Finra is leaning toward keeping its Suitability Rule, even if the SEC’s Regulation Best Interest has been characterized by both regulators as a step up from that rule.
“Our thinking at this point is to say that with respect to [brokers servicing] retail persons, if you comply with Reg BI, you comply with our Suitability Rule,” according to Robert Colby, chief legal officer of Finra.
Colby said that even if the Suitability Rule “will be largely superseded by Reg BI,” Finra’s rule will still serve a purpose.
“We thought about whether we should just not apply our Suitability Rule any longer to [brokers servicing] retail persons,” he added. “But … you’ll see that there are a lot of references to the [regulatory] positions and guidance that were given under the Suitability Rule, so we don’t want to take it out so they don’t disappear.”
Colby made the comments Thursday last week at the Practising Law Institute’s Broker-Dealer Regulation and Enforcement 2019 seminar in New York.
Reg BI is “a really important change in the way the broker-dealers deal with their customers,” Colby noted.
The SEC voted to approve Reg BI in June. The new rule requires broker-dealers to comply with the best interest standard when making a recommendation to a retail customer of any securities transaction or investment strategy involving securities.
“Our [Finra] members, when we talk them, will say: ‘Look, we always take into account trying to achieve the best interest of our customers. If we don't have that [attitude], we lose them.’ That's true that the vast majority of the firms and the people, that's their attitude,” he added.
“But Reg BI requires them to think it through carefully and analyze the conflicts and then have policies and procedures designed to mitigate those conflicts. So if you're already doing this very effectively, then you'd have to document it. And if you haven't thought those things though, then you have to think things though.”
Colby said Finra is coordinating closely with the SEC on enforcement plans for Reg BI.
“It’s really important for us to be able to do this effectively. We are in close touch with the way the SEC is thinking about this rule,” Colby said.
“So we're having conversations with the SEC staff on a scheduled basis every other week to talk about how we're going to coordinate and who's doing what. We're looking to try to have similar exam modules, similar training for our examiners, comparing schedules to make sure we don't both go into the same firm,” he added.
Back in October 2018, Finra president and CEO Robert Cook said the SRO was reviewing whether the Suitabity Rule should remain when the SEC’s Reg BI is in place. Cook said at the time that Finra could monitor broker compliance with Reg BI.