Initial Finra examinations of financial firms’ compliance with Regulation Best Interest will focus on whether they have put in place policies and procedures for the new standard, officials of the broker-dealer self-regulator said Tuesday.
Reg BI, the new broker investment advice standard, went into force last Tuesday. The Securities and Exchange Commission maintained the implementation deadline despite the coronavirus pandemic that has disrupted many brokerage operations.
In risk alerts released in April, the SEC said it would look for “good faith” efforts by firms to put Reg BI in place. The Financial Industry Regulatory Authority Inc. will work with the SEC in enforcing the measure, and a podcast posted on the Finra website Tuesday gave a hint of what firms should expect in early Reg BI exams.
“By and large, we’re going to be looking at the compliance obligations of policies, procedures and training, and we’re not looking at it to say, ‘Did a firm do everything the way that we would have done it?’ or ‘Did they do everything perfectly?’” Jim Wrona, Finra vice president and associate general counsel, said on the podcast. “We’re looking to see do they understand the obligations, and do they make a good faith effort to implement the changes that needed to be made and incorporate those in their policies, procedures and training.”
Finra Chief Executive Robert W. Cook described initial Finra examinations in a similar way during an interview Tuesday with Financial Services Institute CEO Dale Brown.
“Our main focus is going to be on good faith efforts to comply with the compliance obligation,” Cook told Brown. He added that most Reg BI exams would occur as part of a brokerage’s cycle exam rather than being conducted as stand-alone reviews.
Kurt Wolfe, regulatory counsel at Troutman Pepper, said firms will find the Finra exam forecasts useful.
“It’s helpful because it puts a little more meat on the bones of what firms should expect exam staff to look at,” Wolfe said.
Under Reg BI, brokers are prohibited from putting their financial interests ahead of those of their clients. They also have to meet an array of disclosure obligations — including filing and delivering Form CRS to clients — and identify and mitigate conflicts of interest.
Those Reg BI obligations are a much heavier lift than the compliance prong. Over time, the SEC, Finra and firms will get a better handle on how to meet them, Finra’s Wrona said.
“They’ve done their best to make sure that they’re acting in the customer’s best interests, but they may find with some experience that certain ways of dealing with obligations isn’t as effective as they had anticipated,” he said. “And so they’ll make changes, they’ll tweak their policies and procedures or approaches to issues. So it’ll be somewhat evolving over the course of the next year or two.”
But some questions are already cropping up. Meredith Cordisco, Finra associate general counsel, indicated on the podcast that Reg BI does apply to high-net-worth clients of institutional firms but that it may or may not apply to family offices.
“If you’re working on a recommendation to a human being, you are almost certainly in Reg BI land,” Wolfe said.
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