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The Key Role Finra Would Play in the SEC's Best Interest Rule

By Rita Raagas De Ramos May 22, 2018

Finra CEO Robert Cook said Monday the self-regulator will have exam oversight on the requirements in the SEC’s Regulation Best Interest package that are relevant to broker-dealers.

Cook, who was responding to a query at Finra’s annual conference in Washington, D.C., said he expects the self-regulator to check if broker-dealers are complying with the SEC’s Regulation Best Interest package, once it is finalized and implemented. The SEC is collecting comments on the proposed package until Aug. 7.

The SEC’s proposed Regulation Best Interest package establishes a best interest standard of conduct for broker-dealers, interprets the fiduciary standard for investment advisors, and creates a new Customer Relationship Summary form that will state if clients are dealing with a broker-dealer or an investment advisor.

The proposed rule requires broker-dealers to have a duty to act in the best interest of retail customers when making a recommendation – at the time the recommendation is made – without putting his/her own financial or other interest ahead of the retail customer. And broker-dealers are required to perform this duty by complying with disclosure, care and conflict of interest obligations.

Cook said Finra routinely examines broker-dealers for compliance to relevant SEC rules.

He said he expects Finra to “engage in close coordination” with the SEC, which will be responsible for interpreting what is required by the best interest rule.

On the sidelines of the conference, Cook said Finra is still studying the SEC’s proposed best interest rule, and as such will refrain from commenting on it for now.

During his keynote address, and without referring to a specific regulation, Cook raised the question: “Does reducing regulatory burdens on firms always come at the expense of investor protection?” And vice versa – does protecting investors need to hurt broker-dealer firms, he asked.

He said Finra continues to try to strike a balance between regulating the industry and protecting investors.

Engagement from broker-dealer member firms will help Finra reach that balance, according to Cook.

“I would like to see more engagement … our SRO model depends on it,” he said.

Cook also took the opportunity to reiterate and highlight to the conference delegates the accomplishments of Finra 360 on the first year on the multi-year initiative.

Last month, the self-regulator identified the following most significant operational and regulatory changes implemented in the first year of its ongoing Finra 360 review:

  • releasing an Examinations Findings Report detailing Finra's observations from the prior year's examinations;
  • publishing a summary of Finra's 2018 budget and financial guiding principles;
  • launching a Small Firm Helpline to address routine questions about Finra;
  • creating an Innovation Outreach Initiative to address the growing activity in FinTech, cryptocurrencies and related issues;
  • increasing funding for training of examiners and regulatory coordinators;
  • updating the activities of Finra's advisory and governance committees and enhancing transparency regarding what they do and how interested parties can get involved;
  • and further advancing Finra's risk-based approach to examinations and implementing certain process improvements in how Finra interacts with member firms in the exam context.

Robert Cook (Getty)

Cook said the next step in Finra 360 is to enhance its risk-based examination program.

The goal is for the “depth and breadth” of its exam program to be better aligned with each firm’s business model, according to Cook.

Finra published in December its first-ever Examinations Findings Report. That report covers Finra’s observations on issues that potentially impact investors and the markets, and describes compliance practices the self-regulator considers effective. The key topics in that report are best execution, product suitability, outside business activities and private securities transactions, cybersecurity, anti-money laundering and market access controls.