By Sebastian Estrada

 

For years, many aspects of our society, economy, and legal industries have been in limbo. A limbo driven by an exodus from our antiquated ways of buying, learning, working, and interacting. Prior to the “lockdown,” many aspects of outdated industry were dying but not yet dead. One need only think about in-person retail shopping as an example: prior to COVID, the in-store and in-person retail experience was undoubtedly waning. Major retail stores such as Macy’s were experiencing the wrath of competitive online consumerism. The effects from COVID lockdowns may have been the final crippling blow to such traditional norms. But this shift has been felt across the board in other fundamentally important industries. The realm of finance and investment is no exception. COVID induced changes were felt from the “average Joe” retail investor, all the way to the regulatory entities of the economy.

At the retail investor level, an unprecedent number of investors joined the market during the pandemic.[1] Charles Schwab, a major investment platform, reported that 15% of its current investors entered the market in 2020 alone.[2] Pandemic related ripples similarly echoed through the industry and reached the Financial Industry Regulatory Authority (“FINRA”). FINRA is the largest self-regulatory organization for securities firms doing business in the US.[3] Its rules govern over 3,700 brokerage firms and almost 630,000 registered securities representatives.[4] Significantly, Section 15A of the Securities Exchange Act of 1934 gave FINRA the authority to discipline its firm members and certain individuals for violations of securities laws and rules administered by FINRA.[5] In other words, FINRA’s creation and enforcement of rules and regulations are backed by federal law.[6]

While COVID triggered tectonic-like shifts throughout the financial world, the regulatory mechanisms that oversaw it were likewise forced to change. According to FINRA’s webpage, “[i]n response to the coronavirus pandemic, member firms have made unprecedented changes to their business operations in order to prioritize the health and safety of firm personnel and investors, while maintaining the public’s access to capital markets.”[7] As a result, FINRA modified various traditional regulations, to account for the new virtual / at-home lifestyle.[8] Regulatory Notice 20-16, for instance, implemented monitoring practices for firms to incorporate into the remote work environment.[9] The notice focused on confidentiality and cybersecurity in order to increase fraud-prevention measures.[10] Relatedly, FINRA filed a proposed rule change with the SEC to adopt remote inspections.[11] It effectuated remote supervisions and internal inspections of firms, and eliminated on-site visits to offices or locations.[12]

Do these rule changes signify a needed update to the execution of financial regulation and enforcement? The answer is still to be determined. However, it undisputed that much of the regulatory and supervisory mechanisms used in our economy have necessarily increased their cybersecurity protection measures. In today’s world, where news of a massive hack is a normalcy, maybe such changes were past due. If our country has finally taken on the challenge of updating laws and regulations to align with our technologically focused society, the real question should be how to continue this modernization.

 

[1] Maggie Fitzgerald, A large chunk of the retail investing crowd started during the pandemic, Schwab survey shows, CNBC, https://www.cnbc.com/2021/04/08/a-large-chunk-of-the-retail-investing-crowd-got-their-start-during-the-pandemic-schwab-survey-shows.html (last updated Aug. 17, 2021).

[2] Id.

[3] Troy Segal, FINRA vs. the SEC: What’s the Difference?, Investopedia, https://www.investopedia.com/ask/answers/how-does-finra-differ-sec/ (last updated May 6, 2020).

[4] Id.

[5] Id.

[6] Id.

[7] FINRA Seeks Comment on Lessons From the COVID-19 Pandemic, FINRA, https://www.finra.org/rules-guidance/notices/20-42.

[8] Id.

[9] FNRA Shares Practices Implemented by Firms to Transition to, and Supervise in, a Remote Work Environment During the COVID-19 Pandemic, FINRA, https://www.finra.org/rules-guidance/notices/20-16.

[10] Id.

[11] Proposed Rule Change to Adopt Temporary Supplementary Material .17 (Temporary Relief to Allow Remote Inspections for Calendar Year 2020 and Calendar Year 2021) under FINRA Rule 3110 (Supervision), FINRA, https://www.finra.org/rules-guidance/rule-filings/sr-finra-2020-040.

[12] Id.