The Financial Industry Regulatory Authority is taking a “good-faith” effort approach in examining broker-dealers for compliance with Regulation Best Interest, but “open issues” remain that need further guidance from the Securities and Exchange Commission in light of Reg BI’s principles-based make-up.
“We’re not expecting perfection, but FINRA will be looking for good-faith efforts” to comply with Reg BI and the customer relationship summary, or Form CRS, said Meredith Cordisco of FINRA’s Office of General Counsel, during a recent FINRA Unscripted podcast.
As to Form CRS, “firms should have filed it,” Cordisco said. “They have or should be in the process of delivering it to their customers and they should have policies and procedures and systems in place to deliver it going forward when the triggers are met and also to evidence that delivery.”
Jim Wrona, also with FINRA’s general counsel office, clarified on the podcast that when it comes to Reg BI, “any time you make a recommendation to a retail customer, the rule kicks in.”
Reg BI is “a really big deal for the industry — particularly the disclosure and conflicts obligation are new overarching obligations that the industry hasn’t dealt with in that broad sweeping manner,” Cordisco said. Form CRS requires brokers and advisors who offer services to file that form with the SEC and deliver a relationship summary, she added.
Now that the June 30 effective date has passed, “firms need to be in compliance with Reg BI,” Cordisco said. “They should have policies and procedures to account for Reg BI, system standards, and they should have trained their reps,” even in a virtual setting because of the pandemic.
Firms “had to switch gears to virtual training” because of COVID-19 and the work-from-home environment, Wrona added. “Firms were able to do that, by and large, and they should pat themselves on the back.”
FINRA, Wrona said, has also trained its examination and enforcement staff, “not only on understanding the obligations from a substantive standpoint but also understanding the approach that we want to take” to exams, including the “good-faith effort.”
Broker-dealers, he continued, “have worked really hard to meet their obligations and get ready for the compliance date. Small firms are no exception. Everybody has different challenges. Some of the larger firms maybe had more different types of products and services that they had to take into consideration, but they had bigger teams that were working on these issues. Smaller firms maybe had not as many customers, not as many different types of services or products to deal with but they had a smaller number of people working on it with limited resources.”
How will FINRA examine for compliance? Examiners will “primarily look at the compliance obligation on the Reg BI side. That’s things like policies and procedures and training,” Wrona said. “We’re not looking at it to see they’ve done it perfectly.”
That said, “if there’s customer harm involved, if it’s something that would be a violation under the previous standards, we’re going to take a look at that.”
As FINRA, the SEC and firms “gain experience with Reg BI, then we’ll start doing deeper dives,” Wrona added.
Firms with “open exams” likely had questions from examiners about Reg BI and Form CRS before the June 30 compliance date kicked in, Wrona said. “New exams are being scheduled all the time.”
Cordisco noted that “a lot of issues haven’t been addressed with particularity because many aspects of Reg BI are really principles-based and it will depend on the facts and circumstances. That makes a lot of people very uncomfortable, and for good reason, perhaps. So there’s not always absolute clarity on all of the requirements.”
A lot of questions are around when family offices, for instance, are included in the definition of retail customer and fall within Reg BI. The SEC, she said, “has not put out guidance on that,” Cordisco said. “This is where the good-faith effort kicks in; firms have had to make reasonable judgement calls when things aren’t clear.”