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Mar 13, 2020

Update Regarding FINRA Regulatory Notice 20-08: Pandemic-Related Business Continuity Planning, Guidance and Regulatory Relief

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UPDATE REGARDING FINRA REGULATORY NOTICE 20-08: PANDEMIC-RELATED BUSINESS CONTINUITY PLANNING, GUIDANCE AND REGULATORY RELIEF

On Monday, FINRA published Regulatory Notice 20-08 specifically addressing pandemic-related business continuity considerations in light of the recent coronavirus (“COVID-19”) outbreak, as well as providing potential regulatory relief from certain obligations.[1] This notice did not create new rules or obligations, but highlighted key considerations for member firms and noted the possibility of additional regulatory relief and guidance in the future.

Guidance on Key Considerations for Member Firms

Telework Arrangements

Firms using remote offices or telework arrangements during a pandemic may need to implement alternative means of supervising associated persons who change their work locations or arrangements during the pandemic. In such cases, FINRA expects member firms to establish and maintain a supervisory system that is reasonably designed to supervise the activities of each associated person while working from an alternative or remote location. FINRA also suggests pre-testing the use of remote offices or telework arrangements by associated persons prior to putting them into widespread practice.

Cybersecurity

Risk of cybersecurity events may increase during a pandemic due to the use of remote offices or telework arrangements, heightened anxiety among associated persons and confusion about the virus. FINRA recommends taking the following steps: (1) ensuring that virtual private networks (VPN) and other remote access systems are properly patched with available security updates; (2) checking that system entitlements are current; (3) employing the use of multi-factor authentication for associated persons who access systems remotely; and (4) reminding associated persons of cyber risks through education and other exercises that promote heightened vigilance.

Form U4/Form BR

FINRA has temporarily suspended the requirement to maintain an updated Form U4 and is not requiring firms to submit a Form BR for any newly opened temporary office locations (see Section 2.2 below).

Emergency Office Relocations

Member firms relocating personnel to a temporary location that is not currently registered as a branch office or identified as a regular non-branch location should use best efforts to provide written notification to their FINRA Risk Monitoring Analyst as soon as possible after establishing the arrangement. That notification should include at a minimum (a) the office address, (b) the names of each member firm involved, (c) the names of registered personnel, (d) a contact telephone number and, if possible, (e) the expected duration of the temporary location.

The notification should also indicate whether (a) the member firm’s personnel will be sharing space with another entity, and (b) if so, the type of business in which that entity engages. Firms should take into account the risks associated with sharing office space with another entity such as (a) customer privacy, (b) information security, and (c) recordkeeping considerations. In this respect, the longstanding principle of FINRA (and its predecessors) has been that space-sharing arrangements should neither (a) compromise the confidential and/or material non-public information of the firm, nor (b) confuse customers or the public as to with which broker-dealer they are dealing. Firms should take steps to mitigate these and other related risks during an emergency relocation.

FINRA also notes that, if a non-branch location or branch office is relocated, or customer calls are rerouted to another office, member firms must exercise diligence in validating the identity of the customer and provide heightened supervision of the affected customer accounts.

Communicating with Customers

Firms may face higher call volumes and online account usage during a pandemic. Firms should review their procedures for communicating with customers and ensuring customer access to funds and securities during a pandemic (or other significant business disruption). If registered representatives cannot service their customers, member firms should place a notice on their website indicating whom affected customers should contact concerning the execution of trades, their accounts and access to funds or securities.

Communicating with FINRA

Firms are required to provide FINRA with emergency contact information pursuant to Rule 4370. Member firms should review their emergency contacts to ensure that FINRA has a reliable means of contacting each member. If a member firm or another person cannot contact FINRA via its usual contact due to a pandemic or other significant business disruption, they should call FINRA’s Call Center at (301) 590-6500.

Regulatory Filings and Responses to FINRA Inquiries, Matters and Investigations

In the event of a pandemic, firms may face challenges making timely regulatory filings (e.g., FOCUS filings, Form Custody filings and supplemental FOCUS information pursuant to FINRA Rule 4524 (Supplemental FOCUS Information)) and responding to regulatory inquiries or investigations. FINRA has offered certain relief to firms with difficulty meeting these filings (see Section 2.3 below).

Qualification Examinations and Regulatory Element Continuing Education

FINRA has offered certain relief to firms regarding required qualification exams (see Section 2.4 below).

Military Personnel and National Guard

FINRA has offered certain relief to firms regarding personnel that may be called into military service during a pandemic (see Section 2.5 below).

Potential Relief

FINRA has specified certain relief that may be appropriate given the potential effects of COVID-19 in the United States. FINRA has also specified that, depending on the nature and impact of the COVID-19 outbreak, it may provide additional, specific regulatory relief and guidance. As COVID-19-related risks decrease, FINRA will publish a Regulatory Notice announcing a termination date for the regulatory relief that will provide member firms with time to make necessary operational adjustments.

Scheduled Inspections of Remote Locations and Branch Offices

A firm’s scheduled on-site inspections of branch offices may need to be temporarily postponed during the pandemic. Furthermore, completion of this annual regulatory obligation in 2020 may need to be re-evaluated depending on the duration and severity of the pandemic.

Form U4/Form BR

FINRA is temporarily suspending the requirement to maintain updated Form U4 information regarding office of employment address for registered persons who temporarily relocate due to COVID-19. Furthermore, member firms are not required to submit branch office applications on Form BR for any newly opened temporary office locations or space-sharing arrangements established as a result of recent events.

Regulatory Filings

If a member firm requires extra time to respond to open inquiries, investigations or upcoming filings, it should contact its Risk Monitoring Analysts or the relevant FINRA department to seek extensions. FINRA has stated that it may waive any late fees incurred by a member firm based on the member firm’s particular circumstance.

Qualification Examinations and Regulatory Element Continuing Education

An affected person with a qualifications examination or continuing education window that is due to expire is encouraged to contact FINRA concerning an extension.

Military Personnel and National Guard

FINRA has reiterated that firms should consult the guidance available in Rule 1210 (Registration Requirements) with respect to persons who are registered with FINRA who volunteer or are called into active military duty.

Conclusion

Regulatory Notice 20-08 provides guidance to firms and certain regulatory relief in respect of COVID-19 impacts, noting the possibility of further specific regulatory relief in the future. Shearman & Sterling is staying abreast of developments in the financial industry, and welcomes questions at any time.

Footnotes

[1]  See FINRA Regulatory Notice 20-08 (March, 09, 2020); Additional information about best practices can be found in “Significant Business Disruptions: Considerations for Broker-Dealers,” in Shearman & Sterling Perspectives (March 04, 2020)

Authors and Contributors

Russell Sacks

Partner

Financial Institutions Advisory & Financial Regulatory

+1 212 848 7585

+1 212 848 7585

New York

Jennifer D. Morton

Partner

Financial Institutions Advisory & Financial Regulatory

+1 212 848 5187

+1 212 848 5187

New York

Jenny Ding Jordan

Associate

Financial Institutions Advisory & Financial Regulatory

+1 212 848 5095

+1 212 848 5095

New York

Steven Blau

Associate

Financial Institutions Advisory & Financial Regulatory

+1 212 848 8534

+1 212 848 8534

+1 416 360 2154

+1 416 360 2154

New York

P. Sean Kelly

Associate

Financial Institutions Advisory & Financial Regulatory

+1 212 848 7312

+1 212 848 7312

New York

Taylor Pugliese

Associate

Financial Institutions Advisory & Financial Regulatory

+1 212 848 7294

+1 212 848 7294

New York