Speaking on a webcast panel at the Financial Industry Regulatory Authority's annual conference, Evan Charkes, managing director and associate general counsel at BofA, cautioned that, "of all the topics that are on today's agenda, outside business activities, creates the biggest regulatory risk for firms."
"I assume everyone listening has an at least annual questionnaire where advisers have to disclose outside business activities," Charkes said, urging firms to maintain clear policies on "what that means," to fully evaluate the responses, and to always follow up on any red flags or reporting gaps.
"Don't forget to follow up on it … and you have to be prepared to take appropriate disciplinary action if the adviser doesn't disclose something to you," he said.
The comments came amid a discussion on the risks and benefits associated with remote work since the start of the pandemic, and what will likely be a "hybrid" work environment as some employees return to the office full-time, some remain home, and others choose to split their time between the two.
Ilene Marquardt, associate general counsel with Wells Fargo Advisors, stressed the importance of using the entire "timeline" of a representative's association with the firm, beginning with pre-hire information, to uncover any potential red flags that occur during their employment.
She noted that firms have tools available to monitor employees no matter where they are working. These include so-called local and central supervision tactics as well as "compliance processes to look at trading aberrations [and] exceptions" on a regular basis.
"There's also a growing trend toward doing analytics that pick up various pieces of information about any particular registered rep" to determine if "we would want to look at him or her more closely," she added.
Charkes pointed to a slew of FINRA actions this year, against both individuals and firms, tied to outside business activities. For instance, he mentioned that FINRA recently fined an individual $7,500 for allegedly failing to report outside real estate dealings to his firm, as well as a $40,000 fine against a company that allegedly failed to review and document the outside activities of its representatives.
"In terms of risk, this is number one," Charkes reiterated. "This isn't just about direct compensation, it also could be indirect as well — other benefits that the adviser may be gaining from the activity."
In line with Marquardt's thoughts, Linde Murphy, a compliance adviser with broker-dealer M.E. Allison & Co. Inc., argued that "COVID just emphasized the fact that a lot of firms are now able to supervise remote workforce very effectively."
Supervision pre-pandemic was already "significantly completed online and through our trading systems and through our email systems," she noted.
However, Hillary Sale, a FINRA board member since 2016 and a professor at Georgetown University Law Center, noted that it remains to be seen if large companies will be able to promote a solid corporate compliance culture in a predominately remote environment.
"The more the number of remote locations and remote employees, the more complicated that is," she said. "I think it's actually a long-run experiment. We just don't know if you can effectively inculcate culture in a large, remote organization. We have very few examples of it."
--Editing by Ellen Johnson.
For a reprint of this article, please contact reprints@law360.com.
