The Financial Industry Regulatory Authority (FINRA) recently published Regulatory Notice 23-20 to highlight guidance and resources available to broker-dealers to assist with compliance efforts related to the SEC’s Regulation Best Interest (Reg BI).
Reg BI, adopted in 2019, requires broker-dealers and associated persons to act in the best interest of retail customers when making securities recommendations according to the four main component obligations:
- Care Obligations,
- Disclosure Obligations,
- Conflict of Interest Obligations, and
- Compliance Obligations
The notice comes in the wake of FINRA barring a broker for excessive churning of multiple client accounts in late November, resulting in a massive $2.3 million in losses and a major violation of Reg BI.
NOTE: The notice does not create any new regulatory requirements but serves to highlight useful Reg BI guidance broker-dealers should review to aid compliance efforts.
In the notice, FINRA highlights a series of resources published by the SEC that offer firms guidance in navigating Reg BI, including FAQs, risk alerts, and most recently, a series of three Staff Bulletins in 2022-2023 emphasizing conduct standards for broker-dealers and investment advisers. The bulletins provide SEC views via Q&As on meeting obligations when making account recommendations, identifying and addressing conflicts of interest, and satisfying care obligations.
For example, on conflicts, the SEC states that while disclosure alone doesn’t satisfy the best interest duty, certain conflicts may require disclosure or elimination. And on product recommendations, complex or risky products warrant heightened scrutiny on whether they are in the customers’ best interest.
FINRA has also assisted broker-dealers with Reg BI compliance by:
- Providing an updated Reg BI compliance checklist
- Issuing enforcement guidance in Regulatory Notices
- Sharing exam report findings
- Offering a dedicated webpage, podcasts, conferences/panels, and more
To read the full notice, click here.