Key Themes Discussed: Reg BI, Complex Products, Best Ex Reviews
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.
These key focus building blocks include both the Financial Professional activities and the home office activities that are expected of every firm.
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.
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.
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.
MORE INFORMATION:
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: