It’s hard to believe that two years ago the SEC’s Regulation Best Interest (Reg BI) took effect. Not surprisingly, it’s been a huge topic of conversation ever since and this past month at FINRA’s 2022 Annual Conference was no different.

In fact, FINRA session, “Regulation Best Interest: Lessons Learned” was one of the most highly attended breakouts of the three-day conference. So much so, that by the time our staff shuffled into the room, every seat was already filled and it was at standing-room only. Note to future self: show up extra early when Reg BI is on the docket. 

So, exactly what lessons have we learned from implementing Reg BI? What’s worked for firms so far? And what are some of the conflicts that have been identified? All great questions, that we address below!

1.) FINRA will be Conducting Deeper Reg BI Exams

Right off the bat, FINRA acknowledged that they will be conducting deeper reviews of Reg BI and Form CRS in the near future. Specifically, they will be digging into the Care Obligation and how firms are complying by requesting account recommendation samples. They want to know, “how did the representative determine that this was in the best interest of the customer?”

It was also discussed that any firms that were cited for suitability issues in the past, will likely be getting a visit from FINRA to see how they are handling Reg BI. If your firm calls into this category, be on the lookout.

2.) Audits Unveiled Some Good (and Bad) Behaviors

FINRA was also extremely candid in terms of what practices have been implemented by firms that have been effective and, vice versa, which areas have been more… problematic.

Effective practices include:

  • Firms that are taking a risk-based approach
  • Firms that are implementing worksheets to help assist in the process
  • Implementation of a “conflict committee”
  • Leveling out compensation and commission

Areas of concern include:

  • Procedures that are extremely generic (essentially, firms that are just copying and pasting the regulation into their policies and procedures and not including any details on how it should be applied)
  • Representatives and supervisors not having a clear picture of what is expected of them
  • Firms that are hanging their hat on “speculative”
  • No follow through on conflicts of interest

3.) Product Decision Trees Should be Documented

Something that was reiterated several times throughout the conversation was that representatives are not expected to consider every product for their clients, just reasonably available alternatives. As one panelist put it “if your client were to get hit by a bus tomorrow, you should be able to look back through your documentation to determine exactly how they arrived at that product recommendation over others. You should start your decision tree by first defining what hat you’re wearing “IA vs BD” and then narrowing down the type of products that can/should be considered until a decision is reached.

4.) Training/Policies Needs to go Beyond Rule Definitions

Beyond a basic application of the regulation, FINRA wants training and policies to cover, more intricately, what is required of both the representative and supervisor.

Reg flags they will be looking for include:

  • Firms not knowing who’s been trained
  • Generic training
  • Representatives/supervisors that have only been trained once since the rule came out
  • Training that does not cover some of the most recent FAQs that have been released

FINRA indicated that they may be requesting course outlines, PPTs, topics that were covered and whether there were options for both representatives and supervisors.

To view Quest CE’s Reg BI training options, visit our Firm Element course catalog.