FINRA’s first full year of assessing compliance with the Securities and Exchange Commission’s Regulation Best Interest indicated that many firms still have a ways to go, according to the regulatory authority’s just released annual report on examinations and risk monitoring.
According to the report, examiners found that some firms’ written supervisory procedures gave paltry guidance by not specifying the firm personnel responsible for supervising Reg BI compliance. In other cases, the firms stated the rule requirements in general terms but failed to explain exactly how they would comply with them, according to the report.
In some instances, FINRA examiners found that firms did not modify their existing policies to address the new mandates; some didn’t relay how costs and reasonably available alternatives needed to be considered due to the rule or didn’t address the conflicts that could lead to incentives to place their own interests ahead of customers.
Some firms also fell short when it came to following the requirements for designing and delivering the Form Customer Relationship Summary (CRS) to clients, according to the report. In some cases, firms did not fully represent disciplinary histories of their financial professionals (the SEC raised this as one of the initial problem spots for Reg BI/CRS compliance in fall 2020).
Examiners also found that in some cases, firms exceeded the required page limits of two pages (or four pages for dual registrants), didn’t describe the types and limits of the services offered) and sometimes changed language required by the SEC. In some cases, firms that have a public website failed to post (or prominently post) the form in a way that retail customers could easily find it.
Additionally, some firms wrongly ascertained that they did not have to file a Form CRS because doing so was incumbent on whether you made recommendations, rather than offering any services to a retail investor, or they thought the type of customers they service removed them from the regulatory requirement.
FINRA included a number of best practices to solve the issues. In the case of Reg BI/CRS shortfalls, FINRA recommended establishing policies to identify conflicts, including a "conflicts" committee, and even broadly prohibiting all sales contests to remove the possibility of conflicts. Firms could mitigate the risk of making recommendations that were not in a client’s best interest by better categorizing the risk and complexity levels of particular products and limiting their recommendations to certain customers. Additionally, FINRA suggested firms conduct monthly reviews to ensure recommendations met Reg BI mandates and monitor social media and email so that professionals who are not investment advisor representatives (IARs) are not using the terms “adviser” or “advisor” to describe themselves.
The 2022 report includes a number of new sections, including findings on how firms handle trusted contacts for clients, how they assess crowdfunded offerings and portfolio margin and intraday trading, among other topics. Additionally, examiners found that firms often included inaccurate, false or misleading information when working with clients via mobile apps, including false information on an account’s historical performance, sending margin call warnings for customers when their balances were not near minimum maintenance requirements and falsely telling clients that they were not set up to trade on margin.
