While FINRA enforcement staff may bring action against firms that fail to comply with Regulation Best Interest, the agency will not look to play “gotcha,” echoing the agency’s oft-repeated decree on how it is approaching Reg BI examinations and what they will (and will not) entail.
FINRA enforcement staff will follow the lead of the agency’s exam staff, according to Jessica Hopper, an executive vice president and the head of enforcement at FINRA. She spoke about her division’s approach during a virtual panel discussion for SIFMA members and firms, covering myriad topics, including Reg BI, the impact of COVID-19 and cybersecurity.
“Where you’ll find enforcement sooner is in those matters where we formerly would have brought cases under suitability,” she said, citing, as an example, excessive trading. “From the enforcement concept, I don’t think you’ll see a lot of new trailblazing matters right away.”
FINRA and SEC officials have repeatedly stressed that regulators are not setting out to catch firms that may fall short of the exact letter of the rule. John Polise, the associate director of the Broker-Dealer and Exchange Program at the SEC’s Office of Compliance Inspections and Examinations, told attendees at a FINRA conference focused on Reg BI held last December that regulators would be looking for “good faith efforts” to comply with the regulation. The rule, which was passed last year, goes into effect on June 30.
Bari M. Havlik, an executive vice president and the head of member supervision at FINRA, said the first six months of Reg BI examinations will primarily focus on how firms implemented policies, procedures and controls to comply with the new rule, and that a harder look at compliance would come in 2021.
However, they will also be examining firm supervision to see that employees are following the newly instituted policies and procedures. Simple documentation by itself will not suffice, according to Michelle Bryan Oroschakoff, a managing director and chief legal officer at LPL Financial, who helped moderate the panel.
FINRA is also continuing to track regulatory and legislative efforts at the state level to introduce their own standards for brokers and advisors, according to Robert Colby, FINRA’s chief legal officer. Numerous states, including Massachusetts and New Jersey, have sought to introduce their own fiduciary standards, asserting that the SEC’s finalized rule did not go far enough. Massachusetts’ regulation will go into effect this September.
Nevertheless, Colby said any state regulations wouldn’t pertain to FINRA oversight.
“We don’t impose state laws, so we won’t be enforcing state fiduciary standards,” he said.
