FINRA
, the Financial Industry Regulatory Authority, published a report on industry preparedness for Regulation BI (Best Interest).
Regulation BI was adopted by the Securities and Exchange Commission (SEC) in June 2019.
“Reg BI establishes a ‘best interest’ standard of conduct for broker-dealers and associated persons when they make a recommendation to a retail customer of any securities transaction or investment strategy involving securities, including recommendations of types of accounts. The SEC also adopted new rules and forms to require broker-dealers and investment advisers to provide a brief relationship summary, Form CRS, to retail investors. The compliance date for Reg BI and Form CRS is June 30, 2020,” FINRA said in its report.
For its report, FINRA examined a set of small and business brokers. “to assess their preparedness for Reg BI and Form CRS. These assessments were not undertaken with the purpose of making findings of anticipated violations of Reg BI or Form CRS, but rather as a helpful dialogue with firms about their ongoing efforts and potential challenges.”
Form CRS will be required by the SEC to be filled out by each broker as part of the Regulation BI compliance.
More information in Form CRS is found here.
The highlights of the report are as follows.
“Firms developed governance structures to lead and manage Reg BI and Form CRS compliance requirements,” the report found.
Specifically, the report found that workgroups had been created with these sets of characteristics.
- Composed of multi-member steering committees representing multiple functions (at larger firms) or one or two designated staff (at smaller firms);
- Structured around the four component obligations of Reg BI (i.e., disclosure, care, conflict of interest and compliance) and Form CRS; and
- Included representatives from multiple areas of a firm (e.g., business units, compliance, legal and communications) (at larger firms).
The report also found that firms were working on timelines and that firms had begun training for compliance with Regulation BI.
Firms had developed systems for avoiding conflict of interest, according to the report.
“Firms created inventories or logs of conflicts (some of which may have been previously developed), implemented automated tools to track, report and document existing conflicts and initiated reviews of controls to mitigate or eliminate those conflicts,” the report stated.
Specifically, firms had made adjustment to compensation.
- Adding compensation caps;
- Leveling the compensation across comparable products within a category;
- Making changes to compensation for certain product lines; and
- Addressing concerns about compensation directly with the product manufacturer or issuer.
Firms had also removed sales contests, “Prior to the adoption of Reg BI or in preparation for the compliance date, firms had prohibited sales contests, sales quotas, bonuses and non-cash compensation practices based on the sales of specific securities or specific types of securities within a limited time period.”
FINRA was formed as a self-regulatory organization when the regulatory arms of the NYSE and the NASD merged in 2007.
