Global Pandemic or Not, Regulation BI is Here – Here Is FINRA’s Guidance


Published on July 10, 2020

Despite the devastating effects of the Covid-19 pandemic on the country and the economy, on June 30, 2020, the United States Securities and Exchange Commission (“SEC”) chose to move forward and implement Regulation Best Interest (“Reg BI”), under the Securities Exchange Act of 1934. Shortly, thereafter, the Financial Industry Regulatory Authority (“FINRA”) issued its own guidance on Reg BI.

“Reg BI establishes a ‘best interest’ standard of conduct for broker-dealers and associated persons when they make a recommendation to a retail customer of any securities transaction or investment strategy involving securities, including recommendations of types of accounts.”

As broker-dealers and investment advisers scramble to adjust to serve customers in a pandemic environment, it is unsurprising that for many, becoming compliant with Reg BI may have taken a back seat. If you are one of the firms that weren’t able to meet the June 30, 2020 deadline and are now out of compliance, you are likely not alone. As you consider how best to move forward toward compliance with Reg BI, here are a few things you should keep in mind:

#1. For the SEC and FINRA, It’s Business as Usual

The SEC and FINRA are not making any special accommodations for broker-dealers and investment advisers that are out of compliance with Reg BI because of setbacks or complications during the pandemic. If anything, in light of new Pandemic relief legislation that loosens restrictions on 401(k)s and other retirement funds, the SEC and FINRA view Reg BI as an important tool in ensuring that broker-dealers and investment advisers make recommendations in the best interest of their clients.

#2. Reg BI is a Heavy Lift – Don’t Try This At Home

Reg BI poses a full suite of compliance updates and procedures, which can take weeks, and in some instances months to implement. FINRA has highlighted a lengthy list of best practices here. By way of summary, under Reg BI broker-dealers face heightened suitability standards, more robust disclosure obligations, mitigating and disclosing conflicts of interests, and a need to put procedures in place for compliance in all brokerage accounts. Among the disclosures is the Form CRS, which both broker-dealers and investment advisers must provide to customers containing information about their products, services and relationships. Further, Form CRS discloses services provided, core conflicts, disciplinary history and fees charged. Lastly, Reg BI also requires training with staff related to communications with clients.

In addition, the SEC published interpretations concerning investment advisers’ standard of conduct under the Investment Advisers Act of 1940, and the “solely incidental” prong of the broker-dealer exclusion from the Advisers Act.”

While every broker-dealer and investment adviser consider the future of their business amidst a pandemic that shows no signs of abating, becoming Reg BI compliant is critical, as is partnering with legal counsel that can ensure you are ready should FINRA or the SEC initiating an audit or examination. Warren Law Group specializes in SEC and FINRA regulatory compliance and securities litigation. Learn more here: https://warren.law/services/#regulatory-compliance

Invest in hiring experts who can guide you through the process and ensure every Reg BI box is checked. This will enable you to focus on what you do best – continuing to help clients through this difficult and volatile time.

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