The impact of the Covid-19 pandemic on operations, particularly since many employees are still working remotely, and the rise in fraudulent activities were among the key topics raised yesterday at the 2021 Finra Annual Conference.

The Financial Industry Regulatory Authority is in talks with the Securities and Exchange Commission about potentially extending remote inspections of broker-dealers through 2022, Finra chief legal officer Robert Colby said yesterday.

Finra adopted a temporary rule change that allowed inspections in 2020 and 2021 without a visit to the office or location because of health and safety concerns and broker-dealers’ operational challenges during the pandemic.

“That is intended to buy a little time in order to figure out how to do this in the longer term,” Colby said. “That has not been resolved yet, but I feel like the conversations are going well.”

“Our supervisory rule is, at the top, a broad, generalized, principal-based statement about supervision,” he added. “But it also has details about how you do it on an incremental basis, and those details are based on locations.”

“[L]ocations aren’t what we used to think they are,” so the supervision of an Office of Supervisory Jurisdiction, a branch office or a non-branch location needs rethinking, Colby said.

While Finra is thinking that through, Colby noted that it will also need to engage and coordinate with the states, which also supervise brokers and advisors.

“The states have warned that before they would be willing to agree to any sort of changes, we’re going to need to show that the concerns that have historically been there have been addressed, that we’re not leaving any gaps by which misconduct or inattention or errors could take place,” Colby said.

“We’ll need to get information from the firms to make sure that if we go away from a location-based approach to a functional approach, that we’re going to get the same level of supervision and protection that we’ve had in the past,” he added.

Working remotely has led many broker-dealers to use new and different tools, such as file sharing platforms or worksheets like Google Forms, Colby noted.

Like any other technological development, firms need to be able to track where work is being done and ensure that information is being brought into its record keeping and surveillance system, he said.

Bari Havlik, Finra executive vice president of member supervision, noted that while adoption of those sorts of tools has likely waned as the pandemic had gone on and those initial work-from-home challenges have been overcome, the assessment focus should not be different from what it was pre-pandemic.

“Firms are back to a more regular assessing of new tools and other tools that they bring on board and allow their employees to use,” she said. “It’s just as if you were in the office and you’re rolling out new technology and new tools.”

Havlik said firms must make sure they have the appropriate level of supervision and recordkeeping.

Uptick in fraudulent activities

There has been an uptick in fraudulent activities targeting both investors and financial advisors during the pandemic, according to Greg Ruppert, executive vice president of Finra’s national cause and financial crimes detection program.

“[A]n inability to get face-to-face with their counterparts has created a gap in terms of procedures and normal behavior,” further opening the door for criminals to try to obtain account information using scare tactics or even impersonating advisor or firm websites, he said.

Ruppert said advisors should explain to clients in advance some of the common and aggressive fraud tactics that criminals have been using and reiterate that they would not ask for sensitive data via email.

In May last year, Finra set up the Covid-19 task force specifically targeting fraud related to the pandemic. Over the past year, the self-regulator has focused on education, alerts and warnings about cybersecurity measures at financial advice firms, phishing and ransomware attacks, risk of misconduct and impostor websites, among other potential threats.

Smaller firms that can’t afford to enhance the security of their technology, even through two-factor authentication, should lean on “the personal touch and closer relationships” they have with clients and “focus on direct interaction,” Ruppert said

There have also been recent attempts to duplicate the websites of broker-dealers, which would lead potential clients to provide financial details directly to criminals, according to Ruppert.

While Finra tries to monitor any scam sites, firms and advisors should constantly Google themselves to ensure there is not any foul play happening without their knowledge, Ruppert said. Any findings along those lines could be reported to the risk monitoring specialist assigned to the firm, he said.

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