The Financial Industry Regulatory Authority has conducted hundreds of exams related to the Securities and Exchange Commission’s Regulation Best Interest, gradually shifting focus from procedural issues to more in-depth analysis of specific recommendations.
From the time the rule went into effect in June 2020 until the end of 2021, Finra conducted more than 570 exams related to the regulation, Scott Gilbert, a vice president in the diversified firm group, an alternative net capital group within Finra’s Exam and Risk Monitoring Program, said in recent Finra podcast posted on the self-regulator's website this week..
This year, the industry’s self-regulator plans to take “deeper dives” into its member firms’ standard of care obligation, Gildert said. There will be "more testing of what do the recommendations really look like, vis- à-vis the best interest of the customer and their client profile," he said.
The first batch of exams revealed “a lot of procedural violations, not clearly articulating how exactly a firm is going to comply with the different facets of Reg BI,” Nicole McCafferty, a senior director with Finra’s National Cause and Financial Crimes Detection Program, said in the podcast, adding that the industry’s self-regulator is still finding such issues.
More recently, Finra examiners have found that firms which ran into issues with suitability requirements are now having problems with duty of care obligations, such as excessive trading, she said. The industry’s self-regulator is analyzing cost-to-equity ratios and turnover rates to identify potential violations, according to McCafferty.
McCafferty added that a customer signing an “activity letter” that permits the broker to engage in active trading “doesn't absolve the firm from these requirements under our care obligation.”
The industry’s self-regulator is also looking for instances of conflicts related to specific products, such as variable annuities and options, as well as firms that develop strategies to mitigate conflicts of interest but fail to follow through with them, according to McCafferty.
In addition, after focusing on firms’ compliance with rules governing the content and delivery of the customer relationship summary, known as Form CRS, Finra is now looking at amendments to the form and failures to communicate them to the industry’s self-regulator, she said.
Moreover, many firms still mistakenly believe they’re not required to have a Form CRS at all, according to McCafferty.
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