FINRA’s New Senior Investor Rule and CFPB’s Latest Developments Discussed in This Month’s Compliance Podcast

In our February Compliance Insights podcast, Jill Smiley, a Director, and Steven Stachowicz, a Managing Director with our Risk and Compliance practice, discuss FINRA’s new rule on protecting senior investors and the CFPB’s recent Request for Information notices  – two of the topics covered in this month’s Compliance Insights newsletter. Download the full February issue at this link.

In-Depth Interview
Compliance Insights, February 28, 2018 [transcript]

Kevin Donahue: Hello. This is Kevin Donahue, Senior Director with Protiviti, welcoming you to a new edition of Powerful Insights. Today we’re talking again about the latest issue of Compliance Insights from Protiviti’s Risk and Compliance practice. I’m pleased to be joined again by Steve Stachowicz, a Managing Director and a leader in Protiviti’s Risk and Compliance practice. Steve, thanks for joining me today.

Steven Stachowicz: Good to talk to you again, sir. Thank you.

Kevin Donahue: I’m also happy to be joined for the first time in our podcast here by Jill Smiley. Jill is a Director with Protiviti’s Risk and Compliance practice. Jill, it’s great to speak with you.

Jill Smiley: Thank you for having me.

Kevin Donahue: So Jill, I’m going to toss the first question to you, and again, we cover this in the February issue of Compliance Insights. FINRA issued a new rule effective this month to prevent abuse and exploitation of elder investors. The intent of the rule is clear and the guidelines on how to comply seem clear as well. Is it as straightforward and easy as it sounds or are there hidden cost and hurdles that banks may encounter in complying with the rule?

Jill Smiley: Thank you for the question. That is a good question. Definitely something to think about because it does seem very straightforward, but when you start to dig into it and you look a little bit deeper as to the implications to what these mean and the responsibilities that are now placed on member firms and the people that are working there, it’s pretty extreme. So, the first one that they have enacted is the trusted contact person. So now, what the member bank is supposed to do is when someone opens an account, they ask them for a trusted contact person. They are supposed to use reasonable efforts to do this. The reasonable effort, all it has to be is them asking, and that’s proven as a reasonable effort.

Now, for accounts that have been opened before this rule was enacted in February, when they do their annual update, then they have to go back through for everyone and ask them for a trusted contact. So, it’s either verbally or via email that can work, but that’s a lot of added work to go through and update that. I know it may seem small, but when it’s in combination with everything else, it’s a lot. And additionally, this new contact person adds a different element to the relationship because now this contact person is supposed to be a resource for them to use and so what the member bank can do then, the person there can call this trusted person and if they haven’t seen them for a while, they can ask about the person’s health, they can tell them they think they may be suffering from something, from diminished capacity, they can tell them that they think someone else might be trying to financially exploit them. It just really opens the door for a lot of things. Those are a couple of things on the first one.

The second one, is the new rule where now a member firm is allowed to put a temporary hold on disbursing money to a person. So, if the member bank feels that there is something going on with one of their clients, all they have to do is have a reasonable belief that there is something wrong. So, it puts the responsibility on that person. They can put a hold on it if they want, or they don’t have to. They’re not obligated. Then this starts a whole process. So now they have to notify the contact person. Now, if they think that that contact person is involved, then a whole other process starts. So, it’s just a lot of deep involvement.

Then after they’ve done all that to try to resolve it, what the regulators want them to do is they want them to resolve this on their own.  They don’t want holds to be placed. So now, what these member firms have to do is start talking to the member, they talk to the person who may be potentially doing some inappropriate activities with the member’s account, and it’s really using the member firm’s judgement on what can be done. So, even if a customer objects and they say, “No. They’re not doing anything.” If the member firm, if they think that something is going on, they can withhold the money. I really think the implications can be far reaching if we think about it, because if someone’s putting a hold on someone’s account and it turns out there isn’t a problem, well that’s an issue, and then, what if it comes out that there was a big problem? Someone was taking money from someone, there was elder abuse going on, and the bank didn’t notice it, they didn’t feel there was a reasonable belief. Those are all open questions that we don’t have the answers for yet and it all has just come up this month. So again, lots of ambiguity here and the bottom line with this is, it gets to what you think is a reasonable belief.

Kevin Donahue: Jill, thanks for the rundown and, clearly, it’s an example of another rule that appears to be clear and straightforward, but it’s going to require a lot of work for banks to comply with. Steve, let’s shift over to you and talk about I think our favorite topic every month, the Consumer Financial Protection Bureau. So, as we cover in this month’s issue, the Bureau appears to be talking a step back. It’s seeking the feedback of institutions that regulates on its recent rules and activities in the form of Request for Information notices. Steve, what’s the reason for the shift in stance, if we want to call it that, and will it affect the consumers or the institutions in any significant way?

Steven Stachowicz: It absolutely could, but it’s hard to say exactly what that’s going to mean right now. The CFPB is going through a moment of introspection, which is what we’re seeing with the RFIs that are addressed in the Compliance Insights. There are four in the Compliance Insights, and actually since its publication as we’re talking there’s been a fifth one issued since then. Some of that is driven by the rules that established the Bureau in the first place under the Dodd-Frank Act. There’s some obligation that the Bureau has to seek feedback on its performance and consider that in terms of its operations, but even to the extent that that wasn’t something that’d be driven by the Dodd-Frank Act, it would be driven clearly by the new leadership and administration. The administration and congress for a long time have signaled that they believe the CFPB’s historical approach to regulation and supervision has been overly broad and maybe to some degree suspect, if I can be that frank. There has been a change in the leadership of the agency with the departure of the agency’s first director in the fall, and the acting director in the interim has quite publicly said that he would like to ensure that the agency is focused on its particular priorities and is calculated and thoughtful in terms of how it approaches its role in supervising financial institutions and regulating them and the market for consumer financial products and services.

So then from his phrase, that he would like to ensure that the agency is not pushing the envelope when it comes to these types of matters, does signal a change in the agency’s focus and potential approach to handling matters that warrant their attention. It does not mean that the CFPB is going away, it does not mean that they’re no longer going to be enforcing the laws and regulations with which they are charged. That is not the case at all. It simply means that the leadership and the administration want to maybe shift or focus its priorities a little bit more. What does that mean in terms of does it affect consumers or financial institutions in a significant way? I don’t know, and none of us exactly know. We see that there are delays right now in the implementation of certain rules. The agency has signaled that it will reconsider rules, as well. So it very well may change what is out there or what is planned, to regulate certain things like payday loans, et cetera.

There are changes in the Bureau’s structure from a supervision and enforcement perspective that could result in changes in practices and how they approach enforcement, in particular related to fair lending, that’s what’s recently caught folks’ attention. And certainly the RFIs that you mentioned will provide the Bureau a pretty expansive opportunity to evaluate its operations in terms of how it’s dealing with consumer outreach, how it’s dealing with the regulatory examination processes, how it deals with enforcement actions and adjudications, and really from start to finish how the Bureau engages with the institutions that it regulates. It’ll be something that we have to monitor over time.

All of these things though are not to send a signal  – and should not send a signal  – that we are suddenly in some deregulatory environment where consumer compliance is simply not as important and should not be as much of a focus for financial institution that it has been in the past. I don’t think that that would be an appropriate way of looking at any of these activities, and again, the bureau has said that it’s going to continue to play the role that it still needs to play. It’s just that it may shift a little bit of how it goes about things. Compliance is going to still be a key risk area for organization to manage. There are still a multitude of complex regulations that have to be dealt with. We still are in an interesting environment with respect to product innovation and technology, and many old rules are going to be tested in ways that they have not been in the past and certainly, even if the agency were to take a much less aggressive approach towards supervision or regulation, it’s not to say that there aren’t other agencies’ regulators at the federal, state or local level that still have an interest in making authoritative compliances. Compliance matters are enforced and compliance risks are appropriately managed. So, I think everything is wait and see. I think the financial institution should monitor what’s going on, which is what we intend to do as well and we’ll address in future editions of Compliance Insights, but not take the eye off the ball for now because I think that would be, for financial institutions, would be the wrong tack at the moment.

Kevin Donahue: Jill and Steve, I want to thank you very much for joining me today to discuss these stories from FINRA and from the CFPB, which we cover in the latest issue of Compliance Insights. Those in our audience interested in additional information can visit to find and download our February edition as well as all of our prior issues.

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