Heidi continues to stay on top of developments relating to Reg BI. – Alan
Just in case you’ve not yet seen them, both the SEC and FINRA, over the last week or so, have released a series of documents that touch, partly or entirely, on Reg BI (which everyone knows they must comply with by the end of June 2020). First, we have the 2020 Priorities Letters which, in addition to the evergreen priorities we see year-to-year (e.g., AML, suitability, fraud and sales practice violations), both regulators have announced their intention to examine firms’ compliance with Regulation Best Interest. FINRA, in its letter, has provided a list of factors it “may” take into account when reviewing Reg BI compliance. While such a list sounds helpful, the factors FINRA identifies in the letter do not shed any light on what kind of policies and procedures will be “acceptable” to achieve compliance with the new rule (i.e., how to comply). Instead, the factors merely repeat the requirements imposed by the Regulation and ask whether compliance has been achieved:
- Does your firm have procedures and training in place to assess recommendations using a best interest standard?
- Do your firm and your associated persons apply a best interest standard to recommendations of types of accounts?
- If your firm and your associated persons agree to provide account monitoring, do you apply the best interest standard to both explicit and implicit hold recommendations?
- Do your firm and your associated persons consider the express new elements of care, skill and costs when making recommendations to retail customers?
- Do your firm and your associated persons consider reasonably available alternatives to the recommendation?
- Do your firm and your registered representatives guard against excessive trading, irrespective of whether the broker-dealer or associated person “controls” the account?
- Does your firm have policies and procedures to provide the disclosures required by Reg BI?
- Does your firm have policies and procedures to identify and address conflicts of interest?
- Does your firm have policies and procedures in place regarding the filing, updating and delivery of Form CRS?
The SEC’s priority letter did little more than mention its intention to look at Reg BI Compliance. However, shortly thereafter, it put out a much more helpful document: FAQs on Regulation Best Interest. Unlike FINRA’s list of questions, the SEC’s “frequently asked” list comes with answers and examples. Granted, many of these questions are also addressed in the release (and therefore the answers are not, technically, new information), but it’s useful simply to know that these are the questions that the Commission is “frequently” receiving from firms as they work on their new procedures. Also worth noting: if the SEC takes the time to answer a question through public guidance, it’s wise to be familiar with it. While you cannot use guidance to bind the SEC (see the disclaimer at the beginning) they can certainly use it against you (by showing the answer was publicly available and you were negligent – or worse – in not knowing it).
If you read thought these materials and are still hungry for more information, you can listen to a (brief) discussion about what a Reg BI exam will look like in the latest episode of FINRA’s podcast (Reg BI comes up in the second half of the episode). Bringing this post full circle, FINRA notes in the podcast that Firms should continue to reach out and ask questions of FINRA between now and the June compliance deadline. Not only might your question be met with an answer, but because FINRA is also “learning,” it collects the questions received and shares them with the SEC…who answers them by publishing FAQs on Regulation Best Interest.