On October 18, 2019, the Financial Industry Regulatory Authority issued Regulatory Notice 19-34 (the Notice) to announce that it has reviewed the annual compliance meeting (ACM) requirement set forth in FINRA Rule 3110(a)(7) (the Rule) and corresponding Supplementary Material .04 (SM.04) and has determined to maintain the ACM requirement without change. The Notice also provides additional guidance with respect to the Rule.
The Rule requires each registered person to participate, at least annually, in an interview or meeting at which relevant compliance matters are discussed, to ensure that registered persons remain current on applicable regulatory developments and changes in firm policies. No single form of meeting is prescribed. Broker-dealers are permitted to conduct the ACM individually or in groups, in live settings or through video conferences, by telephone or other electronic means, subject to certain conditions. The Rule has been around for more than 30 years and has been considered an important part of each broker-dealer’s supervisory system. While supplemented by guidance and clarifications from time-to-time, the substance of the Rule has remained essentially unchanged.
In the spring of 2018, as part of a larger initiative, FINRA launched a retrospective review of its ACM requirements. While the review confirmed the continuing importance of the Rule, the feedback FINRA received indicated a need for additional guidance.
In conducting its review, FINRA sought the views of interested parties. It requested and received public comment letters and obtained input from FINRA advisory committees and trade organizations including a committee of registered representatives. FINRA’s Member Supervision and other departments provided insights, and FINRA distributed a confidential survey to all members to get their views on the Rule’s effectiveness and efficiency, including information regarding its benefits and burdens.
Based on the information it received, FINRA concluded that the ACM remains an important component of an effective compliance program and that it promotes a culture of compliance in a cost-effective manner.
A number of those providing feedback suggested that FINRA issue updated guidance on the methods and manner of conducting ACMs. Firms also requested additional guidance on topics for discussion in ACMs and some suggested that FINRA consider whether the ACM and Firm Element continuing education required under FINRA Rule 1240(b) (the Firm Element) could be streamlined to avoid duplication.
Several respondents suggested that FINRA consider allowing greater flexibility in the delivery of compliance information. According to SM.04, firms are not required to conduct in-person meetings with each registered person or group of registered persons to comply with the Rule. Firms may elect to use on-demand webcasts, video conferences, interactive live settings, and other methods, provided that, at minimum, each registered person attends the entire meeting (for example, via an on-demand annual compliance webcast requiring a unique identification and password for access and tracking purposes) and the firm ensures that registered persons can ask questions and receive answers in a timely manner. The Notice explains that the current Rule is designed to allow substantial flexibility in the manner of delivery, and the particular examples in SM.04 are solely for illustrative purposes.
Topics for compliance meetings
As noted above, there were requests for guidance on the appropriate topics for ACMs, and requests for FINRA to provide a checklist of topics based on examination findings, customer complaints, and other relevant sources. However, FINRA continues to believe that it is not possible to provide an exhaustive list of topics for compliance meetings. According to FINRA, the purpose of the ACM is to allow broker-dealers to review issues of relevance to the specific firm and registered person involved, which depends on the business conducted by each firm and its particular policies and procedures.
FINRA did point out many available sources for determining ACM content, including FINRA’s Annual Risk Monitoring and Examination Priorities Letter, its Report on Examination Findings and Observations, and Investor Alerts, and said that it would look to identify and communicate additional resources.
Coordinating the ACM with continuing education requirements
Finally, with respect to coordination between the ACM and Firm Element requirements, FINRA noted that it is working with the Securities Industry/Regulatory Council on Continuing Education and other self-regulatory organizations, exploring ways to improve the effectiveness and efficiency of the continuing education program. According to the Notice, FINRA is developing a proposal that would expressly permit ACM-related training to contribute to satisfying each individual registered person’s annual Firm Element requirement, and it intends to continue assessing the feedback received from firms on redundancies in training requirements.
The Notice makes clear that the ACM requirement will continue to be a cornerstone of FINRA’s regulatory objectives.