As new FINRA rules are introduced, broker-dealers are forced to deal with a regulatory environment of general guidelines and broad interpretations of the facts and circumstances of each case. They don’t have the benefit of a detailed “specification” for compliance. What follows are observations of how some are approaching the new rules and creatively meeting the challenges of compliance when certainty is lacking.
Certainty–and, not so much
There is certainty in the wealth management community regarding FINRA rules 2090 and 2111:
- Regulations are final.
- Implementation is July 9, 2012.
- Regulatory scrutiny is increasing.
- Cost of compliance is increasing.
There is certainly interest among broker-dealers in the implementation of the rules. This interest was obvious in the standing-room-only session at the FINRA Annual Conference session titled “Suitability and Know Your Customer.” The body language of the attendees was telling. I didn’t observe any indication of certainty from the attendees that they knew precisely what they needed to do and how they were going to comply.
In spite of the impending implementation, significant disparity exists in preparation for the regulations. Some broker-dealers have been preparing for the past year. Conversely, some broker-dealers are just beginning the process.
Why, with the impending implementation, are we seeing such disparity in the response to the regulations? There are a couple themes that emerge:
- Confusion about what compliance looks like.
- Reliance on clarity to come through enforcement.
What compliance looks like
“Investment Strategy” is one of the key elements of FINRA 2111. Supplemental materials indicate that investment strategies should be “interpreted broadly.” Some believe that this broad interpretation and a shift away from transaction-based suitability is the first step toward a fiduciary standard.
Another point of concern is the explicit hold order. What once was a simple conversation with a client about market conditions could become an explicit hold order—a recommendation requiring the same documentation, review and costs as the sale of a new product.
Several concerns about the explicit hold recommendations go beyond implementation concerns.
- Will it inhibit client/advisor communication?
- Will it encourage transactions that would not otherwise take place?
- Will this serve any real benefit for the average investor?
- Will it serve only as fodder for increased litigation?
- All of the above?
Clarity through enforcement
To a certain extent, there is agreement that the practical requirements will be defined through the FINRA examination and audit process. Obviously, the risk is becoming the object lesson of the industry.