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Robert Cook, FINRA CEO

Regulation and Compliance > Federal Regulation > FINRA

FINRA ‘Ready to Act’ if SEC Finalizes Best-Execution Rules: CEO

By John Manganaro

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What You Need to Know

  • According to FINRA CEO Robert Cook, one of the top priorities for 2023 is ensuring regulatory clarity on evolving best-execution standards.
  • The self-regulatory organization is also hard at work processing criticism and discussion of its proposed Rule 3110, which involves remote office audit requirements.
  • Other key focal points are cybersecurity threats and advisor-client communication monitoring issues.

FINRA CEO Robert Cook said Wednesday that the self-regulatory organization is prepared to act swiftly to ensure its members are not subject to confusion regarding best-execution standards when enacting trades and other transactions for clients.

Cook made that suggestion during a live discussion hosted in New York by The Securities Industry and Financial Markets Association’s Compliance & Legal Society that featured Cook and Greg Ruppert, executive vice president of member supervision at the Financial Industry Regulatory Authority.

The discussion, which was moderated by Saima Ahmed, SIFMA’s newly appointed general counsel, focused on FINRA’s recently published 2023 priorities and examination findings.

According to Cook and Ruppert, FINRA’s staff and leadership have more on their plate than ever before, with priorities across all aspects of member firm operations.

On one front, cybersecurity threats are ever-growing, with the frequency, sophistication and variety of attacks all continuing to increase. At the same time, FINRA is pushing forward its internal review of member firm communications and disclosures to customers, especially those relating to complex products and the clients’ best interest.

Cook and Ruppert also emphasized that FINRA has observed potential issues with emerging communication platforms and mobile apps. They specifically urged firm leaders to focus on this area and proactively install, police and regularly update their staff communication-monitoring procedures to reduce the risk of recordkeeping failures.

While much of the discussion closely mirrored the information contained in FINRA’s 2023 priorities and examinations report, Cook and Ruppert also took time to address some broader issues, including the news that the Securities and Exchange Commission has proposed a new best-execution rule.

While he emphasized that the SEC’s rule is still in the early innings, Cook said that FINRA stands ready to act to update or modify its own best execution rule framework to reduce any regulatory duplication or outright discrepancies that could emerge from the SEC’s process.

Best Execution in Focus

As Cook pointed out, FINRA already has a best-execution rule (5310). While the rule was published decades ago, he said, it has been supplemented over time with lots of guidance.

In digesting the SEC’s proposal, experts have emphasized that the SEC should not lose track of the fact that investors may have different preferences for how brokers handle their trades. Some may prefer pursuing the best execution price, while others may prefer lower upfront cost or to avoid speed bumps that slow trading times.

As proposed, the SEC rule would establish a best-execution standard and require detailed policies and procedures for brokers, dealers, government securities brokers, government securities dealers, and municipal securities dealers and more robust policies and procedures for entities engaging in certain conflicted transactions with retail customers. The proposal would also affect related review and documentation requirements.

While Cook declined to offer a direct opinion about the SEC’s proposed approach, he conceded that, as a self-regulatory organization, FINRA is obligated to follow in the SEC’s footsteps.

“What I can confirm today is that FINRA is following this process very closely, and we are working on a plan to deal with the potential uncertainty that would emerge if the SEC finalizes and begins enforcement of its own rule,” Cook said. “We understand that regulatory overlap and a lack of clarity would be a problem for our members.”

Cook suggested that FINRA, in responding to a finalized Regulation Best Execution, would essentially reuse the playbook from the earlier Regulation Best Interest process. That is, FINRA would very likely move to essentially hard-code compliance with the SEC’s Regulation Best Execution into its existing best-execution rules, such that compliance with the SEC’s standards would represent compliance with FINRA’s standards.

“At this point, I would guess that is what we would do, but we will have to wait and see how the rulemaking process plays out,” Cook said. “But, I do think we will be able to quickly and easily address any duplication issues that emerge. Remember, we would still have our own examination and enforcement responsibilities, so it will be important for us to minimize any regulatory duplication, as well.”

Remote Office Monitoring Issues

According to Cook and Ruppert, FINRA remains at work considering updates and revisions to its proposed Rule 3110, which is aimed at allowing a home office to be considered a non-branch “residential supervisory location” under certain conditions. This would have various effects on firm monitoring efforts, for example by allowing more remote audits in certain situations.

Cook and Ruppert acknowledged the significant amount of public comment and criticism that has come in about Rule 3110, and they said the rulemaking process is still far from complete.

The proposed Rule 3110 was initially published for comment on Aug. 2, and it quickly generated a substantial degree of controversy among market participants. FINRA’s rule was subsequently updated and republished on Nov. 4, but it again sparked disagreement from various parties in the financial services industry, and the SEC signaled it would not approve the rule.

One commenter, for example, stated that the original and amended proposals represent a fundamentally flawed idea that runs counter to FINRA’s stated objective of investor protection. The most common point of criticism is that there are some advisor behavior issues that technology just cannot detect, but which would be found with little difficulty through an in-person audit.

“What I can say at this stage is that we thought we had it right with the initial proposal, but the SEC was not going to approve our initial proposal, so we have been in a process of amendments and updates,” Cook said. “I can also say that firms are pushing hard for clarity here, so getting this all figured out is very high on our list of 2023 priorities.”

Other FINRA Highlights

Cook and Ruppert also suggested the interrelated issues of preventing improper off-channel communications while maintaining advisor and client privacy is a top priority in 2023, given the growth of new communication platforms and shifting client preferences.

“Frankly, this is actually an issue that has been around for a long time, but the challenges are accelerating with the growth and change in digital communication technologies,” Cook said. “Right now, the guidance is clear. You have to maintain records of all incoming and outgoing client and advisor communications related to the operation of the business as such.”

Cook and Ruppert urged firms to set up policies and procedures that specifically and actively address this issue.

“So, what is your process for monitoring the emergence of new platforms that people might want to use?” Cook asked. “Do you actively provide insight and training to your advisors and staff about this issue? Do you have a process to identify and investigate any red flags?”

Cook and Ruppert said the SEC’s recent $2 billion enforcement actions may have raised attention on this topic, but it has been a long-developing issue — one that firms should already be actively addressing.

(Pictured: FINRA CEO Robert Cook)

John Manganaro

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