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FINRA Releases Questions for SEC’s Reg BI Compliance Review

The Financial Industry Regulatory Authority has released its 2020 risk monitoring and examination priorities letter which highlights the areas of focus for its risk monitoring, surveillance and examination programs in the coming year.

The Financial Industry Regulatory Authority has released its 2020 risk monitoring and examination priorities letter which highlights the areas of focus for its risk monitoring, surveillance and examination programs in the coming year. In the letter, the regulator included nine questions that it plans to use when reviewing whether a firm is complying with the Securities and Exchange Commission’s Regulation Best Interest, its new broker advice rule.

Firms must comply with the SEC’s Regulation Best Interest and Form CRS by June 30, 2020. During the first part of the year, FINRA plans to review firms’ preparedness for Reg BI to gain an understanding of implementation challenges they face, and after the compliance date, will examine firms’ compliance with Reg BI, Form CRS and related SEC guidance and interpretations.

FINRA said that it expects to work with SEC staff to ensure consistency in examining broker-dealers and their associated persons for compliance on the regulations.

In June 2019, the SEC adopted Reg BI, which establishes a “best interest” standard of conduct for broker when they make a recommendation to a retail customer of any securities transaction or investment strategy involving securities, including recommendations of types of accounts.

As part of the rulemaking package, the SEC also adopted new rules and forms to require broker-dealers to provide a brief relationship summary—Form CRS—to retail investors.

FINRA may take the following factors into consideration when reviewing for compliance with Reg BI after June 30, 2020:

  • Does your firm have procedures and training in place to assess recommendations using a best interest standard?
  • Do your firm and your associated persons apply a best interest standard to recommendations of types of accounts?
  • If your firm and your associated persons agree to provide account monitoring, do you apply the best interest standard to both explicit and implicit hold recommendations?
  • Do your firm and your associated persons consider the express new elements of care, skill and costs when making recommendations to retail customers?
  • Do your firm and your associated persons consider reasonably available alternatives to the recommendation?
  • Do your firm and your registered representatives guard against excessive trading, irrespective of whether the broker-dealer or associated person “controls” the account?
  • Does your firm have policies and procedures to provide the disclosures required by Reg BI?
  • Does your firm have policies and procedures to identify and address conflicts of interest?
  • Does your firm have policies and procedures in place regarding the filing, updating and delivery of Form CRS?

FINRA also plans to focus on private placement retail communications, including how firms review, approve, supervise and distribute retail communications regarding private placement securities via online distribution platforms, as well as traditional channels.

In addition, the regulators plan to address registered representatives’ and customers’ use of digital communication channels, such as texting, messaging, social media or collaboration applications.

The letter can be read in its entirety here.

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