Takeaways from the FINRA Small Firms Conference - Los Angeles, November 2022

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Michael Freeman

Key Themes Discussed:  Reg BI,  Complex Products,  Best Ex Reviews 

Reg BI and the Care Obligation

FINRA examinations in 2023 will focus on the SEC’s Reg BI rule.  Unlike 2022, exams will focus more on the Care Obligation moving beyond form CRS.  What does this mean for Broker Dealers? The warm up is over.

(For a refresher on what the Care Obligation requires, I’ve pasted the key sections at the bottom of this missive.)  

Key Building Blocks of the Care Obligation

To support the Care Obligation of Reg BI a few areas were highlighted as key building blocks. 

  • Product Committee Processes:  For both new and ongoing product reviews, Product Committee processes must demonstrate a foundation to operate in the Reg BI paradigm. 
  • Account Type: Accessing the best Account Type for a client, whether fee-based or brokerage, is the next step to ensure a client is being treated in their Best Interest. (Account Type recommendations also include rollovers which means the DOL is not the only regulator focused on rollovers.) After the Account Type recommendation comes the Product recommendations.
  • Product Recommendations: Reasonably Available Alternatives tools including costs are certainly preferred by regulators to create a systemic and repeatable solution for firms. The reg might not say you have to document your Reasonably Available Alternatives, but practice says you do (not my words).  
  • Conflicts: Lastly, firms should have an understanding of their own conflicts, write them down, and have clear mitigation plans in place.

These key focus building blocks include both the Financial Professional activities and the  home office activities that are expected of every firm.  


Complex Products

Complex products are always a focus for FINRA, and next year is no change. Purchasing a complex product will be reviewed for suitability but also for Best Interest. FINRA also expects a comparison to Reasonably Available Alternatives. To learn from other missteps, it is not a best practice to change client suitability shortly before selling a complex product. This can certainly appear to be fixing the suitability to match the products, when it should be the other way around. Lastly, if your due diligence files are thin, that will probably be an issue. 


Best Execution Reviews

FINRA invested quite a bit of time in Best Ex and PFOF (payment for order flow).

“Some exchanges or market-makers will pay your broker's firm for routing your order to them – perhaps a penny or more per share.” Source: sec.gov

While most full service firms do not participate in PFOF, you can be sure that someone in your supply chain does. From your clearing firm to your product manufactures, PFOF is ubiquitous in the business and very few are spared from the conflicts. Disclosures are table stakes, which should be reviewed for transparency and accuracy, but diving in a little deeper to ensure trades are being routed to receive the best execution possible is what will really help clients. When conducting oversight on your vendors and supplies, Best Execution policies should be front and center in your review. 


In Conclusion 

It is difficult to summarize the content from two full days of a FINRA conference but I hope this provides some useful guidance. If you’d like to discuss any of these topics in more detail, feel free to reach out to me directly. 

MikeFor more information about the author DDW's products and services, contact Mike Freeman, President of DDW.

917.328.7498 | michael.freeman@duediligenceworks.com


Just so it's handy...here's the Care Obligation… 

“Under the Care Obligation, you must exercise reasonable diligence, care, and skill when making a recommendation to a retail customer to:

  • understand potential risks, rewards, and costs associated with recommendation, and have a reasonable basis to believe that the recommendation could be in the best interest of at least some retail customers;
  • have a reasonable basis to believe the recommendation is in the best interest of a particular retail customer based on that retail customer’s investment profile and the potential risks, rewards, and costs associated with the recommendation and does not place the interest of the broker-dealer ahead of the interest of the retail customer; and
  • have a reasonable basis to believe that a series of recommended transactions, even if in the retail customer’s best interest when viewed in isolation, is not excessive and is in the retail customer’s best interest when taken together in light of the retail customer’s investment profile.
  • Whether you have complied with the Care Obligation will be evaluated as of the time of the recommendation (and not in hindsight).” Source: sec.gov


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