Friday, March 27, 2020
Although this is a little off-brand for the BLPB, I thought readers might appreciate a puppy break. This is Lucky, the newest addition to the family.
She's excellent at giving me so much to worry about that I stop thinking about the pandemic! But that does not mean that stuff stops happening!
Notably, FINRA has a rule proposal out to alter its exiting suitability standard in light of the SEC's new Regulation Best Interest. FINRA summarized the proposal as doing two things:
- amend the FINRA and CAB suitability rules to state that the rules do not apply to recommendations subject to Regulation Best Interest (“Reg BI”), and to remove the element of control from the quantitative suitability obligation; and
- conform the rules governing non-cash compensation to Reg BI’s limitations on sales contests, sales quotas, bonuses and non-cash compensation.
Because Reg BI so closely resembles the FINRA Suitability Rule, firms may not have to do too much to comply with the text of the rule. This leaves me wondering about guidance. FINRA has many notices to members and other explanations available to give context to the suitability rule. With regulation moving from the self-regulator to the regulator, will the guidance move as well and will it have the same force? This may be unknowable because so many customer issues get resolved in arbitrations without explained decisions.
What will happen in the future when FINRA has to manage compliance or enforcement for activity covered by Reg BI? In the past, FINRA could simply determine what its own rules meant. Now, new issues may need to be addressed by the SEC instead. FINRA may still simply opt to apply Rule 2110 for conduct it would have deemed over the line under the suitability standard. Essentially, it's a catch-all for requiring all members to "observe high standards of commercial honor and just and equitable principles of trade."
Regulation Best Interest is now set to go into effect this July. Whether the date will get bumped back remains uncertain. Financial Planning has reported that the SEC is now mulling whether to extend the deadline. My bet is that the SEC will probably extend the deadline event though there probably isn't much of a need to because it didn't seem as though Reg BI actually required any major changes to most firms' business practices.