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Are the SEC and FINRA heading to the metaverse? | JD Supra

Are the SEC and FINRA moving into the metaverse? Not quite yet, but we emphasize Again! Like private sector companies, U.S. financial services regulators are increasingly exploring what the metaverse, augmented reality (AR), and virtual reality (VR) mean for their registrants’ businesses, as well as for the means and methods of regulating them.

A notable example: FINRA recently announced that it is developing “Xpand Reality,” an augmented reality-based application for investor education. FINRA has also recently proposed to allow its members to fulfill their internal office inspection obligations remotely without an on-site visit. For their part, FINRA and SEC staff largely remain in a work-from-home situation (although that may change with a return to “normal” after the summer).

Our guess is that it’s only a matter of time before regulators use elements of AR, VR, and the Metaverse to perform remote reviews – but it will likely take several years. What is more likely in the short term is that many companies in the financial sector will develop a metapresence in search of increased efficiency and greater engagement with customers and staff. When this happens, regulatory reviews, whether in person or remotely, will encompass companies’ virtual footprints. Regulators will likely apply existing guidance and regulatory frameworks early on, but may eventually develop new rules and expectations over time to align with advancing technology.

Businesses can and should “think in 3D” (more on that below) early and often so they and their staff are prepared for that virtual knock on the door.

Virtual exams

Whether or not remote exams are inevitable, the COVID-19 pandemic has accelerated the adoption of this exam format by FINRA and the SEC. This trend seems likely to continue and the metapresence of a practice could facilitate or even characterize remote examinations. For example, a company could provide regulators with something akin to administrator access to the company’s virtual office for certain records, or use a VR data room to provide documents to meet regulatory requests. Companies could also provide regulators with a way to automate their review of rep/customer meetings in the metaverse and review the various iterations of communications and correspondence, all without the company spending a lot of time preparing for production. , as is often needed today.

Communication

The metaverse will provide companies with new channels of communication and interaction, both internal and external. However, in the absence of new regulatory guidance, companies will need to look to past technological advancements to understand regulators’ expectations. Social media provides a good starting point for understanding how regulators are likely to perceive a company’s communications in the metaverse. FINRA content standards will of course continue to apply. The same applies to SEC requirements that statements are not materially misleading or omit necessary material facts. Businesses will also need to continue to be aware of third-party content and links that may appear in their metapresence and whether the business or its staff adopts or otherwise entangles with the content.

Surveillance

Supervision of staff and their activity will be a major focus of any company’s metapresence. Perhaps paradoxically, interactions in the metaverse might actually promote greater means of enterprise oversight, as interactions will occur through a central “location” (i.e. the virtual space of company), which could help create a central digital repository of documents, communications, and other records and interactions for review (perhaps even including recordings of meetings, presentations, etc.). Companies will need to adapt their written monitoring procedures to address interactions in the metaverse, the actions companies (including their compliance teams) will take if they detect issues, how to document findings and any corrective actions, and how companies train Associates on these new and evolving standards. The best interests of regulation would also apply to recommendations in the Metaverse and companies would need to develop a way to comply with the various disclosures and other requirements of this standard of conduct.

Record keeping

Activity in the metaverse could also help businesses meet their recordkeeping obligations. The virtual office “location” and the communication device could essentially serve as a single whole, with interactions and communications recorded in a centralized log. The information presented to the client could be immediately transformed into a record of what was presented, to whom and when. Iterative records used in a virtual space could be automatically stored and updated. In this regard, the SEC recently proposed new recordkeeping requirements that would allow companies to remove the current “WORM” requirement in favor of an audit trail alternative that would require storage and retrieval. iterative versions of documents. A company can use its metapresence to comply with these requirements.

Think in 3D

For companies that dip a virtual toe into the metaverse, “thinking in 3D” will be key. What we mean by that is:

  1. Design. Map your company’s strategy to implement a metapresence. Identify key considerations, risks, challenges and opportunities for your business. Expect unknowns. Include key stakeholders within your organization and your regulator contacts (keeping them in the dark probably hurts you here). Integrate your systems, processes and controls. Strive to ensure that messages to customers and the market are crystal clear. Then hit snooze on all of it to catch what you might have missed before.
  2. Deployment. The deployment of your metapresence strategy must be done carefully and in a targeted manner. Make sure your staff is well trained. The various components of your real business must talk and work with the virtual components. Your message to the market must be relevant. Stay in close communication with your regulators, not only about successes, but especially about setbacks (and before they turn into real problems).
  3. Dedication. It will take commitment to make sure a metapresence works for your company’s business and it will be a very subjective set of inputs and outputs for each company in the space. Regular and repeated reviews of progress, condition and opportunities for adjustment are essential. Ask your customers and staff what is working/not working. Constantly look for regulatory and compliance gaps and fix them immediately.

Look forward

Significant resources are currently deployed in the metaverse. So while business conduct and reviews in the metaverse remain speculative for most financial firms and regulators for now, it may not be long before that changes. It’s no different from the early days of online brokerage, robo-advisors, or even corporate use of social media. If done in a rules-focused and compliance-conscious manner, early adopters can gain an edge over their competition by appearing more attractive to younger investors. And in addition to potentially improving engagement with customers, implementing a metapresence could actually be fun – let’s not forget!

However, due to the highly regulated nature of their business, companies in the financial sector will need to consider the topics mentioned above when establishing a meta presence, as well as cybersecurity, business continuity, AML, KYC/customer identification and a host of other legal, regulatory and compliance obligations. And as always, businesses should be on the lookout for new guidelines, rules, and regulatory requirements as they emerge.

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