While brokers and firms should prepare for regulatory scrutiny on compliance with Regulation Best Interest after it is implemented on June 30, in most cases those specific inquiries will be part of broader, standard examinations for the rest of the calendar year, according to a Financial Industry Regulatory Authority executive.
“I think primarily, Reg BI reviews will be done within the firm examination program, but not totally,” William St. Louis, a senior vice president and firm group leader at Retail and Capital Markets for FINRA, said. “For example, if a customer complaint comes in that’s focused against a firm or broker, our cause exam team may do a standalone Reg BI review depending on what the complaint is alleging and the time period of the activity.”
St. Louis spoke about FINRA’s Reg BI exam priorities during a “virtual conference panel” recorded earlier this month intended to shed light on how regulatory agencies would gauge Reg BI compliance. While FINRA regulators have stressed that initial examinations will not be a form of "gotcha" enforcement, that does not mean firms may not have to answer some questions from regulators regarding their compliance with the new rules.
Firms undergoing SEC examination should be prepared for some scrutiny, as well as for exams that are exclusively focused on Reg BI, according to John Polise, an associate director at the broker/dealer and exchange program at the SEC’s Office of Compliance Inspections and Examinations.
“I think it’s important to know we plan on doing exams in July, but phasing them in; doing first-phase exams so our examiners can become conversant with what they’re seeing and can report back to the commission on any issues or themes, and gradually over the course of the year and next year, getting more BI-exclusive exams done,” Polise said.
Generally speaking, St. Louis believed that the examiners' initial focus in regard to Reg BI adherence would be about the rule’s compliance obligation (one of four obligations included in the rule), and that firms are meeting requirements about delivering (and documenting the delivery of) Form CRS to clients.
“However, from a risk-based perspective, if we see, when planning the exam, indications of other issues or red flags that suggest that other aspects of Reg BI should be scoped into the exams, we’ll scope those in,” he said; potential red flags included excessive trading or firms making recommendations not in clients’ best interests.
According to FINRA, in 2019 there were 3,517 securities firms and 624,996 registered representatives; that year, the regulatory agency conducted 1,014 “cycle exams” (which determine whether firms are in compliance with federal securities rules and regulations), as well as 293 “branch exams,” which target high-risk firms to check as to whether they’re in federal compliance.
Wendy Lanton, the chief compliance officer for Lantern Wealth, said her firm was approaching Reg BI-focused exams the same way it would approach other regulatory inquiries, and she was assuming that Reg BI was likely to at least be a “dialogue” in any examinations her firm would undergo.
“It may not be a focus; however that might work, I don’t know, but from all the exams I’ve been through in my 26 years of doing this, is you sit down and have a real dialogue,” she said. “A lot of larger firms may have teams that get together to discuss these things. At small firms, there’s no teams. It’s usually one person, maybe two people, and it’s a very practical approach, and that’s what I’d expect when speaking to the examiner.”
St. Louis also affirmed that both FINRA and the SEC will continue the practice of sharing information on exam scheduling.
“For several years now, we’ve been sharing the names of the firms we’re going to be examining so we don’t bump into each other at the elevator bank,” he said. “I think with Reg BI, that’s particularly important, so that communication will continue.”
