COVID-19: FINRA Addresses U.S. Broker-Dealer Preparedness and Regulatory Relief in Regulatory Notice 20-08

On March 9, 2020, the Financial Industry Regulatory Authority (FINRA) published Regulatory Notice 20-08 (Notice) with respect to business continuity planning in connection with the recent coronavirus (COVID-19) outbreak.¹ The Notice offers guidance on preparing for potential pandemic-related risks and provides regulatory relief from certain requirements in light of COVID-19.

Firm’s Readiness for COVID-19

• Review Your Business Continuity Plan (BCP): Firms should review their BCPs to ensure they are sufficient to address a wide range of possible effects in the event of a pandemic in the United States that may present significant financial or operational risks.² Firms should consider how operations may be affected by a potential pandemic, such as through staff absenteeism, use of remote offices or telework arrangements, travel or transportation limitations and technology interruptions or slowdowns. Firms should also ensure that they have the appropriate emergency contacts set up so that FINRA has a reliable means of contacting them in the event of an emergency. Based on our experience, we recommend redundancy or a backup to the emergency contact(s) and that firms take the time now to test this function.
  
  
• Consider Remote Offices or Telework Arrangements: In order to mitigate the potential effects of a pandemic, firms may consider employing methods to limit travel or physical contact. Where personnel work remotely or have telework arrangements for the duration of a pandemic, firms must implement a system reasonably designed to supervise those personnel. We recommend that firms test the broad use of remote offices or telework arrangements by associated persons prior to activating their BCPs.
  
  If a firm temporarily relocates personnel to an unregistered or non-branch location, it should use its best efforts to provide written notification to its FINRA Risk Monitoring Analyst as soon as possible after establishing a new temporary office or space-sharing arrangement. In addition, in instances where a non-branch location or branch office has been relocated, or customer calls are being rerouted to another office, firms must exercise diligence in validating the identity of the customer and provide heightened supervision of the affected customer accounts. FINRA will want to understand a firm’s ability to supervise activities at these remote locations.
  
  
• Be Alert to Cybersecurity Risks: The risk of cyber events may be increased due to use of remote offices or telework arrangements, heightened anxiety among associated persons, and general confusion about COVID-19. Firms should remain vigilant in their surveillance against cyber threats and take steps to reduce the risk of cyber events as a part of their pandemic preparedness.
  
  
• Prepare for Communications Disruptions: Firms may experience increased call volume or online activity as a result of a pandemic. Firms should review their BCPs regarding customer communications and ensure customers have access to their funds and securities in the event of a significant business disruption. If registered representatives are unavailable to service their customers, firms are encouraged to promptly place a notice on their websites indicating to affected customers whom they may contact concerning the execution of trades, their accounts and access to funds or securities.
  
  As discussed above, firms should also ensure they have provided FINRA with reliable emergency contact information. Firms are reminded to call FINRA’s Call Center at (301) 590-6500 if they are unable to contact FINRA through their usual contacts due to a pandemic or other significant business disruption

Regulatory Relief

• On-site Inspections: Scheduled on-site inspections of branch offices may need to be temporarily postponed during a pandemic. The ability to complete this annual regulatory obligation in 2020 may need to be re-evaluated depending on the duration and severity of a COVID-19 outbreak. Firms should document contingent efforts to supervise activities at branch offices.
  
  
• Form U4/Form BR: FINRA is temporarily suspending the requirement to maintain updated Form U4 information regarding the office of employment address for registered persons who temporarily relocate due to COVID-19. Additionally, firms are not required to submit branch office applications on Form BR for any newly opened temporary office locations or space-sharing arrangements as a result of COVID-19.
  
  
• Regulatory Filings and Responses to FINRA Inquiries, Matters and Investigations: Firms that require extra time to respond to open inquiries, investigations or upcoming filings due to COVID-19 disruptions should contact their Risk Monitoring Analysts or the relevant FINRA department to seek extensions. FINRA may waive any late fees incurred by a firm based on the firm’s particular circumstance. In addition, if any data communications are disrupted, firms should retain the relevant data until it can be transmitted to FINRA.
  
  In considering regulatory filing requirements, firms are reminded of the requirements in Rule 15c3-3 under the Securities Exchange Act of 1934 regarding reserve formula computations and required deposits that are intended to protect customer funds and securities.³
  
  
• Qualification Examinations and Regulatory Element Continuing Education: Any affected person who has a qualifications examination or continuing education window that is due to expire is encouraged to contact FINRA regarding an extension.
  
  
• Military Personnel and National Guard: The declaration of an emergency in a specified area due to COVID-19 may result in some persons volunteering or being called into active military duty. FINRA Rule 1210 provides relief to persons registered with FINRA who volunteer or are called into active military duty.

Firms should already be considering what steps they will need to take in the event of a COVID-19 pandemic—steps toward preparation can ultimately help to mitigate stress during these difficult times. We are available to discuss your Business Continuity Plan and to discuss additional guidance or regulatory relief from FINRA or the SEC related to COVID-19.

 

¹ See FINRA Regulatory Notice 20-08 (Mar. 9, 2020), available at https://www.finra.org/rules-guidance/notices/20-08.

² Rule 4370 (Business Continuity Plans and Emergency Contact Information) requires a member firm to create, maintain, review at least annually and update upon any material change a BCP identifying procedures relating to an emergency or significant business disruption. BCPs should be reasonably designed to enable a member firm to meet its existing obligations to customers and address existing relationships with other broker-dealers and counterparties.

3 Exchange Act Rule 15c3-3(e)(3) requires a broker-dealer to prepare the reserve formula computations, necessary to determine the amount required to be deposited as specified in Rule 15c3-3(e)(1), to be made weekly, as of the close of the last business day of the week, and the deposit so computed to be made no later than one hour after the opening of banking business on the second following business day.