Finra outlines questions firms must answer on Reg BI compliance

Regulator also highlights private placements, digital communications and bank sweeps as priorities

Finra gave its member brokerage firms a spoiler alert on Thursday regarding the implementation of investment-advice reform this summer.

In its annual examinations priorities letter, the broker self-regulator outlined a list of nine questions it will use when reviewing whether a firm is adhering to Regulation Best Interest, a rule the Securities and Exchange Commission approved last year to raise the broker advice standard above suitability.

As the SEC did in its examination priority letter Tuesday, Finra led with Reg BI, which must be implemented by June 30. Finra made it clear that Reg BI is at the top of its agenda.

But in contrast to the SEC, Finra provided more specific guidance on what it expects to see from firms. Brokerages won’t have to wonder what to expect when Finra knocks on their doors to examine Reg BI compliance.

For instance, Finra will ask firms whether they have procedures and training in place to assess whether recommendations, including guidance on what type of account to open, are in a customer’s best interest. Finra will probe whether the firm and its registered representatives consider costs and “reasonably available alternatives.”

Finra also will assess firm policies on tackling conflicts
of interest and delivering a new disclosure document known as Form CRS.

“The questions FINRA has laid out are comprehensive and cover the areas that firms should be addressing as they develop their policies, procedures, training and disclosure,” said Emily Gordy, a partner at McGuireWoods and a former Finra senior vice president of enforcement.

In the first half of the year, Finra said it will ask firms about the challenges they’re facing with Reg BI, as it’s known. But after June 30, compliance exams will begin.

“Rather than waiting, they’re coming in early and saying we want to make sure you’re ready to go on Day 1,” said Marlon Paz, a partner at Mayer Brown. “It is a proactive approach to regulatory developments.”

Finra reports to the SEC and has said it will defer to the SEC on interpretations regarding Reg BI compliance.

Elsewhere in the priorities letter, Finra indicated it will look closely at firm communications surrounding sales of private placements, or unregistered securities. It also will evaluate how firms use digital communications, such as texting, social media and collaborative software applications.

Brokerages should put a premium on technology governance, said Marianna Shafir, corporate counsel and regulatory adviser at Smarsh, a compliance software firm.

“They absolutely should be capturing and archiving electronic communications and supervising it,” Ms. Shafir said.

Finra also will be keeping an eye on recommendations to put client funds into bank sweep account programs, where they often generate miniscule returns due to ultra-low interest rates. Finra warned firms to discuss alternatives to sweep accounts and not to imply they are equivalent to a checking or savings account at a bank.

Sweep accounts have “raised several concerns about firms’ compliance with a range of Finra and SEC rules,” the priorities letter states.

Recent Articles by Author

Former baseball star Angel Pagan wins $1.7 million arbitration award against Merrill Lynch

Former baseball star Angel Pagan wins $1.7 million arbitration award against Merrill Lynch

Case revolved around investments in Puerto Rican bonds made by the former MLB star

Small brokers push bill to ease audit rules despite challenging political environment

Small brokers push bill to ease audit rules despite challenging political environment

Legislation impacting financial advisers tries to get traction amid impeachment, election

Finra names Jessica Hopper head of enforcement

Finra names Jessica Hopper head of enforcement

The longtime Finra official served as acting enforcement chief since September


Subscribe and Save 60%

Premium Access
Print + Digital

Learn more
Subscribe to Print


Get unlimited access to

Starting at $4.95 a week for 4 weeks


Pay just $4.95 for the first 4 weeks