Finra review shows paths brokerages take to implement Reg BI

Experts say Finra, SEC will focus on firms' process for achieving compliance

Brokerage firms that are rattled about how to implement a new investment-advice standard for their registered representatives by the now reinforced deadline of June 30 can look at how their colleagues are proceeding.

This week, the Financial Industry Regulatory Authority Inc. posted on its website its review of how some small, medium and large firms are preparing to comply with Regulation Best Interest and Form CRS.

Reg BI, which was approved last summer by the Securities and Exchange Commission, is meant to reduce broker conflicts of interest and raise the standard for their advice above the current suitability. Form CRS is a client relationship summary that outlines a firm’s services, fees, potential conflicts.

Last week, the SEC confirmed that both pieces of its advice-reform regulatory package must be implemented by the original deadline this summer despite the dislocations brokerage firms are enduring as a result of the COVID-19 outbreak.

Finra’s Reg BI preparedness review covers how firms have addressed governance and implementation management, written supervisory procedures and supervisory systems and conflicts of interest for Reg BI, and how they are drafting and delivering Form CRS.

“Finra shares this report to provide firms with information on how some firms are preparing for Reg BI and Form CRS,” the broker-dealer self-regulator said in the posting. “However, this does not imply that Finra requires firms to implement any of the practices described above, nor that implementing any of the practices would constitute compliance with Reg BI and Form CRS.”

But the guidance is a helpful road map for firms when combined with risk alerts about Reg BI and Form CRS that the SEC released earlier this week, said Daren Domina, a partner at Haynes and Boone.

“They serve effectively as both planning aids and compliance check lists,” Domina said.

The SEC has acknowledged that the coronavirus pandemic is creating challenges for firms, many of which are working remotely, and the agency said that it will look for “good faith” compliance efforts.

The Finra preparedness review also follows that theme, said Timothy Foley, counsel at Alston & Bird.

“Finra and the SEC are going to be ensuring a good-faith development of a system of compliance,” Foley said. “Exams during the first year will focus on the process for achieving compliance rather than strict compliance with the substantive standards, which will likely be assessed over a longer period of time.”

Earlier this week, Finra also released a statement saying that it would follow the examination approach outlined in the SEC’s risk alerts when conducting its own Reg BI exams.

“The fact that they’re coordinating lends more certainty to firms that exam approaches will be consistent,” Domina said. “That’s important because sometimes exams may differ among regulators.”