When the Financial Industry Regulatory Authority (“FINRA”) initially proposed the Regulation Best Interest (“Reg BI”), many professionals within the financial services industry shrugged and treated it as another item that could be added to the daily pile of tasks, documentation, and industry noise. Three years into the practical application and enforcement actions, broker dealers are experiencing the consequences of resistance to change. Fines, restitution, bans, and overall corrective actions can be significant, especially in respect to the originating event circumstances.
Broker dealer responsibilities require establishment, maintenance, and enforcement of a supervisory system reasonably designed to achieve compliance with Reg BI’s care obligations. This entails coordinating written supervisory procedures with permitted activity, evaluating transactions, documenting corrective actions, making disclosures to clients, messaging and providing ongoing guidance through training to firm personnel.
Registered Representatives are responsible for matching a retail customer’s investment profile and objective with every recommended transaction, including a series of transactions. It is vital to understand that even if the client is not aware of their own best interests, the financial professional must be acutely aware in applying reasonable diligence, care, and skill as well as apply high standards of commercial honor and just and equitable principles of trade.
The overall problem lies in the definitions and application. Factors such as account turnover, ratios, account type, and in-and-out trading all play factors in the equation. Interpretations of “a call to action” or “investor influence” can be complicated and compounded by nuances of explicit and implicit holds, but good intentions do not exempt anyone from the core mission of Reg BI compliance.
One of the first customer-initiated Reg BI enforcement actions arose after the customer paid $54,000 of commissions and costs over 350 recommended trades (churning in a low-balance account), which also resulted in a $17,500 loss in asset value. The exacerbating factor was that the financial professional behavior was found to be willful. This resulted in over $740,000 of fines, not including collateral damage costs such as time, attorney fees, reputational damage, and a statutory disqualification.
Enforcement costs outweigh the benefits of taking shortcuts or ignoring the weight of Reg BI. It is a complicated formula that must be fully embraced and understood in order to avoid unintended consequences.
SCM can help your firm write policies and procedures that specifically apply to Reg BI and offers training videos to help promote a culture of compliance. Reg BI is best addressed by understanding it fully and taking immediate action to implement it in daily operations. Please contact SCM here to speak with a professional compliance consultant regarding how to best enforce Reg BI at your firm.