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Brokers, Take Notice: Industry Watchdogs Eye Reg BI Compliance


Brokers, Take Notice: Industry Watchdogs Eye Reg. BI ComplianceFinancial professionals recently received a reminder that industry overseers are closely monitoring how firms are implementing standards and practices under Regulation Best Interest (Reg BI). In mid-January, the Financial Industry Regulatory Authority (FINRA) issued an annual report that, among other topics, addresses and reviews firms’ compliance with this broker-dealer standard of conduct. The takeaway: It’s time to get with the program when it comes to Reg BI. Here’s what securities brokers should know.

FINRA’s 2023 Examination and Risk-Monitoring Report

Brokers, Take Notice: Industry Watchdogs Eye Reg. BI CompliancePublished on Jan. 10, the report from FINRA’s regulatory operations covers 24 topics relevant to the securities industry. Released about a month earlier than in previous years, the report was slated to dovetail with firms’ start-of-the-year compliance cycles.

“Firms typically use the report as a good reference tool in order to evaluate and hopefully strengthen their controls and their supervisory processes and their procedures,” said Michael Solomon, senior vice president of examinations, in a podcast related to the release of the report.

“The report provides information on areas that FINRA seems to find more frequently firms are having challenges (with),” he adds.

FINRA’s Addressing of Regulation Best Interest (Reg BI)

One area in which the report goes into detail is Reg BI, which requires that broker-dealers act in the best interest of their clients. Reg BI took effect in 2020, and firms have had 2.5 years to build out processes, distribute staff training materials and develop strategies for handling Form CRS (Customer Relationship Summary).

If some firms are dragging their heels on implementing related changes, the FINRA report’s focus suggests that it’s time to step up.

“Reg BI and Form CRS became effective on June 30, 2020, and FINRA has been examining member firms’ implementation of related obligations throughout 2021–2022,” the report says. “FINRA will continue to share further findings as we continue to conduct exams and gather additional information on member firms’ practices.”

FINRA recently had its first enforcement case under Reg BI for churning, Solomon said in the podcast. And industry actions hint that financial professionals may start to see more enforcement actions under Reg BI going forward.

What Brokers Should Know About Reg BI

Brokers, Take Notice: Industry Watchdogs Eye Reg. BI ComplianceThe FINRA report homes in on elements of Reg BI implementation. Those include the need to identify and address conflicts of interest, adhere to Reg BI’s care obligation, and disclose to retail customers all material facts related to conflicts of interest.

The FINRA report also covers establishing and enforcing adequate written supervisory procedures. And it touches on filing, delivering and tracking an accurate Form CRS.

In one example, FINRA asks these questions about recommending a rollover or transfer of an account such as a retirement account:

  • Does your firm ensure that it has a reasonable basis to believe that the rollover or transfer and the underlying securities are in the retail customer’s best interest?
  • Does your firm consider specific factors potentially relevant to rollovers or transfers, such as costs, level of services available, features of the existing account and available
    investment options?

This report builds on previous releases from industry regulators, including the Securities and Exchange Commission (SEC), which have sought to provide context and insights about Reg BI for compliance professionals.

Bottom Line

The FINRA report is required reading for financial industry compliance professionals. For brokers, keep an eye out. Industry regulators are keeping tabs on how professionals implement and adhere to Reg BI standards of conduct.

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