FINRA 2022 Report – Exam and Risk Monitoring: Reg BI Edition
Today, FINRA published the 2022 Report on FINRA’s Examination and Risk Monitoring Program. For firms that are impacted by Regulation Best Interest (Reg BI), this regulatory report is certainly insightful. It addresses over 20 regulatory areas, adding new topics including Reg BI exam findings and effective practices.
Since 2020, InvestorCOM has been helping wealth management firms comply with Regulation Best Interest. To bring awareness to the examination findings and effective practices, we have summarized the core areas of focus.
Reg BI Exam Findings:
- Insufficient guidance on the individual(s) responsible for supervising compliance with Reg BI, and outlining how the firm will comply with the requirements
- Failing to address
- how costs and reasonably available alternatives should be considered when making recommendations, including account types.
- conflicts that incentivize financial professionals to place their interest ahead of those of their customers; and
- the required Reg BI-related recordkeeping obligations
- Inadequate controls for memorializing written supervisory procedures.
- Lack of financial professional training to comply with Reg BI beyond previous suitability obligations
- Failure to comply with Care Obligation – recommendations that were not in the best interest of a customer based on their profile risks, rewards and costs and recommending transactions that were excessive in light of a retail customer’s investment profile.
- Not identifying conflicts or, if identified, not addressing those conflicts.
- Improper Use of the Terms “Advisor” or “Adviser”
- Insufficient Reg BI Disclosures – Not providing retail customers with “full and fair” disclosures of all material facts related to the scope and terms of their relationship with these customers
Effective Reg BI Practices:
- Identifying, disclosing, and eliminating or mitigating conflicts of interest across business lines, compensation arrangements, relationships or agreements with affiliates, and activities of all financial professionals
- Sampling recommended transactions to evaluate how costs and reasonably available alternatives were considered;
- providing resources to financial professionals making recommendations that account for reasonably available alternatives with comparable performance, risk and return that may be available at a lower cost, such as:
- Paper or electronic tools to compare costs and reasonably available alternatives or guidance on relevant factors to consider when evaluating reasonably available alternatives to a recommended product (e.g., similar investment types from the issuer; less complex or risky products available at the firm);
- revising commission schedules within product types
- Prohibiting sales contests
- Limiting High-Risk or Complex Investments for Retail Customers –
- establishing product review processes to identify and categorize risk and complexity levels for existing and new products;
- limiting high-risk or complex product, transaction or strategy recommendations to specific customer types; and
- heightened supervision for high-risk or complex products.
- Implementing systems for tracking delivery of Customer Documents – tracking and delivering Form CRS and Reg BI-related documents to retail investors and retail customers in a timely manner by:
- Tracking mechanisms to determine who received Form CRS and other relevant disclosures and memorializing delivery of required disclosures.
- Implementing New Surveillance Processes – Monitoring associated persons’ compliance with Reg BI by:
- conducting monthly reviews to confirm that their recommendations meet Care Obligation requirements, including system-driven alerts or trend criteria to identify:
- account type or rollover recommendations that may be inconsistent with a customer’s best interest;
- excessive trading and sale of similar product(s) to a high number of retail customers;
- monitoring communication channels and incorporating Reg BI-specific reviews.
Learn more about how our award-winning compliance platform can help your firm and financial professionals meet Reg BI’s Care Obligation – contact us to schedule a demo.