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Regulation and Compliance > Federal Regulation > FINRA

FINRA’s Cook: SEC Reg BI Compliance to Be a Heavy Lift

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As the SEC works toward finalizing its Regulation Best Interest proposal for brokers, two issues are front and center for the Financial Industry Regulatory Authority: how to implement the new rule as well as potential changes to the broker-dealer self-regulator’s own rules, FINRA CEO Robert Cook said Wednesday.

“Wherever the SEC lands, it may have implications for our rulebook,” Cook said during a question and answer session at the Institute for Portfolio Alternatives’ annual conference in Washington. “Let’s say that [the SEC] standard incorporates the [FINRA] suitability standard within it; then it seems like it might make sense for us to look at our suitability rule.”

(Related: Raymond James CEO Opposes State Fiduciary Standards )

FINRA is also “thinking more generally about are there aspects of our rules that might need to be adjusted/aligned with where the SEC lands,” Cook said. “It’s not surprising because most of the sales practice requirements historically have come from the FINRA rulebook. Reg BI is sort of federalizing sales practice issues.”

Philosophically, Cook added, “it doesn’t make sense that you would have rules where there’s a risk of inconsistency in approach.”

In separate comments to ThinkAdvisor after his remarks, Cook said in his view, as it stands now, “Reg BI incorporates the suitability rule, but adds to it; there are other requirements there that are more explicit with additional requirements.”

There’s a “suitability element to Reg BI, and that’s when we’re talking about looking at alignment with our rulebook; if they [the SEC] have covered 100% of our suitability rule” in the final version of Reg BI, “then we might look at whether we need our suitability rule or do we need it in all circumstances,” Cook said.

Because FINRA is “the front line examiner” of broker-dealers, the regulator will need to “make sure that our examiners are well-trained and understand the requirements of the rule design,“ Cook said during his Q&A remarks.

Unlike other SEC rules that FINRA examiners must interpret, Reg BI “is going to be in the order of magnitude that’s going to be quite different,” than other SEC rules, Cook added. “We’re going to have to work closely with the SEC to make sure we’re examining it as intended for.”

Reg BI compliance is “going to be a management issue for us — how we make sure that our examiners are well-trained and understand the requirements of the rule design,” Cook said.

He also said that he anticipates using the Reg BI implementation period as set out by the SEC “to see if we can achieve alignment, if necessary.”

SEC Chair Clayton’s Testimony on Reg BI

SEC Chairman Jay Clayton told a Senate Appropriations Subcommittee the same day that under proposed Reg BI ”a broker-dealer cannot put her or his interests ahead of the retail customer’s interests when making a recommendation. The proposal incorporates that key fiduciary principle and goes beyond and enhances the current suitability obligations applicable to broker-dealers under the federal securities laws.”

Clayton stated that while proposed Reg BI ”draws on fiduciary principles, the obligations of a broker-dealer under Regulation Best Interest and the obligations of an investment adviser pursuant to its fiduciary duty under the Advisers Act would differ in certain respects, reflecting the differing scope of the services, payment forms and other relationship terms offered by broker-dealers and investment advisers, respectively.”

NASAA President on the State Fiduciary Rules

As to the state fiduciary landscape, Michael Pieciak, president of the North American Securities Administrators Association and the commissioner of the Vermont Department of Financial Regulation, who also spoke at the IPA conference, told ThinkAdvisor that as an organization, NASAA is “focused on” SEC Reg BI, but supports states’ authority to move forward with their own fiduciary rules “as they see fit.”

Said Pieciak: “We think a strong rule at the federal level will sort of make the rest of the playing field much clearer,” and “will help states determine what they’re going to do.”

If the states “see clear deficiencies as they perceive them in the SEC rulemaking, as we’ve been clear in our comment letters [to the SEC], then states are going to have to do what they have to to protect their constituents,” Pieciak said.

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