The Financial Industry Regulatory Authority, as the enforcer of the Securities and Exchange Commission’s upcoming Regulation Best Interest, will either revamp its current suitability rule once Reg BI is final or eliminate it, Robert Colby, FINRA’s chief legal officer, said Tuesday.
“There’s a lot of overlap between the existing suitability rule and the direction that Reg BI is going in order to mitigate conflicts,” Colby said during a regulatory panel discussion at the Securities Industry and Financial Markets Association’s annual compliance event in Phoenix.
After Reg BI is finalized, FINRA will “look to see first, is there anything different between our [suitability] rule and the way it [Reg BI] comes out? We’ll fix that,” Colby said. “We’ll also look to see if there’s any reason to continue to have a separate suitability rule, because we’ll be enforcing Reg BI and we don’t want to be inconsistent in any way.”
If FINRA decides to keep its suitability rule, “we want to make sure they are completely aligned,” Colby said.
Brett Redfearn, director of the SEC’s Division of Trading and Markets, stated on the panel with Colby that Reg BI continues to be a priority for the agency.
“Reg BI is a very high priority because it’s an important rule,” Redfearn said, as it will “heightened the current broker-dealer rules for standards of conduct.”
He continued: “Ultimately, we’re walking into a world where it becomes very clear that broker-dealers cannot put his or her interest ahead of a customer when making a recommendation.”
The securities regulator has two goals with Reg BI: “To enhance the quality of broker-dealers’ recommendations by reducing the potential harm that can come from conflicts,” as well as “to preserve the broker pay-as-you-go model, which is extremely important,” Redfearn said.
As the agency works through Reg BI and “thinks about the fiduciary standard and [fiduciary] concept, there are common fiduciary concepts that are the basis behind what we’re doing for broker-dealers and Reg BI.”
The agency is assessing “how do you tailor those fiduciary obligations to different characteristics of the relationships and particular transaction-based advice?” he noted.
It’s also weighing how to deal with conflicts. “This really does go beyond the suitability [standard] as it’s currently understood, because not only do we need to disclose conflicts, but mitigate conflicts where they can be mitigated.”
— Check out FINRA Developing ‘Credit for Cooperation’ Guidance; SEC Aims to ‘Bring Cases Faster’ on ThinkAdvisor.