Finra released guidance on Tuesday designed to help its member firms comply with new broker investment advice and disclosure requirements approved earlier this year by the
Securities and Exchange Commission.
The checklist posted on the website of the
Financial Industry Regulatory Authority Inc. covers the broker standard,
Regulation Best Interest, as well as a client
disclosure document known as Form CRS.
The SEC approved in the early summer an
advice reform regulatory package that includes Reg BI, as the regulation is known, Form CRS and two other measures. The implementation date for Reg BI is June 30.
The 11-page checklist contains 20 items related to Reg BI and eight related to Form CRS. It delineates how Reg BI differs from the suitability standard that currently governs brokers. The guidance largely reiterates what the SEC has said about the new regulations, but it does so in Finra's words.
"The firms and the associated person may not place their interests ahead of the retail customer's. This is a change from Finra's suitability standard, which does not have an explicit best interest requirement," the Finra checklist states.
The checklist also states that Reg BI applies to recommendations involving account types — such as advisory, brokerage or individual retirement accounts — and requires brokers to keep new criteria in mind as they give advice.
"Care, skill and costs (in addition to applying a best interest standard) are new express elements for consideration when making recommendations to retail customers," the checklist states. "Cost must always be considered when making a recommendation."
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It also provided an explanation of how Reg BI affects the recommendation of a firm's proprietary products.
"An evaluation of reasonably available alternatives does not require evaluation of every possible alternative (including those offered outside the firm) nor require BDs to recommend one 'best' product," the checklist states.
It goes on to say that a Reg BI ban on sales contests "would not prevent a BD from offering only proprietary products, placing material limitations on the menu of products, or incentivizing the sale of such products through its compensation practices, so long as the incentive is not based on the sale of specific securities or types of securities within a limited period of time."
The checklist also says firms must make full written disclosure of conflicts of interest, such as the sale of proprietary products and the receipt of third-party payments.
"It provides as detailed a roadmap for writing the policies and procedures that are required for the new regulations as has been offered," said Tim Foley, counsel at
Alston & Bird. "The checklist, combined with public statements by regulators, underscores the regulatory expectations that firms have their supervisory systems fully developed by the compliance date."
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Finra chief executive Robert Cook has emphasized that although Finra will enforce brokerages' compliance with Reg BI, it is up to the
SEC to define what Reg BI means.
"We view ourselves as being in a position of being able to help, on the one hand, collect information from the industry about questions they have or challenges they see in implementing Reg BI and making sure that these questions get back to the SEC and, on the other hand, communicating the guidance from the SEC out to the industry," Mr. Cook said in a recent interview. "But we're not sitting in a position where we can give you interpretations of what the requirements are of Reg BI."
Finra will host a
Reg BI conference in Washington D.C., on Dec. 18, as well as other events in October where Reg BI will be discussed.
