Broker-dealer firms will have their work cut out for them between now and the compliance deadline for the SEC’s Regulation Best Interest, according to Finra CEO and president Robert Cook.
“With Reg BI, firms are in the process of working to build systems to be in compliance with it,” Cook said Tuesday at the 2019 Finra Senior Investor Protection Conference in Washington, D.C.
Though Reg BI was not the focus of the conference, it was top of mind for many attendees.
“We think it’s a heavy lift, something that the firms need to be spending a lot of resources on, obviously depending on the size of the firm and where they are in their management of conflicts,” he added.
Reg BI requires brokers to comply with the best interest standard when making a recommendation of any transaction or investment strategy involving securities to a retail customer.
The SEC set June 30, 2020 as the compliance deadline for the implementation of the rule, which the regulator believes gives “sufficient time” for firms to comply with the requirements.
The elements of managing, mitigating and disclosing conflicts will be the “one area, in particular" where Cook thinks there will be "lot of incremental work” for broker-dealer firms.
Cook clarified that “it’s not that firms don’t do that today, but [they need] to do it in a way the firms have to do it under the rule.”
The Finra chief hinted that broker-dealer firms must not be complacent or have a false sense of security.
“I keep saying to folks, you know, that a lot of firms — especially firms who may not have had as much time to engage with the rule yet so far — shall we say, [they] might think to themselves: ‘Oh, you know, this rule requires me to act in the best interest of my customers. No problem. I do that every day. That’s the kind of firm I am,’” Cook said.
“And I say don’t be that firm and think so, therefore, you've got it covered because obviously there’s a lot in the rule that you need to do in terms of processes and Form CRS,” he added.
The Form CRS, or Customer Relationship Summary, requires advisors and brokers to provide retail investors with simple, easy-to-understand information about the nature of their relationship with their financial professional.
Cook said Finra is “trying to do what we can” to help its member firms comply with Reg BI by the deadline, and that includes helping the firms understand the requirements.
“It’s obviously the SEC’s rule and they’re going to be the source of all the interpretations of the rule,” Cook said.
“We want to make sure that any interpretive questions that we’re getting are going to the SEC for an answer, [and we are] trying to push out materials where we can help firms come into compliance,” he added.
Cook reiterated that member firms will have “preparedness reviews,” which he described as technical. FA-IQ first reported on the preparedness reviews last month.
“The reviews will be a conversation about, you know, how’s the firm getting ready to comply, and we just want to make sure that we understand what are the challenges that firms are facing at this stage and where they’re going to need some more guidance,” Cook said.
Cook also reiterated that Finra is working closely with the SEC, which will be doing its own examination of Reg BI compliance.
“We want to make sure that examinations are kind of embodying the same general approach. And to that extent, we’re talking about making sure examiners are commonly trained or trained on the similar things and that the exam modules are synchronized,” he said.
There will be “a lot of coordination on the exam front with the SEC,” he added.
Cook said Finra is studying how to address its suitability rule and “how it interacts with Reg BI.”
“We don’t expect anything we’re doing though to be materially [in the way] of people’s preparations for Reg BI,” he said.
Last month, Finra chief legal officer Robert Colby said the SRO is leaning toward keeping its suitability rule, as reported.
Meanwhile, Cook was also asked about the so-called “golf course discussions” that registered representatives may have with prospective or existing clients, and whether those discussions fall under the disclosure requirements of Reg BI, such as Form CRS.
Cook acknowledged that the question has been raised several times since “Reg BI requires certain disclosures to be provided early on in the relationship.”
“Some firms are raising [the question of] how do you ensure as a practical matter … that you have a good system in place to ensure that those disclosures are getting out there in time to comply with Reg BI,” Cook said.
Cook didn’t have a specific answer to the question but said a firm’s reasonable supervisory system should take that into consideration.