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Expect ‘Deeper Dive’ Reg BI Exams in 2022: FINRA Exec

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What You Need to Know

  • Since Reg BI went into effect in June 2020, FINRA has conducted more than 570 firm exams.
  • FINRA will be doing deeper dives with respect to the standard of care obligation.

The Financial Industry Regulatory Authority conducted more than 570 firm exams since the Regulation Best Interest went into effect in June 2020, through the end of 2021.

In 2022, firms can expect that FINRA will “be doing deeper dives with respect to the standard of care obligation, with more testing of what do the recommendations really look like, vis- à-vis the best interest of the customer and their client profile,” Scott Gilbert, vice president of Risk Monitoring at FINRA, said on a recent FINRA podcast.

Since Reg BI and Form CRS — the customer relationship summary — went into effect, like broker-dealers, FINRA has “been very focused on how they’re being implemented and what compliance looks like,” Gilbert said. “As firms have more experience with the rules and how they’re developed, they continue to be a tremendous priority for us in our examination program.”

Gilbert explained that FINRA uses a “risk identification” process.

“We go through this prior to every exam, and through that process we will determine, is this compliance with this regulation a particular risk at the firm we’re about to examine? If they have no retail customers, they are strictly institutional, then it’s unlikely that we’re going to conduct a risk review based on Reg BI at that firm because it wouldn’t be a good use of our resources.”

Once FINRA determines “that it’s appropriate to review for Form CRS or for Reg BI at a particular firm during that exam, the examiners will execute risk reviews regarding, for example, the care obligation or the conflict-of-interests obligation, or how the firm is complying and what its written supervisory procedures look like,” Gilbert said.

Nicole McCafferty, senior director in FINRA’s National Cause and Financial Crimes Detection Programs, said during the podcast that some of the first exams detected “a lot of high-level themes in looking at review periods that started with the beginning of Reg BI going into effect. So, a lot of procedural violations, not clearly articulating how exactly a firm is going to comply with the different facets of Reg BI.”

Those findings, she continued, “have really evolved now going into the end of 2021 exams and now into 2022, as our review period generally is a year look back.”

Exams have also identified instances “where, from a customer-specific standpoint, there have been investments that are recommended that don’t appear to be in line with the client’s investment profile, and there are potential risks there,” McCafferty explained.

During its exams, FINRA is “also looking at product-specific rules, such as the variable annuity rule, FINRA Rule 2330, or an options rule, FINRA Rule 2360,” she continued. “Looking at complex products and how that relates to a client’s profile is one thing that we’ve identified as well.”

More recent Reg BI compliance issues have shown that “firms that historically had suitability issues, now [are] having issues complying with care obligations,” McCafferty relayed.