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FINRA Will Look at “Good Faith Efforts” of Firms on Reg. BI Enforcement

In April 2020, we previously discussed FINRA’s focus on enforcement of Regulation Best Interest (“Reg. BI”) as the enforcement date approached.[1]  Now that enforcement of Reg. BI has begun, FINRA has provided additional guidance on how they will focus on a firm’s compliance with Reg. BI.  In a July 7, 2020 podcast, Jim Wrona, Vice President and Associate General Counsel of FINRA, summarized FINRA’s current approach to Reg. BI by stating “by and large, we're going to be looking at the compliance obligations of policies procedures and training, and we're not looking at it to say, ‘did a firm do everything the way that we would have done it,’ or ‘did they do everything perfectly.’ We're looking to see do they understand the obligations, and do they make a good faith effort to implement the changes that needed to be made and incorporate those in their policies procedures and training.”

FINRA also clarified to whom Reg. BI would apply going forward.  In the podcast, Meredith Cordisco, from the Office of the General Counsel at FINRA, stated “Reg BI defines retail customer a bit differently than the industry may be used to.  So, for example, under the suitability rule some high net worth individuals could be treated as institutions if other conditions apply.  But that's no longer the case under Reg BI. So, any natural person--any human--regardless of how much money they have, if a firm is making a recommendation to them, and that recommendation is going to be used primarily for personal, household or family purposes, then Reg BI is going to apply.”  She also added that “there's no sort of exemption for the super-rich.”[2] 

Additionally, Robert Cook, the CEO of FINRA, was also interviewed on July 7, 2020.  In his interview, Cook noted that FINRA will look at a firm’s “good faith efforts to comply” with Reg. BI and the policies and procedures put in place to meet the requirement of Reg. BI.  Cook also noted that FINRA will likely look at Reg. BI obligations as part of the normal cycle of exams with firms.  However, Cook did note that “there may be stand-alone exams [addressing Reg. BI compliance] if there is a customer complaint or the filing of an arbitration”.[3]  

FINRA seems to be finding its way on how to enforce Reg. BI going forward and how it is notifying firms on what firms should expect when it comes to full compliance with Reg. BI.  This process will likely evolve over the next couple of years, which we will monitor closely.  

 

[1] See Mintz Insight on FINRA enforcement of Reg. BI (April 10, 2020) available at https://www.mintz.com/insights-center/viewpoints/2161/2020-04-10-finra-agrees-sec-regarding-enforcement-regulation-bi.

[2] Regulation Best Interest: Implementing a New Standard of Conduct, FINRA, audio and transcript (July 7, 2020) available at https://www.finra.org/media-center/finra-unscripted/reg-best-interest-implementation.

[3] Ask the Experts: Conversation with Robert Cook, available at https://financialservices.org/events/ask-the-experts-robert-cook/

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Authors

David L. Ward is a Mintz attorney whose practice includes financial services regulatory matters, internal investigations, and securities-related litigation in state and federal courts. He represents financial services clients before the US Department of Justice, SEC, FINRA, and other regulators.
Jason L. Burrell is a Mintz attorney who focuses on commercial litigation, securities matters, government investigations, and enforcement proceedings. He was a Mintz Summer Associate in 2017 and 2018.