As the implementation date for the SEC’s Regulation Best Interest approaches, FINRA is taking steps to amend the language in its own rules on suitability to make them better align with the SEC's regulations.
Additionally, the regulatory agency is amending its Capital Acquisition Broker suitability rule and rules regarding noncash compensation to offer clarity on when the SEC and FINRA standards apply to a broker’s conduct. According to FINRA, the changes will go into effect on June 30, the same day Reg BI will be implemented.
Prior to Reg BI, brokers regulated under FINRA were subjected to the agency’s Rule 2111, which stated brokers would have to have a “reasonable basis” to think that a suggested product, service or strategy for an investor is “suitable.” The rule highlighted three obligations brokers would need to meet; the recommendation would need to have "reasonable-basis," be "customer-specific" and meet "quantitative suitability."
However, Reg BI mandates that brokers must now meet a “best interest” standard, rather than a suitability standard, when making recommendations to clients (though the strength of this standard has been a continuous point of contention for critics of the SEC’s rule).
“Absent action by FINRA, a broker-dealer would be required to comply with both Reg BI and Rule 2111 regarding recommendations to retail customers,” a notice from FINRA read. “In such circumstances, compliance with Reg BI would result in compliance with Rule 2111 because a broker-dealer that meets the best interest standard would necessarily meet the suitability standard.”
FINRA said it hoped to avoid unnecessarily duplicating regulations for broker/dealers and did not want to make it unclear as to which standard should apply, which is why it amended Rule 2111 to clarify that the suitability obligation would only apply to recommendations not subject to Reg BI’s rule.
FINRA also noted that Reg BI required brokers to develop and enforce policies that were “reasonably designed to identify and eliminate” sales contests, quotas or other types of noncash compensation that were tied to the sales of particular securities or types of securities.
“To avoid potential inconsistencies, FINRA has amended its non-cash compensation rules to provide that the practices addressed by those rules also must be consistent with Reg BI,” FINRA’s statement read.
