were responsible for regulatory policy and oversight with respect to broker-dealers, securities exchanges and markets, clearing agencies and FINRA. In addition, the Division reviewed and acted on proposed rule filings from self-regulatory organizations, including the securities exchanges and FINRA,

and was responsible for implementing a range of initiatives and studies generated by the Dodd-Frank and JOBS Acts. He also directed the staff’s review of equity market structure.

Immediately prior to joining FINRA, and before his service at the SEC, Mr. Cook was a partner at Cleary, Gottlieb, Steen & Hamilton, LLP, based in Washington, DC. His practice focused on the regulation of securities markets and market intermediaries, including securities firms, exchanges, alternative trading systems and clearing agencies. During his years of private practice, Mr. Cook worked extensively on broker-dealer regulation, advising large and small firms on a wide range of compliance matters.

Mr. Cook earned his J.D. from Harvard Law School in 1992, a Master of Science in Industrial Relations and Personnel Management from the London School of Economics in 1989, and an A.B. in Social Studies from Harvard College in 1988.

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Just When You Thought It Was Safe to Go Back in the Office (Or at Least Think About It): SEC and FINRA Examination and Enforcement Actions in July 2020

By Brian Rubin and Dylan de Fouw

About the Authors: Brian Rubin is a Partner at Eversheds Sutherland. He can be reached at brianrubin@eversheds-sutherland.com. Dylan de Fouw is an Associate at Eversheds Sutherland. He can be reached at dylandefouw@eversheds-sutherland.com.

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July 1975 was a lot like July 2020. For those of us old enough to remember, we experienced a long, hot summer. And the country was dealing with a force of nature that was killing people randomly. There was also push to do something about it “quick,” to “put all your businesses on a payin’

basis.”1 However, 1975’s horror did not blanket the world. Instead, it focused on Amity Island. And this terror wasn’t COVID-19. Instead, it was . . . Jaws (cue the music: “dun dun… dun dun…. dun dun dun dunnnnnnnnnnnnn!”)2

This month, as we analyze SEC and FINRA examinations and enforcement actions from July 2020, we also focus on the Steven Spielberg classic summer blockbuster Jaws, which has been called the “perfect horror movie.”3 It featured Bruce the Shark (named after Spielberg’s attorney),4 police chief Martin Brody (played by Roy Scheider), professional shark hunter Sam Quint (Robert Shaw), marine biologist Matt Hooper (Richard Dreyfuss), and a “despicable” politician, Mayor Larry Vaughn (Murray Hamilton).5 (No comment about past, present, or future politicians.)

Not only did the movie showcase terrific characters (who doesn’t love an iconic character named after a lawyer?) (even if the character is a killer), but it also contained some great lines, including the following:

Chief Brody: “You’re gonna need a bigger boat!” (ranked 35th on American Film Institute’s list of “The 100 Greatest Movie Quotes of All Time).6

Quint: “Sometimes that shark he looks right into ya. Right into your eyes. And, you know, the thing about a shark... he’s got lifeless eyes. Black eyes. Like a doll’s eyes. When he comes at ya, doesn’t seem to be living... until he bites ya, and those black eyes roll over white and then... ah then you hear that terrible high-pitched screamin’.”7

Mayor Vaughn: “Martin, it’s all psychological. You yell ‘barracuda,’ everybody says, ‘Huh? What?’ You yell ‘shark’ and we’ve got a panic on our hands on the Fourth of July.”8

And, of course, it offered the tagline: “Just when you thought it was safe to go back in the water.”9

But, most important for our purposes, the movie had important lessons that apply to examinations and enforcement actions, which should help compliance officers and other securities professionals get through the rest of the summer.

Regulation Best Interest

Mayor Vaughn: “I was-I was acting in the town’s best interest.”

Chief Brody: “That’s right! You were! You were acting in the town’s best interest, and that’s why you’re gonna do the right thing! That’s why you’re gonna sign this, and we’re gonna pay that guy what he wants!”10

Jaws dealt with the best interest standard??? Who knew?? Maybe that’s why the SEC was drowning in comment letters. Maybe that’s why the proposed regulations caused so many waves. Maybe that’s why people complained that the SEC was taking a bite out of their business. Sounds too fishy to believe, doesn’t it? As everyone knows, the “best interest” standard is not just for small-town mayors, it has now been promulgated in the securities laws. And the securities regulators have battened down the hatches and are now on a regulation best interest hunting expedition.

1. https://www.imdb.com/title/tt0073195/characters/nm0001727. 2. https://iamamoviecritic.wordpress.com/2015/07/13/the-sound-of-jaws-dun-dun-dun-dun-dun-dun-dun-dunnnnnnnnnnnnn/. 3. https://www.comingsoon.net/horror/news/748448-5-reasons-jaws-perfect-horror-movie. 4. https://www.npr.org/2019/08/09/745651910/jaws-shark-gets-his-bite-back-a-love-story. 5. https://www.comingsoon.net/horror/news/748448-5-reasons-jaws-perfect-horror-movie. 6. https://www.afi.com/afis-100-years-100-movie-quotes/. If anyone is reading this footnote (and if you care about movies), the number one quote is “Frankly, my dear, I don’t give a damn” from Gone with the Wind.7. Id 8. Id9. https://bookroo.com/quotes/jaws. 10. https://www.quotes.net/movies/jaws_5942.

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A couple of weeks after the June 30, 2020 compliance date for Regulation Best Interest (Reg BI) and Form CRS, the SEC began examining firms for compliance.11 The request letter from the SEC’s Office of Broker-Dealer Exchanges, sent to an unknown number of broker-dealers, was lengthy, but among the more important requested items were the following:

• Description of• brokerage account types that a retail customer may establish;• non-brokerage accounts, including advisory accounts, which a prospective customer who is a

retail customer may establish; and• training delivered to employees on Regulation Best Interest.

• Copy of• all grids or schedules given to registered personnel that set forth the compensation method;• marketing materials given to retail customers, including those that use the term “adviser” or

“advisor”;• written policies, procedures, memorandum, or other materials that pertain to the firm’s compliance

obligations with FINRA Rule 2111;• written policies, procedures, memorandum, or other materials that pertain to Regulation

Best Interest and Form CRS;• the Relationship Summary provided to retail customers and all other documents provided to

customers for the purpose of meeting the disclosure obligation under Regulation Best Interest;and

• surveillance and monitoring reports designed to identify recommendations inconsistent withRegulation Best Interest.

• A list of all• proprietary products sold to retail customers, and• third parties or affiliates with which the firm has arrangements for sale of their products to retail

customers.• If the firm subjects any products or account types to a focused review to determine consistency with

Regulation Best Interest or to consider potential modifications or limitations for consistency withRegulation Best Interest, a list of those products or account types.

• Documentation of the firm’s analysis of conflicts.

Takeaways:

• First, this request was expected, given prior statements from the Staff. However, the SEC may havepulled the trigger (or let the shark out of the cage) sooner than a lot of securities professional hadexpected.

• Second, there’s no blood in the water (so to speak)—yet. The SEC and FINRA stated that they arelooking for “good faith” compliance and will not bring “gotcha” enforcement actions. This is the first timethe SEC is sticking its toe in the water. (You saw that one coming, right?) Any enforcementaction will likely be years away because most enforcement actions take at least one or two years beforethey are finalized.

• Third, if your firm didn’t receive this request, you may wish to review it to see how you would respond.

School Teachers

Quint: “It proves that you wealthy college boys don’t have the education enough to admit you’re wrong.”12

Sometimes grizzled shark hunters know more than college educated oceanographic researchers. And sometimes they don’t. (Spoiler alert: One survives, the other doesn’t.) (Hint: The college boy who survives.) Similarly, sometimes teachers do the teaching, and sometimes teachers do the learning. The settled order that the SEC issued on July 28, 2020, is about the latter, where financial professionals taught teachers about retirement products and services. In that case, a dually registered firm was assessed a $20

11. https://us.eversheds-sutherland.com/portalresource/SECRegBIExamRequest.pdf.12. https://www.rottentomatoes.com/m/jaws/quotes/.

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million penalty for its advisory activities related to the K-12 market.13 The SEC found that the firm failed to disclose to certain Florida teachers who were potential and actual clients that its parent was providing cash and other financial benefits to a for-profit company owned by Florida K-12 teachers’ unions. In exchange for the payments, that company referred teachers to the firm and to the parent’s products and services. In addition, the firm did not disclose that the people who referred them to the firm were employees of the parent. The firm also failed to adopt and implement policies and procedures reasonably designed to prevent violations of the Advisers Act and the rules thereunder. In assessing sanctions, the Commission considered the firm’s cooperation and remedial acts. In addition to the monetary penalty, in settling the action, the firm undertook to cap certain management fees.

In a public statement about the case,14 SEC Chairman Jay Clayton highlighted three points:

• First, the SEC’s “Teachers Initiative,” announced about a year ago,15 “is an important aspect of [the SEC’s]efforts to focus enforcement and investor education resources where they are needed and will have thegreatest impact – we have at least 800,000 teachers who participate in defined contribution plans witha total of over $1 trillion in assets.” In both defined benefit and defined contribution plans, the chairmanestimated that teacher retirement assets totaled more than $2 trillion.

• Second, the Enforcement Division has “recognized that teachers need and deserve our attention, andthey have turned this recognition into tangible actions with lasting benefits.”

• Third, “today’s action should be a signal to teachers and those who sell them investment products.” TheChairman warned that if firms “are engaged in (or facilitating) any conduct that is similar to the conductour Enforcement Division has brought to light today, Stop. Further, remedy it and report your efforts tous promptly. We believe in substantial credit for self-reporting and cooperation. We also believe thatthose who continue a practice that is clearly inconsistent with the law have no place in our markets.”

Takeaways:

• First, the SEC has been investigating several firms that are active in the 403(b) and 457 marketplace, andwe expect that the SEC will bring other enforcement cases.

• Second, given the Chairman’s interest in this area, and the Commission’s view that teachers “need anddeserve our protection,” firms may want to review their policies, procedures and disclosures regardingbasic issues such as disclosures, suitability and revenue sharing. Indeed, Chairman Clayton said,“[i]nvestment professionals and others who are providing retirement services to teachers (and similargroups) should examine their practices to ensure that they are appropriately discharging theirobligations and, in particular, that there is full and fair disclosure of fees, expenses and conflicts.”

• Third, firms may want to review the sanctions ordered in this settlement.• On its face, it is not clear how the decreased management fee relates to the charges. However, it

is possible that the firm negotiated a decreased monetary penalty in exchange forthe reduced fees.

• The order also noted that the firm received credit for cooperation and remedial acts. TheChairman similarly emphasized, “we believe in substantial credit for self-reporting andcooperation, and investment professionals should remedy any potentially improper conduct and report their efforts to us promptly.”

• Finally, while this case deals with teachers in schools, you may want to know that a school of sharks iscalled a “shiver.”16 (Feel free to use this tidbit to impress your friends, family, and securities regulators.)

Anti-money Laundering

Quint: “Gimme your hands… [Quint grabs Hooper’s wrists and looks at his hands and examines them] Dogfish [contemptuously] You’ve got city boy hands, Hooper. You been countin’ money all your life.”17

13. https://www.sec.gov/litigation/admin/2020/34-89405.pdf.14. https://www.sec.gov/news/public-statement/clayton-protecting-teachers-retirement-savings.15. https://www.sec.gov/news/press-release/2019-85.16. https://www.finsunited.co.nz/bite-blog/back-to-school-sharks.17. https://www.quotes.net/movies/jaws_5942.

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Different people use different techniques to assess the veracity or experience of others. In last month’s Curb Your Enforcementism18 article published in Currents, we cited the example of Larry David, who sometimes peers into the eyes of others (with and without his glasses) to determine—he believes—whether they are telling the truth. Another method could be to take someone’s hands and examine them. However, we think it’s unlikely that the SEC or FINRA would look at the hands of registered or associated persons to determine their experience with “countin’ money” (particularly in the age of COVID-19). Indeed, using a different methodology (as far as we know), on July 29, 2020, FINRA fined a firm $474,000 for anti-money laundering (AML) and other failures.19 FINRA found that in a 15-month time period, the firm failed to establish and implement an AML laundering compliance program reasonably designed to detect and report suspicious trading activity in low-priced securities. At least 2.07 billion shares, valued at approximately $221 million, were traded through the firm without being reasonably reviewed for suspicious activity.

FINRA noted that the firm failed to follow the Department of Treasury’s (DOT’s) standard for determining whether to file a suspicious activity report (SAR). The DOT requires every broker-dealer to file a SAR when there is “suspicion” that a transaction involved unlawful activity or lacked an apparent lawful purpose. The firm, on the other hand, required proof of actual fraud before filing a SAR. Just as Mayor Vaughn required cold hard proof of a shark before taking protective measures on the beaches, a firm that requires proof of actual fraud before filing a SAR might find itself in “deep water.”

According to FINRA, the firm also failed to implement its procedures requiring the collection and completion of deposit review forms in connection with the deposit of low-priced securities. This resulted in missed red flags of potentially suspicious activity. When the firm did obtain deposit review forms, they were often inaccurate or incomplete. These errors and oversights were relevant to the red flags enumerated in the firm’s AML procedures.

Due to the failure to implement its AML procedures, the firm accepted the deposit of millions of shares of low-priced securities without having sufficient information to perform a review for red flags. Without this information, the firm could not make a reasonable determination regarding the suspicious nature of the transactions and whether a SAR filing was warranted. FINRA explained that the firm’s failure to devote adequate resources to the program was one of the main reasons the firm’s AML compliance program failed to reasonably detect and report suspicious trading activity.

In resolving the matter, $100,000 of the fine was for unrelated municipal securities violations. The firm was also ordered to engage an independent consultant to conduct a comprehensive review of the reasonableness of the firm’s policies, systems, procedures, and training related to compliance.

Takeaways:

• First, FINRA and the SEC continue to be concerned about AML issues, as evidenced by the enforcement cases brought virtually every month.• Second, it is important that firms follow their procedures. A firm’s failure to follow its procedures is “low hanging fruit” (or “blood in the water,” if you prefer) for securities regulators. • Third, FINRA often sanctions firms if the regulator believes that the firm did not provide sufficient resources to address an issue.• Fourth, if a firm has an issue, the firm should consider fixing it, otherwise, FINRA may order the firm to retain an independent consultant to fix the issue, which may be more expensive than a fine.

Rule 8210/Failure to Comply

Matt Hooper: “Sharks have everything a scientist dreams of. They’re beautiful―How beautiful they are! They’re like an impossibly perfect piece of machinery. They’re as graceful as any bird. They’re as mysterious as any animal on earth. No one knows for sure how long they live or what impulses―except for hunger―they respond to.”20

18. https://us.eversheds-sutherland.com/portalresource/lookup/poid/Z1tOl9NPluKPtDNIqLMRV56Pab6TfzcRXncKbDtRr9tObDdEqWpCmG3!/fileUpload.name=/NSCP%20Currents%20July%202020%20REPRINT%20Rubin%20Oliveira.pdf. 19. FINRA AWC No. 2017053708001 (July 29, 2020), https://www.finra.org/sites/default/files/fda_documents/2017053708001%20Hilltop%20Securities%2C%20Inc%20CRD%206220%20AWC%20sl.pdf.20. https://bookroo.com/quotes/jaws.

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FINRA, luckily, hasn’t yet gone the route of starve-the-associated-persons-to-get-them-to-respond. Instead, it brings disciplinary actions for failing to respond to Rule 8210, FINRA’s provision allowing it to request documents, information, and testimony from member firms and their associated persons. In July 2020, FINRA highlighted this rule, calling it FINRA’s “most prevalent” rule violation that resulted in bars. (If you had your money on misuse of customer funds, fraudulent statements, or shark bites, thanks for playing our game.)

In a “blog” published on FINRA’s website on July 20, 2020, FINRA’s head of Enforcement, Jessica Hopper, wrote about “The Importance of FINRA Rule 8210.”21 (Or perhaps it was a “white paper.” Or maybe it was a “screen treatment” for Shark Week: “Sharks v. FINRA Enforcers, equipped with only a laptop and Rule 8210.”) According to Ms. Hopper, in the last two years, FINRA barred more than 730 individuals for such violations, which was more than one-third of the enforcement cases that resulted in individuals being barred. Ms. Hopper emphasized that Rule 8210 is “a crucial tool that FINRA relies on to protect investors and the market by requiring individuals under FINRA’s jurisdiction to provide information when requested.” And the penalties for failing to comply with Rule 8210 are “severe—most often a bar from the securities industry if someone under investigation decides to stop cooperating with FINRA.”

Takeaways:

• First, the implications of failing to comply with FINRA requests can be quite serious. If a firm or an individual does not want to respond, they need to carefully consider the implications. • Second, while the blog addresses the easy issue (a complete failure by an individual to respond), it doesn’t address more nuanced and more difficult issues. Perhaps in the future, FINRA can let the industry know its thoughts about some of these other elephants in the room (or sharks in the water, if you prefer). • What happens if someone believes FINRA is overreaching or wants to assert a privilege? A firm or an individual cannot go to a judge (or even a lifeguard) to quash the request. The firm or individual must fail to produce. FINRA will then file a disciplinary action. At that stage, for the first time, a neutral party will determine whether the request was appropriate or whether the firm or the individual had a basis to refuse to produce. • What happens when a firm or an individual produces after FINRA’s deadline? • Do individuals (such as CCOs) get charged if their firm fails to comply with FINRA’s requests? • What happens if a firm or an individual produces most, but not all, of what FINRA requested? Just as there was Jaws 2, Jaws 3D, and Jaws: The Revenge (also known as Jaws 4: The Revenge) maybe we’ll be treated to future “blogs” about Rule 8210.

Supervision

Chief Brody: “I can do anything; I’m the chief of police.”22 (No comment.)

Quint: “Y’all know me. Know how I earn a livin’. I’ll catch this bird for you, but it ain’t gonna be easy. Bad fish. Not like going down the pond chasin’ bluegills and tommycods. This shark, swallow you whole. Little shakin’, little tenderizin’, an’ down you go. And we gotta do it quick, that’ll bring back your tourists, put all your businesses on a payin’ basis. But it’s not gonna be pleasant. I value my neck a lot more than three thousand bucks, chief. I’ll find him for three, but I’ll catch him, and kill him, for ten. But you’ve gotta make up your minds. If you want to stay alive, then ante up. If you want to play it cheap, be on welfare the whole winter. I don’t want no volunteers, I don’t want no mates, there’s just too many captains on this island. $10,000 for me by myself. For that you get the head, the tail, the whole damn thing.”23 (Again, no comment.)

On July 21, 2020, FINRA brought a significant settled supervision case, where the firm was fined $300,000 and the CCO was fined and suspended.24 The case primarily dealt with the firm’s failure to supervise one of

21. https://www.finra.org/media-center/blog/working-front-lines-investor-protection-importance-finra-rule-8210. 22. https://www.rottentomatoes.com/m/jaws/quotes/. 23. https://www.rottentomatoes.com/m/jaws/quotes/. 24. FINRA AWC No. 2018060577602 (July 21, 2020), https://www.finra.org/sites/default/files/fda_documents/2018060577602%20Concorde%20Investment%20Services%2C%20LLC%20CRD%20151604%20Kimberlee%20Elizabeth%20Levy%20CRD%204065593%20AWC%20sl.pdf.

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its former representatives, who allowed her then-husband to engage in securities business with the firm’s customers even though the husband was serving a one-year suspension.

According to FINRA, the firm had reason to believe that the husband was engaging in an impermissible securities practice. A consultant hired by the firm recommended that the CCO schedule a surprise inspection of the wife’s branch office to determine whether the husband was, in fact, servicing the firm’s customers. The CCO was selected for this task because she was responsible for the firm’s branch inspection program. The CCO did not schedule an inspection of the branch office until approximately six months later. FINRA further alleged that the CCO failed to adequately tailor the inspection to determine whether the husband was conducting a securities business. FINRA pointed out that no customers were contacted, and no branch emails were reviewed.

Other red flags existed. On one occasion, the firm’s clearing company notified the firm that it rejected a check made out to both the clearing company and the husband. The firm failed to conduct an investigation to determine why a customer wrote the husband’s name on the check.

Upon completion of the husband’s one-year suspension, the firm hired him. As set forth in the firm’s written supervisory procedures, the CCO was required to establish a control system of heightened supervision because the husband had a disciplinary background. This system would have included a daily review of the husband’s transactions and correspondence. Notably, the CCO decided against implementing heightened supervision. FINRA found that had the husband been placed on heightened supervision, the firm might have learned that he was conducting business in states where he was not registered and that he was recommending unsuitable trades. For example, the husband recommended a private placement purchase to a 22-year-old student whose account opening documents listed a moderate risk tolerance, an annual income of less than $25,000, and a net worth of approximately a half a million dollars. According to FINRA, the firm approved the recommendation without verifying the net worth claimed in the private placement application—between $1 million and $1.1 million—was accurate.

In settling the matter, the CCO was suspended for four months, fined $10,000, and ordered to complete 40 hours of continuing education concerning supervisory responsibilities.

Takeaways:

• First, firms need to be very careful about suspended representatives engaging in securities business. (One might say that firms should be “sharks” in hunting for such individuals or the regulators could take a bite out of them.)• Second, firms and CCOs are often sanctioned for failure to follow up on red flags. An issue highlighted by a consultant or a clearing firm could be considered a “bloody” red flag. • Third, CCOs should review WSPs to determine how their responsibilities are described. • Fourth, FINRA may review a firm’s failure to place a representative on heightened supervision.

Research

Matt Hooper: “This was not a boating accident! It wasn’t any propeller; and it wasn’t any coral reef; and it wasn’t Jack the Ripper! It was a shark.”25

Sometimes you need research, and sometimes you don’t need no stinkin’ research. And sometimes, firms are sanctioned if their research allegedly stinks. For example, on July 6, 2020, FINRA fined a firm $100,000 in a settled action for publishing research reports with allegedly deficient disclosures, including inaccurate disclosures regarding investment banking relationship with companies covered by the reports.26 According to FINRA, the disclosure breaches arose from a failure to track the firm’s investment banking activities and communicate those activities to research supervisors responsible for incorporating the required disclosures into the firm’s research reports.

25. https://www.rottentomatoes.com/m/jaws/quotes/. 26. FINRA AWC No. 2017054925801 (July, 6, 2020), https://www.finra.org/sites/default/files/fda_documents/2017054925801%20Chardan%20Capital%20Markets%2C%20LLC%20CRD%20120128%20AWC%20sl.pdf.

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FINRA also alleged that the firm failed to implement information barriers between the firm’s investment banking and research personnel, which resulted in investment bankers improperly suggesting that researchers should assist in the solicitation of investment banking clients. This failure created the risk that research analysts could be inappropriately influenced by the firm’s interest in attracting and maintaining investment banking business. According to FINRA, the information barrier breaches arose from a failure to block email communications between investment banking and research personnel or to ensure that compliance personnel acted as intermediaries in such communications.

In resolving the matter, the sanctions included a requirement that the firm review its supervisory system and implement procedures concerning research reports and the supervision of research analysts.

Takeaways:

• First, FINRA continues to be concerned about disclosures in research reports. We’ve been seeing these types of cases for more than 20 years.• Second, although there was no evidence of inappropriate influence, FINRA was concerned about the “risk” of inappropriate influence.

FINRA Enforcement Statistics

Matt Hopper: “There are more than two hundred and fifty species of shark, and everyone is different from every other one.”27

Chief Brody: “Is it true that most people get attacked by sharks in three feet of water about ten feet from the beach?”28

Sometimes statistics can save your life (e.g., “If you jump now, you’ll be fine for the next 499 feet, but the last foot will kill you”)29 and sometimes, they’re just fun (e.g., statistics about sharks) (as long as you’re reading the statistics from your home office, den, kitchen or bathroom, and not while swimming with the fishes). On the other hand (assuming you still have two hands after making fun of sharks), sometimes statistics can be used to make you think longer and harder about your job. Our review of FINRA’s sanctions falls into the latter category. Based on our analysis of the cases reported on FINRA’s website,30 FINRA’s disciplinary program for January 2020 through June 2020 is more robust compared with last year. FINRA brought 267 cases for the first half of 2020; during the same time period in 2019, it brought 228 cases. It assessed $15.3 million in fines in 2020 and $9.5 million in 2019. With regard to restitution, FINRA ordered $23 million in payments in 2020 compared with $5.6 million in 2019.

The following is a brief summary of the largest cases brought during the first half of 2020, based on fines ordered:

• $3.4M – The NAC affirmed a decision finding that a firm facilitated unregistered and non-exempt customer sales of billions of shares of penny stocks.• $1.75M – A firm allegedly failed to reasonably supervise early UIT rollovers, causing its customers to incur sales charges that they would not have incurred had they held the UITs until their maturity dates. The firm was also ordered to pay $1.9 million in restitution.• $1.55M – A firm allegedly submitted inaccurate trade data blue sheets to FINRA for more than seven years. The firm was also ordered to pay $1.55 million to the SEC.• $1M – A firm allegedly disseminated inaccurate expense ratio information and historical performance information for numerous investment options in retirement plans and provided inaccurate third-party ratings for those investment options.

The following is a brief summary of FINRA’s orders to pay more than $1 million in restitution during the first half of 2020:

27. https://bookroo.com/quotes/jaws. 28. https://www.quotes.net/movies/jaws_5942.29. Made up quote that sounds very familiar. 30. https://www.finra.org/rules-guidance/oversight-enforcement/finra-disciplinary-actions-online.

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• $7.2M – A firm allegedly failed to have reasonably designed supervisory systems and procedures to ensure customers received mutual fund sales charge waivers and fee rebates. FINRA did not assess a fine because of the firm’s extraordinary cooperation.• $7.1M – The NAC affirmed a decision finding that a firm and executives misrepresented and omitted material facts concerning sales of fractional interest in saltwater disposal wells. • $1.32M – A firm allegedly failed to reasonably supervise early UIT rollovers.

Life (and Death) Lessons

As demonstrated above, Jaws has many important lessons for securities professional. And, if you watch the movie very carefully, it also has many important lessons for everyday living.

If at first you don’t succeed. . .

Ellen Brody: “My husband tells me you’re in sharks.”

Hooper: “Yeah, I love them, I love them. When I was twelve years old, my father got me this boat and I went fishing off of Cape Cod. And I hooked a scup. And as I was reeling it in, I hooked a four and a half-foot baby thresher shark who proceeded to eat my boat. Ha, ha. He ate my oar, hooks, and uh, my seat cushions, he turned an inboard into an outboard. Scared me to death. And I swam back to shore. And when I was on the beach, I turned around and I actually saw my boat being taken apart. And ever since then, why yes, I have been studying sharks.”31

Know your fears:

Ellen Brody: “Martin hates boats. Martin hates water. Martin - Martin sits in his car when we go on the ferry to the mainland. I guess it’s a childhood thing. It’s a - there’s a clinical name for it, isn’t there?”

Chief Brody: “Drowning!”32

. . .

Matt Hooper: “The tide is with us today.” [after the death of the shark and as they are paddling to shore] Chief Martin Brody: “I never liked the water.” Matt Hooper: “I can’t imagine why.” [fade to black]33

You gotta love (some) politicians

Mayor Larry Vaughn: “I don’t think either one of you are familiar with our problems.”

Matt Hooper: “I think that I am familiar with the fact that you are going to ignore this particular problem until it swims up and bites you in the ass.”34

Finally, as most of us are stuck in our homes, trying to figure out when we can go back to our lives as we used to experience them, it’s important to keep things in perspective and know what we’re dealing with.

Matt Hooper: “Mr. Vaughn, what we are dealing with here is a perfect engine, an eating machine. It’s really a miracle of evolution. All this machine does is swim and eat and make little sharks, and that’s all.35

Indeed, perspective sometimes depends on where you’re sitting. As Chief Brody (who had a very strong fear of water) said, “It’s only an island if you look at it from the water.”36

31. https://www.moviequotedb.com/movies/jaws/page_2.html. 32. https://www.moviequotedb.com/movies/jaws/page_2.html. 33. https://www.rottentomatoes.com/m/jaws/quotes/. 34. https://www.quotes.net/movies/jaws_5942. 35. https://www.rottentomatoes.com/m/jaws/quotes/. 36. https://www.quotes.net/movies/jaws_5942.

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Form CRS and Reg BI are Here: Now What?

By Doug MacKinnon

About the Author: Doug MacKinnon is Senior Compliance Consultant, Hardin Compliance Consulting LLC. He can be reached at dmackinnon@hardincompliance.com.

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After 391 long days of countless meetings, hand wringing, never-ending scenario-based questions, policy and procedure revisions, and the US Court of Appeals for the 2nd Circuit siding with the SEC to uphold the rule, Form CRS and Regulation Best Interest (“Reg BI”) became effective on June

30th. So now that your Form CRS filing has been completed, your new policies and procedures have been implemented, and you have trained everyone on the new requirements…what’s next?

Each firm will have to make its own assessment in determining how they will proceed in the new world of Form CRS and Reg BI, but to assist you in making these determinations, we have provided some thoughts for how you might approach your compliance with these new requirements.

What’s first?

• Filing Form CRS – It seems obvious, but double-check that your firm filed Form CRS correctly. When you do, verify that the version of the form that was filed was the most current copy and not a previous draft. • Investment Advisers and Dual Registrants – Filing is completed by electronically filing their forms as Form ADV, Part 3 through IARD (Note: For dual registrants, the filing in IARD satisfies their requirement to file in Web CRD.). • Broker-Dealers – Electronically file their forms through Web CRD. • Public View – You can also check to see how the form will be viewed by the public by visiting FINRA’s BrokerCheck (Broker-Dealers & Dual Registrants), or the Investment Adviser Public Database (Investment Advisers & Dual Registrants).

• Form CRS Initial Delivery – Existing firms are required to deliver Form CRS to their existing retail clients within 30 days of the June 30th Compliance Date. Now that the delivery deadline has come and gone, it is an excellent time to conduct a look back to test your firm’s compliance with this requirement. • Books & Records – Identify all supporting records that your firm needs to maintain that will evidence the delivery of Form CRS to your clients. • Clearing Firm Delivery of Form CRS – If you engaged your clearing firm to deliver your Form CRS be sure that they provide you with records evidencing all clients that they delivered your form to and when it was sent. • In-House Delivery of Form CRS – If you mailed the form to your clients, be sure that you have records showing the name and address of the clients to whom the form was sent, the date the form was sent (mailing date), and any other supporting documentation. • Client Receipt of Form CRS – An easy way to test to see if retail clients successfully received your Form CRS is to poll your employees that have accounts with your firm. However, depending on your firm’s specific circumstances, you may want to expand your review to include a sampling of non-employee clients.

• Direct Links – Firms using links in their communications, emails, Form CRS, or their Reg BI disclosure documents should verify that all links are functioning as intended and that those links are easily accessible for their retail investors. Even if you tested all of the links before implementation, it is essential to check the links periodically because, for one reason or another, a website address may change from time to time. • Email Signatures – Do you now include direct links to your Form CRS and Disclosure Documents in your email signatures? If so, conduct a review of your employees’ email signatures to confirm that the links are working as intended. • Form CRS and Disclosure Documents – Does your firm include direct links on Form CRS or your disclosure documents? If yes, go ahead and double-check that they are all working correctly. • Website Direct Links – Did you add a link(s) to your main website? If so, are those links clearly visible and easy to navigate for your clients? Do the links work as intended? • New Account Opening – How did your firm decide to comply with the Form CRS requirements for new accounts? Walk through your new account opening process to check that a copy of Form CRS is being delivered to the account owner. • Clearing Firm – If your clearing firm is responsible for providing Form CRS go ahead and test that the new process is working as intended.

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• Electronic vs. Paper Delivery – Test to be sure that both your electronic or manual account opening processes are including Form CRS as intended. There may be subtle nuances between both processes, and it is crucial that both are consistent and producing the same resulting delivery of Form CRS. • Sample New Accounts – Review a sampling of new accounts that have been opened in the first couple of months since the requirements became effective and validate that Form CRS was delivered in all instances. • Additional Step – Did your clearing agreement need to be updated as a result of Form CRS? What limitations or restrictions does your clearing firm impose on providing Form CRS? What proof does the clearing firm provide to your firm showing that Form CRS is being delivered to the client? • Training – Training should have been conducted with all of your Financial Professionals and designated supervisors before the June 30th Compliance Date. Did your firm complete the training? Check that everyone completed the required training. If anyone missed the training, work with supervision to ask that they complete it immediately. • Additional Thoughts • Institute a process for delivering Form CRS or Reg BI training to new employees. • Have a process in place to identify when new training should be developed and delivered for Form CRS and Reg BI. • At a minimum, update your Firm’s Continuing Education Program to include annual reminder training on Form CRS and Reg BI.

What’s next? We have some data, let’s use it! • Financial Professional Survey – Now that you have a couple of months of your Form CRS and Reg BI procedures being effective, conduct a poll of your financial professionals. The poll does not have to be overly formal, but here are some questions to consider:

• How is the new process working? What is working well and what isn’t? • Have you encountered any problems? If so, what were those problems? • Have you received any feedback from clients? If so, what did they say? • Do you have any best practices that you would like to share with the rest of the firm? • Do they have any questions regarding the new process, or would they like to see additional training on Form CRS or Reg BI?

• Financial Professional Compliance – Check to see how well your financial professionals are complying with the new procedures.

• Client Notes – Are appropriate notes being made in the client file or client relationship management (“CRM”) platform? • Evidence of Form CRS Delivery – Whether included in the client notes or other supporting documentation, confirm that your Financial Professionals are maintaining proof that Form CRS is being delivered (and that it is being delivered in all required situations).

• Designated Supervisors – Check in with your firm’s designated supervisors regarding their role in the oversight of compliance with the new procedures (similar to surveying the financial professionals). Consider the following discussion topics: • Designated Supervisors – Do the supervisors understand their role is in the newly implemented procedures? • Resources – Do the supervisors feel they have the resources necessary to supervise the new process effectively? • Status of Supervisory Process – Is the new supervisory process working? What is or isn’t working? Have any unintended issues resulted from the process (e.g., too time consuming)? • Feedback – Do the supervisors have any other feedback, concerns, or suggestions? If so, what are those?

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• Clearing Firm Obligations – Be sure that all obligations of your clearing firm have been identified, and any related processes are understood by both your firm and your clearing firm. • Clearing Agreement – Did the clearing agreement need to be updated to include any new services being provided? • Reporting – Did your clearing firm agree to provide you with reporting evidencing the completion of any obligations related to Form CRS or Reg BI? If so, what reports are available? How will they be delivered? What will be the frequency of the reports? Are the right people receiving the reports, and do they understand what they mean? Do they know what to do with the information? Are the reports being used to oversee the firm’s compliance with the new requirements? • Written Policies & Procedures – Have you updated your internal policies and procedures to include the role of your clearing firm, describe the reporting process, and appropriately designate responsibility? • Testing – If not already in place, develop a testing process to determine that clearing services related to Form CRS and Reg BI are being performed as expected. Processes should include the identification of all responsible parties, the frequency of any testing, and whether any documentation should be maintained to evidence the completed testing. (Note: Consider conducting more frequent testing initially to identify any issues quickly.).

• Updating Form CRS & Reg BI – At a minimum, because of personnel, business, or regulatory changes, firms must have a process to identify those changes and determine the impact on their Form CRS, Reg BI disclosures, or related procedures.

• Conduct an Initial Review – Go ahead and conduct a review to determine if the firm has experienced any changes to personnel or business activities that require amendments to Form CRS or updates to your disclosures. • Review Process – Has an on-going process been established to review for material changes? How frequently will reviews be conducted? Who is responsible for those reviews? How are changes made and implemented? • Form CRS Amendments – Material changes that require amendments to Form CRS must be filed through IARD or WebCRD within 30 days of the change. • Additional Thoughts – Keep in mind that there may also be other types of changes that may impact the firm’s compliance with Form CRS and Reg BI requirements. Here are a few examples: • Operational changes to systems, service providers, or technology. • Updates to the firm’s website, including, but not limited to, landing page design changes, changes to servers, or network provider updates. • Regulatory requirements may also change from time to time. We should expect to see additional regulatory guidance soon on Form CRS and Reg BI, based on observations from examinations. After the guidance is published, firms should respond and make appropriate updates to their respective processes. • Written Policies and Procedures – As the foundation for each firm’s Form CRS and Reg BI procedures, a review of existing policies and procedures should have been conducted and updates made as appropriate.

• Updates Made – Have the firm’s written policies and procedures been updated to include Form CRS and Reg BI as appropriate? Were the changes made consistent with the newly implemented process? • Internal Documentation – Some firms also maintain internal policies and procedures for specific departments (e.g., Operations Manual, Desktop Procedures, etc.). This documentation should be consistent with the firm’s other written policies and procedures. • Indirect Policies and Procedures – Frequently, a firm’s written policies and procedures include many cross-references. If your firm has not already done so, conduct a review for consistency among the policies and procedures. For example, review sections that reference prospecting of clients, the solicitation of specific investments, and communications with the public, to determine that these sections reference the new Form CRS and Reg BI procedures.

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• Future Changes – Your firm’s process for identifying when updates are required for Form CRS or Reg BI disclosures should also include identifying and making updates to your policies and procedures.

• Books and Records – Form CRS and Reg BI have specific record-keeping requirements. Do not overlook the record-keeping process. Confirm that firm is maintaining all required records, that appropriate parties know where those records can be found, and that the records are maintained for the required time.

• Broker-Dealers • Rule 17a-3(a)(24) requires a record evidencing the date that each Form CRS was provided to each retail client, including the delivery of the form before opening an account. • Rule 17a-4(e)(10) requires the records made pursuant to Rule 17a-3(a)(24), as well as a copy of each Form CRS, be maintained at least six years after such records or Form CRS were created. • Investment Advisers • Under Rule 204-2(a)(14)(i) under the Advisers Act, advisers are required to make and keep a record of the dates that each Form CRS, and any amendments or revisions thereto, was given to any client, or any prospective client who later becomes a client.

• Mitigating Conflicts of Interest – An essential control for ensuring your compliance with Form CRS and Reg BI requirements is always striving to identify, and when possible, eliminate conflicts of interest.

• Conflict Mitigation – The best option for mitigating a conflict of interest is to eliminate it. • Conflicts Review – If it has not been done already, the firm should conduct a review to determine which newly or previously identified conflicts of interest can be eliminated. If this process was already completed, then confirm that those identified conflicts have, in fact, been eliminated or appropriately disclosed. • Going Forward – Verify that the firm has a reasonably designed process for identifying conflicts of interest, assigning responsibility for the process, and describes how that process will be handled to meet the requirements of Form CRS and Reg BI. If any changes were required, verify that they have been implemented and are functioning as intended.

What else?

• During the lead up to the June 30th Form CRS and Reg BI Compliance Date, your firm likely held many meetings and conducted extensive reviews of its current procedures. Were any other gaps in policies and procedures identified but shelved until after Form CRS and Reg BI were implemented? If so, be sure those gaps do not get lost in the shuffle and are addressed appropriately.

While this is not intended to be a comprehensive list of the things each firm needs to consider in their compliance with Form CRS and Reg BI, it is intended to help drive your thought process and the discussions that should take place moving forward. Each firm should consider its specific circumstances when running its Form CRS and Reg BI compliance programs. At a minimum, the process should identify who is responsible for the oversight and testing of the new processes. The controls also need to identify the “how” and the “when”, and, more importantly, not make any assumptions. Firms should anticipate a focus on Form CRS and Reg BI during their next regulatory exam. Initially, the examiners will be looking to see if firms have made a reasonable effort to comply with the new requirements. As time goes by, however, they will become more stringent in their reviews and the consequences that result from any identified exceptions.

Good luck!

Hardin Compliance Consulting is providing this guidance for general informational purposes only. It does not constitute the provision of legal advice, tax advice, accounting services, or professional consulting of any kind.

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Getting to Know Our National Conference Speakers: Genna Garver and Hope Brown

By Shachi Bhatt

About the Author: Shachi Bhatt is a Chief Compliance Officer at the Office of the New York City Comptroller Bureau of Asset Management. She can be reached at sbhatt@comptroller.nyc.gov.

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First, Genna, can you tell us about your session at the National Conference, 7c. Expanding the Table: Advancing Women in Compliance?

Genna Garver: I’m really looking forward to the interactive discussion we have planned for our session. It’s an honor for me to join Medina and Shachi, both of whom are amazing women with powerful personal stories that will lead our discussion topics. We will be focusing on the importance of rising together and how we can all be better allies to each other—not just women supporting women, but men supporting us too. Not only is this an important topic for women in compliance, but also for all of our diverse colleagues. We also intend to cover a few highlights from an upcoming September event Troutman Pepper is hosting with NSCP and a few other co-sponsors, Men as Allies.

What is the best book you’ve read in the last year?Genna: I’m obsessed with historical fiction, especially anything by Alice Hoffman, but I just finished The Murmur of Bess and Red Letter Days. I’m halfway through Cartier’s Hope and just bought White Fragility.

What is the best piece of professional advice you have ever received?Genna: Be responsive and don’t [mess] up.

What is one important skill you think everyone should have?Genna: Empathy.

If you could visit anywhere in the world you’ve never been, where would you go?Genna: Patagonia is definitely my next dream destination.

What’s the most important leadership lesson you’ve learned and how is it valuable? Genna: The art of actively listening. My dad always said to me no one has ever learned anything by talking.

Best sandwich ever. What’s on it?Genna: Toasted bread from our local bakery, fig spread, Meredith goat cheese, avocado, thinly sliced turkey, tomato and red butter lettuce. A family favorite!

What is a slogan, motto, or quote that describes you or your values?Genna: I do try to live by the Four Agreements (a book by Don Miguel Ruiz): 1. be impeccable with your word; 2. don’t take anything personally; 3. don’t make assumptions; and 4. always do your best. The first one in particular—integrity is everything.

Finally, what is the best part of NSCP?Genna: Comradery. Compliance can be intense. We support each other, we rise together.

I sat down with Genna Garver and Hope Brown, two speakers for the upcoming NSCP National Conference in October, for their insights on professional development, and some personal favorites.

Genna Garver is a partner at Troutman Pepper with more than 20 years of professional experience.

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First, Hope, can you tell us about your session at the National Conference, 3d. ALL – Diversity & Inclusion Considerations for Compliance?

Hope Brown: Join us for an interactive discussion regarding diversity, inclusion, belonging and equity, why they matter and how the past six months-both the public health crisis and recent events related to systemic racism- have made the business imperative even stronger.

Briefly describe your education and career path. How did you end up in Compliance?

Hope: Shortly after I graduated from college, I was reading The Washington Post and I noted a firm seeking a Policies and Procedures Specialist. I did not know what a broker-dealer was at the time, but I knew I loved to write and decided to apply. The rest is history. This role ended up being the launch of my career in compliance.

There are now 25 hours in a day! How do you spend your extra hour?Hope: Sitting outside and reading a good book.

What are three positive words that people often use to describe you?Hope: Hardworking, energetic, hopeful.

If you could visit anywhere in the world you’ve never been, where would you go?Hope: South Africa.

What’s the most important leadership lesson you’ve learned and how is it valuable? Hope: One of the most important lessons I have learned is to be my authentic self. This lesson has been the governing principle of my life, especially over the last 10 years. Being my authentic self has allowed me the freedom to make decisions that are best for me (for example, choosing a company not based solely on the position, but also asking myself is this a company in which I can thrive); build genuine relationships with colleagues and employees and set boundaries.

If you could have any super power, what would it be?Hope: I would love the ability to read minds.

What do you wish you had known before taking your first compliance role?Hope: I wish I had known the importance of building relationships and networking earlier in my career. I think building sustainable relationships is critical for any successful role.

What is the best piece of professional advice you have ever received?Hope: One of the best pieces of advice I have ever received is that I am the CEO of my own life - hire, fire, and promote accordingly.

Who’s someone you really admire?Hope: Aside from my family, I admire everyone who is speaking up and speaking out as we continue to fight for diversity, inclusion, and equity.

Finally, what is the best part of NSCP?Hope: The best part of NSCP is the amazing group of people I have been working with, particularly over the past three years, and the opportunity to advance and evolve the compliance profession.

Hope Brown is the Vice President, Chief Compliance Officer at Calvert Research and Management with more than 20 years of professional experience.

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Tips and Tools for Attending the NSCP National Conference Virtually

By Kristen Hinz

About the Author: Kristen Hinz is Membership Support and Publications Coordinator at the National Society of Compliance Professionals (NSCP).

This month’s featured NSCP Currents Podcast

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In the midst of COVID-19, everyone has had to adapt to new routines and work patterns, including the NSCP staff and its members. Even though we will greatly miss seeing everyone in person this year at the National Conference, there are many advantages that come with participating in a virtual conference that we want to share with you. To maximize your conference experience, we have prepared some tips and tools for attending our virtual conference, networking with other attendees, and having an engaging and educational experience from home.

Get In Early.In order to ensure that every attendee is fully connected and comfortable using the conference platform, we will be granting attendees access to the site one week before the conference start date. This will allow each attendee to build their own profile, sharing as much or as little information about themselves as they are comfortable with. Attendees will also have the option within their profile to make themselves available in 10-minute time blocks over the 3 days of the conference (during non-session times) to connect with speakers, sponsors and other attendees through one-on-one video chats.

Testing out the platform before the conference begins will allow you to learn how to access all of the features and tools available on the site, eliminating any technical difficulties or confusion once sessions begin. A general chat room will be open for you to begin communicating with other attendees before the conference. A full attendee roster will enable you to search by name or company for people you want to connect with. Conference materials will be posted the week before on the platform under each session’s description, allowing you to preview the presentations and resources. Make sure you are pre-registered for the sessions you plan to attend.

Get Excited. One of the best ways to have a great experience at a virtual event is to get into a positive and enthusiastic state of mind.

If you have previously attended conferences in person, we understand that attending virtually is an entirely different experience, but “different” doesn’t mean “bad.” Virtual conferences can be very beneficial, saving both time and money by eliminating the need for travel, hotel and meal costs. Virtual conferences allow you to learn and network from the comfort of your own home or office, without as much disruption to your everyday routines and family life as in-person conferences can cause.

Set your mind on what you want to want to get out of your conference experience this year, whether it be gaining new knowledge in a certain area, making meaningful connections with other compliance professionals, or a combination of the two. Our speakers and sessions are engaging and informative, providing new insights and practical solutions to compliance challenges.

Get Comfortable. Optimizing your office space for a conducive working and learning environment is immensely helpful in maintaining your attention during virtual sessions.

Set up your computer in a quiet and comfortable space where you will be able to focus. If you share your living space with other people, shut your door to minimize background noise and, if needed, let the people you share space with know that you are going to be busy and will check in with them when you’re not in a session.

The National Conference includes three days of sessions, with five sessions per day, thirty minute breaks between each session, and a one hour lunch break. Keynote addresses will be posted by 8:00 am Eastern Standard Time each morning for you to view on-demand, at your leisure. Use the break times between sessions to move or stretch, have lunch, and get re-energized! If you anticipate that you will be hungry or thirsty when you return to the conference, make sure to bring some snacks and beverages to your office space so that you can remain energized and comfortable throughout the day.

Get Focused. While it may seem easy to multitask during the conference, minimizing your distractions will help with learning comprehension and engagement. Close extra tabs or windows you may have open in your internet

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browser, mute your email notifications during sessions, and avoid using your phone during sessions. If possible, avoid doing work during the conference session times. As Jim Downing wrote last year in Five Tips for National Conference Attendees: “Don’t work! I know it’s tempting, but you are at the conference for a reason (and likely your work paid for it). Be present in your sessions and learn something.”

Make sure you are well rested, energized, and prepared to take notes before the conference begins. Setting up your office space with a notebook or note taking apparatus in advance will ensure that you are ready to learn as soon as your first session starts. Taking notes helps add color to the information presented and will help contextualize the session materials you will receive as an attendee.

Get Credit.If you are looking for continuing education credits, make sure that you are focused and engaged with the content being displayed onscreen. Due to the virtual nature of the conference, we will be issuing continuing education (CE) certificates to attendees who indicated that they will be applying for CE on their registrations and answer polling questions to verify their attendance in specific sessions. Missing these polling questions could prevent you from receiving your CE credits, so make sure that you are checking in! If you are not sure if your registration indicates your need for a CE certificate, please contact NSCP.

Get Familiar with the Technology. This year’s National Conference is being hosted in a virtual event setting. While it is possible to access the site via a mobile device such as a cell phone or tablet, we recommend that you use a computer instead, as this will properly display all of the features the site has to offer. We highly recommend that you use the latest versions of Google Chrome or Mozilla Firefox as your browser of choice, as technical difficulties may arise when the site is accessed via Internet Explorer. Make sure that either Chrome or Firefox is installed on your computer in advance of the conference.

While technical difficulties are a potential added stressor to attending a virtual conference, there are ways to ensure that you have a strong connection to the conference. Make sure that your office space is in a location where you can connect to WiFi or plug your computer in to an ethernet cable. While a stable WiFi connection is helpful, if you are able to wire your computer to the internet, that will allow you to have the best possible connection to the conference. An alternative option to WiFi is a mobile hotspot connection with a reliable signal. We recommend that you have two methods of connectivity in order to prevent technical issues.

Get Connected with Other Professionals.Conferences are fantastic opportunities to network with fellow compliance professionals, speakers, and vendors alike. Just because you are unable to shake the other person’s hand, that doesn’t mean you can’t make valuable connections at a virtual conference!

Our conference site has a matchmaking feature that allows attendees to build connections and meet new people through direct messaging and video chats.

In lieu of our exhibit hall, attendees will be able to stroll through the “Sponsor” listing and the “Find A Solution” search pages in the platform. You may choose to learn more about a particular sponsor by scheduling one-on-one video chat meetings with them when you are not in a session. Click here to see our current National Conference Sponsors.

The conference will also feature topical chat rooms where attendees will be able to chat with their peers, ask questions, share ideas and discuss compliance issues. This is a great place to network with your fellow attendees and gain new industry insights.

Finally, the best tip for attending the National Conference virtually is to embrace the experience and have fun. We want you to leave the conference with practical takeaways, new connections, and an overall great experience!