Welcome to the Regulatory Roundup. Each month, Eversheds Sutherland Investment Services attorneys review significant regulatory developments (including notable rulemakings and guidance from securities regulators) from the previous month that are of interest to retail broker-dealer and investment adviser firms.
SEC and Financial Crimes Enforcement Network (FinCEN) Propose Customer Identification Program (CIP) Requirements for Investment Advisers
- On May 13, the SEC and FinCEN issued a joint notice of proposed rulemaking to apply CIP obligations on registered investment advisers (RIAs) and exempt reporting advisers (ERAs). The proposal complements a separate FinCEN proposal to designate RIAs and ERAs as “financial institutions” under the Bank Secrecy Act and subject them to AML/CFT program requirements and obligations to file suspicious activity reports.
- The proposal would require RIAs and ERAs to, among other things, establish, document and maintain written CIPs appropriate for their respective sizes and businesses. A firm’s CIP would be required to include risk-based procedures for verifying the identity of each customer to the extent reasonable and practicable within a reasonable time before or after a customer’s account is opened. The procedures would have to enable the RIA or ERA to form a reasonable belief that they know the identity of each customer.
- The comment period closes on July 22, 2024.
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SEC Adopts Rule Amendments to Regulation S-P to Enhance Protection of Customer Information
- On May 15, the SEC adopted amendments to Regulation S-P, the regulation that governs the treatment of nonpublic personal information about consumers by certain financial institutions. The amendments apply to broker-dealers, investment companies, registered investment advisers and transfer agents (covered institutions).
- The amendments will require covered institutions to develop, implement and maintain written policies and procedures for an incident response program that is reasonably designed to detect, respond to, and recover from unauthorized access to or use of customer information. The amendments will also expand the scope of information covered by Regulation S-P to include both nonpublic personal information that a covered institution collects about its own customers and nonpublic personal information it receives from another financial institution about customers of that financial institution.
- The amendments require covered institutions to notify affected individuals whose sensitive customer information was, or is reasonably likely to have been, accessed or used without authorization. The covered institution will be required to provide notice “as soon as practicable” but not later than 30 days after becoming aware that unauthorized access to or use of customer information has occurred or is reasonably likely to have occurred.
- Larger covered institutions (RIAs with $1.5 billion or more in AUM and broker-dealers that are not small entities under the Securities Exchange Act of 1934 for purposes of the Regulatory Flexibility Act) will have 18 months after the date of publication in the Federal Register to comply with the amendments, and smaller entities (all entities that do not meet the “larger entity” thresholds above) will have 24 months after the date of publication.
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FINRA Issues Guidance on New Residential Supervisory Location (RSL) Office Location Designation
- In early May, FINRA released its Frequently Asked Question (FAQ) guidance on the new RSL office designation, which became available for broker-dealers starting on June 1. The FAQs address a wide range of topics related to remote work, including when a residential location in a “hybrid” or “remote” work arrangement is required to be inspected, supervised and “counted” for FINRA Membership Agreement purposes.
- The FAQs address several specific aspects of the RSL office designation, including several of the more notable conditions under which a location is ineligible for RSL designation. This includes the condition under which the residence of a supervisor with less than one year of direct supervisory experience with the firm is ineligible for RSL designation.
- Finally, the FAQs address how a firm should address the situation where its move to a “hybrid” or “remote” work arrangement causes the firm to exceed its Membership Agreement office count and the safe harbor in FINRA IM 1011-01.
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FINRA Issues Guidance on the Remote Inspections Pilot Program
- In mid-May, FINRA released its FAQ guidance on the Remote Inspections Pilot Program (Pilot Program), which begins on July 1, 2024. The FAQs primarily address operational questions related to the Pilot Program, including how and when firms can “opt-in” and “opt-out” and the manner through which FINRA will collect data and information from participating firms.
- The FAQs explain that starting on July 1, 2024, a firm that does not affirmatively elect to participate in the Pilot Program will be required to conduct on-site inspections of all offices and locations subject to FINRA Rule 3110(c). FINRA expects the functionality for “opting in” to the Pilot Program to be available through FINRA Gateway by the beginning of June.
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FINRA Issues Guidance Regarding the Use of Artificial Intelligence (AI) in Advertising
- FINRA recently revised its Frequently Asked Questions About Advertising Regulation to include two new questions regarding the use of AI in advertising.
- The first question addresses how firms should supervise chatbot communications that are used with investors and notes that depending on the nature of the chatbot communications, they may be subject to FINRA communications rules as correspondence, retail communications or institutional communications. The second question asks whether firms are “responsible for the content of communications created using [AI] technology.” FINRA notes that firms are responsible for their communications, regardless of whether they are generated by humans or AI technology.
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SEC Approves Rule Changes to Allow the Creation of Ether ETFs
- On May 23, the SEC voted to approve the listing on a national securities exchange of Exchange-Traded Products (ETPs) holding Ethereum. The SEC’s decision comes less than six months after the SEC’s approval of ETPs holding Bitcoin.
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