Welcome to our new quarterly newsletter by the Tarter Krinsky & Drogin White Collar and Regulatory Enforcement Practice and Three Mile Advisors LLC highlighting key regulatory and compliance developments for broker-dealers for the first quarter of 2026.

This edition of our newsletter focuses on updates from the SEC and FINRA, with an emphasis on emerging priorities such as data privacy, outside activities, communications standards, and oversight trends. The updates discussed signal a continued push for demonstrable, practical compliance protocols that complement company policies and best practices.

As always, staying ahead of these changes is crucial for maintaining robust compliance programs and mitigating risks.

Regulation S-P Amendments: Ongoing Compliance and Outreach

The amendments to Regulation S-P, adopted by the SEC in May 2024, require broker-dealers and other covered institutions to enhance protections for customers’ nonpublic personal information. Key changes include implementing written incident response programs for detecting, responding to, and recovering from unauthorized access to customer data, as well as notifying affected individuals within 30 days of a breach involving sensitive information. Larger broker-dealers (those not classified as small entities under the Exchange Act, generally with total capital of $500,000 or more) were required to comply by December 3, 2025. Smaller entities have until June 3, 2026.

Recommended Actions:

• For larger firms: Conduct a post-implementation review of your incident response program, including testing scenarios for data breaches and ensuring vendor contracts include strict reporting requirements.
• For smaller firms: Begin developing or updating your written policies and procedures now to meet the June 3, 2026, deadline;
• All firms: Integrate Reg S-P requirements into annual training and perform a gap analysis against existing cybersecurity frameworks to avoid overlaps or deficiencies.

Amendments to FINRA Capital Acquisition Broker (CAB) Rules

On February 13, 2026, the SEC approved a FINRA proposed rule change to amend capital acquisition broker (CAB) rules, eliminating prohibitions on CABs and their associated persons participating in private securities transactions. This allows greater flexibility for CABs, which are limited-purpose broker-dealers focused on corporate financing, while maintaining oversight requirements. This change may increase firms’ exposure for outside business activity monitoring.

Recommended Actions:

• If your firm operates as a CAB or plans to, update your written supervisory procedures to incorporate permissions for private transactions, including risk assessments and reporting.
• Ensure associated persons provide prior written notice for such activities and integrate this into your compliance monitoring systems.
• Consult legal counsel to confirm eligibility and avoid unintended expansion beyond CAB-limited activities.

2026 FINRA Annual Regulatory Oversight Report Highlights

Although published in December 2025, FINRA's 2026 Annual Regulatory Oversight Report sets the tone for examinations and priorities in the new year. Based on recent exams and public deficiency trends, firms should expect staff scrutiny in the following key areas: cyber-enabled fraud, protections for senior investors, trends in generative AI (GAI), Regulation Best Interest (Reg BI) compliance, vendor management, best execution, and Consolidated Audit Trail (CAT) obligations. The report emphasizes that GAI tools must comply with existing rules, with a focus on governance and accountability. It also notes effective practices for private placements and senior investor safeguards.

Recommended Actions:

• Incorporate the report's findings into your 2026 risk assessment, particularly by evaluating GAI usage for compliance with books and records rules and conducting vendor due diligence. For example, if marketing or research personnel are using generative AI tools to draft communications, firms should confirm retention protocols and comply with Rule 17a-4
• Enhance training on cyber fraud and senior protections, and test your incident response plans in light of Reg S-P ties.
• Prepare for potential exams by documenting adherence to Reg BI, best execution, and CAT reporting, using the report's examples of common deficiencies.

SEC 2026 Examination Priorities: Focus on Broker-Dealers

The SEC's Division of Examinations released its Fiscal Year 2026 Examination Priorities (covering October 2025–September 2026) in late 2025, but these remain highly relevant in Q1 2026. For broker-dealers, priorities emphasize financial responsibility, trading practices, and retail sales under Regulation Best Interest (Reg BI).

Key areas include:

• Compliance with the Net Capital Rule and Customer Protection Rule, including internal controls, timeliness of filings, and operational resiliency (e.g., vendor supervision and change management).
• Trading practices in equity and fixed income, such as extended-hours trading, municipal bond practices (e.g., rates reset on variable rate demand obligations), best execution, Regulation NMS Rule 605 (order routing/execution quality), Regulation SHO (short sale close-outs), and ATS safeguards for confidential information.
• Retail sales practices and Reg BI, focusing on product recommendations (including complex/high-cost items), conflict identification/mitigation, review of reasonably available alternatives, and Care Obligation factors (e.g., investor profiles, goals, and account types).

Recommended Actions:

• Review your firm's risk assessment to prioritize these areas; conduct mock examinations or gap analyses on net capital/customer protection processes and Reg BI documentation.
• Enhance supervisory procedures for trading practices, particularly illiquid instruments and best execution; document reviews of reasonably available alternatives for recommendations.
• Train staff on Reg BI obligations, especially for retail clients near retirement or with limited product menus; prepare for potential exams by maintaining robust records.

SEC Staff Guidance on Payment Stablecoins and Net Capital Rule

On February 19, 2026, the SEC's Division of Trading and Markets issued an FAQ clarifying the treatment of payment stablecoins under the broker-dealer net capital rule (Exchange Act Rule 15c3-1). The staff indicated it would not object to a 2% reduction on proprietary positions in payment stablecoins (rather than a 100% reduction that some firms applied cautiously). This provides relief for broker-dealers holding or dealing in stable coins, reflecting evolving crypto-asset guidance.

Recommended Actions:

• If your firm holds payment stablecoins, update net capital calculations to apply the 2% decrease where appropriate; document the basis for this treatment.
• Review proprietary positions and inventory for stablecoin exposure; consult with your CFO or compliance team to ensure alignment with the FAQ.
• Monitor for any further crypto-related guidance, as this could impact liquidity and risk management.

Extension of Compliance Date for Daily Reserve Computations (Rule 15c3-3 Amendments):

The SEC adopted amendments in December 2024 (effective early 2025) requiring certain carrying broker-dealers—those with average total credits (customer and proprietary accounts of broker-dealers, or PAB) of $500 million or more—to perform customer and PAB reserve computations daily (instead of weekly) and make required deposits promptly. This strengthens customer protection by reducing the risk of underfunding in reserve accounts.

• Original compliance date: December 31, 2025.
• Extended by six months (announced mid-2025) to June 30, 2026, to allow firms time for systems changes, testing, and operational implementation.
• Related adjustment: Broker-dealers performing daily computations may reduce aggregate debit items (customer-related receivables) by 2% (down from 3%) in the reserve formula, with corresponding Financial and Operational Combined Uniform Single Report (FOCUS) Report updates.
• This extension applies only to the daily computation requirement under Rule 15c3-3(e)(3)(i)(B)(1); other parts (e.g., the 2% debit reduction) remain in effect.
• Firms transitioning from weekly to daily computations should assess reconciliation staffing, holiday timing, and automation controls.

Additional Notes

• **E-Delivery Default Approval:** In February 2026, FINRA's board approved rules allowing default electronic delivery of certain communications, subject to opt-out provisions. Watch for final SEC approval.
• **Global Research Settlement Easing:** The SEC's December 2025 decision to relax restrictions relies more on FINRA Rules 2241 and 2242, potentially increasing research coverage for smaller issuers.

For More Information

Stay vigilant as Q1 progresses—additional updates may emerge. For personalized advice, or if you have questions, reach out to us.

Robert Heim
Co-Chair, White Collar and Regulatory Enforcement Practice, Tarter Krinsky & Drogin
Rheim@tarterkrinsky.com
 

Stephen Zak
President, Three Mile Advisors LLC
szak@threemileadvisors.com

*This newsletter is for informational purposes only and not legal advice.*