FINRA recently released a podcast Regulation Best Interest and Form CRS: Two Years In. This podcast provides a great update on the current Regulation Best Interest and Form CRS trends and best practices as well as common problem areas and effective practices to compliance.
A few highlights from the podcast:
Regulation Best Interest vs. Form CRS
Reg BI applies to any retail firm or any firm with retail customers where recommendations are being made whereas Form CRS applies to any Firm that has retail investors including Firms that offer solely self-directed business. The podcast notes that there is no de minimis exemption to Reg BI and Form CRS. Even with only 1 applicable customer, the Firm would have to ensure both Reg BI and Form CRS compliance is in place. Another myth discussed on the podcast is for friends and family only accounts. Friends and family individual accounts would be considered retail accounts under the rule.
Since Regulation Best Interest applies when recommendations are made, understanding what is a “recommendation” is an important concept Firms should be aware of. Recommendations are the triggering event, and it’s always a facts and circumstances determination. Since there is no bright line rule, Firm’s have to ensure proper training is in place to determine the facts and circumstances that would result in a recommendation. Even the recommendation to have an account with the Firm would trigger an event.
FINRA Examination Trends
FINRA has noted some big picture challenges across Firm’s that include but are not limited to the following:
- Procedural violations- Specifically not clearly articulating how exactly a firm is going to comply with the different facets of Reg BI.
- Compliance with the care obligation from Firms that historically had suitability issues. One example of this would be looking at customers where their accounts are excessively traded.
- From a customer-specific standpoint, there have been investments that are recommended that don’t appear to be in line with the client’s investment profile, and there are potential risks there.
- For the conflict-of-interest obligation, FINRA has identified firms that have failed to adequately mitigate or eliminate conflicts that are applicable to their business.
- Training- Firm’s that conducted training prior to the 2020 implementation but did not do training going forward.
- Challenges with account type recommendations
- Reasonably available alternatives
- Form CRS amendments where the Firm failed to communicate those amendments to FINRA when filing it through CRD as well as to their retail customer base.
- Firms that don’t think that they have a CRS requirement even though they have retail investors.
- For high net worth customers, some firms are under the misimpression that they are not retail customers for purposes of Reg BI.
Effective Practices
The speakers noted that certain Firms did have great examples of effective implementation of Regulation Best Interest and Form CRS. The podcast highlighted a few examples that include the following:
- When a Firm customized their policies and procedures based on their business, customer base, type of recommendations they offer and risk based program.
- Taking a risk-based approach and looking at certain account type recommendations or securities recommendations and how those are going to be documented. An example was with rollovers where the Firm presented several options and the associated person reviewed them critically through the lens of what’s in the client’s best interest?
- Using worksheets or electronic programs on recommendations related to securities and proposed products vs. The clients current holdings.
- Leveling commissions or compensation for both reps and supervisors across the board to eliminate conflicts.
- Creating conflicts matrices or spreadsheets or use a committee approach to gain insight into different Firm conflicts.
The podcast noted that both FINRA and the SEC provide and continue to provide updated resources for Reg BI including FAQs and on demand resources as they become available. Firm’s can access both the SEC Reg BI Resource Page or the FINRA Reg BI Resource Page for the most update to date information.
MasterCompliance provides expert consulting, outsourcing, and implementation tools in planning and budgeting for your firm’s compliance responsibilities. If there are any areas where you would like to explore additional assistance or services, please contact us.