SEC looking at low-hanging fruit
Expect the SEC to file its first Reg BI enforcement case this year, says Susan Schroeder, a partner at Wilmer Hale. She says the agency is likely to target the policies and procedures firms have in place related to specific aspects of the rule.
Mark Schoeff Jr [00:00:03] Welcome to Three Questions, I’m Mark Schoeff Jr., a senior reporter for InvestmentNews. We’re talking today to Susan Schroeder, a partner at WilmerHale and vice chair of its Securities and Financial Services Department. Prior to rejoining the law firm in 2020, Susan was executive vice president and head of enforcement at FINRA. While FINRA, she streamlined the enforcement division and promoted regulation promoted coordination between securities regulators. Thank you, Susan, for joining us.
Susan Schroeder [00:00:36] Thanks for having me, Mark.
Mark Schoeff Jr [00:00:38] Reg BI went into force in June of 2020. We’ve all been waiting for the next shoe to drop. What will the SEC file its first reg BI enforcement case and what will it look like?
Susan Schroeder [00:00:50] I think we can expect to see the SEC file its first reg BI enforcement case this year. And as to what it will look like, I think we can take a page from their form CRS Matters last year. They’ll be looking for low hanging fruit, and reg BI allows them to bring cases, for example, related to insufficient policies and procedures, right? Inadequate supervisory structure. And I think some of the first cases we’ll see will relate to the policies and procedures that firms have in place for specific aspects of reg BI, such as policies and procedures, to ensure that firms assess reasonably available alternatives when recommending securities.
Mark Schoeff Jr [00:01:28] Right. Well, we’ll we’ll look for that. FINRA has made regulation of sales of cryptocurrency and complex products a priority this year. What steps will FINRA likely take?
Susan Schroeder [00:01:41] FINRA is going to be looking at two things right cryptocurrency and then complex products, including options. On crypto they’re going to follow the SEC’s lead. They don’t want to be out in front of the SEC. So I think they’ll be thinking about things like disclosure and advertising steps that FINRA could take to make sure that they’re eliminating investor confusion about whether investors are dealing with the broker dealer and securities, or dealing with a crypto entity that’s not regulated by the same rules. On complex products I think we’ll see FINRA continue to be pretty aggressive. Last year, they were basically regulating by footnote when they put out guidance on options, essentially saying that for the first time in decades, firms had an obligation to make sure that options trading was suitable at the time that the firm approves an account for options trading as opposed to whenever the firm if the firm recommends a particular option. And I think we’ll see something like a request for comment and additional guidance around whether or not firms need to have gating mechanisms in place just to ascertain whether or not complex products like options are suitable in general for trading, even when they’re not being specifically recommended.
Mark Schoeff Jr [00:02:58] Last year, the Securities and Exchange Commission rejected a FINRA expungement reform proposal, which FINRA is continuing to work on. What does this signal about the challenges related to expungement reform?
Susan Schroeder [00:03:13] FINRA faces significant challenges when it’s trying to deal with expungement reform, and I think Chairman Gensler’s addition of Barbara Roper to his senior staff, Miss Roper was at the Consumer Federation of America, which is an outspoken critic of expungement. I think she probably had some influence here. The criticism of FINRA is expungement reforms to date is that it doesn’t provide enough of an opportunity for regulators and investor advocates to weigh in, usually in an expungement proceeding. It’s just the broker arguing that there should be expungement. The customer who was wrong has no incentive to be involved in the expungement proceeding and so often is not. And so I think FINRA continues to grapple with how do you provide a voice for that investor advocate in an expungement proceeding in a way that would satisfy state regulators and and investor advocates?
Mark Schoeff Jr [00:04:10] Well, thank you, Susan, for your time today.
