Six years into Regulation Best Interest, "products have changed, firms have evolved," Ted Luecke, examination director at the Financial Industry Regulatory Authority, said at FINRA's recent annual conference in Washington. "Are your disclosures staying up to date with your new products?"
Bringing on new products can mean changing the customer relationship summary known as Form CRS, fee documents or other regulatory disclosures, Luecke told attendees.
A firm should be assessing how products fit into the overall product profile and also be considering what reasonably available alternatives should be considered, Luecke said.
Broker-dealers should revisit Notice to Members 05-26 "when thinking about new product onboarding" and Reg BI compliance, Luecke continued. "Onboarding has been a thing for many years, but that's a good resource for firms that want to look at the process again," he said. The notice "asks you questions that you should be thinking about when you have new products, it gets you thinking about this process — what are the risks of the products? What customers are they supposed to be focused on?"
Consider how you want to "document that process," Luecke added, and "then have a post-approval process where you assess how the product is doing."
Also, BDs need to create training for reps on the new products.
When bringing on new products and considering compliance with Reg BI, Ann Robinson, chief compliance officer at Farmers Financial Solutions, added on the panel that the firm has a due diligence team that asks, "Why is this product in the best interests of customers? Which customers does it fit? Does it fill a gap that we may not have? Is there a better product?"
Linde Murphy, president and chief compliance officer, M. E. Allison & Co., Inc. added that her firm also looks at the objective of the product, costs as well as liquidity — "how fast could a client get out of this product if needed?"
With Reg BI compliance, "it is pretty well laid out with the potential risk, rewards and costs" of a new product. "So we know we have got to cover these three categories ... to truly have a grasp on a new product."
What about conflicts?
"We're getting paid, so there's a conflict," Murphy said. The firm has to look at other conflicts, such as a new conflict associated with bringing on a new product and mitigating that conflict — "the big one being, especially on a compensation level, what are we getting paid? Is this pay more than another product that may work for that client? And how do we differentiate why it would be justified to put them into this higher expense in a newer product versus something they could have had [at] a lower expense?"
Reg BI Exams
Exams when Reg BI was passed in 2020 covered "all the component obligations," including Form CRS, Luecke said. "We wanted to make sure firms were in a great position to handle the regulatory requirements. As firms have evolved over the last six years, and their processes have become more sophisticated, our process tends to be more risk-based, so we want it targeted on risks at that particular firm."
For instance, "instead of requesting a whole slew of all of the trades for a firm, [Reg BI exams] might be more targeted on a particular product," Luecke added. The exam "might be focused on the supervisory level, if we understand that you sell a product that we want more information about, we might want the supervision process the firm has in place."
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