Welcome back to the Compliance In Context podcast! On today’s show, we welcome in former NSCP Chair and current CCO of Robinhood, Norm Ashkenas, to discuss how firms can build a culture of compliance inside their firms and what it takes to build out an effective compliance team. In our Headlines section, the SEC Investor Advisory Committee considered draft recommendations on mandatory arbitration clauses and the expansion of retail investor access to alternative assets (among other items), and a dually registered firm settled SEC charges for failing to timely investigate and report suspicious transactions to FinCEN. And finally, we'll wrap up today's show with another installment of What’s On My Mind, where an old quote from Winnie the Pooh might just be the best thing we can do for our friends and loved ones during the holidays and these cold winter months.

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Headlines

Interview with Norm Ashkenas

What’s On My Mind

Quotes

12:20 – “Somebody I didn’t know reached out to me via Slack and said, ‘Hey, so-and-so senior executive thought I should reach out to you because we’re thinking about doing A and he said ‘You should talk to Norm and compliance first to see what they think and how to get it done.’’ That’s what I want to have happen. It’s not about me, it’s about somebody else thinking of compliance when we weren’t there.” – Norm Ashkenas

22:15 – “If you’re asking questions, certainly you’re starting with the technical expertise. If you’re looking for somebody who does surveillance on municipal securities, they have to know a great deal about that space to start, if that’s what you want them to do. So certainly you’re testing for that. Obviously, you are certainly looking for culture fits, again, another overused phrase. But if your firm is the type of firm that seeks to get alignment from everybody and its a firm where they don’t want somebody to present a solution, they want to have conversations with everybody who might be a stakeholder, get them all on the same page, and then have a final discussion, you need to find people who can do that kind of thing. If it’s a firm that’s more entrepreneurial, where it’s, ‘We want you to go solve the problems and see how many people react,’ you have to try to ask questions to glean what that is. So it does start with ‘What is your firm looking for after you hit the technical expertise?’ And then you also certainly want to ask how they fit into your overall compliance program and team. Complimentary skillsets are helpful. Like, you need, yes you want technical expertise, but in some cases, it’s ‘Am I hiring somebody to do this job in front of them for the next two or three years? Or am I hiring somebody who I think can do much more than this or different things? Am I hiring–I’ll use the phrase–a pocket knife? Somebody who’s got a multiplicity of things they can do. And I see them doing a number of different things. Those are things you’ve got to think about as you’re doing the hiring.” – Norm Ashkenas

38:06 – “Yeah, so interviewing is clearly important. Once you’ve got folks that you’ve determined might be qualified for the role, you wanna speak with them. And one of the things that we do here at Robin Hood, at least, is have... You use word banks; we often have question banks. I have some in my head, but I’ve been asked to put them down on paper, which is actually helpful exercise. And then when you build out for the interviews, you build out your diverse slate of interviewers to make sure you’ve got business partners; you’ve got oversight partners. You don’t have everybody sitting in front of them. Look just like you when you’re doing the interviews, reflect the firm and, yes, give them topics. Give them subject areas. Give them what to test on. And yes, you’re gonna have some sample questions. Sometimes it’s gonna be hypotheticals. I love giving candidates hypotheticals and, I’m not looking to get a right answer per se. It’s not about that. It’s about understanding how they think about whatever that is.” – Norm Ashkenas

Welcome back to the Compliance In Context podcast! On today’s show, we welcome in Ranah Esmaili and Louis Froelich to help us review the current state of crypto and digital assets, the impact of a new administration, how firms operating in this space should be thinking about custody, and what the SEC Enforcement Division is focused on as it relates to this embattled asset class. In our Headlines section, President-elect Donald Trump has named his choice to run the Securities and Exchange Commission, and finally, we’ll wrap up today’s show with another installment of Outtakes, where we examine what a recent SEC complaint against the chief investment officer of a large investment advisory firm can teach us about the importance of trade allocation and avoiding instances of cherry picking in the delivery of advisory services.

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Headlines

Interview with Ranah Esmaili and Louis Froelich

Outtakes

Quotes

10:24 – “You know, I think [crypto] is here to stay. I also think that even in a decade from now, people maybe asking the same question. Let’s dive into where we’re at right now. Crypto is everything that you’ve said. It’s a wildly volatile asset class considered its own asset class right now. Most people still don’t really understand what the stuff does. As you know, if their businesses start to invest with it or trade with it, you know, kind of where to begin.” ~ Louis Froelich

11:50 – “The crypto lobby is a very real thing. It was one of the largest spenders in the last campaign. And so when sometimes people look at the headlines of the results or why is crypto such a thing, I don’t think it’s a coincidence, right? I think there’s a lot of people that made a lot of money in the space, had vested interests, have worked very hard and deliberately to kind of have the election results that we have and have crypto, kind of, part of the national conversation.” ~ Louis Froelich

17:42 – “So I expect we’re going to continue to see crypto asset offering fraud cases, cases involved in this appropriation, Ponzi schemes, maybe even insider trading cases. But that will, of course, depend on whether crypto assets are considered to be securities going forward. But those are really a significant portion of the cases that the SEC is bringing right now. So I think much is going to change, but some will stay the same.” ~ Ranah Esmaili

28:43 – “Until and unless there is, you know, clearer guidance or new guidance rules, new legislation, that kind of provide clarity related to digital assets, and whether there’s securities along the lines of what Louis was just talking about. You know, I think this audience and the compliance officers listening should really just assume that all the same rules and regs apply today. And that may very well change, but I just want to start with that note that there’s no change coming today. We’ve got a few months before, you know, the new, kind of, CFTC leadership will, you know, take the reins. And so for now the current state of play is the current state of play. So just don’t let your guard down.” ~ Ranah Esmaili

Welcome back to the Compliance in Context Podcast! On today’s show, we feature a Lessons From The Front Lines episode where we welcome an august panel to provide an in-depth look at the embattled DOL Fiduciary Rule—including where are we now, what’s next, and what other best practices firms should firms have in place currently regarding any investment recommendations being made and other services provided to retirement investors. To help guide us through this important topic and share some fantastic insights for our listeners, we welcome in august panel of experts—Jason Berkowitz with the Insured Retirement Institute, David Kaleda with the Groom Law Group, and Jason Roberts with the Pension Resource Institute.

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Interview with Jason Berkowitz, David Kaleda, and Jason Roberts

Quotes

05:57 – “Let me just start with a quick overview of what the regulatory package is, that was adopted earlier this year. It included four components. The first component is a change in the definition of who is a fiduciary under ERISA. And then the other three changes, or the other three components, rather, were changes to what are called prohibited transaction exemptions, which are essentially the rules that ERISA fiduciaries have to follow in order to receive compensation for their services. And, in effect, essentially the way that, at least for my organization and our members, we look at this final regulatory package as significantly expanding the reach of fiduciary status to reach almost any financial professional who interacts in any way with a retirement saver and create significant new burdens and hassles for those individuals in order to get paid.” – Jason Berkowitz

09:18 – “So at this point we're still waiting to see how this will be resolved. There are really two tracks here. One is just this effective date stay, and the other the next track is the merits of the case, whether the DOL even has the authority to do this in the first place. So the DOL did file a notice of interlocutory appeal, which basically means they're appealing the stay at this point and also all the parties had been working on a decision on the underlying regulation and exemptions that's being put on hold so that the DOL can at least consider what they're going to appeal. At this point, they've just noticed the court that they could appeal. Whether they do or not, I guess, remains to be seen.” – David Kaleda

Welcome back to the Compliance in Context Podcast! On today’s show, we feature a Lessons From The Front Lines episode where we welcome two very special guests, namely Ms. Alpa Patel and Mr. Igor Rozenblit, to share their fantastic insights and help us unpack the Loper Bright and Corner Post decisions, PFAR getting vacated, and what’s next on the examination and enforcement front.

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Interview with Alpa Patel and Igor Rozenblit

Quotes

12:10 – “The rules expanded over the years, and it was always in reaction to litigation, right? Sothis will just be more. PFAR being dropped, and that was obviously more on a statutory authority side. But when you have a rule that’s struck down for being arbitrary and capricious, which is normally how these rules go, the answer to that is, well, let me give you more reasons. And that is why, you know, our releases ended up just writing more. The more you can draft, the better because you’re trying to counteract the idea that you did not address some random issue that a commenter raised, you know, in their 600-page comment letter. So that’s, that is the give and take and sort of the beauty of the Administrative Procedures Act of, well, okay, you’re telling me I didn’t do enough. I will do more. And that’s exactly where you’re going to end up more here.” – Alpa Patel

23:55 – “I think the vacation of PFAR didn’t really change the examination approach of the commission at the moment. I think, had PFAR stood, there was a pretty good probability that exams would have changed pretty significantly and would have transformed into a group that tests a lot of the PFAR disclosures that were required, but that did not happen. In terms of the areas that PFAR covered, those areas are traditional exam risk areas, and that is why they were in PFAR. It really didn’t work the other way around. So in terms of what exam does now, it’s really a version of what they’ve always been doing, which is identifying potential conflicts of interest, identifying potential technical violations of certain rules, including the books and records rule, which is kind of a hot topic right now, and pursuing those in both an exam and enforcement context.” – Igor Rozenblit

27:01 – “So I think you’re going to see more regulation by enforcement to get their message out about particular practices that they find problematic. And there are lots of different themes you’re going to see—that you’re continuing to see from the exams. And if anything, it’s more to building the case that they are—that this is an area of law that needs regulation and needs sort of very specific principle-based rules. Let me show you by bringing a bunch of cases and showing a bunch of exam issues that get referred, and the more you’re able to cite to it, the more sort of groundswell you have to prove, from a prophylactic perspective, these principled-based rules are required, or these actually more prescriptive-based rules are required because there is fraud going on.” – Alpa Patel

40:16 – “And to be frank, like the technological solutions aren’t great. And I think advisors have really struggled with how are we supposed to monitor, you know, some forms of communication, but have really put the time and the resources into try to get on the right side of this issue. And as Igor will say, like, it’s still hard. The surveillance piece is still hard, no matter if you as the advisor, do everything correctly, trying to get it right with your employees is not easy. And if they are going to sort of really pick apart procedures and actual surveillance practices, we’re in trouble. And I think they know, there’s sort of not a great answer to that other than hoping that they show some judicious application of the rules here.” – Alpa Patel

Welcome back to the Compliance In Context podcast! On today’s show, we perform a comprehensive review a of rule proposal from 2024 with the biggest long-term impact to the RIA community—namely AML rule proposal from FinCEN. In our Headlines section, we review recent decision from the Fifth Circuit court to stay the new DOL Fiduciary Rule that was issued earlier this year. And finally, we’ll wrap up today’s show with another installment of What’s On My Mind, where we take a quick moment to visit the 2024 Paris Olympics and review how some of the greatest athletes in the world can give us a critical insight into being the best versions of ourselves and building our own firm’s best compliance program.

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Headlines

Interview with Ed Wegener and Laura Goldzung

What’s On My Mind

Quotes

10:26 – “Earlier this year, FinCEN proposed adding investment advisors as designated financial institution for AML and CFT purposes. And then additionally following on that, FinCEN and the SEC issued a joint proposal that would require investment advisors to comply with the customer identification and verification requirements, as well as the requirements to identify and verify identities of certain beneficial owners of legal entity customers. So in a nutshell, the impact will be that once this rule becomes effective and we meet the implementation date, investment advisors are going to have virtually the same requirements that certain other financial institutions have with respect to AML programs, including broker dealers. So many investment advisors who have affiliated broker dealers are well aware of those requirements, but we’re working with all of our investment advisor clients to understand what those expectations and requirements may be and how they can prepare for that.” ~ Ed Wegener

20:54 – “In the proposal, Vincent talked about the training needing to be designed based on the roles of the individuals that are being trained. So you have to distinguish different roles. And those roles will likely determine the nature, the scope, and the frequency of the training for each of those roles. So people who are very involved in the AML program likely are going to need more regular training. Those individuals that might not be as involved in the AML program, but touch certain aspects of it, like client-facing people that are dealing with account opening and things like that, will at a minimum need to be trained at least annually” ~ Ed Wegener

24:20 – “One of the aspects of the AML requirements that impacts training are the requirements to monitor for, identify, and report suspicious activities. So you want to make sure that as you develop your programs, that you’re looking at, what are the particular risks for money laundering, CFT, other illicit activities that my firm is at risk for, how are we going to monitor for those items? So what sort of monitoring systems are we going to put in place? And making sure that the alerting systems that you have are geared towards those particular red flags that you need to identify based on the risks associated with your firm. But there are a lot of activities that aren’t the types of things that will be picked up through a monitoring system or exception reporting system, things like account opening and issues red flags that might pop up during account opening. So it’s also important in addition to having a system for monitoring for suspicious activities that you’re training your staff—especially those client-facing staff on what are the particular red flags that they might come across that you need to escalate for further review because one of the areas that the regulators really hone in on looking at AML programs—is how are you monitoring for suspicious activities when those are identified how are you following up on those items and importantly are you documenting both the identification and follow up to those items.” ~ Ed Wegener

25:53 – “I think too that it’s very important to have qualified people in the firm who have some AML experience. You can’t just assign the baseball hat to somebody and say, okay, you’re in charge of monitoring. When they have no idea with everything, even red flags. It’s a red flag. Most people are not doing with red flags. So that’s not to take anything away from the talented salespeople, you know, all those very important functions in the advisory firm. But AML is a living, daily living thing. People who are managing all the parts of it really need to be skilled and understand not only what they should do, but why they should too.” ~ Laura Goldzung

Welcome back to the Compliance In Context podcast! On today’s show, we look at the evolution of compliance through the lens of the NSCP, analyzing key growth milestones, identifying new resources and building for the future, and reviewing what’s up next for the organization in 2024. In our Headlines section, we review recent decisions from the Supreme Court in the Loper Bright case and the long-term impact federal agencies’ rulemaking interpretations. And finally, we’ll wrap up today’s show with another installment of Outtakes, where a recent SEC Enforcement action provides us significant insight and also raises more questions regarding the SEC’s stance on cybersecurity controls.

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Headlines

Interview with Lisa Crossley and Melissa Loner

Outtakes

Quotes

22:58 – “I think the community is what runs deep through NSCP and what makes it so special. I mean, I have wonderful friends that I’ve met through NSCP. I’ve had job opportunities that with the help of members of NSCP, it is a very strong community. There’s so many ways to be involved, whether, you know, whether it’s very micro to being on NSCP’s board. So that’s something that Melissa will talk about in terms of volunteer development. But I can speak from my own experience that I felt that, you know, immediately there was a group of members who just were there to help me along the I introduced me to other people got me involved, like whether it was speaking or being on a committee, just being able to have those connections is so important, similar to having your social connections. So that’s something that I’ve always tried very hard to make sure that we maintain and we would maintain those opportunities in various work for our members ~ Lisa Crossley

30:50 – “You look at how the NSCP has evolved over the last couple of years with adding podcasts, adding more virtual sessions, right? We still hear about COVID and how people had to switch up from that and get more creative. We’re sort of in that realm again. We’ve also talked about that with the compliance officer of the future, right? How many of us back in the day thought that we would need to know so much about cybersecurity or any of that type of technology? We have AI, right? That’s a huge initiative all over. So just looking at how we continue to evolve in the subject matter, because the compliance professional of the past is not going to be the compliance professional of the future, right? And so looking at AI, I know that is also a big initiative of Lisa’s is to see not just how we can offer continued resources and AI to our members, but how do we encompass and integrate AI into the National Society of Compliance Professionals?” ~ Melissa Loner

Welcome back to the Compliance In Context podcast! On today’s show, we review an incredibly important topic for all SEC-registered broker-dealers and investment advisers, namely third-party due diligence of service providers—what situations require it, regulatory considerations, and what are the basic building blocks for establishing a successful due diligence program inside your firm. In our Headlines section, we review the recent SEC rulemaking amending Regulation S-P. And finally, we’ll wrap up today’s show with another installment of History Has Your Back, where an old quote from an ancient stoic might just help you make the best of a bad situation when things in your compliance program don’t go exactly as planned.

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Headlines

Interview with Kevin Gleason

History Has Your Back

Quotes

17:20 – “Does the level of scrutiny need to be the same for, you know, someone that, you know, provides you maybe some training and content for your employees as it does for someone who, you know, maybe executes trades or who, you know, performs sort of risk analytics, maybe a fact set or someone or, you know, right? You know, I'm not here to say it does or doesn't, but to be able to do all of those people and provide the same sort of level of rigor, I think, is rather would be rather difficult for firms.” – Kevin Gleason

25:43 – “I mean, that is sort of the next step, I think, in the process, which is working on developing a questionnaire. With regards to sub-advisors, at least in my mind, right, they provide a similar service. It may be in regard to different asset types or asset classes. It may be taking different risks but really, they manage assets on behalf of your clients or on behalf of a fund or account. Where, I think, it’s more challenging is, now you have lots of other service providers outside of that same sort of function, in terms of a sub-advisor. You have pricing services and custodians and you have administrators and others. And so those types of questionnaires look differently. You do want to cover, I think, some of the same ground in terms of business continuity, disaster recovery, information security and how information will be transferred to them and what type of information will be—really you want to develop a questionnaire. In some cases it can look very similar for multiple parties. In others, I think it’s very sort of bespoke and specific to that type of service and that type of service provider.” – Kevin Gleason

35:17 – “We obviously have dedicated professionals inside of firms that are charged with running compliance, with designing and implementing the firm's compliance program, but just in the same way that we would say, everybody at the firm practices compliance, right? And we need everybody to buy into that. I think the same thing is kind of true with regard to third-party service providers and how they fit into the overall operations and again, the kind of monitoring and supervision that goes on so that there needs to be collaboration among the people on your team anytime you're utilizing the services of a service provider to be able to provide real-time feedback and if there are issues that are occurring that those get fixed on a more frequent basis than say once every three years that you send over a questionnaire.–Yeah, I think that is important that the audience as a takeaway, right? It's sort of an evergreen process. I refer to it as, you know, to your point, lots of other departments we talked about, is sort of it takes a village. And I realize, depending on the size of your firm, you may not have access to people in audit or risk or separate legal people, but you do need to, I think, draw upon the expertise of the people you have.” – Patrick Hayes and Kevin Gleason

Welcome back to the Compliance In Context podcast! On today’s show, we review one of the most important topics impacting broker-dealers this year, namely the issue of remote supervision and how to address the new Residential Supervisory Location Designation and the Remote Inspections Pilot Program. In our Headlines section, we review the recent Supreme Court decision impacting 10b-5 disclosures and a recent FinCEN report tracking new information and trends surrounding elder financial exploitation. And finally, we’ll wrap up today’s show with another installment of Outtakes, where we look at the recent risk alert from the Division of Examinations focusing on new SEC Marketing Rule violations.

Headlines

Show

Interview with Ben Marzouk and Andrew Mount

Outtakes

Quotes

14:50 – “People soon realized that no one was really going back to the way things used to be five days a week in a set physical office location. To some extent, people were going to continue to work from home for some period of time, even at the pandemic subsided. So with that in mind, FINRA reminded firms that, ‘hey, if you’re going to continue to allow people to operate their home and do brokerage business from their homes, you’re going to need to supervise that location.’ And that supervision would mean inspection on some regular set schedule. It would also mean, and we can get into it later, thinking about your membership agreement.” – Ben Marzouk

20:13 – “If an associated person works two days a week from home and three days from the office, FINRA’s staff has said that that would mean towards being a regularly working at home arrangement, and you’d have to count that residential location and as a person. office. I would say that that’s not to say that just because someone’s one day at home and four days in the office during the week you don’t need to count the one day at home, you need to look at the locations where your associated persons work on a routine and predictable schedule with a firm’s knowledge and some sort of formalized arrangement and, you know, make that determination. by case basis. It’s a really a facts and circumstances analysis. You know, that FINRA, as staff has said recently, at least, that of locations that you use on an ad hoc basis, so I’m thinking locations where you work from the office five days a week, but you stay at home on Friday because you have a contractor coming or your kids are coming.” – Ben Marzouk

28:10 – “The one area where FINRA’s management of remote work has evolved has been, I think, with the inspection requirements, and we can get into the specifics of the rule later. But, you know, traditionally, FINRA had always taken the view that under 3110, the obligation to inspect an office needed to be done in person, that you had to show up to, you would typically have a principal of the firm that would show up to the actual branch office location and inspect it and go through the actual physical location, look at files, look at the way business was being done and FINRA’s view is that you couldn’t phone it in. You had to physically be there to inspect the office.” – Andrew Mount

37:11 – “It’s something that FINRA staff, at least, has tried to get out in front of by saying, everything’s going to be reported on an aggregated basis. We won’t be able to tie the findings to any specific office or location or person. So they’re trying to get out in front of it and say that this is purely for data collection. It’s purely to support the eventual permanence of remote inspections. I would say that some firms do remain skeptical there. The last thing I’ll say on the remote inspections [pilot program] is a key takeaway. Like I said at the top, firms aren’t required to participate, but if you don’t participate in the pilot program, you’re going to have to go back to doing on-site inspections.” – Andrew Mount

Welcome back to the Compliance In Context podcast! On today’s show, we feature a Lessons From The Front Lines episode with renowned retirement plan fiduciary expert, Mr. Fred Reish, to help us through another groundbreaking DOL Fiduciary Rule and unpacking where and how it will affect investment adviser and broker-dealer firms across the country. This is an episode you won’t want to miss!

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Interview with Fred Reish

Quotes

7:54 – “If you look at both of those, I think Reg BI for broker dealers is actually a tougher standard. I know that’s going to surprise some investment advisers to hear, that but, and part of that’s because the interpretation for investment advisors is really principles, truly principles-based. And, you know, the SEC said the duty of care and the duty of loyalty for investment advisors together is a best-interest standard of care, but very principles-based. If you get into Reg BI, the standard of care is principles-based, but then there are a bunch of rules-based parts to Reg BI, so for no other reason other than just the volume of rules alone under Reg BI make it a more complicated and more demanding set of requirements.” – Fred Reish

21:32 – “Number one, the advisor has to satisfy the impartial conduct standards. Well, what are impartial conduct standards? That's a label from the Department of Labor. It has meaning, though. You have to act with a duty of care, sort of thing of a fiduciary duty, and a duty of loyalty. Similarly, a fiduciary duty. You can't put your interest ahead of the investors. No more than reasonable compensation relative to the services provided, no materially misleading statements. There is a group of things like that that are called the impartial conduct standards.” – Fred Reish

Welcome back to the Compliance In Context podcast! On today’s show, I am thrilled to welcome back to the show, Mr. Rob Tull, who talks us through what’s in the complete toolkit every CCO needs to build an effective compliance program. In our Headlines section, we review recent comments from the SEC’s Enforcement Division responding to criticisms from the crypto industry. And finally, we’ll wrap up today’s show with another installment of Outtakes, we look at the first-of-its-kind enforcement action against investment advisers for misleading statements about their use of artificial intelligence.

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Headlines

Interview with Rob Tull

Final Segment – Outtakes

Quotes

11:58 – “So if I had to stack these things in priority, the first thing is, do I know the rules? Am I knowledgeable? So is a compliance officer knowledgeable? That’s kind of, it’s rough. There are layers to that. The first thing is, do you know the regs that apply to your business? And that’s where, you know, that’s where there’s a ton of content from NSCP, from law firms, from consulting firms—like, we get that, we get the knowledge. But then there’s two layers on top of that. Then there’s also, do you know the industry you’re in? Like, it’s one thing to know the rules, but do you know what’s going on in the industry? What’s happening for investment managers and broker-dealers in aggregate? And then what’s happening in your business? Like you need to know your business. And that’s kind of like the foundation, like that knowledge piece.” – Rob Tull

20:29 – “The beauty about empowerment is we tend to think, once I’m the named CCO, I am, by default, empowered. That’s the way we tend to get because the rules are title-focused, we get title-focused. But what we forget is that title has nothing to do other than who gets to wear the target. What it really talks to in our ability to be empowered is our ability to demonstrate–it’s how well we demonstrate our competence and our knowledge. And it’s not an ivory tower task. It is a ‘what do you bring to the business as a value-add, to take compliance from a checklist to make it something that is additive to the business. And that is the most important thing. And it’s not just–and this is beyond the concept of profitability, beyond that concept–it is how do you make the organization better top to bottom.” – Rob Tull