The Financial Industry Regulatory Authority has published its 2022 Examination and Risk Monitoring Program report, outlining the initial findings of its review of the SEC’s Regulation Best Interest and Form CRS over the past year. The regulator plans to share additional findings in the future as it continues to conduct exams and gather information on firms’ practices.
Regulation Best Interest and Form CRS became effective on June 30, 2020. Regulation Best Interest established a “best interest” standard of conduct for broker-dealers and registered reps when they make investment recommendations to retail customers. Firms were also obligated to provide investors with a Form CRS, a plain-language relationship summary that discloses the investment services provided, fees, conflicts of interest, and legal and disciplinary history of the firms and financial professionals.
“During Reg BI’s and Form CRS’ first full calendar year of implementation in 2021, FINRA expanded the scope of its reviews and testing relative to 2020 to execute a more comprehensive review of firms’ processes, practices and conduct in areas such as establishing and enforcing adequate written supervisory procedures; filing, delivering and tracking accurate Forms CRS recommendations that adhere with Reg BI’s care obligation; identifying and mitigating conflicts of interest; and providing effective training to staff,” FINRA stated.
In its report, FINRA pointed to a number of deficiencies related to Reg BI and Form CRS, such as firms providing written supervisory procedures that were not reasonably designed to achieve compliance with the new rules, not identifying the specific individuals responsible for supervising compliance, and stating the rule requirements, but failing to detail how the firm will comply.
FINRA claims that firms and their representatives made recommendations that were not in the customer’s best interest based on their investment profile and the potential risks, rewards, and associated costs. It also reported firms and reps not identifying conflicts, and when identified, not adequately addressing them.
The improper use of the terms “advisor” or “adviser” was also highlighted. Firms and their representatives alike were cited as using the terms in their titles and firm names, even though they lack the appropriate registration, FINRA said.
FINRA mentioned that retail customers were not provided with “full and fair” disclosures of conflicts of interest, such as fees received as a result of investment recommendations, revenue sharing, or other payments.
The report also states that firms’ Form CRS filings “significantly departed” from the SEC’s guidance and exceeded prescribed page length, omitted material facts such as the services offered, inaccurately represented disciplinary histories, and failed to describe types of compensation and compensation-related conflicts. FINRA also faulted firms for changing or excluding language required by Form CRS and not posting it properly on their website.
FINRA is a not-for-profit organization that regulates brokerage firms doing business with the public in the United States. FINRA, overseen by the SEC, writes rules, examines for and enforces compliance with FINRA rules and federal securities laws, registers broker-dealer personnel and offers education and training, and informs the investing public.