FINRA warns small firms: Start Reg BI compliance 'very soon'
WASHINGTON -- It's tempting to assume that the brokerage firms in line to be impacted by the SEC's Regulation Best Interest rule are already well on their way to building out a robust compliance program. After all, the regulation has been debated, scrutinized and analyzed for more than a year.
By a show of hands here at a FINRA conference on the rule, fewer than half of the brokers in attendance indicated that their firms have yet to begin their compliance efforts in earnest. It was an unscientific poll to be sure, but regulators and industry insiders are urging firms to get serious about how they're going to approach compliance, particularly small brokers that expect to rely on their clearing firm, outside vendors or counsel for compliance support ahead of the June 30, 2020 deadline.
"Have those conversations now — or very, very soon. I don't mean to ruin your holidays, but you shouldn't wait until May 2020 to start having those conversations," said James Wrona, vice president and associate general counsel at FINRA. "You need to talk to your clearing firm. You need to talk to your third-party vendors to see what they're able and willing to do and to kind of plan accordingly."
But with hundreds of pages of guidance to digest from the SEC's release, formulating a compliance strategy can be daunting. At LPL, which began its compliance work immediately after Reg BI was finalized, the firm has broken the rule up into its main parts, and assigned separate teams to tackle those components like disclosures, training, products and the use of titles, according to Michelle Kelley, senior vice president and associate counsel at the independent broker-dealer.
Smaller firms might not be able to take that kind of coordinated divide-and-conquer approach, but Kelley still recommends segmenting the regulatory package into components, and prioritizing the parts of it that will likely take the longest to implement. Firms might consider starting with any technology initiatives, "because that always takes longer than you expect," she said.
Similarly, firms should think through how they are going to approach training around the rule for registered reps and branch offices. Firms might also consider moving quickly to phase in any changes to their compensation structure and planning for any updates to the language used in marketing materials.
"It's crunch time, but there's time," Kelley said.
You've got June 30. Put it on a piece of paper and work back.
"You've got June 30. Put it on a piece of paper and work back," she said. "I'd really recommend building out that timeline. I think once you have it on paper, you're going to feel better about it and you're going to have a plan."
Emily Russell, chief counsel at the SEC's Division of Trading and Markets who helped author the regulation, noted that one of the regulation's chief "enhancements" over FINRA's current suitability standard is its explicit application to account recommendations. For dual registrants, the most basic decision will be whether to place a client in the advisory or brokerage wing of the practice. But under Reg BI, Russell said, the SEC will expect brokers to be able to justify the recommendation to steer a client to any account that they oversee. That includes whether to place the client in a full-service brokerage account, one that's self-directed or a full-on robo, as well as some of the more arcane and product-specific account decisions.
"The obligation applies to account recommendations generally," Russell said. "When you're recommending these types of accounts you need to make sure under Regulation Best Interest that they're in the best interest of the retail customer, and it's important to remember that these different accounts have different products and services and costs associated with them."
On the disclosure aspect of the rule, Russell also cautioned against firms relying too heavily on Form CRS, which she described as a more generalized description of how a firm operates that would be presented to the client or prospect at an initial meeting. But as the client relationship develops, the SEC is expecting firms to offer more detailed disclosures about individual recommendations or investment strategies.
"While a lot of firms will rely on their relationship summary and other disclosures to help meet their disclosure obligation under Regulation Best Interest, in most cases the relationship summary will not in and of itself be enough to satisfy your Regulation Best Interest disclosure," she said.
"And that's something to really keep in mind," Russell said. "I think there's been some confusion given the timing, but this is really intended ... to be two different documents that may be provided at different times and with different levels of information, so really the layering of disclosure is important here."
Failure to satisfy one [of four components] violates the entire rule.
The SEC has signaled that it intends to begin examining how firms are responding to the rule as soon as it takes effect, and Russell cautioned that the agency expects firms to satisfy each of regulation's four main elements: the duty of care, the duty of disclosure, conflicts of interest and compliance.
"It's important to note that you need to satisfy all four components," Russell said. "Failure to satisfy one violates the entire rule."