Finra finds brokerages fall short on Reg BI compliance

Brokerages are failing to act in the best interests of their customers and aren't adequately addressing conflicts of interest in the first full year of operating under the new broker standard of conduct, according to Finra.

The Financial Industry Regulatory Authority Inc. outlined shortcomings it found during Regulation Best Interest compliance reviews in a 60-page report on its examination and risk monitoring program released Wednesday.

Reg BI prohibits brokerages and registered representatives from putting their financial interests ahead of their clients’ interests and requires that they disclose and mitigate conflicts of interest.

The measure went into force in June 2020, after being approved by the Securities and Exchange Commission a year earlier. After giving firms breathing room to implement Reg BI for the rest of 2020, Finra said it conducted more comprehensive reviews of firms’ processes, practices and conduct last year.

Finra found firms and reps were “making [investment] recommendations that were not in the best interest of a particular retail customer based on that customer’s investment profile and the potential risks, rewards and costs associated with the recommendation,” the report states.

The report faulted firms for “not identifying conflicts or, if identified, not adequately addressing those conflicts.” It cited insufficient disclosure of fees related to investment recommendations, such as revenue sharing and other payments from product providers, and problems with disclosures related to “material limitations in securities offerings.”

Finra also highlighted problems related to the client disclosure document known as Form CRS. It said firms aren't accurately disclosing their reps’ disciplinary histories and failing to describe how they are compensated and potential conflicts related to their pay structure. In addition, the document itself is not being posted properly on firm websites.

When it comes to Reg BI policies and procedures, firms are “providing insufficiently precise guidance,” according to the report. For instance, they are “stating rule requirements, but failing to detail how the firm will comply with those requirements [i.e., stating ‘what’ but failing to address ‘how’).”

In addition to Reg BI exam results, the Finra report outlined the organization’s regulatory priorities, which cover 21 areas, including complex products, cybersecurity, outside business activities, private placements, variable annuities, best execution and liquidity risk management.

A new area of concern cited in the report is monitoring whether firms are obtaining information for customers’ trusted contact persons. The contact is meant to be someone brokerages can reach out to if they suspect the customer is a victim of financial exploitation.

Finra said firms should keep the annual report handy as a compliance guide. It highlighted section that are new this year, as well as new material in existing sections.

“Today’s securities industry landscape is highly dynamic in terms of business models, technologies, products and compliance practices,” Greg Ruppert, Finra executive vice president of member supervision, said in a statement. “This report looks at these significant changes through the lens of Finra’s commitment to investor protection and market integrity, so that firms’ compliance programs can benefit from our findings about emerging and ongoing issues.”