FINRA hosted a Regulation Best Interest (Reg BI) conference on Dec.18, 2019 in Washington, D.C. for firms to discuss best practices and approaches. Approximately 500 compliance officers and other industry participants attended the one-day event focused on assisting firms as they gear up for the June 30, 2020 compliance date for the SEC’s Reg BI and Form CRS.
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. Form CRS requires broker-dealers and SEC-registered investment advisers to deliver to retail investors a brief customer or client relationship summary that provides information about the firm. The conference – which was free of charge to the first two participants per firm - featured six sessions. Topics included Reg BI, Form CRS, issues for dual registrants, client interactions and conversations with FINRA examiners and SEC officials from the Division of Trading and Markets, Division of Investment Management, the Office of Compliance and Inspections and Examinations.
“The time is now for firms to get started with planning for Reg BI and Form CRS” was a recurring theme heard throughout the day from speakers from the SEC, FINRA and industry representatives who shared advice and best practices.
“This whole rulemaking package is really designed to enhance the quality and transparency of retail investors’ relationships with their financial professionals,” said SEC panelist Emily Westerberg Russell, who discussed the new rules’ requirements. Reg BI will “enhance the quality of brokerage recommendations by reducing the potential harm that may be caused by conflicts of interest.”
“A broker-dealer must comply with four component obligations…a care obligation, a disclosure obligation, a conflict of interest obligation and a compliance obligation,” Russell added. “It’s important to know that you need to satisfy all four components. Failure to satisfy one violates the entire rule.”
Several speakers provided tips to help broker-dealers begin and continue the implementation process.
“We started right away,” said Michelle Kelley, LPL Financial, LLC, who cited her firm’s use of workstreams to review the requirements under the new rules and their impact on titling, training, policies and procedures.
According to Kelley, the firm created a timeline for key decisions and deliverables based on the June 30 compliance deadline. The process also included prioritizing those deliverables that required technology, changes to compensation, updates to the website and even changing titles on business cards.
Evan Charkes, of Bank of America, stressed the importance of getting organized and working together to focus on key tasks --- including taking inventory of all of the account types the firm offers, drafting the Form CRS relationship summary and making risk-based decisions.
“It’s important to have someone in the firm be an expert,” Charkes said, noting that it is critical for firms to read the 1,400 pages of four companion releases related to the rule. “The SEC did a good job explaining the rule…If you read it, you’ll find the answers to your most basic questions.”
Jim Wrona, FINRA Associate General Counsel also encouraged small firms to have conversations now with their clearing firms or third-party vendors to discuss the new requirements.
Panelists also addressed the new disclosure obligations and the required delivery of Form CRS, which serves as an investor’s introduction to the firm. Participants discussed efforts to modernize disclosure, including electronic delivery and interactive tools to help customers understand the impact of fees.
“We want this to work and be done right,” said Pete Driscoll, of the SEC. “The goal is to protect those retail investors.”
Driscoll also commended the joint efforts of the SEC and FINRA.
“It’s an SEC rule, but FINRA is going to be right there working and examining as well,” Driscoll said. “We’ve done a really good job of, within the borders that we have, sharing information and collaborating and this is a good example of how we can work together.”
FINRA and SEC speakers also discussed how they intended to examine and inspect for compliance with Reg BI.
“Our objective when the exam starts is not going to be ‘Gotcha!’,” said Bill St. Louis, FINRA’s Senior Vice President, Firm Group Leader. “We will be looking to see that firms have taken meaningful and reasonable strides to achieve compliance with the rules, that they have taken good faith efforts.”
“Within FINRA, and with the SEC, FINRA is going to be looking to achieve consistency on how we conduct the examinations, how we enforce the rules,” St. Louis added. “And, through our Office of General Counsel, we will continue to dialogue with the SEC around complex issues that we may encounter.”
The SEC and FINRA speakers encouraged firms to send any questions that arise in planning for Reg BI and Form CRS implementation to the SEC at: [email protected]
The SEC has published Small Entity Guides for both Reg BI and Form CRS, as well as FAQs on Form CRS. FINRA, moreover, has published a Reg BI and Form CRS Checklist that explains key differences between FINRA rules and Reg BI and Form CRS. The SEC and FINRA publications are available on FINRA’s Reg BI resource page. FINRA also will continue to assist member firms with other tools on its Reg BI resource page and by hosting in-person meetings and educational events to assist with these efforts.
Additional Highlight from John Polise, the Associate Director of Broker-Dealer and Exchange Oversight in the SEC’s Office of Compliance Inspections and Examinations