Although the Security and Exchange Commission’s Regulation Best Interest standard goes into effect on June 30, the SEC is going to start asking questions testing firms’ preparation as part of the commission’s regular exams in January.
That was one of the takeaways from FINRA’s Regulation Best Interest Conference on Dec. 18 and earlier comments when FINRA officials have said they were preparing “preparedness reviews.”
FINRA has set up a resource page for additional background, and tools such as a compliance checklist, on the new requirements for Reg BI and Form CRS. Drinker Biddle, a law firm with regulatory expertise, placed that effort into a bag of a “potpourri of support and information” provided by FINRA and the SEC to help firms with compliance.
At FINRA’s November Senior Investor Conference, FINRA CEO Robert Cook confirmed the agency’s intention to perform “stress tests,” according to a Drinker Biddle blog post.
“FINRA has emphasized that its intent is not to be punitive and fine firms for compliance violations,” the post said. “Rather, FINRA insists its primary goal is to assist firms in successfully implementing the nearly 1,000 pages of Reg BI’s regulations.”
Those efforts listed by Drinker Biddle include:
- FINRA Reg BI Checklist: The checklist includes 20 questions, “such as whether the firm (1) considers all elements of care, skill and costs when making recommendations or (2) considers reasonably available alternatives or (3) has policies and procedures to identify the firm’s conflicts of interest.”
- FINRA Form CRS Checklist: This checklist is designed to ensure compliance with Form CRS, including “whether the firm is (1) delivering a Form CRS to each new retail investor, (2) creating and publishing a relationship summary that is accessible on their website or (3) maintaining a process for filing and subsequently updating Form CRS.”
- FINRA Webpage: The webpage is intended to educate firms on Reg BI.
- SEC Form CRS FAQ: The FAQs cover Form CRS’s Relationship Summary format and its delivery requirements.
- SEC Interpretations: The SEC released interpretations, including the exclusion of broker/dealers from the definition of “investment adviser.”
- SEC Reg BI Compliance Guide: The commission produced a “small entity” compliance guide.
SEC Chairman Remarks: Chairman Jay Clayton’s July 8, 2019, speech provides an overview of Reg BI’s mechanics and perceived misconceptions
But even with that information, the best interest standard is not clearly defined. Speakers at the December conference representing regulators said brokers should be able to show that they made a reasonable effort to take the client’s best interest into account when making a recommendation. Officials have said enforcement will focus on monitoring intent and effort rather than being punitive.
Steven A. Morelli is editor-in-chief for AdvisorNews. He has more than 25 years of experience as a reporter and editor for newspapers and magazines. He was also vice president of communications for an insurance agents’ association. Steve can be reached at firstname.lastname@example.org.
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