The Financial Industry Regulatory Authority’s suitability rule may be phased out now that the Securities and Exchange Commission’s Regulation Best Interest has been adopted, according to attorney Hank Sanchez.
In a just-released paper for the National Society of Compliance Professionals, Sanchez, managing director of Bates Group, examines whether FINRA Rules 2010 (Standards of Commercial Honor and Principles of Trade) and 2111 (Suitability) “may become subsumed or nullified by Reg BI.”
Sanchez, a former SEC and FINRA attorney, argues that regarding Rule 2111, “FINRA may be more likely to bring cases for suitability violations under Reg BI,” stating that Reg BI “may have made Rule 2111 a non-factor in suitability cases going forward.”
The paper examines the potential enforcement aspect of any new FINRA procedures in light of Reg BI. Sanchez points out that Reg BI “does not create a new private right of action nor right of rescission.”
As he notes, the SEC is working with FINRA “to not only update any FINRA rules that are affected by Reg BI, but also to assist FINRA with implementing procedural changes into both its examination and enforcement processes,” as FINRA is Reg BI’s enforcer.
Similar to the best-interest standard in Reg BI, Rule 2010 “is quite vague,” Sanchez writes. The rule says: “A member, in the conduct of its business, shall observe high standards of commercial honor and just and equitable principles of trade.”
Rule 2010, and its predecessors, have “been used as a catch-all violation for many cases where no specific FINRA rule has been identified as being violated. It also has typically been included as an add-on rule violation where other specific rules do apply,” Sanchez explains.