Finra clarifies sales contest restrictions for proposal to align suitability, Reg BI

Competition is okay if it involves general categories of investments rather than specific products


Finra has revised a rule proposal for aligning its current broker advice standard with Regulation Best Interest by clarifying that sales contests involving general categories of investments would be allowed.

In mid-March, the Financial Industry Regulatory Authority Inc. filed a proposal with the Securities and Exchange Commission under which Reg BI would supersede the suitability rule that now governors broker sales recommendations to clients. Reg BI must be implemented by June 30.

Finra amended the proposal on Tuesday to make clear that sales contests involving mutual funds and variable annuities are okay as long as non-cash compensation — such as a trip to Hawaii — is based on total sales and equal weighting of sales among  products.

Reg BI prohibits “any sales contests, sales quotas, bonuses, and non-cash compensation that are based on the sales of specific securities or specific types of securities within a limited period of time,” the regulation states.

In comment letters to Finra, the Financial Services Institute, which represents independent broker-dealers and financial advisers, and the Community of Annuity Insurers expressed concern that the Finra proposal went further than Reg BI in prohibiting sales contests.

The two groups said mutual funds and variable annuities are categories of investments rather than individual investment products that Reg BI is targeting with sales contest strictures. Finra agreed with that interpretation and amended its proposal.

 “It is not FINRA’s intent to propose changes to its non-cash compensation rules that would prohibit sales contests, sales quotas, bonuses or non-cash compensation that are permissible under Reg BI,” Joseph Savage, Finra vice president and counsel, wrote in a May 13 letter responding to the comments. “Finra cautions members, however, not to conclude that any sales contest that awards non-cash compensation for sales of securities within particular product categories is per se permissible under Reg BI.”

Reg BI, which the SEC approved as part of an investment-advice reform package last June, prohibits brokers from putting their own financial interests ahead of their clients’ interests. The agency asserts Reg BI is tougher than the suitability standard.

Although Reg BI curbs sales contests of specific securities or types of securities, it does allow brokers to earn more based on total products sold or asset accumulation.

Bao Nguyen, a principal at Kaufman Rossin, said internal firm competitions designed to spur the sales of mutual funds or variable annuities in general should fall under the Reg BI prohibition.

“To have contests around particular products like VAs could create an incentive for the firm to put their interests or their representatives’ interests ahead of the clients’ [interests],” Nguyen said. “We advise our clients not to have sales contests around a particular product or type of product.”

Micah Hauptman, financial services counsel for the Consumer Federation of America, said the suitability standard already applies to sales contests for specific products.

The sales contest restrictions in Reg BI “just continue the status quo,” Hauptman said. “It’s a very narrow slice of the range of sales contests that can occur. It’s not sufficient to protect investors. All sales contests should be banned. They apply too much pressure to sell.”

The SEC must approve the Finra proposal for revising the suitability standard. It is likely to make a decision before Reg BI is implemented.

What do you think?


Subscribe and Save 60%

Premium Access
Print + Digital

Learn more
Subscribe to Print


Get unlimited access to

Starting at $4.95 a week for 4 weeks


Pay just $4.95 for the first 4 weeks