Writing and Maintaining WSPs Wednesday, December 6 2:00 p ...

© 2017 Financial Industry Regulatory Authority, Inc. All rights reserved. 1

Writing and Maintaining WSPs Wednesday, December 6 2:00 p.m. – 3:00 p.m.

This session provides guidance and practical tips for developing or reviewing written supervisory procedures (WSPs). WSPs are “living documents,” and should provide a road map for supervisory personnel to follow when they conduct reviews. Join FINRA senior staff and industry panelists as they define and provide guidelines for creating WSPs. Moderator: Gargi Sharma Examination Manager, Sales Practice FINRA Boca Raton District Office Panelists: Mitchell (Mitch) Atkins Founder and Principal FirstMark Regulatory Solutions, Inc. Neivon Morantez Examination Manager, Sales Practice FINRA New Orleans District Office Kathryn (Kate) Wilson Senior Regional Counsel FINRA Enforcement

© 2017 Financial Industry Regulatory Authority, Inc. All rights reserved. 2

Writing and Maintaining WSPs Panelist Bios: Moderator: Gargi Sharma has over eight years of experience at FINRA (four at the Florida District Office). Ms. Sharma started at the Dallas office in 2005 right after graduate school and then moved to the Seattle office in 2009. Ms. Sharma moved to Minneapolis in 2010 and joined the Federal Reserve Bank as an examiner. Ms. Sharma came back to FINRA in FINRA’s Boca office in July 2013. Since joining the Boca office, Ms. Sharma has worked as an examiner within the Cycle program and the AMLIU. Ms. Sharma was promoted to an Exam Manager in August 2016. Ms. Sharma looks forward to work every day knowing that the work FINRA does makes a difference in protecting investors and maintaining market integrity. Panelists: Mitchell Atkins is Founder and Principal of FirstMark Regulatory Solutions, Inc., a compliance consultancy based in Boca Raton, Florida. His focus is complex problem solving for FINRA broker-dealers and registered investment advisers. His recent compliance focuses include anti-money laundering compliance, supervisory controls assessments, cyber security compliance, FINRA membership applications, broker-dealer acquisitions, and non-traded REIT and variable annuity compliance. Mr. Atkins has 24 years of experience in the industry, 20 years of which was in various roles at FINRA (previously NASD), most recently as Senior Vice President and Regional Director, with overall responsibility for four districts comprising FINRA's South Region (home to 850 brokerage firms). He oversaw the region's routine inspection program, sales practice special investigations, financial surveillance and membership application programs. Mr. Atkins oversaw the development of innovative initiatives such as the National Anti-Money Laundering Investigative Unit in 2012. Mr. Atkins oversaw the successful startup of the Florida District Office of FINRA in 2005. Mr. Atkins frequently addresses financial services industry groups. He is a Certified Regulatory and Compliance Professional™ through the FINRA Institute at Wharton. He is a graduate of Louisiana State University and a member of the Florida Securities Dealer’s Association, the National Society of Compliance Professionals (NSCP) and the SIFMA Compliance and Legal Society. Neivon Morantez is Examination Manager with FINRA and directs the Cause Investigations section of the New Orleans District Office. He joined NASD / FINRA in 1998. During his nearly 20 years with the New Orleans Office, Mr. Morantez has participated in many high profile cycle, cause and special initiative examinations. Mr. Morantez received a bachelor’s degree in finance from Auburn University. Kathryn Wilson (aka Kate) has been employed with FINRA for 15 years and is currently Senior Regional Counsel. Ms. Wilson started with FINRA in the Membership and Application Program (MAP), then worked as an investigator in Enforcement in the New York Regional program and went to Brooklyn Law School at night. In November 2010, Ms. Wilson was hired as a Regional Counsel in the New York office. In 2012, Ms. Wilson transferred to the same position in the Florida office. Ms. Wilson has worked on cases involving a variety of subject matters and topics including: B-share mutual funds, NAV transfers, UIT discounts, structured products, Puerto Rico bond concentration and supervision, mutual fund fee waivers, AML, and net capital. Prior to FINRA, Ms. Wilson was registered and worked as a CCO and FINOP at a small broker-dealer.

2017 South Region Compliance Seminar

December 6 – 7 | Ft. Lauderdale, FL

Writing and Maintaining WSPs

FINRA South Region Compliance Seminar | © 2017 FINRA. All rights reserved.

Moderator

Gargi Sharma, Examination Manager, Sales Practice, FINRA Boca Raton District Office

Panelists

Mitchell (Mitch) Atkins, Founder and Principal, FirstMark Regulatory Solutions, Inc.

Neivon Morantez, Examination Manager, Sales Practice, FINRA New Orleans District Office

Kathryn (Kate) Wilson, Senior Regional Counsel, FINRA Enforcement

Panelists

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FINRA Rule 3110

Requires establishment and maintenance of a system to

supervise the activities of each associated person; and

Written supervisory procedures to supervise the types of

businesses in which the firm engages as well as activities of

persons associated with the firm.

– Systems and procedures must be “reasonably designed” to achieve

compliance with applicable securities laws and regulations and with

FINRA rules.

Core Requirements – WSPs

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http://finra.complinet.com/en/display/display_main.html?rbid=2403&element_id=11345


SEA Rule 17a-4(a)(7)

The Firm must maintain WSP manuals, including updates, modifications, and revisions for three years following termination of use.

SEA Rule 17a-3(a)(22)

“Each firm must maintain a record listing each principal… responsible for establishing policies and procedures that are reasonably designed to ensure compliance with any applicable federal requirements or rules of a self-regulatory organization… that require acceptance or approval of a record by a principal.”

Core Recordkeeping Requirements – WSPs

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https://www.law.cornell.edu/cfr/text/17/240.17a-4

https://www.law.cornell.edu/cfr/text/17/240.17a-3


FINRA Rule 3120 (Supervisory Controls)

Broker dealers are required to test and verify that the firm’s supervisory procedures are reasonably designed with respect to the activities of that firm and its associated persons, to achieve compliance with applicable securities laws and regulations and with applicable FINRA rules; and

Firms must create new (or amend existing) procedures where the need is identified by the testing.

An annual report detailing the system of controls and the summary of testing results must be submitted to the firm’s senior management.

Core Maintenance Requirements – WSPs

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http://finra.complinet.com/en/display/display_main.html?rbid=2403&element_id=11346

Writing and Maintaining WSPs

A Practical Guide

FINRA South Region Compliance SeminarFort Lauderdale, Florida

December 2017

© 2017 FirstMark Regulatory Solutions, Inc., All rights reserved.

http://firstmarksolutions.com

http://firstmarksolutions.com/

© 2017 FirstMark Regulatory Solutions, Inc. All rights reserved.

Important Considerations for WSPs

• Procedures must be reasonably designed – not perfect. – FINRA Rule 3110: “Reasonably designed to achieve compliance with

applicable securities laws and regulations, and with applicable FINRA Rules.”

• Reasonably designed, forward looking procedures which are adequately enforced and periodically updated will help to minimize compliance risks.

• Supervisory responsibilities must be reasonably delegated.

• Reasonable delegation includes ensuring proper qualificationsand having clear delegation of responsibility.

• Annual supervisory controls testing is critical to maintenance.

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Written Supervisory Procedures should be a living document that is embraced and enforced by a firm’s management team. Effective WSPs can prevent scores of problems. Ineffectively drafted and/or poorly maintained procedures are a problem in and of themselves, and worse, can exacerbate other problems.


Using FINRA Guidance in Drafting WSPs

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• NASD Notice to Members 99-45– Conceptual Aspects

• “a supervisory system cannot guarantee firm-wide compliance with all laws and regulations”

• Industry standards require, “that the system be a product of sound thinking and within the bounds of common sense, taking into consideration the factors that are unique to a member’s business”

– Compliance Procedures v. Supervisory Procedures• Compliance policies and procedures typically outline the requirements of the rules.

• Supervisory procedures must spell out how the firm ensures effective compliance with the rule through various tools, methods, and controls.

– Supervisory System v. Written Supervisory Procedures• The WSP manual is the written document that are part of an overall system of

supervision.

• The Supervisory System is an overall system of supervision that includes the WSPs, forms, reports, supervisors, committees, surveillance systems, and other supervisory tools.

http://www.finra.org/sites/default/files/NoticeDocument/p004311.pdf



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• NASD Notice to Members 99-45

– Minimum Elements• Procedures must be tailored to the Firm’s business

• Designate principals for each area of business

• Assign supervisors to each associated person

• Designate Offices of Supervisory Jurisdiction

• Ensure that designated supervisors are adequately qualified

• Provide for annual compliance meeting

• Provide for annual review of all businesses

• Provide for internal inspections




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• NASD Notice to Members 98-96

– Procedures should detail the following:• Who: The person(s) responsible for supervision (by name or title)

• What: The supervisory steps and reviews to be taken by the appropriate supervisor (including tools used such as exception reports)

• When: The frequency of the reviews

• How: How the reviews are documented



Use of Templates

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No Restriction on Use of Templates: While there is no restriction on the use of templates for WSPs, FINRA requires procedures to be tailored to the firm’s business.

Pros

• Usually comprehensive as to rules

• Can be more cost effective than

custom-designed WSPs

• Some offer subscriptions for

updates

• Can be quickly implemented

Cons

• FINRA won’t look to WSP vendor if

WSPs are inadequate – the firm is

responsible

• Often include areas not applicable to

the firm’s business

• Can indicate to regulators that the

firm has not devoted resources to

developing procedures

• May require actions that the firm

does not perform (not knowing all

that is in the document)

• Little or no firm staff buy-in on

details


Helpful Tips

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• Avoid simply restating rules

• Ensure that the procedures can be carried out

• Use clear, concise language

• Be descriptive, avoid vague references

• Include training following significant updates

• Utilize an exhibit for personnel assignments to simplify updates

• Use caution in assigning supervisory responsibilities to compliance staff

Writing and Maintaining WSPsA Framework.

Stage 2Current State

• Assess current supervisory system to determine extent of required changes

• Solicit feedback from stakeholders about what is working well and what is not

• Determine scope of review (areas to be included and excluded)

• Assess current WSPs vs. desired state of system

Stage 3 Stage 4

Assessing / Vetting / Drafting / Implementing

Stage 1: Evaluate Current State - Existing Systems, Policies, Processes and Procedures

Stage 2: Conduct Gap Analysis - Existing Rules and Guidance vs. Current Processes and Procedures

Stage 3: Develop Revised WSPs and Gain Stakeholder Buy-In

Stage 4: Promulgate, Train and Conduct Ongoing Evaluation/Fine-Tuning

Gap Analysis

• Consider using FINRA checklist

• Incorporate information from constituents (including regulatory results)

• Compare existing processes, procedures, and forms to information gathered

• Develop outline• Preserve old WSP

version(s)

Training and Implementation

• Distribute updated WSPs• Revise forms & disclosures• Conduct training• Conduct follow-up testing

and verification • Make required changes

(from follow-up) • Conduct periodic re-

assessments through 3120/3130 review and more frequent if required.

Stage 1Assess, Commit and Draft

• Draft procedures using the methods outlined in NASD Notice 98-96 (Who, What, When, How) and 99-45

• Incorporate all aspects of system (tools, forms, etc.)

• Consider both rules and interpretive guidance

• Preview drafts with key stakeholders, modify based on feedback

© 2017 FirstMark Regulatory Solutions, Inc., All rights reserved.12


Example

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• New FINRA Rule 2165 (Financial Exploitation of Seniors) effective February 5, 2018– Stage 1: Review requirements of Rule 2165 and Notice 17-11– Stage 2: Assess integration into firm supervisory systems

• What new tools, systems, records, and forms will be required? Updates to existing?• Which departments will be impacted? • Who will be responsible?• Discuss with key stakeholders in each functional area.

– Stage 3: Begin drafting WSPs based on information learned in Stage 2 above, with key elements including:

• Discuss defined terms (as per Rule 2165).• Outline the Rule’s requirements.• Discuss firm’s recordkeeping requirements, including method of inquiring about trusted contact,

periodically confirming with client, notifications regarding temporary holds, and maintenance of records related to investigations (including responsible parties).

• Discuss client/contact notification requirements – who is responsible, how notification is made, what records are maintained.

• Outline key factors in identification of financial exploitation, persons responsible, and any systems or tools utilized, including review of customer complaints and communications.

• Cover process for escalation of suspected financial exploitation and conducting investigation (including responsible parties and process to be followed).

• Include process to ensure AMLCO considers any red flags of suspicious activity indicating financial exploitation.

http://www.finra.org/sites/default/files/Regulatory-Notice-17-11.pdf


Example, Continued

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• New FINRA Rule 2165 (Financial Exploitation of Seniors) effective February 5, 2018– Stage 4: Solicit Feedback, Adjust, Implement, Test

• Seek feedback from key stakeholders on draft WSPs.

• Assess feedback and if necessary, make adjustments.

• Update firm training plan as appropriate to cover required training needs.

• Implement Procedures: distribute, conduct training, update systems and forms as required.

• Conduct periodic assessment as to effectiveness of procedures and make required adjustments.


Helpful Tools

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• FINRA WSP Checklisthttp://www.finra.org/sites/default/files/WSP-Checklist.xlsx

• FINRA Templates and Formshttp://www.finra.org/industry/tools

The information contained in this presentation is for illustrative purposes and should not be

construed as individual advice to any one broker-dealer. Written procedures must be

tailored to the facts and circumstances of each firm after a thorough review of that firm’s

overall supervisory system.

http://www.finra.org/sites/default/files/WSP-Checklist.xlsx

http://www.finra.org/industry/tools


Keys to Solid Supervisory Systems and Procedures

Product specific: Account for the specific features of products and

not just general suitability concerns, e.g. product share classes;

riders for VAs (what should your sales force be considering? / what

should your Principals be keying in on to judge suitability?). Know

the product and how to surveil before rolling it out.

Tested: Adequate testing should be performed post-

implementation. Updates should occur as needed. Procedures

should not be static.

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Avoiding Procedural Pitfalls


Keys to Solid Supervisory Systems and Procedures

Over Disclosure: A necessity – but too much reliance on disclosure

forms can lead to problems. “Covering it” with a form may not get to

the heart of it and can mask training needs, e.g. product knowledge;

suitability considerations, etc. Implementation without proper

training can lead to inconsistencies in form use.

Exception Reports: Should be tailored (not “forced”) to meet a

firm’s business needs. Testing should occur to ensure limited “false

positives” or “misses”. Clearing firms have reports that may be

valuable tools for an introducing firm. Firms should inquire.

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Avoiding Procedural Pitfalls


Discounting an Area: An area of business considered insignificant

was overlooked by the firm. The sales force increased dramatically.

Critical procedures not implemented timely. Compliance issues

soared.

Accountability / Inefficient Reports: Key reviews were not

completed for an extended period of time due to Compliance

turnover. Exception reports never configured properly. Activity was

not evaluated and red flags were not identified.

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Examples of Procedural “Misses”


No Resolution: A firm had useful tools and identified patterns even

though parameters were unclear. Unfortunately, there was no

follow-through. Activity identified was removed from future analysis.

The problem was never resolved and became re-occurring.

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Examples of Procedural “Misses”

Writing and Maintaining WSPs Wednesday, December 6 2:00 p ...

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