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Regulation and Compliance > Federal Regulation > FINRA

SEC Reg BI vs. Suitability: Here's the Difference, According to FINRA's Cook

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While the Financial Industry Regulatory Authority’s suitability rule “implicitly requires a broker-dealer’s recommendations to be consistent with customers’ best interests,” the Securities and Exchange Commission’s proposed Regulation Best Interest for brokers “explicitly establishes the customer’s best interest as an overarching standard of care,” according to Robert Cook, FINRA’s president and CEO.

In an Aug. 3 letter to Sens. Elizabeth Warren, D-Mass.; Sherrod Brown, D-Ohio; and Cory Booker, D-N.J; Cook also said the SEC’s advice standards proposals, including Reg BI, extend in “certain significant areas” the requirements for broker-dealers under current FINRA rules, including the suitability rule.

(Related: Number of BDs, Reps Drops for Second Straight Year, New FINRA Report Says)

The SEC proposals clarify the rules that apply to broker-dealers, Cook wrote.

As to Reg BI enforcement, Cook said that a broker-dealer that is not complying with Reg BI or other portions of the proposal, if adopted, “could be subject to an enforcement action by FINRA and the SEC.”

Also, while FINRA “will have a role” in supervising broker-dealer compliance with Reg BI, so would the SEC.

“FINRA does not independently interpret the SEC’s rules,” Cook told the senators. “Rather, FINRA examines broker-dealers for compliance with the SEC’s rules and enforces those rules in a manner consistent with the SEC’s authoritative interpretations.”

The Senators called on Cook in late July to provide the self-regulator’s interpretation of the SEC’s Reg BI, as they said it was “confusing and ambiguous,” and asked for a response to several questions by Aug. 3.

The comment period on the SEC’s advice standard proposals ended Tuesday.

(Related: Indie BDs Warn SEC of Major Flaw in Conduct Rules)

The senators prodded Cook to provide FINRA’s views “promptly so that we and other interested parties can account for those views in any comments we submit to the SEC.”

Regarding conflicts of interest, Cook said in the letter that “there is currently no similar broad conflicts provision in FINRA rules, including the suitability rule,” despite the fact that FINRA “has repeatedly emphasized the importance of identifying and managing conflicts and has a number of rules to address discrete conflicts of interest.”

Further, an injured customer, Cook said, could seek redress directly against a broker-dealer or its associated persons for violations of Reg BI. Such customer claims “ordinarily would be resolved through the same process that is used for customer claims” under FINRA’s suitability rule — that is, resolution through FINRA’s arbitration forum.

— Check out What 8 Industry Leaders Think of SEC’s Advice Standards on ThinkAdvisor.


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