6 Top Reg BI Compliance Failures: FINRA

Slideshow February 11, 2022 at 09:26 AM Share & Print

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In its initial exams for compliance with Regulation Best Interest, the Financial Industry Regulatory Authority found a bevy of deficiencies.

Reg BI became effective on June 30, 2020, and 2021 marked the first full calendar year during which FINRA examined how broker-dealers have implemented the rule.

In its 2022 exam report, released Wednesday, FINRA cites those deficiencies and states that it will share further findings as the regulator continues to conduct exams and gather additional information on firms’ practices.

FINRA CEO Robert Cook said on Jan. 21 that FINRA will also be looking this year at its rules in light of Reg BI, and that some FINRA rules may need to be reevaluated because they were adopted before Reg BI.

Read the gallery above for the six primary areas where FINRA says broker-dealers are falling short in their compliance with Reg BI.

Melanie Waddell

@Think_MelanieW

NOT FOR REPRINT

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1. WSP Shortfalls

Providing insufficient guidance by:

not identifying the specific individuals responsible for supervising Reg BI compliance; and stating the rule requirements, but failing to detail how the firm will comply (i.e., stating “what” but failing to address “how”).

Failing to modify existing policies and procedures to reflect Reg BI’s requirements by:

not addressing how costs and reasonably available alternatives should be considered in recommendations;
not addressing recommendations of account types;
not addressing incentives for associated persons to place their interest ahead of those of customers; and
not addressing Reg BI-related recordkeeping obligations and testing of Reg BI and Form CRS policies, procedures and controls.

Failing to develop adequate controls or developing adequate controls but not memorializing them in their WSPs.

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2. Inadequate Staff Training

Failing to adequately prepare associated persons to comply with the requirements of Reg BI beyond previous suitability obligations by:

failing to deliver initial training before the June 30, 2020, compliance date;
delivering training without making clear Reg BI’s new obligations; or
delivering training that focused on Reg BI requirements in general, without addressing the specific steps associated persons should take to comply with these requirements.

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3. Failure to Comply With Care Obligation

Making recommendations that were not in the best interest of a particular retail customer based on investment profile and potential risks, rewards and costs associated with the recommendation.
Recommending a series of transactions that were excessive in light of a retail customer’s investment profile and placing the BD’s or associated person’s interest ahead of the customer's.

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4. Failure to Comply With Conflict of Interest Obligation

Not identifying conflicts or, if identified, not adequately addressing those conflicts.

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5. Improper Use of the Terms “Advisor” or “Adviser”

Associated persons, firms or both, using the terms “advisor” or “adviser” in their titles or firm names, even though they lack the appropriate registration.

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6. Insufficient Reg BI Disclosures

Not providing retail customers with “full and fair” disclosures of all material facts related to the scope and terms of their relationship with these customers or related to conflicts of interest that are associated with the recommendation, including:

material fees received as a result of recommendations made (e.g., revenue sharing or other payments received from product providers or issuers, as well as other fees tied to recommendations to rollover qualified accounts);
potential conflicts of interest (e.g., associated persons trading in the same securities in their personal account(s) or outside employment); and
material limitations in securities offerings.

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