This post is about Reg BI, but if you really want to learn about it, as opposed simply to listening to me gripe, I urge you to register for the webcast that my partners Heidi VonderHeide and Rob Betman will present on Wednesday, December 11, 2019, at 2:00 PM EST. It is just one of four financial services webcasts that Ulmer & Berne is hosting in December. As previously noted, they are free, and not only that, depending on where you live, they can provide CLE hours, too. I invite you to register to attend any or all of them by clicking this link. – Alan
I keep reading – I saw another article just today that was quoting Robert Cook, the head of FINRA – that while Reg BI doesn’t go into effect until June 30, 2020, FINRA will nevertheless start testing firms’ “readiness” for Reg BI much sooner. I find that ironic, since it is not at all clear to me at this moment that FINRA understands the regulation well enough to be able to administer those tests adequately.
Why do I say this? It’s simply a matter of paying attention to what FINRA has published so far about Reg BI, and hearing more questions than answers, more confusion than clarity.
Consider the FINRA Unscripted podcast with FINRA’s Chief Legal Officer Bob Colby. It’s only 23 minutes long, so if you haven’t listened to it yet, you ought to do so. But, if you don’t want to make that commitment, I listened to it for you. And, frankly, the guidance it provides is as about as general as it could be. Which means it is not particularly helpful.
The biggest problem, in my view, is when he tries to articulate the difference between the current standard that governs the conduct of FINRA member firms and their associated persons – the suitability rule – and the new standard – operating in a customer’s best interest. What neither FINRA nor the SEC has managed yet to state clearly is how those two standards compare to one another. At the 4:55 mark in the podcast, Mr. Colby states that Reg BI is meant to be “a heightened standard.” Great, but what does that mean? How, exactly, is it “heightened?” Sadly, he never explains himself.
Then, at 7:25 in the podcast, Mr. Colby says that Reg BI “largely replaces” the suitability rule, at least for retail customers. But, again, he doesn’t explain how it manages to do that.
Making things even more confusing, and frustrating, is that I then read this article, which was published six days after the podcast was broadcast. In the article, which relates comments that Mr. Colby made regarding Reg BI at the NSCP’s annual meeting, it states that Mr. Colby told the audience that FINRA is “not going to get rid” of the suitability rule, and that FINRA’s suitability rule and Reg BI “are not going to be in conflict. They’re very close to begin with.”
Assuming that Mr. Colby was accurately quoted in the article, then I do not understand how, on the one hand, he can tell us in the podcast that Reg BI “largely replaces” the suitability rule, but then, on the other hand, also tell us the opposite. Making matters even murkier, Mr. Colby apparently went on to tell the NSCP members that a recommendation for a retail customer will be “covered by Reg BI and it will be covered by our suitability rule.” So, both rules apply?
Ok, so what I know from Mr. Colby is this: Reg BI may replace the suitability rule. But it may not. Also, both rules will apply to retail customers.
Can you sense now why I am concerned that FINRA is hardly in a position, at least not yet, to gauge how ready member firms are for compliance with Reg BI? I mean, if FINRA’s Chief Legal Officer doesn’t know enough to be able to cogently explain the interplay between Reg BI and the suitability rule, how the heck are FINRA examiners supposed to figure this out?
More importantly, how are member firms supposed to figure it out?
The one thing that we should all take some comfort in is what Mr. Colby said at 16:25 of the podcast, that come July 1, 2020, when Reg BI is effective and FINRA starts to examine firms for their compliance with the new standard, the examiners will not be looking for “foot faults.” The problem is, I have heard FINRA senior management use that same phrase before, and like Charlie Brown when he runs up to kick that football that Lucy has teed up for him, I believed what was said to me, only to be disappointed – again – when some examiner apparently failed to get the message and gave one of my clients a hard time about some ticky tack issue. So, like any good trial lawyer, I view the world through the prism of evidence. As a result of that, I have dutifully saved a copy of Mr. Colby’s podcast, in the event that someday I need some tangible evidence to remind some FINRA examiner of FINRA’s professed disinterest in foot faults when it comes to Reg BI compliance.