Alert October 13, 2022

FINRA on Reg. BI Compliance: There is “No One-Size Fits All” Approach

FINRA recently hosted a conference call with its smaller members covering Regulation Best Interest and Form CRS compliance. FINRA’s resounding message was that there is “no one-size-fits all” approach to Reg. BI compliance. 

FINRA and the SEC have had Reg. BI and Form CRS compliance squarely in their sights over the past year-plus, including the first-ever SEC Reg. BI settlement in June 2022 and prominent feature by FINRA in its 2022 Examination and Risk Monitoring Program Report.

FINRA explained during the call that it has moved away from “good faith efforts” reviews to “deeper dives” on how firms comply with Form CRS and the Reg. BI Care, Compliance, Disclosure, and Conflicts of Interest obligations. The discussion focused on expectations during exams and the types of violations FINRA’s exam teams refer to their enforcement colleagues.

EXPECTATIONS DURING EXAMS + OTHER KEY TAKEAWAYS

Firms can expect FINRA to focus on the following areas during Reg. BI and CRS exams:

  1. Written supervisory procedures, including whether they are tailored to the firm’s business model and types of recommendations provided to retail customers 
  2. Care obligation, including suitability-like reviews, but with additional considerations like account type recommendations and assessments of reasonably available alternatives 
  3. Conflicts of interest obligation, including how (and how often) firms have assessed potential conflicts of interest and the mitigating strategies firms implemented 
  4. Supervisory reviews, including the adequacy thereof and exception reports utilized
  5. Form CRS, including filing, amendments, and the process for (i) delivery to new retail customers when the firm makes a recommendation and (ii) recommunication, if firms make material changes
  6. Corrective action taken by a firm as a result of previous exams by the SEC or FINRA 

During the call, FINRA mentioned several common violations referred to FINRA’s Department of Enforcement, including failure to recognize the applicability of Reg. BI and Form CRS and Form CRS deficiencies related to incorrectly answering the disciplinary history question. Perhaps unsurprisingly, FINRA also indicated that firms that were previously cited for Reg. BI and Form CRS deficiencies that made no efforts to correct findings might be more likely to be referred to Enforcement. 

Firms should document the steps they have taken in furtherance of Reg. BI and Form CRS compliance. Doing so could be the difference between simply receiving an exam deficiency or instead being swept into an enforcement action. 

We can expect more in this area from FINRA and the SEC in their annual exam priorities letters and potentially in enforcement actions. We will provide updates when we see them, including any guidance or practical insight we can glean.