Regulation Best Interest and Form CRS: Two Years In
June 30th marks the second anniversary of the implementation of Regulation Best Interest and Form CRS and we are celebrating with a deep dive into everything FINRA has learned on the topic over the last two years.
On this episode, Meredith Cordisco, associate general counsel with the Office of General Counsel, Scott Gilbert, vice president covering the large diversified firm group and alternative net capital group within Member Supervision, and Nicole McCafferty, senior director with the National Cause and Financial Crimes Detection Program, join us to talk about how FINRA is examining around the new regulations and explore some of the common problem areas and effective practices when it comes to complying with all that is now required.
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Resources mentioned in this episode:
Episode 63: Implementing a New Standard of Care
Episode 45: Preparing for a New Standard of Care
Episode 69: Excessive Trading: When A Lot Becomes Too Much
2022 Report on FINRA’s Exam and Risk Monitoring Program: Reg BI and Form CRS
Listen and subscribe to our podcast on Apple Podcasts, Google Podcasts, Spotify or wherever you listen to your podcasts. Below is a transcript of the episode. Transcripts are generated using a combination of speech recognition software and human editors and may contain errors. Please check the corresponding audio before quoting in print.
00:00 - 00:22
Kaitlyn Kiernan: June 30th marks the second anniversary of the implementation of Regulation Best Interest and Form CRS and we're celebrating with a deep dive into everything FINRA has learned on the topic over the last two years. On this episode, we'll hear how FINRA is examining around the new regulations and explore some of the problem areas and effective practices when it comes to complying with all that is now required.
00:32 - 01:06
Kaitlyn Kiernan: Welcome to our FINRA Unscripted. I'm your host, Kaitlyn Kiernan. I'm pleased to welcome three guests to the show today to discuss all things around Regulation Best Interest and Form CRS. First from the Office of General Counsel, we have Meredith Cordisco, associate general counsel with the Regulatory Practice and Policy Group. And then from Member Supervision we have Nicole McCafferty, a senior director with the National Cause and Financial Crimes Detection Program, and Scott Gilbert, a vice president covering the large, diversified firm group, an alternative net capital group within the Exam and Risk Monitoring Program. Meredith, Nicole and Scott, welcome to the show.
01:10 - 01:10
Scott Gilbert: Thank you.
01:10 - 01:11
Nicole McCafferty: Thank you.
01:11 - 01:12
Meredith Cordisco: Great to be here with you.
Kaitlyn Kiernan: So just to kick things off, can you all introduce yourselves and what it is exactly you do with FINRA? Meredith, maybe we can start with you?
01:23 - 01:49
Meredith Cordisco: Yes. Well, you already gave my title. I'm associate general counsel in FINRA’s Office of General Counsel. So, I'm part of the team that works on regulatory policy and rulemaking. And like my esteemed co-panelists here, our podcasters, Scott and Nicole, I am part of an internal working group that focuses on all things Reg BI and Form CRS.
01:50 - 01:52
Kaitlyn Kiernan: Great. How about you, Nicole?
01:53 - 02:29
Nicole McCafferty: My name is Nicole McCafferty. I'm a Senior Director in the National Cause and Financial Crimes Detection Programs. Prior to that, I was an examination director in the retail firm grouping. But in both of these roles, I've been very involved with Reg BI and how the exams have been executing reviews related to both Reg BI and Form CRS. As Meredith mentioned, we are all part of an internal group that do look at all Reg BI and Form CRS findings to ensure consistency in application across all of the different types of exams that FINRA conducts.
02:30 - 02:32
Kaitlyn Kiernan: Scott, can you around us out?
02:32 - 03:05
Scott Gilbert: Sure. So, I'm responsible for the risk monitoring group that covers the large diversified firm group. That group includes some of the largest firms in our membership. I'm also the air quotes single point of accountability for those firms, which means I'm the person those firms can contact if they have any concerns about their risk monitoring analysts or their examination of how they're being regulated. I also supervise the alternative net capital specialist group. This is a team who examine various risks at member firms who compute their net capital requirements by an alternative method permitted by SEC rules.
03:16 - 03:37
Kaitlyn Kiernan: Well, thank you again for joining me, all three of you. We are here today to celebrate—is that the right word here?—the two-year anniversary of Reg BI and Form CRS. So, before we really dig into the topic now that we're two years in, Scott, can you tell us at a high-level what Reg BI and Form CRS are?
03:38 – 05:38
Scott Gilbert: I'll try at a 10,000-foot level and I'm sure we'll get into all the details. But Reg BI and Form CRS, they're separate regulations issued by the SEC that came into effect as a package at the end of June 2020. Reg BI establishes a standard of conduct for broker dealers and their associated persons when they make recommendations to retail clients. These could be recommendations of any securities transaction or an account type or an investment strategy.
The rule draws on traditional notions of suitability that have been longstanding in the industry, but it enhances them in a way that is comparable to but not the same as the fiduciary standards under the Adviser's Act. And specifically, Reg BI imposes four obligations on broker dealers. That's the disclosure obligation, the care obligation, the conflict-of -interest obligation and the compliance obligation form.
Form CRS is a companion to Reg BI, but it differs in that it applies to both broker dealers and to investment advisers who provide services to retail clients. That form requires that all retail clients be provided with a prescriptive structure of information that discloses several points and features about the relationship between the firm and the customer, including the types of services that the firm offers, the fees, costs, conflicts of interest and standards of conduct associated with those services and those relationships, whether the firm and its employees have any disciplinary history and how to obtain additional information about the firm.
05:38 - 00:05
Kaitlyn Kiernan: Thanks so much for that 10,000-foot view on those. There is a link in the show notes to some past episodes that go in more depth for anyone who wants to go and take a look back. But Nicole, who exactly does this regulation apply to?
05:52 - 06:52
Nicole McCafferty: It's a great question, Kaitlyn, the two regulations are actually separate and distinct. Reg BI would apply to any retail firm or any firm with retail customers where recommendations are being made. So, if a firm is making a recommendation, Reg BI applies. Form CRS applies to any firm that has retail investors. So even if the firm is self-directed and the firm is not making any recommendations at all, then Form CRS would still apply. But Reg BI may not. In its simplest form, those are who it applies to.
Keep in mind, there is no de minimis exemption. If you only have two retail customers Form CRS and Reg BI, to the extent that you're making recommendations, would still apply. If you have only financial representatives that have accounts that you're a broker-dealer, even if you're not making recommendations to them, Form CRS would still apply. So, they're considered retail investors as well.
06:52 - 07:00
Kaitlyn Kiernan: So even firms that might not consider themselves retail firms but have a friends and family type account, they have to look into this regulation too.
07:00 - 07:01
Nicole McCafferty: Yes, they do.
07:02 - 07:05
Kaitlyn Kiernan: And Meredith, what counts as a recommendation?
07:06 – 09:10
Meredith Cordisco: Reg BI only applies when there is a recommendation to a retail customer. Recommendations are the triggering event, that makes it a really important concept, and it's always a facts and circumstances determination. There's no bright line test for what is a recommendation. You have to ask whether, based on the context, the content and the manner of a communication, a reasonable person would view it as a call to action.
So, in this way, the more individually tailored a communication is to a retail customer regarding that retail customer’s circumstances – “I know you and I know your financial circumstances, and I think this investment is good for you based on what I know, and you should buy it,” – the closer you get to that more individually tailored communication, the more likely it's going to be a recommendation. And this is the same framework, this recommendation concept framework, that was used in the FINRA suitability rule that Scott mentioned, which has been around for quite some time. So, most people in the industry are familiar with this framework.
As we've already said here, Reg BI applies to recommendations of securities transactions or investment strategies involving securities. But what's new with Reg BI is compared to suitability, at least in this recommendation space, is that it also applies to account type recommendations that are made to retail customers. So, if a registered person is recommending that a retail customer open a brokerage account, even if it's a self-directed brokerage account, for example, that recommendation of that type of account would be subject to Reg BI as well as any other account type recommendations that are made.
09:10 - 09:39
Kaitlyn Kiernan: Thank you all for kicking us off with those high-level questions there. And now I just wanted to dig in a little bit more. We're two years into this regulation, what is FINRA seeing in terms of its exams? I know, Reg BI was a topic on the 2022 report on FINRA's Examiners Risk Monitoring Program, and we will link to that as well, but Scott, how is FINRA examining for compliance with the new regulation with Form CRS and Reg BI?
09:40 - 11:25
Scott Gilbert: Since Reg BI and Form CRS went into effect, like our members, we've been very focused on how they're being implemented and what compliance looks like. As firms have more experience with the rules and how they're developed, they continue to be a tremendous priority for us in our examination program.
We have a risk identification process. We go through this prior to every exam, and through that process we will determine is this compliance with this regulation a particular risk at the firm we're about to examine? If they have no retail customers, they are strictly institutional, then it's unlikely that we're going to conduct a risk review based on Reg BI at that firm because it wouldn't be a good use of our resources.
Once we determine that it's appropriate to review for Form CRS or for Reg BI at a particular firm during that exam, the examiners will execute risk reviews regarding, for example, the care obligation or the conflict-of-interests obligation, or how the firm is complying and what its written supervisory procedures look like.
So, we have been doing many of these exams. We conducted over 570 firm exams since the rule went into effect in 2020 through the end of 2021. And in 2022, firms can expect that we'll be doing deeper dives with respect to the standard of care obligation, with more testing of what do the recommendations really look like, vis- à-vis the best interest of the customer and their client profile.
11:25 - 11:33
Kaitlyn Kiernan: And for firms that are subject to both SEC and FINRA examinations, what is this going to look like and how is that going to work?
11:34 - 12:25
Scott Gilbert: We're very cognizant that Reg BI and Form CRS are SEC regulations, not a FINRA rule. And the SEC has its own examination program and its own priorities, and they are reviewing firms for compliance with these regulations as well. So, from the outset we've been coordinating very closely with the SEC to avoid regulatory overlap and to ensure consistency of approach and to use our resources efficiently.
And we will continue to do that because their SEC rules, we generally will defer to the SEC on matters of interpretation. And to that end, we confer regularly with them on interpretive questions.
12:25 - 12:41
Kaitlyn Kiernan: Thanks, Scott. And Scott just mentioned that there's been more than 570 exams through the end of last year related to Reg BI. So, Nicole, what are some of the findings from those exams? Are there any general themes you can share?
12:42 – 16:32
Nicole McCafferty: Yes, I would love to. Some of the themes that we've seen, and I think they're evolving as we continue to be able to do more deep dive reviews, getting further into review periods now that encompass the full duration of the regulation that went into effect June 30th. Some of our first exams, we noticed a lot of high-level themes in looking at review periods that started with the beginning of Reg BI going into effect. So, a lot of procedural violations, not clearly articulating how exactly a firm is going to comply with the different facets of Reg BI. And those findings have really evolved now going into the end of 2021 exams and now into 2022, as our review period generally is a year look back.
So now the entire review period encompasses the post-BI regulation period. What we've seen more recently is issues with firms that historically had suitability issues, now having issues complying with care obligations. One example of this would be looking at customers where their accounts are excessively traded. So, the associated persons recommending a series of transactions that places the broker-dealer’s interest or their own interests ahead of the customer. Here we're looking at cost-to-equity, turnover rates. And it's important to note here some of the reasons we've gotten from firms is that the client wants an active trading strategy, we sent activity letters. If a firm or a rep is making recommendations for a client to engage in this active trading strategy, actively traded securities, low price securities, they need to have a basis for those recommendations and that they were in the best interest of the client. Customers signing an activity letter, it doesn't absolve the firm from these requirements under our care obligation.
We've also identified instances where, from a customer-specific standpoint, there have been investments that are recommended that don't appear to be in line with the client's investment profile, and there are potential risks there.
When we're doing these reviews, we're also looking at product specific rules, such as the variable annuity rule, FINRA Rule 2330, or an options rule, FINRA Rule 2360. Looking at complex products and how that relates to a client's profile is one thing that we've identified as well. What I will say is firms that historically, again, had these suitability issues on prior exams before Reg BI went into effect, are still having struggles complying with the care obligation.
One other thing I'll mention related to the conflict-of-interest obligation, we've identified firms that have failed to adequately mitigate or eliminate conflicts that are applicable to their business. One example I'll give, we had a firm that identified conflicts related to offering of affiliated funds, recommending those funds to its retail investors. They prohibited their registered reps from doing this type of activity as a conflict mitigation strategy. And when we went and reviewed the firm, we identified that actually the reps were recommending the funds. So, it's just an instance of the firm putting their best practice in place and developing procedures around it, but then not actually following through and executing.
And I will just also say, we are still seeing procedural issues as we do our Reg BI reviews in that firms are not really being specific as to how they're going to comply with the different obligations under Reg BI.
16:32 - 16:35
Kaitlyn Kiernan: So, there's a training element there, it sounds like, with the reps.
16:36 - 17:06
Nicole McCafferty: Absolutely, yes. Training is a key facet. And one thing that also I've noticed from the beginning of Reg BI, all firms were required to train their associated persons before the rule went into effect. There are firms that have simply done a one and done. We trained in June 2020, and we're done. We didn't need to train again. And that is an evolving process. Firms should be continually training their reps, including it as part of firm element CE and things like that. But definitely a continuum of training as FAQs are coming out from the SEC and additional guidance is being issued.
Scott Gilbert: Since the care obligation closely tracks and is resting on a foundation of generally known suitability standards that have been long standing, there's this muscle memory that I think firms have about the care obligation to the extent it tracks the suitability standards that they're used to. But there are some new elements where that muscle memory doesn't exist, and firms need to pay attention to. So, for example, account type recommendations generally were not a big part of suitability analysis in the past. It has really come to the forefront more recently, whether you're talking about retirement accounts or other options, particularly as firm’s offerings have expanded in this regard.
Reasonably available alternatives is another area where suitability rule just didn't recognize that as an explicit obligation that firms had to account for. I just wanted to point those out as areas where firms might trip over. The other one I was thinking about is with respect to excessive trading, that in the past we had to establish that the representative had control over the account. Under Reg BI that's not necessarily the case anymore.
18:36 - 19:05
Kaitlyn Kiernan: And we do have an older podcast on excessive trading that we'll link to as well with Chris Kelly. He goes a lot into kind of what excessive even means for anyone who wants more on that topic. But Scott, you mentioned the account type recommendations. That seems like it could be an issue that emerges if someone is calling the call center and being like, I'm trying to open an account and I don't know what to do. Is that something where they might not be prepared with the right people on the phone being trained on that standard?
19:06 - 19:29
Scott Gilbert: Yeah, well, we talked about how training is very important. We have to distinguish between someone just trying to help a client work through the mechanics of an online application versus a specific, as Meredith addressed at the beginning, recommendation where there's a call to action to open a particular type of account as opposed to something else.
19:30 - 19:37
Kaitlyn Kiernan: So that was a lot on Reg BI. Nicole, can you share some of the findings as it relates to Form CRS?
19:38 – 21:20
Nicole McCafferty: Absolutely. Form CRS, in the beginning, we were looking at lot at firms’ initial filings. So, we were looking at content, making sure it adhered to the CRS instructions, that firms had made delivery to existing customers. A lot of our initial findings surrounded those areas, primarily. As we've gotten into exams a little bit more now, we're looking at Form CRS amendments. How is the firm communicating those amendments to their customers? So, we are seeing deficiencies in that space where firms made material adjustments to their Form CRS and then did not communicate those amendments to FINRA when filing it through CRD as well as to their retail customer base.
So, there are very specific guidelines outlined in the instructions as to how those changes are to be communicated. I will also add, we are still seeing firms that don't think that they have a CRS requirement even though they have retail investors. And that's predicated on a misunderstanding that the two regulations are separate. So, they're thinking, “I don't make recommendations to retail investors, therefore I don't need a CRS, it doesn't apply to me,” and that's not accurate.
So, thinking about things in that way as well, and believe it or not, Kaitlyn, we still have firms that have not filed Form CRS because they still don't think they have a retail customer base. So, we're still working through exceptions related to that as we conduct exams of these firms a lot of times for the first time since the regulation went into effect.
21:20 - 21:29
Kaitlyn Kiernan: So, I think you mentioned earlier a lot of that misunderstanding is not realizing that if their employees have customer accounts, they're still retail investors.
21:29 - 21:46
Nicole McCafferty: Yes, that's accurate. Employees or family related accounts. And as I mentioned before, we have firms that have one or two friends and family accounts that they're servicing on an accommodation basis. Unfortunately for them, Form CRS still applies because there is no exemption.
21:47 - 22:27
Meredith Cordisco: And one of the things that we have seen, which we've talked about a lot, and I think that the SEC has talked about on a number of occasions as well, is if there are high net worth customers, some firms are under the misimpression that they are not retail customers for purposes of Reg BI. When, if you are a human customer and you are using a recommendation primarily for personal, household or family purposes, then irrespective of your net worth, you are a retail customer for purposes of Reg BI and a retail investor for purposes of Form CRS.
22:28 - 22:47
Kaitlyn Kiernan: That's all good to know. So, Meredith, we've had some questions from listeners around the requirement that brokers consider costs and reasonably available alternatives when making recommendations to retail customers. Can you explain what reasonably available means?
22:48 – 26:04
Meredith Cordisco: Sure, I will try. As Scott mentioned, Reg BI has a number of enhancements over this former suitability structure. So, the explicit requirement to consider costs as well as the consideration of the air quotes reasonably available alternatives are among those enhancements. Reasonably available alternatives are alternatives at the firm. It's not that the firm or the financial professional must consider every possible alternative or possible investments outside of what is offered by the firm. But they must consider reasonably available alternatives at the firm itself.
So, what is reasonably available, and I know firms don't like hearing this, but it's really going to depend on the firm's business, on their customers and the products it sells. But firms should make sure that they have processes in place for how their financial professionals, how their registered persons are supposed to identify and consider reasonably available alternatives. And that they’re training their registered persons on this and, to Nicole's earlier point, that they're following through on those procedures.
If I could address costs as well, because I know we've had a lot of questions about that, too, and the SEC has recently put out additional guidance to shed some more light on the consideration of costs. As I mentioned, it's now an explicit part of Reg BI, so we always had it looming in the background as part of suitability. But now with Reg BI, it's expressly in the rule that you must consider costs when making a recommendation to a retail customer. So, the SEC put out a staff bulletin that talks about Reg BI and also the IA fiduciary duty, particularly as these standards of conduct pertain to account-type recommendations.
So obviously, I encourage everybody to read the staff bulletin. It's on the SEC's Reg BI page. We also have it linked on our FINRA dedicated Reg BI page. In it, the SEC staff talks about costs, and what is clear about it is that the types of costs that must be considered when you're making a recommendation to a retail customer are quite broad. So, for example, in the context of an account type recommendation, the SEC staff has said the total potential costs should be considered when evaluating whether that account type is in the best interest for the customer.
This obviously would include direct costs. Those are some obvious things that you could think of off the top of your head, like account fees. But the SEC staff also said in that bulletin that it includes indirect costs, such as costs associated with payment for order flow or cash sweep programs. So, costs are definitely an important consideration that firms need to be thinking of in this space.
26:04 - 26:19
Kaitlyn Kiernan: Good to know. And you mentioned that training, of course, is very important here. But what kind of requirements or expectation is there around documenting these considerations of costs and reasonably available alternatives?
Meredith Cordisco: Cost and reasonably available alternatives may factor into the care application and form really the basis for your best interest determination when making the recommendation. So, when the SEC adopted Reg BI, they stated that firms may take a risk-based approach to documenting the basis for the recommendation. Unlike the consideration of cost, it's explicit In Reg BI, there's no explicit requirement in the rule itself to document the basis for each and every recommendation.
But that being said, there are clearly times when documenting the basis of your recommendation is at least prudent. So easy examples would be if the recommendation appears on its face to be potentially inconsistent with something in the customer's investment profile. You'd want to make sure that you're documenting that. But in the guidance that I just mentioned, that SEC staff bulletin they put out in March, the SEC staff suggested that there could also be certain types of recommendations that are so consequential for a retail customer that documenting the basis for it may be necessary to show how the registered person and the firm complied with the best interest determination.
So, for account type recommendations or recommendations to roll over a retirement account, the SEC staff said that it may be “difficult,” that was the word they used, for a firm to assess the effectiveness of their policies and procedures or to demonstrate their compliance with the best interest obligation without documenting the basis for the recommendation.
So that's really something that firms should keep in mind. And we're going to go back to policies and procedures because that's really the basis for compliance. And firms really should have policies and procedures about what kinds of recommendations for which the firm requires their reps to document the basis. And then again, they need to follow their policies and procedures. So do what you say you're going to do.
28:32 - 29:13
Scott Gilbert: In a given recommendation, it might be debatable whether the representative was required to document the particular thought process that went into that recommendation. There is a sliding scale there. However, no matter what, the firm needs a supervisory system with clear written supervisory procedures and policies that demonstrate a commitment to supervise whether certain recommendations should be documented and under what circumstances. So, I think the clear policies and carrying through on those policies are very important.
29:13 - 29:31
Kaitlyn Kiernan: Thank you, Scott and Meredith for that. We've talked a lot about the problem areas. So, I want to turn to maybe the glass half full side and look at effective practices in this space. Nicole, what are some of the positive things that FINRA has been seeing around Reg BI and Form CRS?
29:31 – 33:14
Nicole McCafferty: So, I hate to continue to talk about policies, but I think some of the best practices that we've seen have stemmed out of firms that really took the time to craft policies and procedures that made sense for their business. So, looking at all of their business lines, at their customer base, at what types of recommendations they offer at a high level and really taking a risk-based approach around crafting those policies, procedures, controls. I would say that would be the backbone of any good compliance program related to Reg BI is the time that a firm took to really get that in good shape.
Some of the other effective practices that have stemmed out of that is, thinking about care obligation as one example, taking a risk-based approach and looking at certain account type recommendations or securities recommendations and how those are going to be documented. So, we had firms develop worksheets as one example, either in paper form or electronically, that gave options for the associated person to look through and consider when making those recommendations to customers.
One that stands out in particular is related to rollovers, where there were several options presented and the associated person was required to really look through and think about, “okay, if we suggest this option, is that in the client's best interest? Here are the reasons why, here are the positives, here are the negatives,” and so on and so forth for each of the options before they come to a conclusion. So, I think that was very effective.
We've also seen worksheets or an electronic determination on recommendations related to securities and proposed products. So, looking at what the client currently holds versus a proposed recommendation. Often times we see this with respect to variable annuities where you're looking at one product and considering why it makes sense for a client to exchange it and purchase maybe a different variable annuity or a different product altogether.
I would also say we've seen firms completely eliminate conflicts by leveling commissions or compensation for both reps and supervisors across the board. One example I can think of of a really good practice we saw was a firm that had the exact same initial and trail payout structures regardless of what VA was being offered. This firm in particular had a proprietary VA that they could recommend to their customers. But what the firm did is made the initial and trail payouts for both proprietary and third-party VAs exactly the same. So, there was no incentive for the rep to recommend the proprietary VA over a third party for one example.
We've also seen firms create conflicts matrices or spreadsheets or have committees that have representation across the firm to really gain insight to make sure that they're capturing all of their different types of conflicts and to continue to have those discussions. So, it wasn't just one set pre-Reg BI, we had this conversation, we documented all of our potential conflicts. It's looking at that as an evolving process. So those are some good examples for Reg BI.
For Form CRS, similarly, I would say procedurally having a good backbone and going from there. But I think firms that took the time to think about the two regulations and how it applied to their business, taking a risk- based approach seem to adhere to it the best.
33:14 - 33:22
Kaitlyn Kiernan: And Scott, what else can firms be doing to ensure they're in compliance with the still relatively new standard of care?
33:22 – 35:34
Scott Gilbert: Well, if they do everything that Nicole tells them to do, they'll be well ahead of the game. So, I urge you to rewind and hit play again on that part. But I would mention a couple of things. Don't assume that you're right in analyzing the rule. We talked about the misconception that, “Well, I don't make recommendations, therefore Form CRS doesn't apply.” Not correct. A lot of firms have made that assumption. Or “I don't have any retail customers.” Really? You don't? Better check. You better seek guidance if you're not sure. Or “I don't make recommendations.” Let's reevaluate that along the guidance that Meredith gave. So just don't assume everything is as you think it is with respect to these rules. And then test your supervisory system to ensure that it's functioning as intended. Make sure your supervisors are actually doing the oversight they're supposed to be doing and that your registered representatives are acting in manners consistent with your WSPs.
And then one of the most important things is to realize that your policies and procedures and your supervisory systems need to be dynamic here because things change, your firm changes. You need to pay attention to changes in business lines, or if you've added new products, or if you've had a merger with another firm or an acquisition or hired new financial advisors who may have different types of business. Do these raise concerns about the applicability of the rule for you? Do you have to make new disclosures as a result, or do you have new conflicts that you didn't have before that need to be either disclosed or mitigated or eliminated? And are your WSPs reflecting old suitability-type language rather than the new language of Reg BI like “reasonably available alternatives,” “the best interest of the customer,” things of that nature? A static process I just don't think is wise for people seeking to comply with these rules.
35:34 - 36:05
Meredith Cordisco: Another thing I would add to that is that parts of Reg BI are fairly prescriptive. The disclosure obligation requires firms to disclose very specific aspects of the relationship. But then there are parts of Reg BI, as with parts we've been discussing, that are more principles-based and definitely have a principles-based element. And so those are being informed by the new guidance that is still coming out by the SEC.
And so, a static compliance process and system with respect to Reg BI is not going to work because you really need to be paying attention to those things. And it really could change how you may have thought that one aspect of the rule was one way and then it's now being informed by new SEC FAQs they put out.
36:28 - 36:44
Kaitlyn Kiernan: I think, Scott, you mentioned don't assume that you're right. Sounds like great advice for REG BI and a relationship. But Meredith, in line with what you were just saying, that you need to pay attention to these things. Just to wrap us up today, where should people be checking for these updates as they come?
36:45 - 37:39
Meredith Cordisco: Yes, absolutely. We do understand that these are a big deal and Reg BI is a seminal new standard of care. But firms are not out there alone with no resources. The SEC has a dedicated Reg BI web page, FINRA maintains, and we have since the beginning, a dedicated Reg BI web page. We have all of the links to all the SEC guidance that they have given so far. We highlight new FAQs as they come out from the SEC. And we also have on demand sessions, like on demand Reg BI sessions from our Annual Conference. I know Nicole was on that panel. And you can watch them at your leisure just with the click of a button. Other events are available there. This podcast will pop up there and a bunch of other resources, so I would encourage everybody to take a look at it.
37:39 - 38:20
Kaitlyn Kiernan: And we will link to those in our show notes for easy access as well. But I think that wraps us up for today. Meredith, Scott and Nicole, thank you so much for taking the time to share your expertise as we mark two years of regulation, Best Interest and Form CRS today. And thank you to our listeners who shared some of their questions on this topic. If you don't already, you can subscribe to FINRA Unscripted wherever you listen to podcasts. And if you have any thoughts about today's episode or ideas for future episodes, you can email us at [email protected]
Today's episode was produced by me, Kaitlyn Kiernan, and engineered by John Williams. Until next time.
38:20 – 38:25
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