The Financial Industry Regulatory Authority is making changes to its suitability and noncash compensation rules to provide clarity on which standard applies and to address inconsistencies with the Securities and Exchange Commission’s Regulation Best Interest.
FINRA’s proposed rule change, which the broker-dealer regulator has sent to the SEC for approval, would: (1) amend the FINRA and capital acquisition broker, or CAB, suitability rules to state that the rules do not apply to recommendations subject to Reg BI, and to remove the element of control from the quantitative suitability obligation; and (2) conform the rules governing noncash compensation to Reg BI’s limitations on sales contests, sales quotas, bonuses and noncash compensation.
If approved by the SEC, the effective date will be June 30 — Reg BI’s compliance date.
The changes would amend the FINRA suitability rule, Rule 2111, to state that it will not apply to recommendations subject to Reg BI, and to remove the element of control from the quantitative suitability obligation.
In addition, the proposed rule change would conform the CAB suitability rule, CAB Rule 211, to the proposed amendments to Rule 2111, and would conform FINRA’s rules governing noncash compensation to Reg BI’s limitations on sales contests, sales quotas, bonuses and noncash compensation.
“Reg BI addresses the same conduct that is addressed by Rule 2111, but employs a best-interest, rather than a suitability, standard,” FINRA explains.
“Absent action by FINRA, a broker-dealer would be required to comply with both Reg BI and Rule 2111 regarding recommendations to retail customers. In such circumstances, FINRA believes that compliance with Reg BI would result in compliance with Rule 2111 because a broker-dealer that meets the best interest standard would necessarily meet the suitability standard.”
To reduce the potential for confusion, FINRA states that it is proposing limiting the application of Rule 2111 to circumstances in which Reg BI does not apply.
To do so, FINRA plans to add new paragraph to the FINRA Rule 2111 supplementary material and new paragraph to the CAB Rule 211 supplementary material that states that those rules shall not apply to recommendations subject to Reg BI.
Robert Colby, FINRA’s chief legal officer, said in October that the regulator would not eliminate its suitability rule in light of Reg BI.
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