The Suitability Rule Might be Eliminated
Self-regulator Finra may eliminate its suitability rule – which requires that broker-dealers recommend investments that are suitable to their client – if the SEC’s proposed Regulation Best Interest is finalized and implemented, according to the organization’s CEO, Robert Cook.
“If Reg BI is adopted, we would look at our rules to see if changes are appropriate,” Cook said Tuesday at Sifma’s annual meeting in Washington, D.C.
For example, “Do we still need the suitability rule?” Cook said.
That’s the kind of question, and many others, that Finra will need to address after Reg BI is adopted because it may not make sense to still apply the suitability rule to those who will be subject to the new best interest rule, according to Cook.
Cook said, however, that such a review of Finra’s rules in relation to Reg BI would take place “down the road.”
At Finra’s own Annual Conference in Washington, D.C. in May, Cook said the self-regulator will have exam oversight on the Reg BI requirements.
Cook said at the time that he expects Finra to check if broker-dealers are complying with Reg BI, once it is passed.
The SEC is currently reviewing the thousands of comments it received for its three-part Reg BI package, which 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 reiterated at the Sifma conference that part of Finra’s mandate is to ensure compliance of its member-firms to SEC rules.
Meanwhile, Cook said Finra’s plan to consolidate its exam and risk monitoring programs is a “significant undertaking” for the self-regulator. The plan is to integrate three separate programs into a single, unified program to drive more effective oversight and greater consistency, eliminate duplication and create a single point of accountability for the examination of firms. The three different programs are responsible for business conduct, financial and trading compliance.
Cook said Finra wants “effective” and “efficient” risk-based programs.
As Finra starts to consolidate its exam and risk monitoring programs, Cook said its consolidation of its enforcement departments is “basically complete now.”
Prior to the consolidation, the enforcement department was separated into two distinct teams – one handling disciplinary actions related to trading-based matters and the other handling cases referred from other regulatory oversight divisions.
The new enforcement structure is designed to facilitate more consistent decision-making and outcomes by, among other things, supporting new centralized functions.
The goal is to “have more consistency in terms of outcomes,” according to Cook.
Both consolidation efforts are direct results of the ongoing Finra 360 comprehensive self-evaluation and improvement initiative.