In the past two weeks, the Financial Industry Regulatory Authority, Inc. (FINRA) issued two notices to members which revise certain FINRA Rules to comport SEC’s Regulation Best Interest (Reg BI). Reg BI, which is set to become effective on June 30, 2020, establishes a “best interest” standard of conduct for broker-dealers and associated persons when they make a recommendation to a retail customer of any securities transaction or investment strategy involving securities, including recommendations of types of accounts.
Notice to Members 20-18: Revisions to Rule 2111 (Suitability)
FINRA Rule 2111 establishes the “suitability” standard for investment recommendations. Under this standard, a broker-dealer or associated person must “have a reasonable basis to believe that a recommended transaction or investments strategy…is suitable for the customer, based on information obtained through reasonable diligence.”
Reg BI establishes a “best interest” standard for investment recommendations and requires, among other things, that a broker-dealer or associated person making recommendations to a retail customer “act in the best interest of the retail customer at the time the recommendation is made, without placing the financial or other interest of the broker, dealer, or natural person who is an associated person of a broker or dealer making the recommendation ahead of the interest of the retail customer.”
On June 19, 2020, FINRA issued Notice 20-18, wherein it acknowledges that “compliance with Reg BI would result in compliance with Rule 2111 because a broker-dealer that meets the best interest standard would necessarily meet the suitability standard.” FINRA did not abolish Rule 2111, however, because the rule may still apply to recommendations that are not subject to Reg BI (i.e. recommendations to non-retail customers). Accordingly, FINRA revised Rule 2111 to state that the suitability standard “shall not apply to recommendations subject to [Reg BI].”
Notice to Members 20-17: Revisions to Rule 4530 (Reporting Requirements/Problem Codes)
FINRA Rule 4530 requires firms to report, among other things, quarterly statistical and summary information regarding written customer complaints. Member firms must also file with FINRA copies of various legal actions such as civil complaints and arbitration claims. When submitting all of this information to FINRA, member firms are required to select the appropriate Rule 4530 Problem Code associated with each complaint or legal action.
On June 10, 2010, FINRA issued Notice 20-17, wherein it added two new Rule 4530 Problem Codes in connection with Reg BI. Firms are now required to use Problem Code16-Reg BI when reporting matters involving potential violations of Reg BI. For matters reportable under Rule 4530 involving allegations concerning a firm’s Form CRS or its delivery, FINRA has added Problem Code 17-Form CRS. The Form CRS is a form established under Reg BI for the purpose of informing customers about, among other things, the types services offered by a firm, fees and costs associated with the customer’s account, the required standard of conduct, and whether the firm or its associated persons currently have reportable legal or disciplinary history. Registered investment advisers, broker-dealers, and dual registrants that do business with retail investors must file a Form CRS (customer relationship summary) with the SEC and distribute the form to its retail investors.
Finally, FINRA is making related revisions to the description of Problem Code 04–Suitability. The revised description of Problem Code 04–Suitability explains that, for allegations regarding activity that occurred after June 30, 2020, firms should consider whether to use Problem Code 16–Reg BI, even if the allegations contain suitability terminology.
The attorneys at Chilivis Grubman represent clients of all types and sizes in connection with government investigations and regulatory matters, including matters involving the DOJ, SEC, and FINRA. If you need assistance with such a matter, please contact us today.
- See FINRA Rule 2111.08