FINRA Publishes Guidance on Reg BI and Form CRS
The Financial Industry Regulatory Authority (FINRA) has issued new resources to assist financial firms in their efforts to comply with the Securities and Exchange Commission’s (SEC’s) Regulation Best Interest and Form CRS by the rules’ compliance date of June 30, 2020.
In September, the SEC published a Small Entity Compliance Guide for Regulation Best Interest, the Form CRS Relationship Summary and Amendments to Form ADV to help broker-dealers and investment advisers comply with these new documents. This month, FINRA followed the SEC’s action by releasing an 11-page “Regulation Best Interest and Form CRS Checklist” with 20 items concerning Reg BI and eight items concerning Form CRS for its broker-dealer members. The Checklist aligns closely to the SEC’s rules, adopting releases, and guides and notes that interpretive questions should be directed to the SEC, rather than to FINRA.
In addition, on December 18, 2019, FINRA is hosting a Reg BI Conference in Washington, D.C. The one-day event is free of charge to the first two attendees per firm and is designed to help regulators, executives and industry practitioners learn more about the regulation. A recording will be available on FINRA’s website following the event.
While not explicitly stated, firms should anticipate that future FINRA examinations will likely be modeled after the Checklist. Most importantly, while the effective dates for Reg BI and Form CRS are still several months away, regulators have noted that firms’ implementation of the rules will be a substantial undertaking and are urging them to begin preparations immediately.
FINRA’s Reg BI and Form CRS checklist outlines the major requirements of the rules and notes key differences between FINRA rules and SEC’s Reg BI and Form CRS. Those requirements include:
FINRA’s Reg BI Checklist items are:
1.) Having procedures and training in place to assess recommendations using a best interest standard
2.) Applying a best interest standard to recommendations of types of accounts
3.) Applying the best interest standard to both explicit and implicit hold recommendations if the firm agrees to provide account monitoring
4.) Considering the elements of care, skill, and costs when making recommendations to retail customers
5.) Guarding against excessive trading, irrespective of whether the broker-dealer or associated person (AP) “controls” the account
6.) Considering reasonably available alternatives to a recommendation
7.) Considering how to ensure that high-risk or complex products are in a retail customer’s best interest (noted as a best practice, not a rule)
8.) Prior to or at the time of the recommendation, providing retail customers with full and fair written disclosure of all material facts relating to the scope and terms of the relationship with the retail customer (and noting as a best practice that APs are encouraged to discuss the basis for any particular recommendation with their retail customers and the associated risks, particularly when the recommendation is significant to the customer)
9.) At or prior to making a recommendation, making full and fair written disclosure of all material facts relating to conflicts of interest
10.) Using the term “advisor” or “adviser” only if the firm is a registered investment adviser, a registered municipal advisor, a registered commodity trading advisor, or an advisor to a special entity
11.) Having APs supplement written disclosures with subsequent oral disclosure (noting as a best practice following oral disclosures with timely, written disclosure summarizing the information conveyed orally)
12.) Having policies and procedures to identify and address the firm’s conflicts of interest
13.) Having policies and procedures to identify and mitigate the AP’s conflicts
14.) Having policies and procedures to identify and disclose material limitations on products recommended
15.) Having policies and procedures to prevent material limitations from causing the broker-dealer or AP to make recommendations that place their interest ahead of the retail customer’s interest
16.) Having policies and procedures to identify and eliminate sales contests, bonuses, non-cash compensation and quotas based on the sale of specific securities or specific types of securities within a limited time
17.) Updating policies and procedures to ensure compliance with Reg BI
18.) Updating policies and procedures and systems to ensure Reg BI’s recordkeeping obligations are satisfied
19.) Implementing training to ensure that APs are aware of Reg BI’s requirements and
20.) Aligning policies and procedures to the new definitions in Reg BI.
FINRA’s Form CRS Checklist items are:
1.) Developing the two-page Form CRS (four pages for dual broker-dealer/investment adviser registrants), with electronic and graphical formatting encouraged
2.) Including in the relationship summary an introduction to the firm; a description of services and advice provided; a description of the fees and costs, applicable standard of conduct, and examples of how the firm makes money and conflicts of interest; relevant disciplinary history; methods for obtaining additional information, and prescribed “conversation starters” as applicable
3.) Having a process in place to file Form CRS
4.) Having a process in place to update Form CRS
5.) Delivering Form CRS to each new or prospective customer who is a retail investor before or at the earliest of (a) a recommendation of an account type, a securities transaction, or an investment strategy involving securities; (b) placing an order for the retail customer; or (c) the opening of a retail brokerage account
6.) Having a process in place to deliver the relationship summary to existing retail customers
7.) Posting Form CRS on the firm’s public website and
8.) Adjusting recordkeeping procedures to reflect Form CRS